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Meet Wall Street’s Best Dealmaker: New Billionaire Orlando Bravo

Orlando Bravo discovered his edge early. In 1985, at age 15, he traveled from his home in Mayagüez, Puerto Rico, a small town on the island’s western coast, to Bradenton, Florida, to enroll in the legendary tennis guru Nick Bollettieri’s grueling academy.

Bravo would wake at dawn, head to class at St. Stephen’s Episcopal School, then return to Bollettieri’s tennis courts at noon. He spent hours warring against peers like Andre Agassi and Jim Courier under the broiling sun. At sundown, after an hour to shower and eat, he would study, then retire to a sweaty, two-bedroom condominium in which players bunked four to a room like army barracks. Then he would do it all over again, six days a week, for a full year. “It was the tennis version of Lord of the Flies,” says his former roommate Courier.

The brutally competitive environment helped Bravo climb to a top-40 ranking in the U.S. as a junior. Then he peaked. “It was quite humbling,” recalls Bravo, who’s still fit from his weekly tennis games. “It was a different level of hard work altogether. It became clear I could operate at these super-high levels of pain.”

That grit and perseverance eventually propelled him to the top echelons of the private equity world. Few outside of finance have heard of the 49-year-old Bravo, but he is the driving force behind Wall Street’s hottest firm, the $39 billion (assets) Thoma Bravo.

In February, the French business school HEC Paris, in conjunction with Dow Jones, named Thoma Bravo the best-performing buyout investor in the world after studying 898 funds raised between 2005 and 2014. According to public data analyzed by Forbes, its funds returned 30% net annually, far better than famous buyout firms like KKR, Blackstone and Apollo Global Management. That’s even better than the returns from the software buyout firm Vista Equity Partners, its closest rival, run by Robert F. Smith, the African American billionaire who recently made headlines by paying off the college debt of Morehouse College’s entire graduating class. Since the beginning of 2015, Bravo has sold or listed 25 investments worth a total of $20 billion, four times their cost. His secret? He invests only in well-established software companies, especially those with clearly discernible moats.

“The economics of software were just so powerful. It was like no other industry I had ever researched,” says Bravo, seated in his office in San Francisco’s Transamerica Pyramid. He wears a tailored purple dress shirt and enunciates his words with a slight Puerto Rican accent. “It was just very obvious.”

Bravo’s firm has done 230 software deals worth over $68 billion since 2003 and presently oversees a portfolio of 38 software companies that generate some $12 billion in annual revenue and employ 40,000 people. Forbes estimates the value of the firm, which is owned entirely by Bravo and a handful of his partners, at $7 billion. Based on his stake in the firm and his cash in its funds, Bravo has a $3 billion fortune. Not only does that make him the first Puerto Rican-born billionaire, it’s enough for Bravo to debut at 287th place on this year’s Forbes 400 ranking of the richest Americans.

Like a good tennis player who’s worked relentlessly on his ground strokes, Bravo has made private equity investing look simple. There are no complicated tricks. He figured out nearly two decades ago that software and private equity were an incredible combination. Since then, Bravo has never invested elsewhere, instead honing his strategy and technique deal after deal. He hunts for companies with novel software products, like Veracode, a Burlington, Massachusetts-based maker of security features for coders, or Pleasanton, California-based Ellie Mae, the default system among online mortgage lenders, which the firm picked up for $3.7 billion in April. His investments typically have at least $150 million in sales from repeat customers and are in markets that are too specialized to draw the interest of giants like Microsoft and Google. Bravo looks to triple their size with better operations, and by the time he strikes, he’s already mapped out an acquisition or turnaround strategy.

The pool of potential deals is growing. On public markets, there are now more than 75 subscription software companies, worth nearly $1 trillion, that Bravo can target, versus fewer than 20, worth less than $100 billion, a decade ago. Investors around the world clamor to get into his firm’s funds, and lenders have checkbooks ready to finance his next big deal. “The opportunities today are the biggest I’ve ever seen,” Bravo says. “Right now we are in a huge, exploding and changing industry.”

Orlando Bravo’s isn’t a rags-to-riches story. He was born into a privileged life in Puerto Rico in the Spanish colonial city of Mayagüez, which for decades was the port for tuna fishing vessels supplying the local Starkist, Neptune and Bumble Bee canneries.

Starting in 1945, his grandfather Orlando Bravo, and later his father, Orlando Bravo Sr., ran Bravo Shipping, which acted as an agent for the massive tuna-fishing factory ships entering the port in Mayagüez. It was a lucrative business. His parents moved him and his younger brother Alejandro to what’s now a gated community in the hills of Mayagüez, where the brothers attended private schools and tooled about on the family’s 16-foot motorboat.

