FI­DELITY FIXED IN­COME STA­BIL­ITY AND EX­PE­RI­ENCE IN EVER-CHANG­ING MAR­KETS

Sta­bil­ity, ex­pe­ri­ence, and con­sis­tency are im­por­tant cri­te­ria when choos­ing fixed in­come in­vest­ments. Fi­delity is one of the most ex­pe­ri­enced fixed in­come in­vestors in the in­dus­try, manag­ing more than $860 bil­lion in fixed in­come as­sets,* with 200+ fixed

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On a hilly, scorched plot of farm­land in Brazil’s des­ti­tute north­east, there’s a replica of the mud-and-stick-walled hut where Luiz Iná­cio Lula da Silva, who went on to serve two terms as pres­i­dent, was born. It’s in places like this, where ema­ci­ated cat­tle graze on sun­baked scrub, that Lula and his hand­picked suc­ces­sor, Dilma Rouss­eff, are mus­ter­ing their forces to fight Rouss­eff’s im­peach­ment and defuse mul­ti­ple cor­rup­tion scan­dals.

Lula, per­haps Brazil’s most pop­u­lar leader ever, spent his first seven years in the hut with his mother and six sib­lings. There was no elec­tric­ity or run­ning wa­ter, no proper bath­room or shoes. In 1952, the fam­ily piled onto a truck for a one-way, 13-day jour­ney to São Paulo. Millions made this ex­o­dus south in the 20th cen­tury as gov­ern­ment af­ter gov­ern­ment failed to pro­vide enough relief from drought and hunger. Lula sold peanuts on the street, worked in fac­to­ries, was jailed by dic­ta­tors for lead­ing a union, and founded the now rul­ing Work­ers’ Party.

In 2002, Lula won the pres­i­dency by a land­slide. He ex­panded wel­fare, credit, crop sup­port, and hous­ing pro­grams for sub­sis­tence farm­ers and slum dwellers, as well as uni­ver­si­ties, health care, and jobs pro­grams for their chil­dren, all on a scale never seen be­fore. This safety net, largely main­tained by Rouss­eff, pulled 36 mil­lion

peo­ple out of ab­ject poverty, es­pe­cially in the north­east.

These poor­est Brazil­ians gave Rouss­eff her nar­row re­elec­tion in 2014. Today, along with union­ized work­ers and civil ser­vants, they are a largely loyal force that Lula and Rouss­eff hope will help them block ef­forts to oust her and keep him from run­ning for pres­i­dent in 2018.

In early April, Lula will visit the north­east to tell sup­port­ers that ef­forts to im­pli­cate him in cor­rup­tion scan­dals and im­peach Rouss­eff are a coup at­tempt. The Work­ers’ Party is go­ing door to door to urge Brazil­ians to pres­sure their con­gress­men by tak­ing to the streets in sup­port of the gov­ern­ment. “This is their base, and they’re try­ing to rally them. And it may help,” says Brasilio Sal­lum Jr., a Univer­sity of São Paulo so­ci­ol­ogy pro­fes­sor who pub­lished a book in 2015 on the last pres­i­dent to be im­peached in Brazil, Fernando Col­lor de Mello. “But it steps up the level of so­cial con­flict, which is very wor­ri­some.” Peo­ple wear­ing red, the Work­ers’ Party color, have been jeered on the streets, law­mak­ers have scuf­fled in Congress, riot police have tear-gassed pro­test­ers, and the for­mer pres­i­dent’s Lula In­sti­tute has been van­dal­ized.

The makeup of the demon­stra­tors shows the im­peach­ment bat­tle is be­ing fought along class and racial lines. In São Paulo on March 13, half a mil­lon pro­test­ers called for the pres­i­dent to step down; they were 77 per­cent white, and more than half were con­sid­ered high-in­come, a sur­vey by poll­ster Datafolha found. Brazil is about 47 per­cent white, with the rest be­ing black or of mixed ances­try. At a pro­gov­ern­ment march in São Paulo on March 18, Rouss­eff drew more black and mixed-race sup­port­ers, and al­most half were lower mid­dle class or poor, a Datafolha sur­vey shows.

Rouss­eff may have the poor on her side, but there are signs she’s los­ing sup­port within the 114 mil­lion-strong emerg­ing mid­dle class. Forty-four per­cent of them are up­set that she has scaled back some of the so­cial pro­grams Lula started that got them to where they are, ac­cord­ing to a re­cent sur­vey by the polling firm Data Pop­u­lar.

If Lula and Rouss­eff pre­vail, it will be thanks to Brazil­ians like Jose Er­minio da Silva, whose farm is 15 miles from the for­mer pres­i­dent’s birth­place. “With­out Lula, we would have been con­demned to hunger, poverty, noth­ing, like ev­ery­one be­fore us,” he says. Since the early 2000s, Da Silva—no re­la­tion—has used a gov­ern­ment credit pro­gram cre­ated by Lula to pur­chase 4.8 hectares of land, build a barn, and ac­quire about a dozen cat­tle. He’s one of 3 mil­lion sub­sis­tence farm­ers who’ve re­ceived such fi­nanc­ing. Da Silva says “no pres­i­dent has helped the poor in Brazil like Lula. Those who want to im­peach the pres­i­dent just want to take it all away. We can’t al­low that to hap­pen.”

