Search results matching tag 'Chavez'

Portfolio: Venezuela’s Search for Economic Security

JohnMauldin — Thu, 08 Sep 2011 23:10:00 GMT

You're familiar with my thoughts on gold: I buy it regularly as insurance, not an investment. Now here's something you didn't expect: I just watched a STRATFOR video and learned that the Venezuelan president, Hugo Chavez, keeps an epic 60 percent of the nation's reserves in gold. Wow. Guess he sees it as insurance as well?

Watch the video. It covers four recent moves by the ailing leader in an attempt to drum up some cash for his social programs, which can only be interpreted as a strategy to keep his waxing and waning political support strong. It all goes to show that Venezuela is a nation to watch, for better or worse, given Chavez's illness and the absence of a strong successor.

Oh, and let's not forget that the U.S. imports about a million barrels per day of oil from Venezuela, or 8 percent of total U.S. oil imports ... not insignificant.

After you <<watch and digest the video>>, I suggest subscribing to STRATFOR to access all their geopolitical intelligence. They cover everything from Chavez to China, and all things in between, with a unique perspective. OTB readers get a whopping 63% discount off their first year, plus a free copy of The Next Decade, the forward-looking bestseller by STRATFOR CEO and founder George Friedman. Try them out. As they say, it's a golden opportunity.

Your keen on geopolitics analyst,

John Mauldin, Editor
Outside the Box

Portfolio: Venezuela’s Search for Economic Security

STRATFOR

Chavez's Health and Implications for Chinese Investment

JohnMauldin — Thu, 30 Jun 2011 17:43:00 GMT

For those of you keeping up with the much-discussed energy deal between China and Russia, you know the many reasons, both geographic and political, why it's unlikely to pan out. The geopolitically savvy folks over at STRATFOR told us about it a couple of weeks ago, and have moved their forecasting on to an existing energy relationship, between China and Venezuela—now potentially uncertain due to Hugo Chavez's precarious position in a Cuban hospital.

Whether Chavez gets better or not, a political transition is down the line somewhere, and China could lose its current preferential treatment as primary investor in Venezuelan oil. This is the kind of thing we have to know about as investors. Yes, we all know that Chavez is ill. But what, if anything, does that mean for the South American energy sector? What about the future of oil, China, the U.S., and so on? This is the kind of forward-looking analysis you get from a news publication like STRATFOR. It doesn't get any better than these guys.

Enjoy this complimentary piece from them. If you're interested in more, watch their video on the <<Venezuelan oil industry here>>, and then take advantage of their special discount for OTB readers. I read them every day, and highly recommend you check out their subscription offer.

John Mauldin, Editor
Outside the Box

Chavez's Health and Implications for Chinese Investment

June 29, 2011 | 1904 GMT

MINORU IWASAKI-Pool/Getty Images
Venezuelan President Hugo Chavez (L) and Chinese President Hu Jintao

Summary

The absence of Venezuelan President Hugo Chavez due to health reasons has caused uncertainty about Venezuela’s future, and this is cause for concern in China. China has made significant financial investments in and commitments to Venezuela, from which Venezuela has benefited greatly. China risks losing billions of dollars if Venezuela destabilizes, and in the long term, it fears losing the standing preferential relationship with Caracas if the government changes and Venezuela begins to look elsewhere for technical expertise to accompany investment.

Analysis

Venezuelan President Hugo Chavez appeared on Venezuelan television June 29 in a recording that was reportedly made the morning of June 28. It is unclear from the video exactly how healthy the South American leader is after he was hospitalized in Cuba on June 10, undergoing abdominal surgery apparently related to prostate cancer. Though he reportedly intends to return to Caracas by July 5 for the country’s independence day and bicentennial celebration, it is not yet clear that he will be well enough to do so. With Chavez having been in a Cuban hospital for nearly three weeks, Venezuela has been rife with rumors about his sickness, and a power struggle among his inner circle has been under way.

