The Devil's Excrement

We got some more wisdom today from Chavez who is looking more like Jim Carey in Liar! Liar:

—He hailed the victory by the Government in the ExxonMobil case. Of course, he failed to say that the victory (where was the Empire when the decision was made?) was a ruling by the British Court that the expropriation by PDVSA of the Cerro Negro property was not within the jurisdictional boundaries of the Court. Thus, the Court implicitly said there was an illegal act, it just was not competent to rule on it. Moreover, the injunctions in Dutch and US Courts remain in effect.

—Chavez earlier had warned Uribe to reign in his “spokesmen for war” referring to the Minister of Defense of Colombia. Well, the only man that tried to pile up troops at a border and threatened military action was Chavez himself, but he was silently reigned in by his military Chiefs of Staff who took three days to do any mobilizations and what litel was moved was not too impressive, according to the Colombians. We know who the warmonger is and he is among us…

—Chavez was silent on two issues: The charges of corruption against his family members which will be brought up in front of the Prosecutor’s office tomorrow by a Chavista Deputies. This includes pictures, deeds and documents of the large state properties the Royal Chavez Family has accumulated in Barinas State over the last few years, making them the new bolilatifundistas. And then there is the coincidence between the “fake” letter from Marulanda found in Reyes’ computer and that read by Chavez on live National TV in December. I guess the CIA managed to slip that letter into Chavez reality show Alo Presidente. Those guys are good!

The day before the Easter vacation/Semana Santa began, the Government owned telecom company CANTV reported it’s 2007 financial results. We had not seen much of a glimpse into these results as the company discontinued its quarterly reports under new revolutionary management, but the company is still publicly traded and the managers decided to comply with the law and present the yearly financials. Well after nine month under the revolution, the news is not good. The company reported that earnings were down 51% from a year ago.

Of course, Chavez has said repeatedly that the company will now have a social purpose, whatever that may mean and the profits will be used for social programs. The problem is that if in only nine moths profits are down 51%, how long will it be before they become negative and there are no profits to use in “social” programs. At that time, the ideological whim of the former autocrat, becomes a cost that will subtract money from social programs. Like so many other things the revolution has destroyed.

And it was an ideological whim, because when CANTV was privatized in 1991, it was not only sold for a huge price, but it was also mostly dysfunctional. IT was hard to make a local call, let alone an international one. At the time, however, it was a monopoly, which allowed it to be mismanaged, give terrible service and lose money year after year.

This time around, since Chavez decided to nationalize the company (which also cost money that could have gone to social programs) without consulting anyone, the problem is that CANTV is no longer a monopoly and private companies will take advantage of the new incompetent management to gain market share by providing better services. Just better, not necessarily good services.

And CANTV made less money for a simple reason, margins are down, the company is charging less and costs increased as the number of workers has increased. It is typical Government management, when the job is not being done, then throw more people and money at it in the hope it will.  But, it wouldn’t.

While I have yet to see the financials of Electricidad de Caracas, I have already seen the effects of the new revolutionary management: More blackouts, a note saying I have yet to pay my bill 21 days after I did and the senseless buyback of the company’s debt I talked about a few days ago.

But even more troubling is that an efficient and working company like Electricidad de Caracas will be taken apart by the decision to merge it into the new PDVSA owned and run, Compania Nacional de Electricidad, whose acronym CNE, simply gives us a glimpse into what we may see going forward.

Juts imagine, a company that runs well, will be split into pieces and merged into a new structure with no proven track record, which will be run and “managed” by an inefficient company like PDVSA. Anyone with the most rudimentary management training or ideas, would have suggested either keeping EDC’s structure or merging the non-working companies into EDC, the jewel of the bunch. Instead, eight or nine regional companies will be merged into a single entity all under the supervision of PDVSA managers, the same ones that have been unable to keep the company functional since the strike, losing production year after year and failing to invest for the future. What a joke!

But of course, this is the same revolution that in 2001 passed the infamous Land Bill and made sugar and cattle their focus for the future. It is not coincidence that he first shortages were in sugar, we have now become net importers of it, as acres of sugar cane plantations lay abandoned as none, yes not a single one, of the sugar processing plants is working at even half capacity under the advise, supervision and sometimes imported machinery of “expert” Cuban advisers. The same “experts” that made Cuba an irrelevant sugar producers long time ago. And the Chavez Government has spent billions; yes billion of dollars in sugar plants alone. Just the CAEEZ project, the jewel of the project in Chavez’ own Barinas State cost US$ 200 million. Obviously “cost” is a euphemism as US$ 200 million was spent in the initial stages of the project and only some land was cleared and some beams went up as the robolutionary National Assembly investigated corruption for US$ 3 million, but never asked where the other US$ 197 million were.

