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By Rick Pendergraft Outside of the Consumer Price Index report for September, the focus this week will be on economic activity. There are several reports that will give us a clue as to where the economy is heading, starting this morning with the New York Empire State Index. This report is expected to drop to 14 from a reading of 14.7 in August.
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BRIC Brazil, Russia,India and China make news every day.

Saturday, 05 July 2008

By Andy Carpenter
Four powerful trends are set to converge in a manner that will topple the global status quo.
The trends are at different levels of maturity. But, those who avoid these forces – or worse deny that they are real – could find themselves financially crippled… unable to advance.
Of course, human nature suggests that we all love our comfort zones. That’s what makes it so easy for many investors, and the media, to ignore irrevocable truths.

This is the curse of knowing what you know and nothing more.

In just a second, I’ll show an idea that allows you to play the trends safely.

But first, here are thumbnail sketches of the four forces that are set to create a historic financial convergence.

TREND #1 – The United States is now a second tier economy. It’s not a manufacturing economy. It’s a service economy led by banks, brokerages, healthcare, media and insurance companies. It’s a weak-and-sliding-dollar economy. It’s a borrowers and debtors’ economy. It’s a 50%-net-importer-of-oil economy.

TREND #2 – US investors are set to flock to dividend paying investments. Now, you may insist that income plays a solid part of your investment mix, but you would be shocked by how many people don’t. Worse, baby boomers don’t have near enough to retire on. They’ve spent their 401(k)s on living expenses. In fact, one recent study revealed that only 19% of today’s workers are on track to maintain their standard of living upon retirement. More chilling was the discovery that nearly 70% of all workers are saving less than 80% of their projected minimum needs for retirement. So, income is set to become a massive trend.

TREND #3 – BRIC, perhaps the most well known of the converging forces, investments in Brazil, Russia,

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India and China make news every day. Most of the experts foisting BRIC upon you today are the same crew that insisted places like Argentina and Iceland were the next big things. Those worked out well, huh? These opportunists are now onto BRIC, so it’s easy to understand why so many investors are leery of global investing. Still, BRIC has something that ArgenIce didn’t. BRIC has economic growth – 9% in China, 5%, or better, for each of the other three. Even better, natural-resource rich Brazil and Russia are going to be solid long-term suppliers to China and India. Seems China, in particular, saw this trend emerge while the rest of the world was busy lending the US trillions and missed out.

TREND #4 – It ain’t gold. In fact, aren’t you getting just a wee bit tired of the way gold’s apologists are always making excuses for why their precious metal, in the face of a weak dollar and $140 oil, hasn’t yet flown to a zillion dollars? And, trend #4 isn’t oil, either. It’s way more powerful than commodities. It’s the ultimate weak-dollar, second-tier economy play. In fact, I shared it with my Asia Business & Investing newsletter subscribers on Wednesday. So, I have an ethical problem revealing it here. You see, AB&I may be low-priced, but its readers do pay for the global intelligence I share with them.

But, read on, because to make it up to you, I’ll show you a nice idea that totally leverages the convergence of today’s most powerful economic/investment trends.

Thick as a Bric

Talk about income. Wow!

Telecomunicaoes de Sao Paulo S.A. (NYSE:TSP) delivers that in spades.

The Sao Paulo, Brazil state telecommunications outfit pays a fat 10.3% dividend, which today would come to about $2.85 a share. And, that’s no one-time deal, either. TSP’s five-year average payout is 8.7%.

TSP sports a super return on equity at 21.64%, but that’s deceiving (numbers can lie) because TSP carries a significant chunk of debt, $1.8 billion, which always inflates ROE. Interestingly, while that $1.8 billion may seem high, it’s just about in line with the industry average of $1.5 billion.

But, TSP’s return on assets is a tasty 12.14%, which shows its assets are very productive. And, with a P/E that’s projected to fall to 9.3 next year, TSP will remain well below the industry-average P/E of around 18.

By the way, just a little BRIC side note here. India’s Tata Communications sports a stunning 2,175 P/E. That’s right – 2,175.00.

Anyway, back in Brazil, Telecomunicaoes de Sao Paulo is a standard telecom. It offers local fixed line services, interregional and international long-distance services, data services, including broadband and data link services. It also sells pay TV services through direct-to-home satellite technology and land based wireless technology multichannel multipoint distribution services… and a whole bunch of other data transmission services.

The company sells interactive banking services, electronic mail, and similar services, as well as sells handsets and other telephone equipment.

At the start of this year, TSP’s regional telephone network included approximately 14.6 million fixed lines, including public telephone lines, of which 12.0 million lines were in service.

On all its business, TSP generated $9.31 billion in revenues last year. It held a nice 15.21% profit margin.

There’s one final thing to like about TSP. It’s a subsidiary of Spain’s Telefonica S.A.

On top of that, even in this market, TSP should not be too volatile. I have a chart that sees it heading from its current $26.80 range to around $42. Wall Street’s consensus is a tad more than $36.

In other words, Telecomunicaoes de Sao Paulo S.A. (NYSE:TSP) looks to be a solid BRIC play. It’s one that’s separated from the US economy. It pays a killer dividend. And, it totally conforms to Trend #4 – the secret sauce – I mentioned above.

See you next Saturday.

Hope you’re having a great holiday weekend.

Andy

P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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