There are many players with a stake in the Venezuelan regime, but one of the most important in the past several years has been China, which could be affected greatly by a transition in Venezuela’s government. China does not stand to lose much in the short term and hopes to continue investing in Venezuela, but a transition away from Chavez and Caracas’ need for technical expertise to accompany investment could threaten China’s preferential standing with Venezuela.

Chinese Interests in Venezuela

China has not commented officially on Chavez’s illness, but China has become increasingly invested in Venezuela and has built a unique relationship with the Venezuelan government. Although the exact numbers have been difficult to confirm, since 2005, China has made hard asset investments and loans as well as commitments for further loan and investments to Venezuela worth about $49.5 billion. Some of the loans have reportedly been paid back in oil, and about $10 billion worth of loans will reportedly be delivered in yuan, which China can print at will and is only accepted as currency by the Chinese government and firms. The terms on the financing vary, but China has been careful to ensure that it has taken a strong role in how the money is spent, with joint decision-making on the projects and a commitment to hiring Chinese firms written into the agreements. Of the total amount that has been invested and discussed, we estimate conservatively that China could be exposed to losses of around $14 billion if Venezuela reneged on its commitments.

China’s interest in Venezuela is multifaceted. In the first place, Venezuela has one of the largest energy reserves in the world, with proven oil reserves of 211 billion barrels and 179 trillion cubic feet of proven natural gas reserves. Much of this oil is so thick it requires special processing before it can be shipped to a refinery. By establishing a relationship with Venezuela, China not only has a chance to learn some of the processing techniques for heavy, sour crude oil, which is an increasing portion of the global oil mix, but it also is able to actually invest in oil production that supplies its own consumption market. Both of these interests are being addressed in a pending deal to build a refinery with a capacity of 400,000 barrels per day in China’s Guangdong province.

(click here to enlarge image)

Second, China has a global outward investment strategy that has targeted Venezuela, among others, for its natural resources and opportunities for Chinese business. This strategy allows China to invest its massive cash surpluses in hard assets worldwide and helps it handle domestic money growth. It also expands markets for Chinese exporters and state infrastructure and industry. China has long invested in several extremely risky countries and governments at variance with the United States or the West, or otherwise viewed as at high risk of instability, including North Korea, Myanmar, Iran, Sudan, Angola and Venezuela. Having arrived late in the global race for resources and markets, China has seized opportunities shunned by the West, and with its large cash reserves and willingness to offer financing without political requirements, it has attracted interest from these regimes.

Investment in Unstable Countries

China generally believes it can secure its investments by cultivating relations across these countries’ regimes and political elite, though it is well aware that losses could result when it chooses to invest in unstable countries. Outside of Venezuela, China has a number of investments worth hundreds of billions of dollars in unstable countries. STRATFOR sources suggest that China may have more than $30 billion at risk in Libya, where it has recently begun negotiating with the rebels to try to ensure that interests established under the regime of leader Moammar Gadhafi will be protected under any potential Libyan government ruled by the rebels. Chavez’s illness and the instability in Libya (as well as the broader Middle East and Africa) reveal a certain degree of strategic weakness inherent in investing in potentially volatile emerging markets, especially where China’s main advantage is the regime’s estrangement from China’s competitors in the West. The potential loss of tens of billions of dollars worth of investment into these economies has prompted a reconsideration of such risks, but STRATFOR sources suggest that Chinese bank regulators’ latest attempts to pull back on foreign investments and loans have been rebuffed by the Chinese national banks.

For Venezuela, the relationship with China has been important for both financial and political reasons. Since the 2002 coup attempt against Chavez — during which the United States was quick to acknowledge the military leaders that briefly took power — Venezuela has been working to isolate itself from the United States by seeking alternative allies and diversifying its oil export markets. As the most aggressive global lender, particularly in the wake of the financial crisis when lending was nearly nonexistent, and a huge consumer of oil, China has become a natural partner for Venezuela. Presiding over an increasingly unstable economy, Chavez has needed to increase borrowing to cover expenditures and debts on a number of fronts. From a severe national housing shortage to a deteriorating electricity system and an oil sector suffering from severe mismanagement and underinvestment, Chavez has needed the Chinese as a political backer, but most important, as a financial backer. This need has meant that China has enjoyed a great deal of leverage over Venezuela and made it easy for China to get the terms it wanted on the loans and investments it made.