For two years, pros­e­cu­tors have pur­sued ex­ec­u­tives and po­lit­i­cal aides on al­le­ga­tions that bribes paid for con­tracts at na­tional oil com­pany Petro­bras were fun­neled into po­lit­i­cal cam­paigns. The in­ves­ti­ga­tion has en­gulfed both Rouss­eff’s gov­ern­ment and Lula, who was briefly de­tained four weeks ago for ques­tion­ing.

In March, Congress started im­peach­ment pro­ceed­ings against Rouss­eff for al­legedly tap­ping state bank cof­fers to mask bud­get deficits, in vi­o­la­tion of the law. Rouss­eff, who’s de­nied any wrong­do­ing, named Lula her chief of staff, en­trusted with over­see­ing po­lit­i­cal and eco­nomic poli­cies. The move could give him im­mu­nity from pros­e­cu­tion in a lower court. The Supreme Court is de­cid­ing whether to al­low the ap­point­ment. A ma­jor party left Rouss­eff’s rul­ing coali­tion on March 29, and the stock mar­ket has surged on hopes that Rouss­eff will soon be out of of­fice.

Ac­cord­ing to a March 19 Datafolha poll, about 68 per­cent of Brazil­ians want Rouss­eff re­placed. Lula has more sup­port and not just in the north­east. In a na­tion­wide Feb. 25 poll by São Paulo-based Datafolha, 37 per­cent said he was the best Brazil­ian pres­i­dent of all time.

In Caetés—whose av­er­age ru­ral house­hold in­come of 77 reais ($21) a month makes it one of Brazil’s poor­est spots—the op­po­si­tion to Rouss­eff’s ouster runs deep. The fam­ily of Maria de So­corro Florentino is one of 13.9 mil­lion who re­ceived Lula’s cash hand­outs, which got paid on con­di­tion that chil­dren be vac­ci­nated and go to school. Florentino says the cash saved them. “I re­mem­ber run­ning out of food, re­ally run­ning out of food when my kids were lit­tle,” she says. “If it weren’t for Lula, and Dilma af­ter him, I’m sure I would have died of hunger. Maybe she wouldn’t have sur­vived,” she says, point­ing to her daugh­ter.

The im­peach­ment process might come to a vote by mid-april, but it’s by no means cer­tain, says Univer­sity of São Paulo’s Sal­lum. To make it to the se­nate for a trial, the mo­tion to im­peach must pass by a two-thirds ma­jor­ity in the frac­tious lower house. “That’s in­cred­i­bly hard to get, which is why Lula and Dilma want to get their base to pres­sure Congress,” he says. “My big con­cern is what will hap­pen if she wins? How will she govern?”

Back at the hut, one of Lula’s sec­ond cousins, Eraldo Fer­reira dos San­tos, says the poor have too much to lose not to fight. “Be­fore, you had no choice but to flee, flee, flee the hunger and des­per­a­tion,” says San­tos, whose fam­ily mi­grated to São Paulo in 1969. “Now you have peo­ple who have what they need to stay. And that’s a legacy we can­not al­low to be taken from us.” �Michael Smith, with Anna Edger­ton and Sab­rina Valle

Share of Brazil­ians who say Dilma

Rouss­eff’s gov­ern­ment is “bad or ter­ri­ble” The bot­tom line The im­pov­er­ished north­east re­gion of Brazil re­mains a bul­wark for Lula and Rouss­eff. It may play a role in their po­lit­i­cal sur­vival.

brought into the Amer­i­can mar­ket.

As of March 25, the four-week av­er­age of im­ports was run­ning at 7.9 mil­lion bar­rels a day, 9.8 per­cent higher than the year be­fore. “That’s not a one-week blip,” says Tim Evans, an en­ergy an­a­lyst at Citi Futures. “We’re see­ing a con­sis­tent pat­tern.”

U.S. pro­duc­ers, who reaped the ben­e­fits of the shale rev­o­lu­tion, no longer en­joy a steep price ad­van­tage over for­eign ri­vals in sell­ing to do­mes­tic re­fin­ers. Pro­duc­tion has fallen by about 600,000 bar­rels a day from its peak of 9.6 mil­lion in 2015. Now re­finer­ies are buy­ing for­eign oil to re­place the lost U.S. out­put—and, along with traders, are stor­ing much of the less-ex­pen­sive im­ported oil to sell when prices rise.

Dur­ing the early years of the U.S. shale boom, the millions of bar­rels of light, sweet crude had one big prob­lem: no af­ford­able ac­cess to re­fin­ers on the coasts of Texas and Louisiana. To tap into the cheaper oil pool­ing in Ok­la­homa, pipe­lines that used to bring im­ported oil up from the Gulf were re­versed to take shale oil down to the coast. Re­fin­ers in Philadel­phia and New Jersey also be­gan buy­ing North Dakota crude in­stead of for­eign oil, mov­ing it by train across the coun­try. By Oc­to­ber 2014, U.S. im­ports had fallen by about 40 per­cent from a high in 2006.