After taking up tennis at age 8, practicing on the courts of a local university and a Hilton hotel, Bravo and his family began making the two-and-a-half-hour drive from their home to San Juan on weekends to allow him to train against better competition. “What I loved about tennis was the opportunity,” he recalls. “I’m from Mayagüez, and I’m going to come to the big city and I’m going to make it,” he says. “Let’s go! The underdog!”

He quickly became one of Puerto Rico’s top players, which landed him at Bollettieri’s academy and then on Brown University’s tennis team. “I was so scared I wouldn’t make it through,” Bravo says of the Ivy League, so he took most classes pass/fail as a college freshman. But he quickly found his footing and graduated Phi Beta Kappa in 1992 with degrees in economics and political science. That helped him get a prestigious job as an analyst in Morgan Stanley’s mergers and acquisitions department. There he paid his dues, clocking 100-hour weeks under the renowned dealmaker Joseph Perella.

“I learned I didn’t want to invest in risky things ever again. It was too painful.”

Bravo’s Spanish fluency put him in front of clients as other analysts slaved away in data rooms. Working on Venezuelan billionaire Gustavo Cisneros’ 1993 acquisition of Puerto Rican supermarket chain Pueblo Xtra International opened his eyes to the world of buyouts. But mostly he says he learned he didn’t want to be a banker.

Bravo eventually headed west to Stanford University. He’d already been accepted into its law school, but he also wanted to attend the business school. He called insistently and eventually got accepted to pursue both. He worked during a summer at Seaver Kent, a Menlo Park, California-based joint venture with David Bonderman’s Texas Pacific Group that specialized in middle market deals. Upon graduation in 1998, Bravo wasn’t offered a position there or at TPG, and he spent months cold-calling for a job. After about a hundred calls, Bravo’s résumé caught the eye of Carl Thoma, a founding partner of the Chicago-based private equity firm Golder, Thoma, Cressey, Rauner (now known as GTCR), and they hit it off. “The biggest mistake Texas Pacific made was…that they didn’t make him a job offer,” says Thoma, 71, who Forbes estimates is also a billionaire based on an analysis of public filings.

One of the pioneers of the private equity industry in the 1970s, Thoma is a tall and mild-mannered Oklahoman whose parents were ranchers. Thoma and his partners practiced a friendlier version of the buyouts popularized by Michael Milken, preferring to buy small businesses and expand them using acquisitions. When Bravo came aboard in 1998, Thoma and partner Bryan Cressey had just split from Stanley Golder and Bruce Rauner, who later went on to become governor of Illinois, creating Thoma Cressey. Thoma sent Bravo to San Francisco to hunt for investments and eventually expand the firm’s Bay Area presence.

Bravo’s first few deals, struck before he turned 30, were disasters. He backed two website design startups, NerveWire and Eclipse Networks, just as the dot-com bubble popped. The two lost most of the $100 million Bravo invested. “I learned I didn’t want to invest in risky things ever again,” Bravo says. “It was too painful to live through.” Thoma Cressey was also struggling elsewhere, with underperforming investments in oil and gas and telecommunications. It was among the worst performers in the private equity industry at the time.

“Every time we picked up our heads to peek at a deal that wasn’t software, the software deal looked a lot better to us.”

But the failure led to an epiphany that soon made Bravo and his partners billions. He realized his mistake was in backing startup entrepreneurs, an inherently risky move, when for the same money he could buy established companies selling niche software to loyal customers. With Thoma’s blessing, Bravo pivoted and became an expert on these arcane firms. Coming out of the dot-com bust, the market was littered with foundering companies that had gone public during the bubble and had few interested buyers. Bravo got to work. His first big move, in 2002, was to buy Prophet 21, a Yardley, Pennsylvania-based software provider to distributors in the healthcare and manufacturing sectors that was trading at a mere one times sales.

Rather than clean house, Bravo kept the company’s CEO, Chuck Boyle, and worked beside him to boost profits, mainly by rolling up competitors. When Boyle wanted to buy a company called Faspac, Bravo flew to San Diego to work out of the Faspac owner’s garage for five days, analyzing reams of contracts to see if the deal would work. “Orlando would help not only at the highest level with strategy but also when we got grunt work done,” Boyle recalls. After seven acquisitions, Bravo sold the business for $215 million, making five times his money.

Software quickly became Bravo’s sole focus, and Thoma Cressey began to thrive. By 2005, Bravo and Thoma had recruited three employees, Scott Crabill, Holden Spaht and Seth Boro, to focus on software applications, cybersecurity and Web infrastructure. All remain with the firm today as managing partners.

Bravo’s big opportunity came during the financial crisis when Thoma put Bravo’s name on the door and split with his partner Bryan Cressey, a healthcare investor, creating Thoma Bravo. From that moment on, the firm invested only in software, with Bravo leading the way.

