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The Money Map Advantage
Thursday, August 25, 2005
By Horacio Marquez
#6
** A compelling play in Eastern Europe while we prudently wait for better re-entry points in energy and other emerging markets
I have been very busy scanning the world equity markets for the next pick. It has not been easy. The prime candidates are Petrobras (NYSE: PBR) , where we locked in a quick 8% gain and Westmoreland Coal (AMEX: WLB) , where we got a more meager 3% profit in a few days. Although both seem somewhat settled after some profit-taking here, I am convinced that we need to wait a bit more to get back in.
The long-commodities, long-emerging markets, long energy trade seems to be overdone for now. There are many signals that point to potential temporary breakdowns, like in BTU, ACI, TV, CX. Wall Street, hedge funds, mutual funds, pension funds and commodity trade advisors (CTAs), as well as the public, seem to all be in the same boat. And that is not too much of a problem long term, because the fundamentals are very strong for those sectors. In fact, I recently presented in Vancouver on the huge potential financial windfall in exploiting such a trend.
However, in the short term, the potential for more important profit-taking weakness is high, ESPECIALLY IN ENERGY, because:
The effects of high energy prices are starting to be felt in the U.S. economy. Inflation popped its ugly head last week with CPI and PPI at 0.5% and 1.0%, although the core indices were better behaved. High gas prices are already affecting the purchasing power of the lower-end consumer. Durable goods surprised big on the downside, and existing home sales started to slow down. These factors indicate higher inflation with slower growth and higher need for monetary tightening.
In addition, Labor Day marks the end of the U.S. driving season.
Therefore, demand growth for oil should slow down in the U.S. at the same time that high prices motivate even less driving and more production. While oil has been propped up by the menial Ecuadorian oil worker strike, and the possibility of a disruption in Gulf of Mexico supply due to a storm about to hit Miami later tonight, the situation will likely decompress quickly in the next few days, exacerbated by the end of the driving season.
This decompression could easily be the catalyst to motivate the large amount of speculative positions looking to get out the door at the same time: Remember, we are in profit-taking season in September. We will re-enter later.
In Petrobras, I am monitoring Brazil very closely, and the most likely scenario continues to be to keep President Lula in power, weakened by a slow drip of scandals, until the elections next year, and NOT to impeach him. With much political volatility, we are still dancing to the same samba tune. Macroeconomically, Brazil is steaming red hot with strong growth, and large primary current account and fiscal surpluses. So at some point later, Petrobras will become a compelling trade.
So, rather than be exposed to the commodity cycle in the short term, we need to play Eastern Europe to exploit the transformational integration of emerging Europe into the old Europe. Estonia, Lithuania, Latvia, Hungary, Poland, the Czech Republic, Slovenia and Slovakia joined the European Union this past May, and are reaping the benefits. One way to play it is with a fund that invests directly in local shares, like EUROX. But for liquidity and fees reasons I prefer to play the ETF of Austria (AMEX: EWO).
Austria’s ETF is ready to show some important gains:
These countries are seeing fast economic expansions by having joined the Eurozone with very competitive salaries and low debt levels. Capital is flowing strongly to the region to finance investments in infrastructure, manufacturing and services, and personal disposable income is growing strongly.
Austria is the epicenter of this transformational change in Eastern Europe, acting as the de facto capital of the process. Erste Bank (OTC: EBKDY), which weighs almost 17% within the ETF index fund, is dominantly positioned in most of the region and expanding deposits and credit very profitably. Austria Telekom (NYSE: TKA), which represents about another 17% of the index, doubled net income from last year.
We are paying a fairly low valuation for these earnings: 14 times versus almost 16 for the slower-growing S&P 500.
Austria is also benefiting from the renewed strength in the Euro. The Euro could be re-testing the highs of about U.S. $1.36 sometime next year.
The ETF technicals indicate a high probability of an upward breakout.
Lower vulnerability to profit-taking, as this ETF’s YTD return is about 8%.
Action to Take:
Buy the MSCI Austria Index (AMEX: EWO) at the market.
Enjoy and profit,
Horacio Marquez
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