The Devil's Excrement

I had set aside the time for tonight to write about the economic plan. The opposition did not invent it. It was first announced around the beginning of September. Both Merentes and Ali Rodriguez said that it would be announced in a week. But then Chavez went on his Dictator’s tour and everything was postponed.

Chavez was away almost two weeks, came back and said that 40 measures would be announced the week after.

Then, Hugo himself “announced” stuff that was more of “wishful thinking” than measures. I recall these:

1) An employment plan

2) CADIVI would be more efficient

3) Barrio Adentro would be reactivated

4) A bond would be issued (This one was done)

5) The swap rate would be lowered

6) Housing would be built

7) PDVSA would pay its suppliers

But Chavez also said that the number of measures in the “plan” had been upped to 54 from 40.

Then, it was announced that the plan would be announced last night, but we had another postponement. Thus, today after about 38 days, we finally saw the Ministers of the Economy together ready to announce their plan, but in the words of the Minister of Planning:

“Those waiting for a package of measures were left with their guayabera on”

Well, sorry Jorge, I did not even wear one…I don’t even own one, but I do have a wedding at the beach soon, so I will buy one.

But hell, why did they have the press conference , then?

Because all I heard was some false statistics about the US (Giordani did not even get right the population of that country and told us about the millions living in tents there). He also said that 75% of Venezuelans had social security coverage (hello?). And then he went into la-la dreamland about how wealth redistribution has improved (Did he understand the bond?) and how now people don’t take their money out of the country but reinvest it (Hold laughter please). We also heard about the GINI index, loved by Gioradnu and the Government and which has as an input the minimum salary at the official rate of exchange.

Measures on the plan?

-There will be a PDVSA bond before the end of the year.

-They will make a budget for CADIVI (after 5 years of  controls, I can only say about time)

The rest was wishful thinking and predictions for  next year’s economy and excuses for inflation.

That’s it!

There are 45 measures to go, but they may never happen at the rate we are going…but they are laughing…

Today in announcing the economic measures (none were truly announced), Minister of Planning Jorge Giordani expressed that his dream was to have not one Ferrari but three, one yellow, one blue and one red, as you can see in this video:

and then he proceeded to blast the three former and current pro-Chavez Mayors of Caracas: Freddy Bernal, Juan Barreto and Jorge Rodriguez, because his dream is frustrated by the potholes of the streets of Caracas.

Jeez, ten years in office and they have not even been able to find a Mayor that would allow Giordani’s Socialists dreams to come true.

I thought I would give a bond issue reading list and include all of the excellent articles available on the many angles of this incredible scam:

The Preamble:

Should you invest? (By the Devil)

We have a bond (or two) New Issue 101

New Bonds 101 part II: Looking Good!

On the implication of issuing the debt (by Juan Cristobal):

Selling bonds, selling our future

On the scam, stew, guiso:

Quico:

The Bonos Soberanos Scam for dummies

The Devil:

An Andorran Stew: Making millions in the robolution

Venepiramides:

El guiso de las asignaciones de los bonos 2019 y 2024

The title of this post should make  no sense to most people. The word “stew” in English, does not have the same connotation that the word “guiso”, it’s Spanish translation, has in Venezuela.

Guiso means, besides stew,  scam or swindle. And that is exactly what the robolution did this week with the sale of the 2019 and 2024 bonds.

The way the whole thing was handled makes absolutely no sense, unless the whole point of the issue was to have the revolutionaries recoup their losses from the accounts frozen recently in Andorra. Thus the title “An Andorran Stew”.

Recall that the issue had two objectives:  One, to have the Government raise money for its expenses. Two, to help lower the swap parallel exchange rate.

Let’s see how well these goals were met:

Obviously the Government raised money. What began as an issue of US$ 3 billion ended up being increased to US$ 5 billion, sold at a price of Bs. 3.01 per US$. (Bs. 2.15 times 1.4 times 5 billion dollars).

The problem is that these bonds are selling at an average of 68% of its face value today (Dropping fast!). Thus, if you bought US$ 1000 of the bonds, you paid Bs. 3,100 for $680, so you really paid Bs. 4.43 per US dollar. This is 19.4% below where the parallel swap market was today.

Thus, you may ask: Why did the Government sell it so cheap if one of its goals was to raise lots of Bs. for its expenses? This clearly makes no sense whatsoever. People would have been willing to buy the bonds at a much higher price. In fact, the Government sold the bonds at auction, with prices between 135% and 140%. But it could have easily thrown in some uncertainty and made the range higher. This would have given it lots more Bolivars, after all, people just want to buy dollars and they would do so even at a small discount to the parallel swap market. 19.4% is simply absurd!