A string of billion-dollar buyouts followed—Sunnyvale, California-based network security firm Blue Coat, financial software outfit Digital Insight of Westlake Village, California, and Herndon, Virginia’s Deltek, which sells project management software—all of which more than doubled in value under Bravo’s watch. The firm’s inaugural 2009 software-only fund posted a 44% net annualized return by the time its investments were sold, making investors four times their money and proving the wisdom of discipline and specialization. “Every time we picked up our heads to peek at a deal that wasn’t software, the software deal looked a lot better to us,” he brags.

It’s late May, and Orlando Bravo’s 20th-floor offices overlooking the San Francisco Bay are filled with dozens of tech executives from its portfolio companies. Folks from Houston’s Quorum Software, which makes technology systems for oil and gas companies, mingle with cybersecurity experts from Redwood Shores, California’s Imperva. They juggle their rollerboard suitcases and thick financial books as Thoma Bravo partners map out corporate strategies on dry-erase whiteboards. Those on break hammer away at keyboards in small workrooms or demolish chicken sandwiches in a no-frills kitchenette.

This is one of Thoma Bravo’s monthly boot camps for new acquisitions, grueling daylong sessions that are critical to its success. Partners regularly buzz into Bravo’s spartan glass-walled offices, while in the background the drilling and hammering of construction workers making room for 13 new associates disturbs the peace.

With a fresh $12.6 billion war chest, Bravo is now eyeing $10 billion-plus deals and expects to begin buying entire divisions of tech giants.

After two decades studying software, Bravo recognizes clear patterns. For instance, when a company pioneers a product, its sales explode and then inevitably slow as competitors emerge. Often a CEO will use this cue to stray into new markets or overspend to gin up sales. Bravo calls this “chasing too many rabbits.” To fix it, he and his ten partners work alongside 22 current and former software executives who serve as consultants. They begin tracking the profit-and-loss statements for each product line and pore over contracts in search of bad deals or underpriced products. Critically, by the time a Thoma Bravo acquisition check clears, existing management has agreed that this rigorous approach will help. Bravo calls it “making peace with the past.”

There are also layoffs. Those can total as much as 10% of the workforce, for which Bravo doesn’t apologize. “In order to realign the business and set it up for big-time growth, you first need to take a step back before you take a step forward. It’s like boxing,” he says. “These are unbelievable assets with great innovators, and they are usually undermanaged.”

Mark Bishof, the former CEO of Flexera Software, an application management company outside of Chicago that Bravo bought in 2008 for $200 million and sold for a nearly $1 billion profit three years later, has a succinct description for this wild success. “He just kind of cuts all of the bullsh*t,” Bishof says. “It’s refreshing.” Flexera’s profits rose 70% during Bravo’s ownership, largely thanks to four major acquisitions. “Orlando’s like the general in the foxhole with his sergeant. You know he’s knee-deep in there with you,” Bishof gushes.

Under Thoma Bravo’s watch, companies on average saw cash flow surge as margins hit 35%, as of 2018, nearly triple those of the average public software company at that time. “It’s like training for the Olympics. . . . You have a finite goal to make it [in year four], and you make it very, very clear,” Bravo says. Today’s roaring market adds potency to the playbook. Lenders are now gorging on software debt, and stock market multiples for these businesses are surging.

“I learned more about building an efficient software company over the last four and a half years than in the first 30 years of my career.”

A recent example is Detroit’s Compuware, a decades-old pioneer of software applications to manage mainframe computer systems. In 2013, this Nasdaq-listed giant was all but left for dead and up for sale. There was minimal interest, other than from Bravo and partner Seth Boro, who were keen on Dynatrace, software that helped companies move databases to the cloud, which Compuware had acquired in 2011. Thoma Bravo used $675 million in cash and raised $1.8 billion in debt to buy Compuware and then split off Dynatrace as a separate company. The pair began to move Dynatrace from selling database licenses, once the bulk of its business, to cloud subscription services, now 70% of sales. This past August, Dynatrace went public, and Thoma Bravo’s 70% stake is now worth over $4 billion, with the remainder of Compuware worth nearly a billion more. “I learned more about building an efficient software company over the last four and a half years than in the first 30 years of my career,” says Dynatrace CEO John Van Siclen.

With a fresh $12.6 billion war chest for its 13th fund raised in 2018, Bravo is eyeing $10 billion-plus deals and expects to begin buying entire divisions from today’s technology giants. But thanks in part to the success of his firm, he now faces more competition. Heavyweights like Blackstone and KKR are increasingly sussing out software deals, not to mention his longtime rival Vista Equity. And he’s not immune to mistakes. Bravo’s $3.6 billion 2015 acquisition of San Francisco-based digital network tracker Riverbed Technology is currently struggling because of slowing sales and too much debt. He isn’t worried. “There are bigger and better companies to fix than there were ten years ago,” Bravo says.

