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[mitchzacks]

Thawing Cuban Relations and Investing Potential

Steady Investor News

Is Cuban rum the smoothest in the world? Arguably ‘Yes’. However, in the last 88 years it has been almost impossible for an American to visit Cuba and try some of that rum (ideally on one of the 250 fun-filled Cuban beaches). But, that all could change soon. 

Following Fidel Castro’s rise to power, political tensions between the Cuban and U.S. governments (communist and capitalist, respectively) rose to the level of nuclear crisis resulting in political hostility and a trade embargo lasting more than half a century – up until 2015 when President Obama took steps to normalize diplomatic and trade relations with Cuba.

Any deal with Cuba is a political minefield and we won’t weigh in on the pros and cons in that context. However, we will take a look at how normalized relations with Cuba could affect economic growth and trade for both countries.

Cuba’s Economy

Shambled Economy: The $128.5 billion Cuban economy is mostly state-controlled and has yet to recover from the 2008-09 financial crisis. According to the Cuban government, the economy has been growing at around 2% since 2009, but most economists believe it’s actually near zero. 

Communication Breakthroughs: Cuba has one of the most underdeveloped telecom infrastructures in the world and is one of the world's least connected countries. Only 23% have state-restricted internet access (which can hardly be called internet access) and just 5% have unfettered access to global internet connections. Additionally, only 10% use mobile phones.

Aging Population: Cuba has a total population of nearly 11.1 million that is aging. Around 18% of the island’s population is above age 60 and this percentage is expected to rise to 30% by 2030. As this shift occurs, Cuba will be faced with having fewer working-age citizens supporting more non-workers placing greater stress on their economy. 

Key Revenue Driver: Cuba has the third highest number of physicians per capita, behind only Monaco and Qatar. Export of health care services, in the form of sending physicians, nurses, and healthcare technicians to countries like Venezuela and Brazil, is the economy’s principal source of revenue. Around 40,000 Cuban medical professionals visit Venezuela every year providing services for which nearly $5.5 billion a year is paid.

Per Capita Income: With a 99.8% literacy rate, Cuba has a well-educated workforce. However, around 73% are employed by the state. With 40% of the workforce falling in the middle class bracket, the aggregated gross per capita national income is around $5,539. Interestingly, however, the take home salary for most Cubans is around $20 a month.

Potential Benefits from Thawed Relations

For Cuba, one of the immediate benefits of renewed relations with the U.S. will likely be increased remittance flows. The most recent figures put annual cash remittances to Cuba at approximately $5.1 billion, a level greater than the four fastest growing sectors of the Cuban economy combined. With a deal, permitted remittance levels from the U.S. would potentially be raised fourfold, from $2,000 to $8,000 per year. This differential has more power than meets the eye as remittances do not cost the Cuban government or its broader economy anything to produce (unlike substantial costs that go into processing sugar, manufacturing drugs, and importing food). This scenario would help increase spending power in Cuba, which is expected to grow at a compound annual rate of 4.6% through this decade. 

In December, direct postal service resumed and baseball teams began reciprocal visits. Additionally, Rihanna has partied there with Paris Hilton, American television shows have filmed in Cuba, Air BnB and Netflix are operating and credit cards are accepted. For global companies seeking a foothold anywhere they can, more money in the pockets of Cubans means more fuel for expansion. Take Coca-Cola for instance - with an open Cuba, Coke could soon be legally sold in every country in the world except one: North Korea.

The past twelve months have seen more changes in Cuba than, arguably, over the previous twelve years.

U.S. Sectors Poised to Benefit

With the U.S. government working toward restoring full diplomatic relations with Cuba, the agriculture and telecommunications export sectors seem to have the most upside along with  farmers in the Southeastern U.S. (whose proximity to Cuba make their poultry, fish, wheat, rice, and corn exports to Cuba especially competitive).

Bottom Line for Investors

A deal with Cuba stands to create thousands of new U.S. jobs while saving the government huge amounts in federal enforcement costs. Previously, the government used resources from 10 different agencies to enforce various provisions of the embargo and has devoted millions of dollars and thousands of man hours. According to the U.S. Treasury Department, every year over 70% of the department’s inspection hours were devoted to sniffing out smuggled Cuban goods, even though the agency administers more than 20 other trade bans.