And there is cattle of course, all those large estates, the hated “latifundios” taken over by the revolution, none of the have even half the heads they did when taken over, as the beneficiaries sold off or killed the cattle when things started to not go well. Milk shortages by now have become chronic, not that Venezuela was ever self-sufficient in milk production, but whatever sufficiency there was has been reduced even further. More waste, more destruction, less money to where it is needed.

But rather than see and recognize the errors, the robolution goes after the next link in the chain, buying off dairy farms, producers and distributors, because they have now decided that is where the problem is. But all it means is more pain ahead as these enterprises from Parmalat to the ones bought off more recently become inefficient, wasteful under the inefficient Government eyes.

 It’s the same everywhere; a dysfunctional Government takes over working structures and rapidly thermalizes them with its own structure, for the worse, never for the better. 

It’s the same everywhere; a parallel health system was created to replace the existing one, today both lie almost useless, the old one decrepit due to the lack of maintenance, the new one mostly abandoned, as the focus on it seems a thing of the past. In education, not much ahs happened other than the change in name. Fewer than 200 new schools have been built in nine years, students graduate without receiving the obligatory math, physics and chemistry in high school. They get passing grades because there are no teachers. The lucky few that get into universities struggle with basic concepts they should have heard of three ears earlier.

The solution? As usual, destroy the existing structure, the functioning one: force universities to take on a fixed percentage from each public high school. It’s democracy they say. But it isn’t. In the end it will be simply frustration, as these students will become chronic repeaters unable to pass the most elementary courses. Universities will set up, like they already do, remedial courses to help them, and even that will not be enough. Most will fail and drop out, it is already happening without this destructive creation invented by the current Minister of Higher Education. Students from public high schools, the ones that have been able to pass the entrance exams are not doing well, too many gaps in their backgrounds, too much competition.

But the beat goes on, despite nine year of oil windfall and failure, the revolution looks for new targets to destroy, with its unique and hopeless power to destroy and undo however little works and functions in Venezuela.

It’s always difficult to understand what is going on from afar,
particularly during Easter week or Semana Santa, when even reporters seem
to leave Caracas and politicians dissapear.

But I had to comment on
two pieces of news which may be unconnected, but I believe are clearly
linked. There is a lot of interest here in Mexico on what happened at the
border between Colombia and Ecuador because some Mexican students were
killed at Reyes’ camp. Thus, coverage has continued and reports are that
there is lots more to come from the computers as Interpol examines them.
Meanwhile, Correa is reported to be nervous in Ecuador, even suggesting
that things with Colombia may heat up if an Ecuadorian citizen was killed
in the raid. (I guess it’s more permissible to kill foreign guerrila
members)

But then two pieces of news go by and they puzzle me:
Insulza comments on the information on the computers dismissing a priori
part of it, saying that not everything in the computers is necessarily
true. Why does the Secretary General of the OAS even bothers to to say this
at a time of slow news?

And then, in a surprise and almost phantom
visit, Lula’s main advisor on international matters Marco Aurelio Garcia
shows up in Caracas to talk to Chavez about common projects between the two
countries.

Yeah, sure, as if Marco Aurelio and Chavez will both take
time out for this at this time.

If you ask me, something in those
computers in making a lot of people nervous at this time and expect
something unusual to be revealed from them. Expect denials too. It will be
all the work of the Empire, the CIA, whatever.

But don’t expect a
condemnation of the Tibet killings. When the Government’s friends kill, it
always has a justification.

Tomorrow is the beginning of Easter week or Semana Santa here in Venezuela, a week in which everything dies all over the country. Scools are out and this time around Wednesday is a Catholic holiday too, making it even shorter in some sectors. Government also shuts down, so it is likely that little will happen for the next ten days. I will take off also, going to the Pacific side of Mexico for a few days of rest. I will have Internet access but updates are likely to be sporadic and only if events deserve my attention.

Have a good one!

One has to get concerned when besides all of the problems the country is facing, there seems to be developing a level of anarchy in Venezuelan society, where both sides of the polarization in which the country is immersed act out destructively and with hate. It is truly bothersome when groups alternate in acting outside of the law violating teh rights of others and then the opposing groups comes back seeking revenge. This happened this week in Barquisimeto at a public University, the Polytechnic University Antonio Jose de Sucre.