His biggest challenge these days is likely back home in Puerto Rico where it all began. Bravo announced in May that he is contributing $100 million to his Bravo Family Foundation that will be used to promote entrepreneurship and economic development on the island.

This new foundation was birthed by Hurricane Maria, which devastated the island two years ago. Bravo was in Japan raising cash for yet another massive fund and frantically calling San Juan trying to locate his parents, who were living in the capital. They were fine, but the island wasn’t.

Five days later, he flew his Gulfstream jet with 1,000 pounds of supplies—water, granola bars, meal kits, satellite telephones, diapers, intravenous tubes and hydration pills—to Aguadilla, near Mayagüez. When an airport worker opened the door of his plane, Bravo says, the look of fear on his face was unforgettable. “All you could say was ‘I’m sorry for what happened to you.’ ”

He returned two weeks later in a larger plane with 7,000 pounds of supplies. Then he came in a massive DC-10 cargo plane before ultimately chartering two container ships carrying 600,000 pounds. “It was just like cold-calling for deals,” Bravo says of rounding up all the donations. He personally put in $3 million in just the first 30 days, and committed $10 million altogether.

When the Federal Emergency Management Agency became fully operative there, the island’s richest native turned his attention to Puerto Rico’s future. Though 44% of Puerto Ricans live below the poverty line, Bravo believes in the potential to foster entrepreneurship, citing that a tenth of the population has tried to build a business.

Armed with his money, his foundation is looking to back Puerto Rican technology entrepreneurs, even ferrying them to Thoma Bravo’s offices for training. Bravo admits to being tired of the debate over Puerto Rico’s statehood and holds his tongue when asked about President Trump’s performance during Maria. “My passion, which is the same as with companies, is to move beyond the strategic, long-term pontification, and into the operational and tactical moves that make you move forward today,” he says. “Economies go down, companies miss their numbers, trade stops, product issues happen and people quit. [The question is] do you have a creative approach to problem solving?” Bravo says. “Some people are stuck . . . and some people love putting the pieces together. I just feel like every operational problem can be solved. There’s always a solution.”

Recommended: Read Forbes’ Other Dealmaking Cover Stories

Gentlemen At The Gate: With Trillions Pouring In, KKR And Its Peers Must Build Up Rather Than Break Up

How Billionaire Robert Smith Conquered Private Equity And Technology

Stephen Schwarzman And Blackstone: Wall Street’s Unstoppable Force

Brookfield’s Bruce Flatt: Billionaire Toll Collector Of the 21st Century

Get Forbes’ daily top headlines straight to your inbox for news on the world’s most important entrepreneurs and superstars, expert career advice, and success secrets.

I’m a staff writer at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, M&A and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a part of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to agara@forbes.com. Follow me on Twitter at @antoinegara

Source: Meet Wall Street’s Best Dealmaker: New Billionaire Orlando Bravo

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Orlando Bravo, managing partner of Thoma Bravo and founder of the Bravo Family Foundation, https://www.bravofamilyfoundation.org/, announced he personally will contribute $100 million to his foundation to promote entrepreneurship and economic development in Puerto Rico, where Bravo was raised, and his family still lives.

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Vietnam’s Stocks Offer Long-Term Profits With Status Upgrades

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Vietnam has surged to become Southeast Asia’s best-performing stock market this year, posting a 12% gain for the benchmark VN index on the Ho Chi Minh Stock Exchange. According to Bloomberg data, Vietnam was the third-best performing market globally over the past five years. Although investors will find that most private banks and wealth managers are still unable to buy or sell Vietnamese equities directly, I would argue that this should be seen an encouraging sign because the market is still not yet on the radar of most investors but the indications are that it will be in the future.

Vietnam appears to be Asia’s most interesting macro story and investment case this year. The country’s ongoing economic reforms combined with recent geopolitical developments have certainly bolstered the country’s outlook. The World Bank expects Vietnam to be among Asia’s fastest-growing economies this year, with the country’s GDP growth rate forecast to reach 6.6%. And Vietnam’s two stock market looks set to benefit further from a major potential catalyst for renewed interest if its equities are added to the widely followed MSCI Emerging Markets Index, which is both long overdue and seems like to happen by 2020, according to Mark Mobius, the veteran investor who earned the moniker: “father of emerging markets.”

Many forget how far Vietnam has progressed since the launch of its “doi moi,” or renovation, policies back in 1986. The political and economic initiative introduced just over two decades ago was intended to facilitate the country’s transition from a centralized economy to a “socialist-oriented market economy.” Doi moi was meant to combine government planning with free-market incentives.

