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The Money Map Advantage
Thursday, August 18, 2005
By Horacio Marquez
#5
** Petrobras: Take Profits
“I never picked bottoms and I always sold early.” Rothschild
Even though I am very bullish on energy (fundamentally medium and long term), I am not in the business of losing money short term.
Petroleo Brasileiro (NYSE: PBR) has performed in an exemplary way since our recommendation, but it is showing signals of tiredness lately. With the initial rally since we bought it, PBR reached the upper band of a bullish trading channel and subsequently sold off over the next few days. At yesterday’s close it was sitting at the lower band of the same channel. Today, that key level has failed to hold, and the risk is that it keeps trading down to consolidate around our initial buying price of $52.73.
As I write, we have a 9% profit on PBR shares and a 73.65% profit in our call options that I would hate to see disappear in the current profit-taking mode.
PBR is NOT alone in this mini-trend: Most of the international, commodity-based stocks are suffering from this week’s U.S. economic data:
This week we saw CPI and PPI print high headline numbers: 0.5% and 1.0%.
The respective core inflation numbers were better-behaved, explained in a large part by oil prices.
This data suggests that the Fed is going to keep tightening a bit beyond what the market anticipated, and it warrants a slight downward readjustment of U.S. growth expectations.
Similarly, Brazil’s Central Bank did not lower rates yesterday, despite lower inflation, as the market expected. This was another source of disappointment. Also, some data indicates that money-flows into the local stock exchange might have been weaker than expected in the first days of August, because of the political scandal.
On the positive side, Brazil posted a record June trade surplus, which keeps its currency rallying strongly, and yesterday the lower house gave President Lula a victory in restraining the salary increases, thus improving future fiscal accounts. This shows that despite the negative media, the main parties keep quietly supporting Lula, and are happy to score political points while keeping the economy and the markets going.
Hence, the short-dollar, long commodities, long emerging markets/international stocks trade seems to be faltering for now. We saw a similar reassessment starting about March 7 this year, which took us down to very attractive levels that allowed the recent summer rally. The exception to this consolidation seems to be some oil service companies.
In addition, we are nearing the late September/October profit-taking season for Wall Street, hedge funds and other trading-oriented accounts. While I hate to let PBR go, we need to retain portfolio discipline.
Within the next few weeks, (and probably sooner than I expect) I look to get back in at lower levels, with technicals pointing the right way. After all, I believe that we are in a multi-year global expansion that is long-term bullish for commodities, emerging markets and especially the BRICs (Brazil, Russia, India and China). Brazil is growing like gangbusters, with a strengthening currency, and Petrobras will be benefiting from this and from increased oil production (more platforms operating), higher international oil prices, and higher domestic price of gasoline in Brazil. PBR could be increasing local gasoline prices as early as October.
I keep working to find other screaming buys, and I expect to pull on the trigger when all the indicators give me the green light, which will probably be very shortly.
Enjoy and profit,
Horacio Marquez
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