An­a­lysts say that West Texas In­ter­me­di­ate crude has to be $3 to $5 cheaper than im­ported oil to pay for those pipeline and trans­porta­tion costs. From 2011 to 2014, U.S. oil was on av­er­age $12.61 cheaper than equiv­a­lent for­eign oil. The dis­count slowly nar­rowed as pipeline projects were com­pleted and U.S. crude be­gan to flow more freely from the mid­dle of the coun­try down to the Gulf Coast. A week be­fore the Se­nate ap­proved lift­ing the ex­port ban on Dec. 18, WTI traded around $3 be­low Brent. Over the next month, the dis­count dis­ap­peared, and, for the first time in six years, WTI traded at a premium to Brent for a few days in Jan­uary. WTI is now less than a dol­lar cheaper than for­eign bar­rels avail­able on the Gulf Coast.

So re­finer­ies along the coasts are choos­ing to buy im­ports in­stead of WTI. One of the big­gest win­ners is Nige­ria, which is re­gain­ing lost mar­ket share. Im­ports from Nige­ria surged to 559,000 bar­rels a day in mid-march, com­pared with an av­er­age of 52,000 for all of 2015. Re­fin­ers are also tak­ing more heavy oil from Mex­ico and Venezuela. Not only is it about $9 a bar­rel cheaper than WTI, it’s also what U.S. re­finer­ies pre­fer to han­dle.

The irony of the shale boom, and all the light crude it un­locked, is that it came just as U.S. re­fin­ers were spend­ing bil­lions to process heavy oil. “In the­ory, there was al­ways go­ing to be a link­age be­tween free­ing up U.S. bar­rels and re­plac­ing them with for­eign crude that U.S. re­fin­ers are bet­ter suited to run,” says Kevin Book, manag­ing di­rec­tor at Clearview En­ergy Part­ners.

For some of the weak­est U.S. pro­duc­ers with the highest costs, lift­ing the ban didn’t mat­ter be­cause they can’t com­pete on the global mar­ket, says Abudi Zein, co-founder of Clip­perdata, which uses cus­toms data and ship­track­ing in­for­ma­tion to es­ti­mate global oil flows. For U.S. pro­duc­ers with the highest costs, “they’ll never be able to ex­port be­cause all of a sud­den they’re com­pet­ing with Saudi Ara­bia and Iraq.”

The U.S. is hoard­ing a lot of the im­ported oil. As of March 25, U.S. com­mer­cial crude in­ven­to­ries hit 534 mil­lion bar­rels. That’s near the all­time high in 1929, when U.S. com­mer­cial stor­age hit 545 mil­lion bar­rels, as huge oil finds co­in­cided with the be­gin­ning of the Great De­pres­sion.

Today, with oil so cheap, pro­duc­ers and traders are opt­ing to wait for prices to rise in­stead of sell­ing, es­pe­cially with the futures mar­ket sig­nal­ing that oil prices will rise. Traders can lock in those prices by tak­ing out a con­tract for de­liv­ery a few months down the road. A bar­rel of WTI for de­liv­ery in Oc­to­ber is about $3.50 higher than the cur­rent price of about $39. That premium has dipped in re­cent months, but it’s still enough to pay for in­surance and stor­age costs—with money left over.

“Putting away oil is one of the few risk-free plays in the world right now,” says Philip Ver­leger, an en­ergy con­sul­tant and for­mer di­rec­tor of the of­fice of en­ergy pol­icy at the Depart­ment of the Trea­sury. Fears of a lack of stor­age space for oil haven’t come true. As of Septem­ber 2015, the U.S. had 551 mil­lion bar­rels of work­ing oil-stor­age ca­pac­ity, 50 mil­lion more than it did two years be­fore, ac­cord­ing to gov­ern­ment fig­ures. Gen­scape, an oil-mar­ket-sur­veil­lance com­pany, es­ti­mates that in the Mid­west and the area along the Gulf Coast, the pace of con­struc­tion has in­creased since Septem­ber to about 574,000 bar­rels of new stor­age—big enough to hold a 747—a week.

The con­struc­tion has helped keep leas­ing costs rel­a­tively low, says Ernie Barsamian, a prin­ci­pal at The Tank Tiger, a tank-stor­age bro­ker. Av­er­age prices for a one-year lease of a stor­age tank run about 60¢ to 70¢ per bar­rel a month, he says. Barsamian es­ti­mates

Easy money? Try im­port­ing oil and stor­ing it Clean­ing trash-strew trash-strewn In­dian streets—with smart­phones China’s wary em­brac em­brace of opi­oids

Crude oil stor­age tanks un­der con­struc­tion in Ned­er­land, Texas West Texas In­ter­me­di­ate price per bar­rel $93.71

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