“In the beginning of the 90s, the per capita income of Singapore was 125 times higher than Vietnam, now it is 24 times,” Vietnam’s Prime Minister Nguyen Xuan Phuc told delegates at the World Economic Forum to ASEAN last year in Hanoi. “Thailand used to be 16 times higher than Vietnam, now the figure is 2.5 times. Compared to Japan, the figure came down from 267 times to 16 times, or the U.S., the figure decreased from 252 times to the current 25 times.”

Vietnam’s wealth grew by 210% between 2007 and 2017, according to the real estate consultancy Knight Frank, and more than 200 Vietnamese citizens now have investable assets of at least $30 million. Having expanded by 320% between 2000 and 2016, Vietnam’s “super-rich” class is growing faster than that of India (290%) and China (281%). And if current trends continue, it will have grown by another 170%–from 14,300 to 38,600 millionaires–by 2026.

Vietnam has been seen by many as having benefited from the new geopolitical realities of the ongoing U.S.-China trade war. Vietnam is expected to attract more manufacturing FDI as companies seek to build a “China plus one” sourcing strategy to mitigate the risk of further trade disputes between the world’s two largest economies. In terms of the stock market, the most direct beneficiaries of this ongoing trend include the Vietnam’s industrial park operators, logistics and port operators and air cargo handling companies

Boeing’s CEO Kevin McCallister, left, exchanges documents with VietJet’s CEO Nguyen Thi Phuong during a signing ceremony at the Presidential Palace in Hanoi on February 27, 2019. (Photo by Saul LOEB/AFP)

And although the recent the Trump-Kim summit in Hanoi may have been a disappointment in terms of denuclearizing the Korean Peninsula, it was a boon for the host country. The summit  helped to raise the awareness of “Brand Vietnam” on the global stage while reaffirming the view that the country has successfully transitioned from a closed, command economy to a market-based, trade-oriented economy. The country’s air carriers highlighted that fact when they signed more than $21 billion in airline orders and service contracts with U.S. companies on the sidelines of the summit.

Vietnam’s inclusion into some of the world’s most influential equity indices would deliver a much-deserved boost in terms of interest from investors in the nation’s stock market.  According to an annual review by the FTSE Russell released last September, Vietnam is still currently classified as a frontier market, but has been added to its watch list for possible reclassification as a secondary emerging market. The probability that it will be upgraded in September this year seems relatively high in my view. Currently, the FTSE’s secondary emerging category includes China, India, Indonesia, Pakistan, the Philippines and Russia, among others.

Vietnam could also be classified as an emerging market by MSCI next year if its free-float rate increases and the market infrastructure is adjusted to better accommodate foreign investors. Most of the concerns pointed out by MSCI about Vietnam’s upgrade are technical and can be addressed with new regulations. Probably the biggest obstacle to overcome would be the willingness of Vietnamese business owners to welcome foreign investment. This openness to foreign investment will form the biggest impression about Vietnam in investors’ eyes, besides the official market status by MSCI.

Policymakers have already expressed their intentions of removing restrictions on foreign ownership of state-owned and listed companies by the end of 2019, as the government looks to open its capital-hungry economy further in order to sustain its rapid growth. The Finance Ministry is currently drafting an overhaul for the nation’s securities law, the first major amendment since 2010.

In order to prepare the market for MSCI EM Index inclusion and to deepen liquidity, VN30 index futures contracts were introduced last year and currently the Ho Chi Minh Stock Exchange is seeking the Finance Ministry’s approval to start the trading of covered equity warrants in the third quarter of 2019. Underlying assets for the warrants will be stocks that meet certain conditions, such as: belonging to VN30 index or HNX30 index; having free float ratios of at least 20%; an average daily market cap in the most recent 6 months of at least 5 trillion Vietnamese dong ($215 million). Vietnam’s markets regulator is also studying new derivatives index contracts for the future that would use the VNX200 index or VNX100 in addition to the current contracts for the VN30 index. The Hanoi Stock Exchange is also aiming to launch Vietnam government bond futures in the third quarter of 2019.

I’m a portfolio strategist based in Singapore, covering global macro, geopolitics, frontier and emerging markets as well as Blockchain and emerging Tech.

Source: Vietnam’s Stocks Offer Long-Term Profits With Status Upgrades

Brazil Stock Market Tanks Amid Petrobras Scandal That Keeps On Giving

Well, that didn’t last long. Brazil is no longer the darling of emerging markets, with stocks crashing over 5% on Friday . Blame the political class, again.