It is a long story of political demands that began last Fall, when a group of students began demanding that the “Professor’s House” be made available to all of the members of the University’s community, not just a privileged few. A group of students too over the House in protest.

A few days later, a different group of students, those that have not been admitted to any university too over the same House in protest. They did this On November 6th. and managed to stay there until mid-February when the police removed them from the Professor’s House. In the process, six students were detained and jailed. This outraged some pro-Government students who then went in and under the passive watch of the National Guard, went in and and took over the House again, this time protesting the jailing of their friends.

Then a couple of days ago, 1,500 students (Yes, mostly anti-Government students!) met at a student Assembly and found a somewhat perverse way of ending the conflict: They decided, despite the opposition of the leaders of the student union, to go and simply destroy the “Casa del Profesor” by taking it apart brick by brick, roof tile by roof tile, which you can see happening on the picture above. A tragic, barbaric and absurd act by any measure.

Thus, one more example of the many types of anarchy that are suddenly surfacing in Venezuela lately and which bodes badly for our future as a tolerant and democratic society.

Truly sad.

It was one of those days when one gets simply incredulous at what is said and done by the revolution. Among the highlights:

—Minister of the Interior and Justice Rodriguez Chacin found a novel and original explanation for the shortages in Venezuela, which he gave to the Government’s TV station VTV: “The US is in a war with us and they are blocking the purchase of food and military parts”. I imagine we will hear this one more often as the Government can’t solve the problem with shortages.

—And El Universal uses the annual report of the Ministry of Education to conclude that there were 2.5 million fewer students in 2007 than in 2006. The reason? According to the same report, the number of students enrolled in the educational “Misiones” went down by 2.4 million students. I guess the cheerleaders of the revolution are likely to tell us that they are all well educated by now. Yeah, sure!

—And the more the Government creates shortages, the more it believes the solution resides in even more intervention and participation by the Government in the production of foodstuffs. Today the Government announced another purchase of a diary company, it was Lacteos Los Andes’ turn to be bought off by an inefficient and incompetent Government. I don’t know who I should feel worse for, the workers that are likely to lose jobs slowly over time or the Venezuelan people that will see more and more shortages as these companies are destroyed by bad management and corruption. Remember Invepal? Remember the sugar processing plants? Just watch…

—And you have to love it when the Minister of Finance says that his objective is to bring the parallel market rate down to Bs. 3.5 per US$. I thought it was illegal to talk about “that” market. I certainly hope his parallel market objective is a little better than his inflation objective of 11% for the year. I also wish him good luck with all of the new bond he plans to issue his year, maybe he is ot aware of the liquidity problems in international credit markets. I do hope Bear Stearns is not the investment bank leading the sale in April.

—And remember the guy who was supposed to be a guerrilla member and none other than the Minsiter of the Interior and Justice (again) told us he was not? Well, based on the fingerprints that the same Minister gave Colombian authorities, it turns out they are not only members of the FARC but part of the High Command of the 38th. Front of the FARC. Do these guys even check things out before they speak?

The New York Times has this slideshow of how Venezuelans flock to Curacao to obtain their preferential rate dollars. Very pictorial, I have heard gripes from people from Curacao that we are making life miserable for them, because we empty their ATM’s of US dollars and there are periodic shortages. So now we also export shortages…

(Note added: I was not aware the slide show accompanied an article on the subject, thanks to “Gringo” for pointing it out in the comments)

There is a local saying: Piensa mal y acertaras (Think the worst and you will be right) and the announcement by PDVSA that it was buying back Electricidad de Caracas’ 2014 Senior Notes or Bonds reminded me of this criollo saying.

You see, Electricidad de Caracas was taken over less than a year ago by the Venezuelan Government and the company had this bond with a 10.25% coupon maturing in 2014 and in the amount of US$ 260 million. The bond can be called back in October 2009 at a price of 105.125%. Thus, as of last Friday the bond was priced at 108% and was yielding around 8%. This may sound great to most fixed income investors in the world, except that PDVSA 2017 is yielding 10.6% and PDVSA happens to be the owner of Electricidad de Caracas, so the 8% makes little sense, simply too low.

By decree, Electricidad de Caracas will cease to exist in May 2010, when it is merged with the National Electric Company (CNE in Spanish, no pun intended in terms of funny business going on). Thus, logic would dictate that the bond would be called back at 105.125% in October 2009 and that would be the end of that.

