On the Ground in Buenos Aires

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On the Ground in Buenos Aires: Understanding “The Crisis and Profits Cycle” in Emerging Markets

By Dr. Steve Sjuggerud, President, Investment U
Tuesday, March 23, 2004: Issue #322

“The only comparable moment in history to Argentina’s collapse was America’s Great Depression.” Marcelo Mindlin, Dolphin Fund Management in Argentina

In 2002 all the banks in Buenos Aires closed for 60 days. Simply put, if you had money in the bank, you couldn’t get it. After two months, even the rich were out of cash.

The crisis was awful. Argentina went through five Presidents in three weeks, as nobody wanted the job. Argentina’s debt default ultimately was the largest in the history of mankind. The stock market fell by 90% in U.S. dollar terms.

In the end, the Argentine peso was devalued average income per person in Argentina fell from $9,000 to $3,000. And due to the devaluation, your money in the bank was worth 70% less if you could even get to it.

Extraordinary Argentine investor Marcelo Mindlin described this to us at an investment seminar I’m hosting down here. Mindlin told us where Argentina has been, where it is now, and where it’s likely going. In his excellent speech, he described the “anatomy of a crash and recovery” in an emerging market, and how to profit from it.

The Crisis and Profit Cycle

Marcelo looked at the other great financial “meltdowns” of recent years Thailand, Indonesia, Russia, Brazil, etc. And he discovered that the markets bottom typically a year to a year and a half after the crisis breaks. In the case of Argentina, the stock market bottomed roughly 18 months after the crisis.

Next, an enormous rally comes. On average, after crashing, the “meltdown” markets then rose by 4.4 times an extraordinary return. Argentine stocks have already risen by 4.5 times, and Mindlin suggested that at a P/E of 15, the market is starting to look a bit pricey.

After the enormous rally, a massive correction then sets in. The average correction was a fall of 52%. Mindlin suggested that, while there are no guarantees of that large correction happening of course, he doesn’t recommend buying at this time. (Attendees asked Mindlin about the Argentine stock that I have written about recently. He said that it hasn’t run up nearly as much as the other Argentine stocks, and the stocks that have run up are likely the ones that will break down.)

Summing up the Crisis and Profit Cycle…

1) Crisis hits, stocks crash, losing as much as 90%
2) An enormous rally comes, with stocks up 4.4 times
3) A massive correction hits, with stocks losing over 50%

Where We’re Headed

If Mindlin is right, the overall stock market in Argentina could fall by 50% or more, before returning to an upward path once again.

At the moment, this Crisis and Profits Cycle may not help us much in Argentina. But Mindlin’s homework is great to keep in mind the next time we see a major crisis break out in an emerging market

The game plan is relatively simple let the market crash then start buying as it settles in and starts moving up, and sit back and collect hopefully over four times your money in the ensuing rally.

Fine Antiques, Great Bargains and Some Madonna Trivia

On a separate note, after spending a few days in Argentina now, I have to say, if you want to find crisis here, you have to look for it. We haven’t seen evidence of the rampant unemployment, demonstrations or the picketers we’ve read about. Quite frankly, I still find Buenos Aires one of the world’s great cities to visit – and it’s an even better place to visit now that the currency has lost two-thirds of its value.

I highly recommend visiting here someday if you can. We visited the Teatro Colon today (www.teatrocolon.org.ar), the most stunning theater I’ve ever seen. We ate the world’s best beef along the waterfront at Puerto Madero. My wife had a leather jacket custom made for $130. The antiques in San Telmo are world class. We visited the square where Madonna sang from the balcony of the President’s house (the Casa Rosada) in Evita. In that square is a cathedral as dramatic and awe-inspiring as any in the world.

The city is alive. I love it. My wife even talked about spending a few weeks or even months a year here, and she doesn’t like to leave home much.

Someday, make it to Buenos Aires, Argentina if you can. And if you can’t visit, at least learn from Argentina’s Crisis and Profit Cycle, as laid out by successful Argentine investor Marcelo Mindlin.

Good investing,

Steve