There are two reasons for today’s correction. One was an immediate over-reaction to news headlines, the other is a rethinking of key market-friendly reforms needed in Brazil this year.

Yesterday’s arrest of former president Michel Temer reminded everyone that the Petrobras Car Wash scandal, the very scandal that led to two years of recession and a never-ending political crisis, will pull the rug out from under this country in seconds flat. Brazil stocks are now underperforming. But just wait until investors price in a failed pension reform, which is probably just three months away. I think that is already starting to happen and Temer’s arrest was just reminder that Brazil is in crisis-mode, making it difficult to govern.

Temer was pulled in on Thursday by Federal Police officers for his role in the Petrobras crime spree. They said he helped run an “organized crime” ring within the government: a system of pay-to-play contracts with civil engineering firms like Odebrecht building all sorts of stuff for Petrobras and skimming millions of dollars off the top. Dozens of A-list executives have been jailed now for at least three years. And yadda yadda yadda. … Temer was next in line.

To date, of the top political leaders in charge during the Petrobras contract-rigging scheme, only ex-president Dilma Rousseff is still standing. She desperately tried to become senator of her home state of Minas Gerais last October but came in third place, probably not because she loved politics or had nothing better to do for work. Now that she is a private citizen, like Temer, she has lost political immunity.

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Temer: Petrobras presidential jailbird No. 2. AP Photo/Eraldo Peres

Dilma was impeached in a somewhat farcical April 2016 vote by the lower house of Congress for breaching budget laws. She was later indicted in August of that year, making her vice president, Temer, the new interim President. Her impeachment had nothing to do with Petrobras, though the people who instigated it did, with one of them, House Speaker Eduardo Cunha … in jail.

Brazil spent much of the last two and a half years in political chaos because of Petrobras.

Temer was the most disliked president in Brazilian history, with an approval rating struggling to get over 10%. When the election season began in 2018, it became clear that no one from the parties associated with Petrobras was going to win.

They tried hard. Lawyers for jailed ex-president Luiz Inacio Lula da Silva worked overtime trying to convince the United Nations and media influencers from London to New York that he was an innocent man, jailed for his politics. His handpicked successor was Dilma. His second handpicked successor was a former São Paulo mayor, Fernando Haddad. Haddad took it upon himself to admit that he was not his own man, even going so far as printing up and wearing T-shirts emblazoned with the ridiculous campaign slogan: “Haddad is Lula.” He visited Lula in jail for campaign advice. And so as while rubbing the face of the electorate with indicted Petrobras criminals, Haddad got beat by a family-values conservative named Jair Bolsonaro who symbolized the boiled-over anger of those who had had it with anyone affiliated with embattled oil company.

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A supporter of former Brazilian president Luiz Inacio Lula da Silva cries in hopes of his release outside the federal police department where Lula is serving a 12-year sentence for corruption in Curitiba, Brazil, on  Dec. 19, 2018. No one has heard from him or about him since the start of the new year. AP Photo/Denis Ferreira

By The Way, Where’s Lula?

Lula has been totally absent from the headlines. The biggest fish fried by the Federal Police made himself part of the daily news cycle in the fall of 2018. The New York Times gave him op-ed space where he sold his political persecution story to the world. (I tried to get an opposing view in the NYT, arguing that he was not a political prisoner, but they rejected it. Tudo bem.)

Now, the disgraced founder of the Workers’ Party is spending the next 12 years in jail, at least. No one is outside his prison quarters cheering “Good morning, president Lula” anymore. He is alone and—mostly—forgotten.

His lawyers are no longer blasting reporters’ Whatsapp accounts with their latest filings of a habeas corpus or a statement by someone who works for the UN Human Rights Commission saying that the Petrobras investigators used their legal powers to jail him unlawfully. Those days are suddenly gone. And they are gone, obviously, because the election is over and the Workers’ Party lost. Lula’s “political persecution” was what it was: a political campaign for the Workers’ Party.

The Car Wash investigation isn’t picking parties to plunder.

Temer’s Democratic Movement Party, a big-tent party of wealthy Brazilian oligarchs, one of the oldest parties in the country, also lost big in last year’s election because of Petrobras. In fact, every party that was part of the government, even those that were part of the majority opposition, got handed their walking papers because of this scandal.

It is no surprise that Temer was arrested. If the courts don’t get you, the voters will.

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Supporters of presidential candidate of the Workers’ Party Fernando Haddad, dressed in a banner written in Portuguese: “Haddad is Lula 13. AP Photo/Eraldo Peres

Brazil’s new government rose to power out of sheer hatred of politicians like Temer and Lula. But this new government is surrounded by noise. Temer’s arrest will likely push Bolsonaro’s already declining public opinion polls lower, especially if Brazilians do not see their economic outlook improving.