Implications of Chavez’s Illness

The Venezuelan government is highly personalized, and a great deal in Venezuelan politics relies on the personal preferences of Chavez. There are no other leaders who are positioned to take control in a scenario where Chavez is incapacitated or a change in government becomes a necessity. China worries that if something were to happen to Chavez, their preferential treatment and access to investments and financing could dissipate. This concern to extend the relationship beyond the confines of a personal relationship with Chavez can be seen in the successful push that got the terms of Chinese loans written into Venezuelan law. The Chinese could still make deals with a new Venezuelan government, but it would require forming relationships with a whole new ruling elite.

In the short term, the risk posed by Chavez’s current illness is that there could be a destabilization of the government if he is not able to return to power in the near future. This could directly threaten China’s in-country assets. However, unless the country dissolves into civil war and outright destroys Chinese direct investments, it is unlikely that a successor government would walk away from its debts to the world’s biggest lender. And, for China, this is a relatively small amount of money, as its annual external investment totaled around $59 billion in 2010 alone.

The longer-term reality is that China will lose its preferential access to Venezuelan resources. Even if Chavez’s current illness does not bring about a change in government, a transition is in the cards at some point, and a change in the Venezuelan government may shift the incentives that make the current partnership with China so important. It is Chavez’s policy of isolation from the United States combined with China’s “no strings attached” lending policy that makes China a perfect partner for the moment.

However, there are opportunity costs accruing to Venezuela as a result of its commitments to China. Venezuela’s oil industry is suffering from a profound lack of technical expertise to accompany investments, and the Chinese simply do not have the technical ability to help revive dwindling production.

The pressing need for Venezuela to resuscitate its oil industry with foreign expertise will eventually necessitate a reconsideration of its isolationist policies — and a leadership change will make this more of a political possibility than it currently is under the Chavez administration, as it will require a more conciliatory posture toward the United States. For China, this will mean higher competition for access to Venezuelan energy resources, and although no one can compete with China’s quantity of cash, it does not have the expertise Venezuela needs.

Are we Sliding into Socialism, Comrade?

IanWyatt — Fri, 15 May 2009 16:32:00 GMT

Your Daily Profit

May 15, 2009

*****Government Intervention

*****Sliding Into Socialism?

*****Rising Gas Prices

You know over the course of the past few months I’ve not held Wall Street or the banking executives in high regard. I hold them almost—that’s almost—singularly accountable for our current recession (Uncle Sam and private citizens who borrowed too much are to blame as well), but the government is beginning to really stick its nose too far. For example, today’s headlines (those not about whether Nancy Pelosi knew about torture and when she knew it) are consumed with government pushing itself on private industry, most notably with the pressure on Bank of America (NYSE:BAC) to change its board.

Granted, “regime change” is a necessity for most of the companies receiving TARP money. After all, they’re the ones who got us into this mess. But shouldn’t it be shareholders forcing the issue? You saw how they forced Ken Lewis of Bank of America to give up his role as chairman. This was done at the shareholder level, not by some bureaucrats in a windowless office overlooking the National Mall.

But for many Beltway insiders this isn’t enough. Someone’s got to pay dearly for the bonuses paid out to Merrill Lynch just before B of A took them over. And since Merrill’s gone, guess who gets to play whipping boy? We’ll see how far this goes and which TARP recipient is next. Unfortunately, this is even more motivation for firms that received TARP money to pay it back as soon as possible, in some case, too soon.

A couple weeks ago the President and his Car Czar worked out a deal to “save” Chrysler. As part of that deal Chrysler is to come out as stronger, if leaner, automaker. We’ll see (ask Daimler Benz how their dance with Chrysler worked out).

But read the fine print on the ownership stake: the United Auto Workers (UAW) union will own 55% of the company with rest as U.S taxpayers, Canadian taxpayers, and Fiat somewhere in the mix, though it’s not 100% on board.

