ETFs have become Wall Street's way of buying the world. You want exposure to Indonesia? Boom! Here's a basket of Indonesian companies. How about homebuilders? Here's a basket of companies in that industry down to the guys that make the mattresses in your bedroom.
So naturally investors have bought into emerging market darling Brazil, but in the midst of this week's chaotic protests, those investors have been taking a serious beating.
Over the last 5 days, the iShares MSCI Brazil Capped Index (EWZ) is down 9.4% (22% year to date). You can see on the chart that things truly got ugly when the protests started a few days ago, but it's also important to keep in mind that ETFs have gotten swept up in the bond selloff that's taken hold of the market since Bernanke spoke this week.
It's a double whammy, and things are just ugly.
Another thing to know here is that EWZ is really heavy on 2 stocks (they make up 26% of its weight). Those stocks are Vale and Petrobras. Both have been having a really nasty year which has been exacerbated exponentially by this week's demonstrations.
First up, Vale, the world's largest iron ore producer. The stock is down 36.67% year to date and over the last five days has fallen 5.4% in the last five days. That isn't just because of what's going on in Brazil either. Vale has a ton of exposure to China, and the slow down we've seen there is also taking its toll on the stock.
On to Petrobras, Brazil's state oil producer. The stock is down 13% over the last five days, and year to date it has fallen 28%.
Wall Street's perma-bear, Jim Chanos, has made a short argument for both these stocks — Vale, of course, has exposure to his most famous short, China. Petrobras, on the other hand is slightly more complicated. Chanos said at last year's London Ira Sohn Investment conference that the government's suppression of oil prices was suffocating Petrobras' profitability.
Basically, someone's got to pay for all that expensive drilling and equipment... or as Chanos put it at the conference, “People worried that Lula was a socialist, well, Dilma is a socialist."
Of course, there have been some big time funds on the other side of this trade — most notably, the biggest hedge fund in the world, Ray Dalio's Bridgewater. According to government filings the firm owned 2.8 million shares of EWZ earlier this year, but it seems even he's getting out. Now Bridgwater only holds about 21,000 shares — chump change for a hedge fund of its size.
We'll write about good news later.
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