Except that nothing is what it seems in the robolution. The first strange thing is that the day that the ExxonMobil injunction came to be known, PDVSA 2017 bond dropped by almost 10% points, while the EDC bond barely moved from 108% to 107%. Same company and the lower yielding bonds moves less, weird no?

Then last Friday, the long rumored buyback of the bond is announced by PDVSA. The price? Well, with a 10.5% coupon and call feature at 105.125%, you would think a price in the low teens (111%-112%) would be more than necessary and reasonably priced for PDVSA to do a buy back. But no, the price is somewhere between 119-120%, which makes little sense. At that price the yield to maturity to the first call is 1.6%, a truly ridiculous value.

So, the owners of this bond will get about 120% by April 9th. and they can take their money and invest it in PDVSA 17 at 10.6% if they trust that risk. Not a bad deal after all.

Of course, if you read the legalese associated with the buyback, it reads something like: “PDVSA will buy it back at 105.25% plus an early consent fee of 2%, plus the future value of all cash flows up to the earliest redemption date, discounted at a rate equals to the yield of the US Treasury Bond which matures on October 15, 2009 plus 50 basis points”. Which if you have an MBA and sa good spreadsheet you can interpret means 119-120% depending on the mysterious yield of that Treasury Bond.

So, there was no rush to buy it back, the price is extremely high for what you would expect and even compared to the country’s yield. To Top it all off, the bond was already trading at a high price.

Yeap, there is no question about it: Piensa mal y acertaras!, This is after all called the robolution.

(Note: The author holds Electricidad de Caracas notes and he will benefit from this peculiar largesse of the robolution. The poor of Venezuela I can assure will not)

And yesterday it was Veneconomia’s turn to add its two cents about corruption in the sale of structured notes right under the nose of the almighty Chavez. Of course, by now, it is not US$ 600 million that have been sold, but US$ 750 million. Everybody denounces the hundreds of millions of dollars robbed in this way, while not a single investigation has been opened on the case, by the Prosecutor General or the National Assembly. Which must mean that much like other corruption cases in the robolution, such as “maletagate” or the precious kids jailed in Miami, who are miraculous multi-millionares thanks to the “process”, that Chavez himself has ordered that nothing be looked into in any of these cases, because in the end corruption represents a form of control.

And there is so much corruption that even superficial investigations turn up the most remarkable cases. There is teh structured notes and Argentinean bonds, which has generated almost a billion in wealth to those participating. There is “maletagate”, a small US$ 800,000 case of a suitcase full of hundred dollar bills which is small sample of what is going on in a larger scale; it was not gratuitous that the Minister of Foreign Relations asked incredulously that how could Chavez give US$ 300 million o the FARC, it would take 300 suitcases. Yes, he knows even the exact measure, it is such a regular procedure by now. But in a country with exchange controls and cash limits per person, there has been little movement in investigating “maletagate”, since the money certainly came from PDVSA and clearly with the knowledge of Minister Rafael Ramirez, who by now knows some many secrets that Chavez can’t get rid of him. And then there is the Chavez family who have gone from the fake poverty that Hugo Chavez claims he had when he was a kid to huge landowners and have created the new Macondo in Barinas State. To say nothing of Minister Rodriguez Chacin, the man who gets credentials for FARC leaders, has two indentities himself and has gone from having little to spending lots of time at his daughter’s huge ranch in teh same state. Pity that his good life was interrupted to become a Minister again, but it is a good sacrifice, who knows what unknown “guiso” (criollo for racket) he can stumble upon in the position this time around,

In any case, by now there are so many public denunciations of the structured notes racket that it should be investigated only based on these noticia criminis. Don’t hold your breath, it ain’t called the robolution for nothing!

Structured Corruption by Veneconomia

A few days ago, it was learned that, over the past four weeks, the Finance Ministry had placed some $600 million in structured notes.

Apart from that, several analysts, among them Orlando Ochoa, an economist with a degree from Universidad de Los Andes, and Jose Guerra, former Economic Research Manager at the Central Bank of Venezuela, have been denouncing a series of irregularities having to do with the fact that the government is using the sale of structured notes as a mechanism for stabilizing the swap market.

For example, Jose Guerra affirms that since 2004 “more than $10 billion have been placed in those structured notes and Argentine bonds without information having been made available on the financial terms of those placements, and with gains for the operators of more than $1.5 billion.”