Let me rephrase this, the means of production will be controlled by the workers and the central government planners. They will control the production quotas and development of new products for the masses.

Does this sound familiar? Didn’t we spend 50 years and untold trillions to avoid this?

General Motors (NYSE:GM) is in the throes of its own bankruptcy deal. We’ll see how this plays out, but I’ll bet it won’t be too dissimilar from the fate of Chrysler, except Fiat won’t be at the party.

And this is rich…the UAW has graciously agreed to not strike Chrysler until September 2015. How magnanimous considering that as majority owner they’d be striking against themselves. But isn’t that kind of what they’ve done over the decades anyhow, just one degree removed?

So only Ford (NYSE:F) is left standing as a real company. In a sense, I’m proud of the management and decisions made at Ford to put them in this enviable position. I can only hope that their eventual fate is not that of Chrysler and GM.

*****Rising Gas Prices

While we’re on the subject of cars, I’ve been thinking about gas and oil prices. Have you checked the price at the pump lately? Here at our Washington, D.C. offices we’ve seen a gradual uptick in prices that if it happened overnight, or heck, even during one month, you’d do a double take.

After the markets collapsed last fall, regular gas was going for about a $1.70 a gallon. It was a nice reprieve just in time for the holiday season. But just yesterday I noticed the price at the local Shell station was $2.38, which also happens to be the local average.

So, let me get this straight: in the midst of the worst recession in a generation when we’re losing jobs at a pace of 600,000 and more PER MONTH, housing prices are falling, tax revenues are declining, retail sales are abysmal (unless you’re Wal-Mart (NYSE:WMT)), and businesses are failing, gas prices have increased by 40%? Something doesn’t jibe here.

Over the past few months Jason Cimpl and I have been doing a lot research on the oil sector. In fact, he’s been getting in and out of the ETF USO in the TradeMaster service to pick nice quick gains. One disturbing trend that we found was the rapid deceleration of oil field exploration and development. It’s virtually dried up. I’m not surprised given that according to the International Energy Agency current inventories are at all time highs. At current usage rates that equates to a stockpile of 62.4 days of consumption. That’s 8 days higher than just one year ago.

So oil, and by extension, gasoline prices should be going down, right?

Not so fast, you see oil traders work off not the here and now, but the future (that’s why they buy oil futures). And they’re anticipating greater demand toward the end of this year as the world economies (particularly the U.S. and China) pick up again and they have readily available data suggesting that Big Oil and nationalized oil are not ready to pick up the slack.

There’s no way they can. They’ve cancelled nearly three dozen big projects. And their existing capabilities are looking rather dubious.

For example, production in the developed world is way off: Alaska’s North Slope is way off, Mexico’s famous Cantarell Field peaked in 2002 at 2.1 million barrels per day and is now on track to produce only 772,000 barrels per day for 2009 (that’s 66% drop off in 5 years!), Britain became a net importer of oil last June—not from increased consumption but from depletion of its North Sea fields.

And then there are the other big players: Russia is having a tough time financing continued operations, let alone new projects; Iran, right, they peaked in 1976 at 6.6 million barrels per day and are now around 4 million; Saudi Arabia is well-known to be cooking the books on proven reserves numbers; Nigeria is constantly on the brink of implosion.

Then there’s Venezuela. What can I say? Chavez has done a great job in turning what was once one of the richest nations in South America into one of the poorest. He’s evicted Big Oil (not without stealing their assets first, just ask Exxon-Mobil (NYSE:XOM) and StatOil (NYSE:STO)), used PDVSA as his own piggy bank for keeping the masses at bay, and is now in the process of stiffing little guys like Williams Cos. (NYSE:WMB) and Helmerich & Payne (NYSE:HP) out of what he owes them for development and extraction purposes.

In 1997 Venezuela produced 3.18 million barrels per day. Today that’s down to 2.24 million, and continues to plummet.

But the real kicker is that Venezuela supplies 1 in 5 barrels of imported oil to the U.S. Talk about a real bind for the U.S. Two of its biggest providers, Mexico and Venezuela, have oil sectors on the verge of collapse and it’s own oil fields are drying up.

