Brazilian politics gives boost to Petrobras

The increasing prospect of regime change in Brazil is making Petroleo Brasileiro the world's best major oil stock. It's also opening the door for foreign companies to tap more of the country's vast energy wealth.

Policies that saddled state-run Petrobras with $139 billion in debt and made offshore projects more expensive also stunted efforts by companies including Royal Dutch Shell and Halliburton to expand in the country.

Opposition candidate Aecio Neves’s pledges to auction exploration licences more frequently, raise fuel prices and ease made-in-Brazil requirements mirror recommendations from the industry.

Neves, whose Social Democracy Party opened oil to foreign producers in the late 1990s, surprised analysts to take second place in voting last weekend and force a runoff ballot.

Frustration among oil companies and their investors with his rival, President Dilma Rousseff, has grown since she took office in 2011.

Last month, an oil lobbying group said the industry is in difficulties and some Petrobras suppliers may leave Brazil.

Neves has attacked Rousseff’s handling of Petrobras and hired an industry consultant and an official involved in 1990s privatisations to draft his energy programme.

Petrobras has surged 16 per cent since Neves won a place in the runoff vote, as other major producers fell.

In the past four years, the stock has lost investors 34 per cent in dollar terms, the worst performance among major competitors.

Rousseff and Neves are statistically tied less than two weeks before the October 26th runoff, according to polls late last week. Right time, wrong deal The hullabaloo surrounding Glencore's spurned approach to rival miner Rio Tinto shows why this is probably the wrong deal at the right time.

Glencore’s proposal to create a $160 billion behemoth is certainly audacious, and may even make sense for shareholders of both companies if priced attractively.

But even if it were successful, such a deal would do little resolve the key problems bedevilling the outlook for many commodity markets, and the companies that produce those resources.

The logic of Glencore taking control of Rio Tinto would be for the former to get access to the latter's iron ore operations in Australia, which have the lowest cost among major producers.

Iron ore is the missing arrow in Glencore’s quiver, and the assumption behind a deal would be that the Swiss-based company would be able to use its trading nous to extract more value from the well-run Rio Tinto mines.

Assuming that all the anti-trust and other regulatory obstacles could be overcome, and that Rio Tinto shareholders could be won over, the potential for the deal to be rewarding for Glencore is compelling.

However, the emphatic rejection of the approach by Rio Tinto’s board likely means that Glencore will be unable to get a low-ball offer accepted, meaning it either has to pay more money for Rio or go hostile.

Both of those would be tough decisions for Glencore's Ivan Glasenberg, the former South African who merged secretive traders Glencore with mining major Xstrata, in a deal completed last year that was initially touted as a merger of equals but ended up with Glencore dominant.

While Glencore clearly faces an uphill battle to make the Rio Tinto deal work, there are likely better opportunities available in mining mergers and acquisitions.

Funds shrink post-Gross The era of one dominant bond fund may be ending with Bill Gross's sudden exit from Pacific Investment Management Co (Pimco).

It’s unlikely that any other actively managed bond fund will soon get as big as Pimco’s $200 billion Total Return Fund – which has lost billions of dollars to competitors since Gross’s departure.

DoubleLine Capital, one beneficiary of the exodus, has said it will stop new money from coming into its total-return bond fund well before it reaches $100 billion because that kind of size can hamstring performance.

Other asset managers, such as Vanguard Group Inc, have previously closed bonds funds to new cash for similar reasons.

The performance of the Pimco fund, whose size peaked at $293 billion last year, has lagged behind most of its peers since the end of 2012.

A shift towards less concentration is alright by Morningstar's Russ Kinnel, who said bond investors will benefit from more competition among investment firms for assets.

“It’s never healthy for one company in one asset class to be the default” investment choice, said Kinnel, director of mutual-fund research at Chicago-based Morningstar.

Pimco’s Total Return fund outperformed 82 per cent of its peers in 2008, when credit markets seized as housing values spiralled downward. It underperformed 65 per cent of its peers in the past year, though, and its assets were already shrinking before Gross left, according to data compiled by Bloomberg.

For years, bigger seemed better. Now, it’s not so clear.

Exchange rates looking hostile Earnings season can be rather a lot like fashion week, in so far as there are very often common trends wherever one looks.

For example, skipper hats, Members Only jackets and plaid Mighty Mighty Bosstones-style suits are destined to be all over the runways in Istanbul and Tokyo this month.

Okay fine, that one is made up, but here is an earnings season trend that you can definitely count on: the phrase “unfavourable currency exchange rates” or something similar to it will show up in a lot of press releases over the next month or so.

How unfavourable exactly is the question.

The dollar surged more than 8 per cent versus the euro in the quarter.

That made American skipper hats a lot more expensive in comparison to equally fashionable and timeless French berets (excluding the cost of having your name stencilled on the front.) And it wasn’t just the euro. The Bloomberg Dollar Spot Index, which is a measure of the currency against 10 major peers, jumped 6.7 per cent in the quarter for its biggest advance in six years.

Bank of America strategist Savita Subramanian is estimating that a 5 per cent rise in the dollar versus the euro results in a drop of about $1 for full-year Standard & Poor's 500 Index per-share earnings, which she projects at $118.

Partly because of the dollar and the related decline in oil prices, earnings estimates have seen “one of the largest downward revisions over the last few years” aside from the weather- beaten first quarter of this year, according to Subramanian.

Still, both Subramanian and her counterpart, Adam Parker, at Morgan Stanley agree that earnings projections have been lowered enough that companies will beat estimates, as they tend to do.

– Bloomberg/Reuters