Thus, the first goal was met, but the Government could have generated lots more Bolivars very easily, rather than giving the bonds away on the cheap.

But if the first goal was met only half way, the second was simply missed completely. The biggest buyers in the swap market are corporations. They are the ones that move it. Not individuals, not small corporations, but the large importers. Thus, you would expect them to be treated at least equally well in the allocation of the bond. Or even treat them better if what you want is to lower the swap rate.

This is what happened in the allocation:

a) Individuals with orders below or equal to US$ 499,000, received 100% of their orders. Individuals with more than this amount received US$ 500,000.

b) Companies with orders up to US$ 999,999 received the full amount. Companies with orders above that received zero, nothing, zippo.

c) Orders from banks up to US$ 20 million received 100%. Orders from brokers up to US$ 8 million received 100%. Above that, zero.

These allocations make absolutely no sense if your purpose was to provide dollars to importers. They were completely left out!

In fact, banks and brokers have no need for US$ other than sell them to their clients, so by giving them such large amounts you gave them about Bs. 1 for each dollar they received. Nice profit if you knew what to ask for. In the past banks and brokers have usually been left out. As it should be.

By giving 100% to orders below half a million dollars for individuals, speculators, and of course, those in the know, maximized their profits. And this is they key, the allocation was so unlike the objective of the bond, that this had to be designed so that those in the know made a lot of money.

Add to that the fact that not everyone deposited the money, as required by the Government, and the profits can simply be staggering if you were in the know. And it was a great deal for everyone. If everyone sells their bonds today at current prices, the total profit was around Bs. 5 billion or about US$ 680 million dollars, about US$ 27.2 per Venezuelan inhabitant. To finance capital flight? Huh?

If you did have the money, as I suggested you do to go to the bond, you made 19.4% in about ten days. Those that didn’t put anything made, of course, an infinite return, and those in the know, surely made up at least part of their Andorran losses, when their account were frozen.

And remember: don’t hold on to the bonds too long, with a US$ 5 billion issue flooding the market (and more coming?), I would be very surprised if bond prices held up. You did not buy the bond to hold onto it, you bought it to purchase foreign currency. Don’t fall in love with the bonds!

Oh yes, and the country’s debt increased by US$5 billion so that all of this could happen…

With 54% plus of the vote Chavista Wills Rangel, a former Adeco and Carlos Ortega aid, won the oil union elections representing Chavez’ PSUV party via the FUTPV union slate.

And you have to love the symbolism of Rangel, a former Adeco, sitting in front of a terrible Chavez painting, talking about socialism.

But note on the lower left he has a little Chavez figurine, with someone that I have yet to clearly identify (Any help would be appreciated) and then…that symbol of the peculiar bolibourgeois socialism: A picture of his race horse winning at the La Rinconada race track in Caracas.

Those are the values of XXIst. Century Socialist union leaders in Chavista Venezuela…

Do I need to say anything more?

I have been busy. I am transferring one by one all of my orchid pictures from my old website to the new one and it takes time. I actually spent like three evenings doing that and I did about a year and a half. I am now up to summer of 2007, so I am closer, but it is a lot of work.

Yesterday evening was quite cool. First, I watched the “Bienvenido Dudamel” concert over the Internet from the LA Philharmonic website. Did not watch it all, but managed to see good pieces of it, even if I missed Red Hot Chili Peppers. I will try yo see that part again. According to the website, they will have it by video on demand soon. Even more interesting, once the Red Sox game began, I managed to watch using my CANTV ADSL both the concert and the game (with the game on mute) over the Internet at the same time. Yes, the Red Sox game was meaningless, since they are going to the playoffs already, but there is a difference between fan and fanatic, I am the latter.

In the middle of both of these I went to have dinner with some good friends and my brother and his wife at what is probably the best value/quality meal in Caracas: I went to eat at Sumito Estevez’ cooking school in Chuao. You get two choices per course (you can see what the menu is on the website early in the week) and there is no charge for opening bottles of red wine. (It is quirky, as there is a charge for drinking white winr!). All of this, including dessert and a guayoyo coffee for only Bs. 150 per person. You get a first class meal with excellent service in an informal atmosphere. Try it! (Disclosure: Sumito is a friend of mine)

Last night I had a ceviche tasting to start, a Beef Carpaccio with confit mushrooms, pepper mustard and tempurized spinach as the first course and Seafood Chowder as the main course, with a cold cus cus salad. For dessert we got Mulberry sherbet with a cream of green apple. Excellent!