The only bright spot is Canada. Our friends to the north are our largest provider of imported oil giving us 1.9 million barrels per day. The only problem is that Canada’s got a lot more callers for oil than it used to, particularly the Chinese who are willing to pay top dollar (literally top dollar, as in the dollars from the exports they sell to you and me at Wal-Mart as I mentioned earlier) and at some point Canada might find itself hard pressed to resist China’s offer.

So, there lies the problem: production is down almost everywhere, new projects put on hold will take years to bring back up, and when the world economy turns around the reserves will be quickly depleted. I don’t want to sound like a pessimist, but perhaps the oil futures traders are seeing something much more clearly than anyone else is.

For the moment, I’ve been following small oil sector plays like Graham (NYSE:GHM) and a few others. If you want to find out more about oil exploration and services companies that stand to deliver big profits in the coming months check out my new report HERE.

In the meantime, feel free to send in your questions, comments, jokes, rants, observations and anything else on your mind to editorial@247investor.com. I enjoy receiving your emails and really do read every one of them.

Have a great weekend. We’ll pick it up again on Monday.

Best Regards,

Ian Wyatt

Editor

Daily Profit

Short-covering rally or the real deal?

IanWyatt — Tue, 10 Feb 2009 17:47:00 GMT

Today's Issue...

The Oil Indicator

Reader Mail

TradeMaster Daily Stock Alerts

The Oil Inidcator

So, on Friday I made the rally call. The Dow Industrials were up 217 points. Now, after a conversation with TradeMaster strategist Jason Cimpl, I'm a little nervous about stocks following through.

Jason believes Friday's rally was short-covering. His indicator? Oil.

Oil prices fell Friday, while stocks rallied across the board. As you know I expect stocks to rally in anticipation of the stimulus bill and then next banking measure. It is my opinion that investors perceive these initiatives as help for the economy in recovering from recession. Not a cure-all, just help.

If investors see light at the end of the tunnel, oil should rally too. After all, production has been cut. And despite growing reserves, oil will rally when it appears the economy will get back to growth.

To Jason, the fact that oil traded lower while stocks rallied means that investors were buying to cover their short positions in anticipation of Geithner's bank bailout plan. And the fact that financials led Friday's charge lends some weight to Jason's argument. We'll see.

Reader Mail

*****I spent part of the weekend going through your most recent comments and suggestions. The bank nationalization topic still generates the lion's share of mail. Here are some of the responses…

*****S. Ravindra asks the all-important question about a nationalization plan for banks: Does the nationalization of these banks mean that US government will buy out all shares and delist the banks till the bank becomes healthy again before listing them back again?

My understanding of what nationalization means is, yes, common stock would wiped out. Nationalizing the banks is essentially the same as privatizing any company, except it's the government doing the privatizing.

In a privatization scenario, the group taking the company private usually makes a tender offer for all common stock outstanding. Investors sell because they know the stock will be cancelled.

In this case, where we're talking about the government taking over, it would probably work a little differently. Fannie Mae and Freddie Mac are examples. Common stock wasn't cancelled there. But shareholder value is gone for all intents and purposes.

Of course, if Fannie Mae and Freddie Mac were to be sold to private investors, common stock would be cancelled before the companies were brought public again.

Now, it must be noted that the Obama administration seems to have taken the bank nationalization plan off the table. Despite most leading economists advocating nationalization as the quickest, cleanest solution, it sounds as if Obama wants to go the "bad debt bank route." I can only assume that the administration is keenly aware of the impact nationalization would have on common shareholders and they are trying to avoid that outcome.

*****Steve writes: I agree with your recommendation to nationalize the "troubled" banks (Citi, BOA, WF, etc.). But with this recommendation, you should also recommend that shareholders consider liquidating their current ownership since a nationalization will most likely significantly reduce the value of their investment.

Nationalization isn't my idea. I'm just trying to generate a discussion of the issue that will help us be positioned properly for the potential outcome.