Some 68% view Bolsonaro as either “good” or “very good,” with numbers for “very good” declining 15 points since his inauguration in January.

At the start of the year, Jan Dehn, head of research for the Ashmore Group, a $74 billion emerging markets asset manager in London, told me he was giving Bolsonaro until the end of the first half to get something done — on pension reform, in particular. That has been the one issue propping up Bolsonaro’s stock price. As soon as the market feels pension reform is in jeopardy, Brazil’s stock market turns the other way, and Bolsonaro is governing over political crisis and weakening investor sentiment, not much different than Temer did.

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Jair Bolsonaro, Brazil’s president, said of Temer’s arrest: “Each person has to be responsible for their actions.” Andre Coelho/Bloomberg

© 2019 Bloomberg Finance LP

Bolsonaro: Governing Above The Noise

It is difficult to govern in Brazil due to all the different political alliances. This is not a two-party system. Considering the difficulties already involved in the Brazilian congress, throw political crisis on top of that and it becomes even harder.

Bolsonaro was relatively quiet on Temer’s arrest, preferring to say that, “Each person should be held responsible for their actions.”

Bolsonaro wasn’t elected on an economic platform. He was always an anti-Lula, law-and-order vote.

His government’s economic team is led by BTG Pactual founder Paulo Guedes, a University of Chicago-educated markets guy who has set the course for a somewhat overambitious list of economic reforms. Bolsonaro basically put Guedes in charge of the market.

Given the complex process in approving Guedes’ measures, from pension reforms to privatization, delays are more likely today because of uncertainty surrounding Petrobras investigations than they were last week. The Car Wash investigations are not over, and that means key members of congress could, in theory, be focused on other matters, or perhaps, lose their post in key cabinet positions in worst case scenarios.

Bolsonaro’s small political party—the Social Liberal Party—was not part of the Petrobras scandal, so it is possible they will not be scrambling like the congressional leaders were under Temer’s Administration when arrests were made of private citizens affiliated with them.

On the bright side, that means Bolsonaro has a better chance to inoculate himself from the Petrobras-related arrests like the eight individuals arrested on Thursday.

If he can do that, then smaller reforms like payroll tax breaks and Petrobras asset sales might get done earlier this year. Pension reform is unlikely to go anywhere until the end of the year, Morgan Stanely analysts said in a report. This is a very different view from a month ago when consensus estimates were for some type of pension reform to be competed by July.

The rest of Bolsonaro’s economic agenda depends on how well he can separate himself and his team from the Petrobras brat pack. He will have to remind them that he is president because he was never part of that group in the first place.

For media or event bookings related to Brazil, Russia, India or China, contact Forbes directly or find me on Twitter at @BRICBreaker

I’ve spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big eme…

Source: Brazil Stock Market Tanks Amid Petrobras Scandal That Keeps On Giving

The Yield Curve Just Inverted, Putting The Chance Of A Recession At 30%

The interest rate on the U.S. Treasury 10-year bond just fell below the rate on the 3-month bill in response to the Fed’s March announcement. This is called yield curve inversion as defined by Arturo Estrella and Frederic Mishkin. It implies a 25%-30% probability of a recession on a 12-month view. Their research can be found here.

As economic relationships go, the yield curve has a good track record. You can see the data below going back to 1982. Per the chart, using this series over recent history, the yield curve inverts before a recession reliably with no false positives. An impressive record. The blue line shows the spread between 10-year and 3-month interest rates. The black line is the zero bound. The shaded grey periods are historical recessions. Note that there is a lagged relationship here, recession historically occurs 6-18 months after inversion. So today’s yield curve suggests a fair chance of a 2019-2020 recession.

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Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity

Federal Reserve Bank of St. Louis

Risks Of Interpretation

Nonetheless, there are some risks with this approach. The first is we’re looking at a limited run of data. There are only a few decades in the sample and a handful of recessions. We’re making a forecast here based on less than ten recessionary events, per the initial research and subsequent out-of-sample data. Plus there are countless pieces of economic data out there. Combining two of them and creating a good recession forecast is possibly due to data mining. For example Tyler Vigen’s site illustrates the problem, showing how correlations can be found between many things that have little basis in reality, such as an apparently strong relationship between mozzarella cheese consumption and sociology degrees. So even though the yield curve relationship looks robust, it has been plucked from hundreds of other relationships that could exist, but don’t look as meaningful. The human brain is adept at creating patterns where none exist.

Also, a 25-30% chance of recession is not that high. Going back from 1960 to 2018 we have 59 years of data. We’ve had U.S. recessions during 16 of those years. So even before any more sophisticated forecasting methods, your chance of being in a recession in any given year are 27%. There’s some auto-correlation there too, as recession years come in clusters, but still, saying the chance of recession coming within a year or so is around one in four isn’t that different from what history tells us regardless of what the economy is doing. Of course, even at a 30% probability the chances are roughly twice as high that a recession does not occur.