An open Cuban economy, coupled with its well-trained workforce, could make it the next ideal international investment destination. Presently, it attracts around $500 million of fixed direct investment, just 1% of its GDP. But, with a lifted embargo investment could soar and bring GDP along with it.

And, while we're taking a close look at what thawing relations with Cuba specifically means for investors, we're always looking hard at U.S. economic data as well. If you want to come up to speed on what we're seeing for investing perspective, download our just-released Economic Outlook Report (April '16 edition).

Steady Investor News is published by Zacks Investment Management.

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[jlfmi]

Are Emerging Markets Finally Hitting “Knife-Catching” Levels?

The beleaguered MSCI Emerging Markets Index is hitting a potentially key level on its chart.

What a wild beginning to the new year, with U.S. stocks off to their worst start ever by some measures. This has definitely made for no shortage of Chart Of The Day (ChOTD) worthy charts. Given the meltdown over the past week you might think we’d choose a metric related to the washed-out, oversold condition in this market as our ChOTD. Well, there are plenty of interesting candidates in that regard, which you should be able to locate fairly easily among the technical analysis gurus on social media. Long-story short there -- markets are very oversold, to the point where, historically, the short-term risk-reward ratio is heavily skewed to the upside.

That said, in this kind of tape, things can get even more out of hand to the downside in the very near-term before the “expected” bounce unfolds. Furthermore (and this is, in our opinion, a critical point), as yesterday’s post indicated, various indices broke extremely consequential levels yesterday, which may have tilted the longer-term balance of power from the bulls to the bears. That is, yesterday’s break may potentially have been the start of something negative, longer-term, rather than nearing the end of your run-of-the-mill short-term dip. While not tied directly to our ChOTD, we just wanted to provide some updated color on these ongoing developments.

So what is the ChOTD today? It is a simpler, more straightforward price chart of...the MSCI Emerging Markets Index (EM). What is so special about EM during this time of short-term upheaval in U.S. markets? Well, folks like to say regarding the action of the past few years in the equity markets that the U.S. is the cleanest dirty shirt. To continue the analogy, Emerging Markets would be the dirtiest dirty shirt.

After moving sideways for 4 years following a top in 2011, EM has been bludgeoned over the past 12 months. Consider EM the equity equivalent of crude oil (which, not surprisingly is highly correlated with many emerging markets). This nearly 5-year drought has resulted in anxious investors and traders taking stabs at catching this EM “falling knife”. Thus far, this endeavor has only resulted in bloodied hands. That said, the knife-catchers’ best opportunity yet may be at hand.

Folks who read our blog probably know by now that our preferred method of investment selection revolves around the concept of relative strength. That is, we like to concentrate our portfolio in strong-performing areas as opposed to attempting to catch falling knives in hopes of a mean-reversion bounce. That said, readers may also be aware of the fact that we only attempt a knife-catch at major support levels.

One such level (as readers again may be aware) is the 61.8% Fibonacci Retracment from major price junctures. And it just so happens that the MSCI Emerging Markets Index is right on top of the 61.8% Fibonacci Retracement level of its rally from 2008 to 2011. Knife-catchers, this may finally be your spot!

As the chart shows, the 61.8% Fibonacci Retracement of the 2008-2011 rally sits at about 741. Today’s close was 739. Now, given the downward momentum in global markets, there certainly could be a slight overshoot to the downside before a solid bounce materializes. Additionally, the index’s post-2002 Up trendline sits just below current levels, so that could provide more support in the case of a temporary breach of the Fibonacci level.

But what of our “key breakdown day” yesterday? That is a valid point and a valid concern. An accelerated downdraft in the U.S. and other vulnerable markets would almost certainly have some effect on EM. However, markets don’t always line up in an orderly, predictably inter-connected manner. Most often, there are scattered bullish and bearish data points which a manager must reconcile. Often, our favored approach is to not reconcile them at all, but rather treat each market and piece of data on its own merits. That is, treat the bullish markets favorably and the bearish-looking markets cautiously.

Therefore, while we have major concerns about this week’s key breakdown in the U.S. equity market, the long-beleaguered Emerging Markets have arrived at the level that we have earmarked for some time as a potential support zone. Therefore, if one is not averse to knife-catching attempts, go ahead and take a, er, stab at it (though, in the current environment, you may want to wear gloves when doing so).

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.