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The Money Map Advantage
Thursday, December 22, 2005
By Horacio Marquez
#23
** Bullish Into Year-end and a Strong January Start
The Federal Reserve included the language that I expected and we saw a disappointing rally in the mining and other stocks. So our last addition, BHP Billiton (NYSE: BHP), is up a mere 1%, but handily outperforming CVRD (NYSE: RIO). It should continue to rally, especially once the price for iron ore stabilizes for the next year. Also, “new money” for international stocks will be coming this way. Read on below.
Our Japanese picks, the ISHARE MSCI JAPAN (AMEX:EWJ) and Mitsubishi UFJ Financial (NYSE: MTU), and ISHARE MSCI AUSTRIA (AMEX:EWO) are flying as they should, reaching new highs. Keep holding them, this is just the beginning of the party.
Also as expected, we got a great exit price for our Petrobras (NYSE: PBR) December calls, since indeed the stock sold off on December 7 after having reached the $73.38 September high. PBR is consolidating at these levels and most probably will breach the old high in January. Also, the recommendation to add below $69 worked nicely. When the stock breached that level on the downside, nice buying volume came in to bring it back up.
This brings us to Brazil and our other pick, Banco Bradesco (NYSE: BBD). Having formed a bottom in the recent profit-taking episode, Bradesco , like Banco Itaú (ITU) and unlike Unibanco (UBB) , has not yet recovered to their highs. The reason is that a lot more investors might be erroneously tempted into taking some tax losses with their latest forays into these. Also, more short-term money tends to invest in them and these managers took large profits and went home for the year, making this a great buying opportunity. They will be reloading in January, along with new money that will be coming in and will be allocated to international funds.
A similar phenomenon happens with ISHARES MSCI BRAZIL (NYSE: EWZ) , which is being held back principally by ITU, UBB and CVRD (NYSE: RIO). CVRD, the largest mining company in the Americas and a huge iron ore producer, at a P/E of less than 11 and a divided yield of 3.40% is very cheap compared to BHP and RTP, which have P/Es of 16 and 19 and about half the dividend yield. So, with no fundamental news to hold off Brazil, other than profit-taking. I am very tempted to add EWZ.
I believe that Brazil’s economy will be reaccelerating very strongly into 2006 because of appropriate government and central bank measures being implemented now, and continued strength in global commodity prices.
The Central Bank lowered interest rates by 0.50% recently, down 1.75% from their 18% high in September and is intervening in the currency market to weaken the Real. Inflation is lower after some short-term government service price hikes, and rates can continue to be lowered some 4% more in the next twelve months.
The government has ample room to increase expenditures without risking investor aversion: its primary fiscal SURPLUS that is, before counting interest payments, is running at 5.13% of GDP, well ahead of its 4.25%, government target.
Finally, the recent bout of political crisis is just one more buying opportunity, since we know that the current government has done a very decent job with the government finances and the alternative, probably the more conservative José Serra, will probably be even better. All these developments are very bullish for the Brazilian economy and local Brazilian stocks.
As if this were not enough, the S&P 500 also took some profits from the phenomenal November run and now has formed a bottom going into the end of the December window-dressing and positioning. Some players took the November rally as an opportunity to take profits and even go short, and are finding it very difficult to cover before year-end.
Fundamentally motivated, longer-horizon money has been adding on dips after the Fed’s language change and many think that 2006 could see the S&P taking off. The reasons behind this bullishness are the end of the Fed interest rate hikes, expected renewed dollar weakness and an increase in corporate capital investment. And do not discount the consumer. Despite the ending of price gains on homes and the rise in interest rates and energy costs, the big surprise that I expect in 2006 will be non-inflationary increases in real wages, which have lagged the pickup in productivity. So, do not give up on the retail consumer and the Santa Claus rally, and expect upside surprises in electronic last-minute sales in early January.
Finally, our opportune sale of Cerner (CERN) , after The Wall Street Journal negative article proved correct. The only reason why it did not crack yet is the huge short ratio in the stock. The accounting policies mentioned in the WSJ article amount to an extremely benevolent recognition of earnings and a delay in recognition of costs, which should catch up very quickly with the company, the moment that they slow down growth. The effect then could be a very bad miss in earnings, which would collapse the stock. Such a risk is not my cup of tea.
ACTION TO TAKE:
Buy ISHARES Brazil Index Fund (AMEX: EWZ) tomorrow at market.
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
IShares Brazil Fund (Amex: EWZ)
New
Buy at market.
BHP Billiton (NYSE: BHP)
$32.94
Buy. Sell stop is $24.
Banco Bradesco (NYSE: BBD)
$30.61
Buy. Sell stop is $21.50.
Petrobras (NYSE: PBR)
$69.78
Buy. Sell stop is $55.
Mitsubishi UFJ Finan. (NYSE: MTU)
$14.27
Buy. Sell stop is $10.20.
iShares Japan Fund (AMEX: EWJ)
$13.68
Buy. Sell stop is $10.
Tenaris (NYSE: TS)
$117.86
Buy. Sell stop is $95.
MSCI Austria Fund (AMEX: EWO)
$27.70
Buy. Sell stop is $20.90.
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