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How to Steal a Billion Dollars

By Dr. Steve Sjuggerud
Thursday, January 11, 2007

I spent a week in the early 1990s a long way from civilization, in the small fishing village of Adicora, Venezuela.

The place is miserably windy... The rattle of shutters struggling to stay closed keeps you awake at night. And during the day, the sand blowing sideways stings you wherever you walk.

There is no reason for foreigners to visit here... unless of course, you happen to like the wind. I went to Adicora to go windsurfing, and it is the windiest place I’ve ever visited.

Venezuela was in turmoil when I visited...

On February 4, 1992, the military attempted a coup d’etat. That coup attempt was led by the military’s Lt. Col. Hugo Chavez.  (Remember that name...)

Until the coup, Venezuela was looking all right. The government was finally getting out of the people’s way, and people were finally making money. It showed in the stock market: In the two years ended January 1992, share prices on the Caracas Stock Exchange had soared by 668% in real terms.

Gunter had ordered a phone line when he arrived in Venezuela. By the time I visited, two years later, Gunter still didn’t have a phone line. When my friend Rick and I arrived, we were aware of one phone in Adicora, near the public square. It didn’t work. So we drove nearly an hour south to Coro, just place a phone call. We then waited an hour in line to use it.Gunter and his wife, my hosts in Adicora, arrived in Venezuela from Germany at about this time. While they loved the beach lifestyle, they couldn’t have been more frustrated with “the system” in Venezuela. Take the phone company for instance...

It wasn’t just phone service. The electricity was inconsistent, too. In short, while the windsurfing in Adicora was fantastic, the experience of dealing with the government-run systems in Venezuela was miserable. I’ve never gone back.

The reason things didn’t work was the government had been broke since about 1988. When oil prices crumbled in the early and mid-1980s, it because increasingly difficult for the Venezuelan government to keep propping up the economy.

Things were getting better about the time we were there. The privatization of government-controlled services started happening all over Latin America. In Venezuela in particular, AT&T and GTE were among a group of investors that bought into the phone company.

Venezuela today is now like it was in the early 1980s... feeling rich and powerful. And it seems to have completely forgotten the lessons of going broke in the late 1980s.

In fact, this week, Venezuela’s President Hugo Chavez (the failed coup leader from ’92) was inaugurated for his third term. Chavez promptly announced plans to nationalize the phone company, CANTV, and the electric company, Electricidad de Caracas (EDC). He promised to go after the natural gas business, too.

In this case, it appears that “nationalize” really means “steal.” Verizon is currently the largest shareholder of the phone company CANTV. And U.S. power company AES controls EDC. When asked about the near one-fifth fall in the stock market on Tuesday alone, President Chavez responded by citing passages of the Bible, praising the redistribution of wealth.

Recently, the stock market value of CANTV was more than $1 billion dollars. Who knows what it will be worth – if it even trades anymore – when Chavez is done with it.

Instead of outrage, it appears that at least some of the people of Venezuela have forgotten the lessons of the late 1980s, too...

According to an Associated Press article yesterday: “Everything the man is doing is good,” said Orlando Vera, a 63-year-old window washer, on Tuesday, adding that his economic situation has improved under Chavez. As for the nationalization project announced Monday, Vera said it makes sense for companies that serve the public interest.”

And also: “Miguel Angel Martinez, a 52-year-old street vendor... says the president “has dedicated himself to studying communist, socialist and democratic models and has taken the best of those models.”

So the street vendors and window washers love him. Meanwhile, back in Washington, the White House press secretary stated the obvious:“Nationalization has a long and inglorious history of failure... We support the Venezuelan people, and think this is an unhappy day for them.”

Chavez is using the country’s windfall oil profits to trample over property rights and economic freedom in the name of a socialist revolution. The result, undoubtedly, will be a major economic bust in Venezuela when the price of oil faces its next down cycle.

If we’ve learned anything in economics over the last few decades, it is that property rights and economic freedom are essential to growing a country over the long run.

With what I’ve explained about Venezuela lately, it won’t surprise you that Venezuelans have the least economic freedom in out of all of the 22 countries in Latin America (according to the Wall Street Journal’s 2006 Index of Economic Freedom). Even Cubans and Haitians have more economic freedom. Even with all the oil income, national income per person in Venezuela only averages out to about $300 per month.

At DailyWealth, we know that big money can be made if you can invest at a time when things look bad. The secret to triple-digit profits, as we’ve explained, is to buy when things go from bad to less bad.

Unfortunately in Venezuela, we are not there yet. “Less bad” is not on the horizon... not by a long shot.

Chances are, we won’t be investing in Venezuela as long as Chavez is around. And that could be a long time...

Good investing,


Market Notes


Depending on your point of view, the new 52-week high set this week by Florida land developer Consolidated Tomoka (CTO) means one of two things...

To us at DailyWealth, CTO’s strong stock price means the real estate market is doing a heck of a lot better than the doom and gloomers make it out to be. Like real estate giant St. Joe, the share price of CTO is an instant snapshot on how land prices are performing in general.

For readers of Dan Ferris’ Extreme Value, the new high is the latest good news in one of the greatest stock picking streaks in history. Consolidated is up 180% since Dan’s recommendation. The stock is also one of the six triple-digit winners in the Extreme Value portfolio.

Dan’s average gain as of this month is an incredible 54%.

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