Then I went home and arrived just when the Ninth Symphony was starting in the concert, directed by Dudamel and watched the whole thing and the fireworks at the end. What can I say? Simply spectacular.

A nice and relaxed day!

Well, the Government announced today the price range for the auction and it looks like it may be quite a gift to buy the bonds. Here is why:

The Government set the Price range from 135 to 140. That is, if you want to buy $ 10,000 of the upcoming combo you have to pay:

$10,000 x Price x 2.15 Bolivars for $10,000 of the issue

Suppose you go at 140, then it is 10,000 x 1.4 x 2.15 = Bs. 30,100

and you get $5,000 of the 2019 bond and $5000 of the 2024 bond.

Now, some people did not understand where I got the 12.5% yield to maturity of the Venezuela curve or why I said that it would yield 14%. Here is the explanation:

Venezuela has issued many bonds over the years. They vary in price. No matter what the coupon is or may be, those bonds that mature from 2020 to 2025 are roughly yielding today 12.5%. This may change in a week (or tomorrow), it was around 14% a month ago.

Thus, in an ideal world, the new bonds would go to that approximate yield: 12.5%. This means that even if you have $5,000 of each of the 2019 and 2024 bonds, you don’t get $5,000 of each, but something around 72% for both (Where they yield 12.5%) This means that you paid Bs. 30,100 for about $7,200 of bonds or Bs. (30,100/7,200)=Bs. 4.18 per US$.

However, the world is not ideal and simply the fact that these bonds are new, will make them yield more than the curve, as the market can not instantly absorb all those bonds Venezuelans will sell during the first week. Thus, if I think that they will yield 14% (a little pessimistic), then the combined bonds will be worth around 67% (These are approximate examples only). Then, if this was the case, you have (30,100/6,600)=Bs. 4.56 per US$.

Given that the swap market closed today higher at around Bs. 5.3 per US$, that is not bad, you would be buying dollars at a nice 14% discount. Nice, you buy on Friday and by Monday, you have made 14%, if you had the Bs. to put in an order (The poor are not allowed into this part of the revolution)

Of course, I am not sure if the bonds will trade at 14%, or 13,5% or 15%, thus, I calculate all of the possibilities and you get this graph:

So, even at a high yield to maturity and a high price, it looks pretty good. Thus, I suggest that you don’t be too greedy, bid at 140, the maximum price allowed and you know exactly how well or how badly you will do. And even if we talk 16% and 140%, you will be ok., because you will be buying dollars at a lower rate than the swap market.

Can something go wrong?

Yes, two things could:

1) The Government could decide to increase the size of the offering to US$ 4 billion or even higher, it has an authorization from the National Assembly for up to US$ 5.8 billion. More bonds, more offering that international markets can absorb at once and the yield to maturity could be at the high range of things. Essentially, there is not infinite appetite for Venezuelan bonds, because only a selected group of investors specializes in it, thus the market could get indigestion if the Government offered too much and there were not enough buyers.

2) You may think “I am going to be rich!!!”, order a million dollars, but you are not the only one doing it and you may get only $100,000 allocated. If you have the Bolivars, no problem. But if you are borrowing them, you may have to borrow a million and only get 200,000 and have to pay interest for the full amount. So, don’t go crazy, put in an order for what you have in Bs. No more, no less.

And yes, it looks good! But don’t get greedy…

When the Hugo Chavez Government decided to jail student Julio Cesar Rivas a few weeks ago, it was clearly an act of defiance by the Government toward the student movement. The message seem to be: Keep protesting and I will jail you too.

Because there was no real reason to pick on Rivas. The Government made him famous by choosing him and sending him to an inappropriate jail. Because in the end, pro-Chavez thugs have visibly done things that are much worse than anything you could accuse Rivas of, but remain at large, such as the 40 motorcycle thugs that accompanied Lina Ron in their violent attack on Globovision and only Ron is in jail, just because it would look bad if she were at large.  But armed Lina Ron was no even sent to the women’s jail, a kids playpen when compared to the Yare jail where Rivas was sent.

The Government had the chance to release Rivas on his own recognizance when he was first brought in front of a judge. But it didn’t. There were clearly orders from above to be tough, to move forward and send a message to the student movement.