There are plenty of reasons not to own financials, and the potential for a nationalization plan to wipe out the common shareholders is a big one. I don't think it's a wager worth placing, but the Obama administration seems to be against nationalization.

Still remember how it played out with Fannie Mae and Freddie Mac: Paulson said he was not in favor of nationalization repeatedly. And anyone who bought based on his hollow promise, like Legg Mason's Bill Miller, lost big when nationalization became the only viable solution.

*****Neil P. writes: For those of you who think "taxpayers" should have ownership for footing the bill for the bank bailout, what you're saying is the government should own them. Please rethink your socialistic tendencies.

In the purest sense, the U.S. government is "of the people and by the people." And if the taxpayer is the lender of last resort, then it stands to reason that some ownership is part of the equation. When a venture capitalist invests, he gets part ownership. When you own stock, you are a part owner.

That's not socialism, it's capitalism. Because it's based on who has the capital. Clearly, right now, the banks don't have it.

Socialism is based on the idea that society at large should benefit from the wealth creation within a country. The medium for doling out the benefits is the government.

Now, rescuing the banks absolutely is for the benefit of our society. If they fail, we're up a creek. That's not socialism, it's survival.

*****M. Schofield The free enterprise system clearly failed us and taxpayers will forever be paying for the irresponsibility of the so-called leaders of this industry. What would be so wrong with nationalizing the banking industry or at the very least highly regulating it. What's the old saying "power corrupts and absolute power corrupts absolutely". Let's not give these people the reins of power again.

Some people blame the Democrats, some blame the Republicans. Some blame the mortgage industry, others blame the borrowers. The fact is, there's plenty of blame to go around. Greenspan and Fuld, Lewis and Paulson.

Ultimately, it was a systematic failure. The system broke down. There will always be loopholes and greedy people will exploit them.

I don't think it's the best use of resources to try to fix a broken system. Especially when you're leaving many of the people who broke the system in place.

*****W. Goss wants more nationalization: I don't know a lot about Nationalization of Banking but what I read in Robert A Heinleins "For us the Living" definitely piqued interest…It was interesting that he wrote it during the recovery of the great depression. We aren't anywhere close to that (I hope) but what we're in is scary enough. Nationalization of our natural resources is another interesting concept that would be appropriate for discussion.

As it now stands, much of America's natural resources are owned by the Federal government. Companies who wish to bring these resources to market have to lease the land and pay the government.

I don't know the specifics of how these leases are awarded and how much money they bring in, but I've read plenty that suggests the process is quite corrupt.

The U.S. is not Venezuela or Russia. There's no way we're going to simply nationalize our natural resources and give the companies that hold them the boot.

But at the same time, there's no way to ignore the benefit that state-run oil companies have provided to countries like Mexico and Brazil.

I would absolutely advocate that the U.S. create state-owned entities to exploit our natural resources in partnership with companies that have the technical know-how.

Take the Alaska National Wildlife Refuge (ANWR) for instance. That's a federally owned parcel of land. Would you rather see Exxon buy the rights and make a huge oil find? Or would you rather see the U.S. government share in the profits? And please, try to get more creative than simply saying the Post Office stinks so the government can't do anything right.

*****R. Watson brings up an investment idea we've discussed before: I'm thinking about buying some shares of the Las Vegas Sands and the MGM. What do you think about those purchases or should I hold on to my money?

If there were ever any companies that live and die on consumer spending, these two are it. Eventually these two stocks will be good buys. But I don't think that time is now.

Unemployment is still on the rise. That means people have less money to spend. And there's no telling when gambling in Vegas will make its way back in to people's budgets.

Casinos have been canceling expansion plans and laying off workers. So they are making the necessary adjustments to account for declining revenues. That's good, but it doesn't mean the stock prices are headed higher any time soon.

TradeMaster Daily Stock Alerts

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If you're interested in giving TradeMaster Daily Stock Alerts a try but you don't want fork over a ton of money then click this link. My friends InvestorsInsight persuaded me to set up something easy for InvestorsInsight members to try the service. I think you'll like it.