Selling Vale on Another Brazilian Election Bounce

10/13/2014 5:01 pm EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Though he still likes this Brazilian iron ore miner’s prospects for the long-term, MoneyShow's Jim Jubak no longer thinks it’s right for the short-term, so, to take advantage of the election bump, he’s selling his shares as of today, October 13.

I’m selling Vale (VALE) out of my Jubak’s Picks portfolio today, October 13 with a loss of 23% since I added it to the portfolio back in November 2013.

I had thought that I’d missed selling on the election bump that the stock—and Brazil’s market in general—had received earlier in October when it looked like incumbent president Dilma Rousseff was sinking in the polls. (The financial markets regard her administration as excessively interventionist, especially in the oil, mining, and utility sectors, so the prospect that she might go down to defeat cheered Brazilian investors.) But Rousseff’s chances improved after the first round vote on October 6 and Brazilian stocks declined.

But today it’s rally time again in Sao Paulo on news that the third place candidate in the first round vote, Marina Silva, would throw her support to the second place opposition leader, Aecio Neves, in his runoff race against Rousseff. The New York traded ADRs of Vale, for example, were up 7.1% today as of 3:00 PM New York time. I think Neves stands a chance in the runoff but I’d still give Rousseff the edge to win re-election.

The problem for Vale, however, is that whoever wins or loses the election in Brazil, the iron miner still faces the hard facts of slow demand from China, the biggest market for seaborne iron ore and huge scheduled additions to capacity by Vale and its competitors Rio Tinto (RIO) and BHP Billiton (BHP). In an effort to drive less efficient miners out of business, the big players have actually ramped up their production plans. In August, for instance, BHP Billiton raised its annual production target to 290 million metric tons from 220 million.

This plan to reduce supply in the long run by unleashing a torrent of supply in the short run may work—I’ve got my doubts about how easy it will be to force Chinese miners out of business using something as quaint as profit and loss—but even if it does, we’re looking at a very long period of pain. The big three are looking to add capacity in 2014 and 2015. I like Vale’s prospects in the long-term—it is a low cost producer in a world that will eventually demand more iron ore—but the stock isn’t a good fit with the 12-18 month Jubak’s Picks portfolio. Time to admit that adding it to this portfolio was a mistake and move on.

Admitting this mistake now has the added advantage of freeing up some cash to take advantage of any bargains that the current nervous market might deliver. And those bargains are likely, no guarantee, of course, to payoff on a shorter timetable than Vale.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.

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