Also, the Federal Reserve (Fed) has a key target of avoiding a recession in order to maintain full employment. This one of their key policy targets. The Fed are quite capable of learning. The increasing emphasis on the yield curve has not gone unnoticed by the Fed. In fact, the initial research here was published by the New York Fed itself. So unlike in the past, the Fed may be able to take corrective action, which was exactly what Chairman Powell was looking to stress in the Fed’s March meeting release. The Fed’s challenge is obvious but not simple, a few quarters ago the markets were spooked by a potential stack of rate hikes in 2019 that could risk recession, so the Fed changed course. Yet, in doing so they have helped create an inverted yield curve, introducing another set of recessionary fears.

However, the risk here is the markets are capable of learning too, and there is some evidence that recessions are self-fulfilling, meaning that if enough decision makers expect a recession they may then take the very actions actions, such as temporarily cutting back on spending, that cause a recession to happen. In that light, yield curve inversion gaining more attention is bad news if it causes people to anticipate a recession, which then makes one more likely.

So yield curve inversion is not a positive sign for markets, but we may be overstating its importance. Also if the indicator is to be believed, we should watch out not just for inversion, but when the 3-month yield falls 1% or more below then 10-year yield, then our confidence in a recession around the corner should be quite a bit higher.

Articles educational only, not intended as investment advice.

Follow @simonwmoore on Twitter. Simon is Chief Investment Officer at Moola, and author of Digital Wealth (2015) and Strategic Project Portfolio Management (2009).

Source: The Yield Curve Just Inverted, Putting The Chance Of A Recession At 30%

U.S. Markets Hits 2-Month High: 5 Top-Ranked Growth Picks – Nalak Das

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Following the easing of tensions between the United States and China, U.S. stock markets hit a two-month high on May 21. Notably, President Trump’s imposition of tariffs on Chinese imports and retaliatory tariffs by China aggravated the market volatility which commenced in February.

However, the two rounds of meetings between the two countries’ high level delegates have prevented tensions from escalating. This positive factor along with robust first-quarter 2018 earnings and strong fundamentals of the U.S. economy signal the persistence of uptrend in the market. Consequently, it will be a prudent decision to pick good growth stocks at the moment to enrich your portfolio.

Wall Street Gains Big on Monday

On May 21, the Dow 30, S&P 500 and Nasdaq Composite gained 1.2%, 0.7% and 0.5%, respectively. The blue-chip Dow 30 index gained 298.2 points to close at 25,103.29, its highest since Mar 12. The benchmark index S&P 500 closed at 2,733.01, the index’s highest point in almost nine weeks. Tech-heavy Nasdaq Composite also followed suit closing at 7,394.04. All three major indexes are currently in the green year to date.

Trade War Fears Ease

On March 2018, the United States levied tariffs worth $50 billion on China. Nearly 1,300 Chinese products which were utilized in high-tech sectors bore the brunt of the tariffs. China also retaliated by imposing tariffs worth of $50 billion primarily on U.S. agricultural exports. The Trump administration also gave indications of releasing a list detailing tariffs worth $100 billion on China, fueling fears of a full-fledged trade war.

However, on May 20, the U.S. Treasury Secretary Steven Mnuchin said that the prospect of a trade war was “on hold” following two rounds of meetings between high-level delegations of the two countries. China agreed to buy larger amounts of U.S. goods, especially energy and agricultural products, in order to reduce $375 billion per annum trade surplus with the United States.

Robust Earnings Momentum   

First-quarter earnings results have been exhibiting strong momentum so far. Total earnings are expected to be up 23.9% from the same period last year on 8.5% higher revenues. This is the highest quarterly earnings growth pace in seven years. For full-year 2018, total earnings for the S&P 500 index are expected to be up 19.4% on 5.8% higher revenues. (Read more: Strong Retail Sector Earnings Growth)

A big driver of these positive revisions is obviously the direct impact of the massive $1.5 trillion (including corporate and personal) tax cuts. The full effect of the tax overhaul is yet to appear in the economy as the measures were implemented in January only.

Our Top Picks

Stock markets momentum remained largely unhindered despite recent volatility. Gradual fading out of trade conflicts, steady economic activities and business-friendly policies adopted by the government will pave the way for further stock market growth.

At this stage, investment in stocks with strong growth potential will be lucrative. Our selection is backed by a good Zacks Growth Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Growth-investing space. We have handpicked five such stocks with a Zacks Rank #1 and Growth Style Score of A.

The chart below shows price performance of our five picks year to date.

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