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The Money Map Advantage
Wednesday, October 26, 2005
By Horacio Marquez
#15
** Ben Bernanke’s Appointment Focuses the Markets On the Other Side of The Valley
Game theory works. It is no coincidence that the last Noble Prize in economics was a game theorist. In my last alert, I posed the “game theory” problem that today’s Fed is facing: Whether to be extremely vigilant with inflation and risk a collapse of the housing market, some banks and possibly entities like Fannie Mae and Freddie Mac, or to allow an acceptably low level of inflation in the U.S. economy. The latter approach would not only help consumers deal with their high burden of debt, but would also allow the wonders of the U.S. economy to work its magic through growth in order to correct the fiscal imbalances. This easier monetary policy in turn would stimulate global growth, especially in emerging markets and cyclical stocks.
In addition, we are seeing initiatives in the U.S. Congress to cut expenditures. The U.S. should follow the example from none other than Germany. Germany is preparing for a massive cut in fiscal expenditures and privatizations, like Frankfurt’s airport, to balance its untenable fiscal situation. Also, it could be preparing itself for a round of cleanup and consolidation in its ailing banking industry. The forced sale of the failing mortgage bank AHBR as part of the bailout of its parent BGAG, which is being sold to Deutsche Postbank could be one of the culprits pressuring U.S. long-term interest rates. This is because of the fear of forced bond portfolio liquidations. All of this is positive for Germany, and for global stocks moving forward.
If both countries move toward these cuts, and toward reorganization of inefficient industries, this will be very positive for inflation, interest rates and ultimately growth and equities.
In this current market situation, where the market has been spooked by inflation fears, the nomination of Ben Bernanke is extremely positive.
President’s Bush’s appointment of the new Chairman of the Federal Reserve Board is crucial. It should prove to be an extremely beneficial influence on the U.S. and world economies and markets for decades. Dr. Bernanke, as former Chairman of Princeton’s Economic’s Department, is well-liked by economists and the markets. And despite his close relationship with the president, as his current Chief of Economics Advisors, he is bound to be independent, vigilant on inflation (within reason) and non-political.
How do we profit from this? In this environment of renewed cyclical strength, we see that our oil pick Tenaris (NYSE: TS) is forming a bottom as we expected, despite weakness in the price of oil. Other cyclicals, like steels, Brazilian stocks and other emerging market and global stocks are making comebacks, we need to profit even more from this chorus.
With a calmed political situation in Brazil, a vibrant economy, local interest rates descending, massive current account surplus and strong fiscal performance, we like Brazil both long and short term. Brazil is one of the only emerging countries whose growth is bound to accelerate in 2006. iShares MSCI Brazil (NYSE: EWZ), Brazil’s ETF (exchange traded fund) has decidedly broken upward from its bearish trading channel. CVRD (NYSE: RIO), the largest mining company in the Americas, and Petrobras (NYSE: PBR), the leading market cap stock in the Americas have also broken out to the upside.
Having seen the oil profit-taking conclude, we will add Petrobras (NYSE: PBR) back to our portfolio. But there is more potential for Banco Bradesco (NYSE: BBD) , the “best of breed” in Brazilian banks, which has a terrific balance sheet, a dominant position in the market and rock solid management. Bradesco tends to follow developments of the larger stocks, and is leveraged to Brazil’s growth and continued benign evolution of Brazilian interest rates, as inflation keeps coming down.
Action to take:
Buy Petrobras (NYSE: PBR) and Banco Bradesco (NYSE: BBD) Aggressive investors should consider buying the Petrobras December $65 call option (PBR LM). There are no options on Bradesco.
Enjoy and profit,
Horacio Marquez
If you have any questions, feel free to call one of our VIP Trading Services representatives at 888.570.9830 (toll-free) or e-mail: viptrader@oxfordclub.com , or contact Pillar One Advisor Greg Galloway at 800.438.3040 or 407.667.4729.
Stock
Current Price
Comments
Banco Badesco (NYSE: BBD)
New
Buy at market. Place a sell stop at $40.
Petrobras (NYSE: PBR)
New
Buy at market. Place a sell stop at $55.
Mitsubishi UFJ Finan. (NYSE: MTU)
$12.37
Buy. Sell stop is $10.20.
iShares Japan Fund (AMEX: EWJ)
$11.81
Buy. Sell stop is $10.
Cerner Corp. (Nasdaq: CERN)
$84.96
Buy. Sell stop is $62.25.
Tenaris (NYSE: TS)
$109.77
Buy. Sell stop is $95.
MSCI Austria Fund (AMEX: EWO)
$25.11
Buy. Sell stop is $20.90.
Copyright – 2005 Mount Vernon Publishing. Mount Vernon Publishing does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mount Vernon Publishing expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mount Vernon Publishing provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mount Vernon Publishing has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mount Vernon Publishing, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
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