Neither the Finance Ministry nor Fonden nor the Central Bank has given information on the terms on or the price at which these notes have been sold, much less has anyone revealed the names of the banks that have taken part in these transactions.
In order to explain how the mechanism of the structured notes works, VenEconomy has prepared a hypothetical transaction, in which the prices used are simply by way of example:

Let us assume that Fonden buys $100 from the Central Bank at the official rate of Bs.F.2.15:$, making a total of Bs.F.215, and that, with those $100 Fonden then buys $100 in structured notes in New York.

Let us also assume that, the next day, Fonden sells that structured note to a consortium of Venezuelan banks for Bs.F.360, so netting Fonden a spectacular “gain” of Bs.F.145.

Now, let us suppose that the Venezuelan buyers do not keep that structured note either, but sell it in New York, also for $100 and that those $100 are then exchanged for bolivares fuertes in an operation on the swap market, obtaining a “gain” of Bs.F.100.
To cut a long story short, this mechanism allows Fonden to post an alleged gain of Bs.F.1.45 for every dollar invested, while the transaction brings the intermediaries a gain of Bs.F.1 for every dollar invested. So it is that the intermediaries obtain a spectacular gain of Bs.F.600 million, equivalent to some $125 million in only four weeks.

While this is a simple operation, it is also an unorthodox and opaque one that produces fictitious earnings where there should be none, besides generating inflationary pressures.

It is worth remembering that, in 1961, the last time a government intervened in the foreign exchange market in a proper manner, it did so in a way that was totally transparent, via the stock market.

I have repeatedly argued, whenever I have been allowed to say so, that Venezuela needs more democracy in the selection of both party leaders and candidates, because it seems as if most political parties in Venezuela were created to satisfy the ambitions of one person and that there is no common vision for Venezuela, but that of the individual leaders who create and control these parties, in ways that would make Stalin proud.

The usual argument against my idea of more democracy is that any primary-like process to elect party leadership or candidates would cost a lot of money and in the end wear out political figures.

I don’t buy it, I think that rather than “wearing out” what any primary process would do is to “weed out” those that have little acceptance by the voters, despite their personal belief that they are what the country needs. In fact, I think that a primary within a party will get little attention outside of those involved and candidates from various opposition parties could then meet at a run-off election which if held within a short period of time after the party primaries, would not be able to “damage” candidates as many believe would happen.

This all comes to mind because this weekend Chavez’ new party PSUV, held primaries to elect the leadership for the next few years. While you can criticize many things about the process, such as the fact that Government resources were massively used for a party activity, that only candidates that had Chavez’ blessing made it to the final list and the process had close control fromm party authorities, I have to praise the fact that some form of democratic process took place and that in itself is a huge progress to me.

But even more interesting, is the fact that the results were quite different from what everyone expected. The election selected principals and alternates for the party leadership and surprisingly, the man most likely to succeed Chavez if can’t run for a third (or fourth?) period in a row, Diosdado Cabello, failed to make it as a principal to everyone’s surprise. He will have to be happy as an alternate.

And he was not alone, as other leading figures of Chavismo, such as Hector Navarro, Freddy Bernal, Luis
Reyes, Rafael Rami­rez, Willian Lara, Ramon Rodri­guez
Chaci­n and Rodrigo Cabezas, also failed to make the cut as principals, as lesser figures such as Aristobulo Isturiz, Adan Chavez, Mario Silva, Jorge
Rodri­guez, Antonia Munoz and Carlos Escarra did make it, proving that even almighty and seer Chavez can be wrong also about who can get elected or not in Venezuela. In fact, it is relevant to note that in a machista/militaristic Chavista leadership, seven out of the ten women won the election as principals. Similarly, only one, yes just a single one of the five former military in the running made it as principals, sort of the antithesis of the structure of the  Chavez Government.

And while I certainly believe there were orders from above to vote in a certain way, I do not believe that Diosdado Cabello was not among the chosen few, nor do I believe that Aristibulo Isturiz was among those favored by the leader himself.

Which indirectly proves my point about the opposition and the need for more democracy: they should allow the party members to elect candidates and leaders, because those that they see as their “natural” leaders may be nothing more than political mirages, within their own Stalinist structures.

And the PSUV elections show this, despite the strict “controls” and candidate selections, the PSUV party members, however few of them actually voted, silently rebelled in their own way.

Maybe if the opposition allowed the people and their members to shake them up and rebel, Venezuela politics will be irreversibly changed forever.

Just because there was more democracy…