But something happened at this point. While the OAS was watching Honduras and sending missions to Honduras (Funny, no OAS CIDH mission has been allowed in Venezuela in seven years but this does not bother those OAS cynics!), a small group of students decided to start a hunger strike at the Caracas OAS headquarters to protest the detention of Julio Rivas.

It started with a group of five students, but in time, it grew, more joined and by today reportedly 58 students (going on 78?) were involved

(Foto by Noticiero Digital)

and one had to add other political prisoners to the group, as Somonovis, Forero and other, including Eligio Cedeno, joined the group.

And it did indeed look like the Government was trying to slow down the tsunami of hunger strikers with Rivas’ release.

But a funny thing happened on the way to freedom. Julio Rivas, after spending a few days at the Yare jail, figured that anything was better than that, even a hunger strike! So, he went straight to the OAS headquarters and joined the hunger strike. Thus, so far the strength of the movement has not slowed down, on the contrary, it has been picking up people.

The students, as usual, have been able to find more impacting strategies, than the so called opposition. I think the Government blinked, the question is at this time, whether the hunger strike action can be sustained in time and what will the Government do if the movement continues to grow.

Kudos to Rivas and the rest of the students!

After a little bit of indecision, today the Government announced that it will sell at least US$ 3 billion in two bonds which will mature in 2019 and 2024 and will be sold for local currency, but denominated in US dollars. This is much like the other Bs/US$ issues sold by the Chavez Government since August 2003, which are sold in order to absorb liquidity, as well as satisfying the pent up demand for foreign currency. The maturity dates arise from the fact that Venezuela has no bonds maturing in those two years, thus 10 and 15 years from now, the payment schedule will be smoother and hopefully easier for the country. The 2019 has a coupon of 7.75% and the 2024 has a coupon of 8.25%.

I have already received a few emails asking me if it is a good deal, so I will try to answer it here:

–The bonds will be sold at auction. The Government will announce tomorrow a range of values for which it will accept offers for the bonds. Thus, there is no “price” yet for the bonds, the highest bidders will get them.

–At last the Government got smart. In previous bonds, people would put in for 100,000 dollars and they would get a fraction of that and pay for it. This time around, you can’t do that, you have to put up the full amount with your order. Thus, if you want 100,000 dollars of the bond and your price is 140%, then you have to pay Bs. 301,000 (100,000 x 1.4 x2.15) when you place the order and your bank and/or broker has to be able to prove that you did so. This eliminates “fake” orders and will make the bonds end up in the hands of those that the Bolivars and want to buy dollars to keep them. Should be more efficient and help keep the swap rate down for a while.

–Is it a good deal? Well, it will be at a certain price. Today the swap market was around 5.4, so anything you can get below that is “good”. Venezuelan Bonds with maturities like 2020-2023, “yield” if you keep them till the last day, around 12.5%. Thus these bonds should trade around that value in an ideal world.

Except the world is not ideal. The market for Venezuelan bonds handles maybe US$ 100 million on a good day. So, imagine that in the first two or three days, Venezuelans eager to sell their bonds will go to the market to sell. Too much offer, few bidders, the bonds will drop in price. Thus, the “yield” will be higher than the “ideal” 12.5% that matches bonds trading today.

Let’s assume the yield goes to 14.5%, then, at a price of 148%, you would be buying Bolivars at Bs. 5.01 to the dollar a nice discount over the swap market price. However, at 15.5% yield, at the same price of 148% you would be buying dollars at Bs. 5.33 per dollar, with commissions and the like it would be like buying dollars at the same value that the swap market closed today at. Not worth it.

-What do I think will happen? Well, the problem is that today may be too early to decide. First of all, the swap market could keep dropping between now and the last day to receive orders, which is Friday October 2nd. If the swap rate drops a lot, then it’s tricky.

I personally think that the bonds will likely trade in the international markets near 14-14.5%, which means a price around 144 should be fine. But I reserve the right to change my mind before Friday.

Why?

Because three things could still happen: One, the swap market could drop near or below 5 Bs. per dollar, which would make it too close for comfort at 144%. Two, The Venezuelan yield curve could go up, as investors sell (Bond prices are pushed down) to get ready to buy these higher yielding bonds. And three, and this one we will not know until after your order is in, the Government could decide to issue more than US$ 3 billion, if there are lots of orders.

This will have the effect that there will be more bonds (Lower bond prices) than expected coming to market, which would move the curve up even more (Yields to maturity higher than the 14% I expect).

Thus, On Thursday, I will give a brief update on how I see it then.

(Send questions to devilexcrement@gmail.com or write a comment with your question)