International Investing

While the details remain sketchy, consensus is that Cuban Leader Fidel Castro has terminal cancer and will never return to office.

Traders at TradeSports.com, an online gambling site, confirm this view. A contract that lists the odds of Castro returning to power by the end of the year recently traded at 15 out of 100. The price of the contract is the same as the odds of the event occurring. In this case the market believes there is only a 15% chance that Castro will return to office by December 31.

So how can US investors profit from this? Cuba has a large supply of natural resources including oil and nickel. And while the figures are highly suspect, the Cuban economy seems to be growing rapidly.

Cuba’s economy grew 12.5 percent in the first half of 2006, boosted by a surge in the construction, transport and services industries, Economy and Planning Minister Jose Luis Rodriguez said.

A small closed-end fund NASDAQ: CUBA has positioned itself to benefit when the trade embargo is lifted, presumably following Castro’s death. Currently the $14m fund holds shares of firms that will benefit from the opening of the Cuban market. It is not a pure Cuba play; a substantial portion of the assets are allocated to the US, Mexico, the Cayman Islands, Panama, and Puerto Rico, but the security is trading like it is a call option on the leader not returning to office.

Here is a chart that tracks the odds of Castro returning to power and the closing price of CUBA (some data points have been eliminated to eliminate mismatched days on the contracts).

The contract will expire at zero if Castro does not take power by 12/31/2006. This can be due to any reason, including death. You can see the relationship clearly, the worse the odds of Fidel Castro returning to office get, the better CUBA does. Buyers of this fund could see a large jump when the inevitable happens.