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Why Germany’s Win Sent Brazil Stocks Higher

Soccer fans around the globe were dumbfounded by the shellacking that Brazil took in the World Cup semifinals against Germany.

Once the final 7-to-1 score was posted – officially making it the worst loss by a host country in the history of the World Cup – people expected riots in the streets of Rio and São Paulo.

Many also anticipated a continued downward spiral in Brazilian sentiment regarding the economy and government.

What the world didn’t expect, however, is that the crushing defeat would send Brazilian stocks higher!

Despite the loss, companies like Petrobras (PBR) and Vale (VALE) are on a serious upswing – with the former up almost 20%. And all signs indicate that the momentum will continue.

So what caused the sudden rally?

From Defeat to Tipping Point

As most countries are exiting recessionary times, Brazil is exhibiting one of the poorest economic performances in the world’s emerging markets. And Brazilians have grown tired of the corruption, taxes, debt, and government mismanagement that have pushed the country to the breaking point.

The World Cup loss must have been the final straw.

Brazil’s loss in the World Cup appears to be directly correlated to a downtrend in current president Dilma Rousseff’s poll rankings.  At the same time, popularity for her competitor, Aécio Neves, is moving higher.

My Brazil contacts also confirm that the sentiment for Rousseff is decidedly negative right now.

How does this relate to the market?

Well, under Rousseff’s socialist rule, the government has been using Petrobras as piggy bank. It controls a big chunk of shares, so it’s able to dictate things like forcing the company to buy future drilling permits.

If Neves, who is a capitalist, takes power, the government will no longer shackle companies like Petrobras. And it won’t fix prices (at lower levels than costs) just for the sake of government popularity.

A Neves-run government would likely mean that Brazilian rates should also come down, igniting a stock market rally as the currency (the real) falls. That would be good news for companies like Vale, which would see production prices move lower as the real plummets against the dollar – the currency that most resources are priced in.

With stocks already on the rise, the Brazilian market is obviously betting against a Rousseff re-election.

Of course, it’s certainly not a sure thing, and plenty could happen between now and early October when the elections take place.

But if you are looking for a speculation that has explosive potential, you may want to bet on Petrobras and Vale. They’re both cheap and have the type of potential to move up 50% or more between now and the end of the year.

I recommend using options that expire after the election. The options are cheap compared to buying the respective shares, and that limits your losses – while giving you the opportunity for unlimited upside if Rousseff loses the election.

Ultimately, if Rousseff loses, the sentiment about the World Cup loss would change from one of defeat, to a positive tipping point for the country.

And “the chase” continues,

Karim Rahemtulla