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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Worswick who wrote (747)	1/15/1999 9:38:00 AM
From: Worswick	Respond to of 2794

The theater is just begining to fill up here again. Since the intermission they've carried out all the bodies from the last show. It is startling to imagine that people actually get paid hundreds of thousands of dollars a year to be this chuckle-headedly stupid. They can now stand around in a circle and say, "Gee..I didn't know." For Private Use Only "Brazil's Move Stings Managers Of Emerging-Market Funds By SARA CALIAN Staff Reporter of THE WALL STREET JOURNAL LONDON -- Some unfortunate emerging-market fund managers were caught this week with too much money in Brazil, which they had thought would be safe from a crisis. They thought wrong. On average, emerging-market funds had more money in Brazil than in any other place in the world, just several weeks before Wednesday's de facto devaluation of the country's currency; on Thursday, the Sao Paolo Stock Exchange's Bovespa Index fell 10% after a 5% drop on Monday. According to a Standard & Poor's Fund Research survey of more than 200 emerging-market funds, the average fund's holding in Brazil totaled 11% of assets as of Dec. 1. While some fund managers say they had pared down their Brazilian positions by January, many were stuck trying to sell in a falling market. "We came into this crisis with holdings in Brazil that were higher than our competitors," conceded Michael Hughes, director in the emerging-markets group at Fleming Asset Management in London. "We've been selling a couple of stocks, which are perceived to be vulnerable to a massive deflation. But it isn't very easy to sell in this kind of market." Mr. Hughes said that of Flemings's $7 billion emerging-market holdings, about 10.8% was invested in Brazil just before the market plunged. On Thursday, the fund group sold shares of electricity company Eletrobras and oil group Petrobras. "We are not bailing out of Brazil," Mr. Hughes said. "We are only reducing our holdings by 2%. The devaluation is still not totally uncontrolled." Mr. Hughes said the firm is still holding onto shares of a few stocks, including the mining giant CVRD. Mr. Hughes said that Flemings usually uses a bottom-up approach to investing by looking at specific stocks, rather than trying to be a market timer. "We thought the bad news from Brazil had already been priced in the markets and there was potential for the market to recover," he said. "And it would have if there was anything other than a total disaster." And the disaster probably is just beginning, skeptical fund managers said. David Stewart, emerging-market fund manager at Fidelity, predicts that Brazilian stocks will fall further. "We sold some Brazilian stocks in November and reduced our holding to 7%," he said. "We are sticking with our core Brazilian holdings, but we aren't looking to buy any more." He said that interest rates will have to rise to such high levels that the economy won't be able to tolerate it. "What they have done so far is a half measure, which is always dangerous," he said. For some fund managers, the Brazilian trouble came as less of a surprise than as just another disappointment. "I don't want to sound too gloomy, but there is always something to worry about in emerging markets," said Edward Hocknell, emerging-market fund manager for Baillie Gifford & Co. in Edinburgh. "Brazil is just the latest crisis and we have to wait for the second shoe to drop." Mr. Hocknell said although he sees some bargains to buy in Brazil he is going to wait for prices to drop further. "We have a high cash position and we are keeping a high cash position," he said. "We are going to wait for the smoke to clear." Mr. Hocknell said that of Baillie Gifford's $800 million invested in emerging markets, only 8% is in Brazil. The stocks in the portfolio include the clothes retailer Guararapes and a little bit of the telecom company Telebras". WSJ

To: Worswick who wrote (747)	1/15/1999 9:43:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 2794

Clark, I believe the counterpartys to the trades being done by speculators in the US and Europe are more likely to be local financial institutions and hedgers. The Brazilian hedge funds mentioned, I presume, more likely to be doing the same sort of thing that their non Brazilian counterparts are doing and therefore would be on the same side of the trade. This is just speculation on my part. FWIW it appears the Brazilians have widened out the bands to levels where they are irrelevant. This is exactly what the Europeans did when the the EMS was in trouble in the early 90s. This means effectively that the currency is floating however they maintain fiction of saying there still are bands so they didn't give in. This could be a very smart move. By taking away a specific target rate that they will defend they deprive the speculators of a specific focus. It will also allow the currency to eventually find the appropriate level. When the Europeans did this the peripherals got trashed but within 18 months they regained everything and it provided a huge economic stimulus. This could be just what is needed. Bovespa well bid at mom.