Playing Politics: Bad News For Brazil, EWZ

Factoring in today's tumble, the past month has been ugly for the iShares MSCI Brazil Index Fund EWZ, the largest ETF tracking a Latin American nation and one of the largest emerging markets ETFs overall. Down almost 2% today, it's fair to blame any number of factors on EWZ's recent woes. The ETF has tumbled 11% in the past month as some of the air has come out of the sails of emerging markets ETFs or it can be said that EWZ has fallen victim to the spate of concerning economic news out of China. China is Brazil's top export destination after all. Or it can be argued that concerns about Brazil's domestic economy and interest rate policy are hurting EWZ. None of those arguments would be wrong, but what is being ignored by many analysts and energy industry and Latin America experts is the damaging effects Brazil's scorched-earth campaign against Chevron CVX and Transocean RIG is having on Brazilian equities. In turn, that has created selling pressure in Brazil-specific ETFs, namely EWZ. In December 2011, Brazilian regulators announced a $10.6 billion suit against Chevron and Transocean, the world's largest provider of offshore drilling services, for their roles in a November spill at the Frade field off Brazil's coast. Brazilian authorities have also said they will pursue criminal charges against executives from Chevron and may seek jail time. The icing on the cake (we think) came earlier this week when Brazilian prosecutor Eduardo Santos de Oliveira announced another $10.9 billion suit against Chevron and Transocean. It's fine when a lawyer wants to make his legal bones, but these suits border on the absurd and they could easily deter foreign investment in Brazil, a scenario that would further plague EWZ and its constituents. Here are the realities Brazil must face: It is rich in natural resources and it's economy is compelling, generally speaking, but the country is still trying to shake off a leftist political reputation of years gone by. Extending to Chevron similar treatment as to what the oil company has received in Ecuador isn't the way to motivate Western oil companies to want to do business in Brazil. Even Petrobras PBR, Brazil's state-run oil company, has said the most recent suit against Chevron and Transocean is excessive. The November spill amounted to about 3,000 barrels. The December suit is equivalent to around $3.5 million per barrel spilled and it dwarfs the U.S. maximum fine of around $4,300 per barrel spilled, according to CNN. Indeed, that's excessive. Speaking of Petrobras, the company is not immune to the problems Chevron and Transocean are facing in Brazil. In fact, if shares of Petrobras are any indication, the company is being adversely impacted by the lunacy of its countrymen. Adding in today's slide, Petrobras ADR's have plunged about 17% in the past month and the selling pressure in Petrobras and EWZ has intensified as the news about Chevron and Transocean in Brazil has gotten worse. Petrobras securities account for almost 17% of EWZ's weight, meaning EWZ is a great short or the ProShares UltraShort Brazil BZQ is a great long as long as Brazil looks to run up Chevron and Transocean's legal bills.