The Money Map Advantage
Friday, January 27, 2006
By Horacio Marquez
Email – #27
** Buy On Dips: The Market Confirmed the Anticipated Opportunity
Last week, we stated that market sell-offs – due to higher energy price spikes induced by the Iran/Nigeria crises – should be bought. And this week, strong gains in our portfolio validate this.
We came very close to executing our stop in Mitsubishi UFJ Financial (NYSE: MTU). Last Friday, it actually went through our stop intraday, and then stayed over it the rest of the day. As if some sneaky Wall Street trader new about our stop (we are on to you, my friend), it actually traded 2 basis points below it in the last minute of trading, in the hopes we would issue a selling alert.
After much debate, and fundamental, relative value and technical analysis, I decided to stay put. The likelihood of being able to buy back MTU below that level looked difficult and the short-term upside was much more important. And the long-term upside in MTU is monumental.
I expect MTU will do what Citigroup did in 1991 through 2000: Generate some 20 times its original investment. So even if we err in the timing short term, sitting in this stock long term is a spectacular opportunity, which should not be mentioned lightly. Why? Because Japan’s bad loans are decidedly turning around on the back of powerful market-oriented reforms pushed forth by Prime Minister Junichiro Koizumi.
Among these reforms, the salient one is the privatization of the postal service, which holds 25% of the country’s very substantial individual savings. Once privatized, these resources will be freed from the current pillaging of government pork projects, and deployed with market discipline to more productive uses, raising the economy and Japan’s productivity. MTU, the largest bank in Japan – and in the world – will be the prime beneficiary. So stay long MTU. We will let you know when to sell with an alert.
But let’s focus back on the economic and market news:
Citicorp, Bank of America and other banks showed disappointing results for the fourth quarter, on the back of a flat U.S. yield curve and a spike in personal bankruptcies ahead of the new bankruptcy law. Also, we saw notably the likely acceleration to the downside of the housing market, with nationwide median prices dropping sequentially.
Also, the mega-cap companies’ earnings reports showed a trend of barely meeting profit expectations, but missing on the top line.
All of this news was pointing to an undisputable slowdown in the U.S. economy, which I wanted to confirm before issuing my next directional advisory to you. As I expected, this was confirmed by the fourth-quarter GDP release this morning. It was much weaker than expected: 1.1% vs. about 3% expected. And the GDP deflator, a Fed-favorite gauge of inflation – 3% against the 2.6% expected by the market. It is, however, still dropping, from 3.3% in the prior quarter.
Is Bad U.S. Economic News Bad For Our Positions?
For starters, remember that the fourth quarter was hit by Katrina, Rita and the subsequent energy price spikes, which slowed demand and prompted some temporary inflation.
But this morning on CNBC, George Soros referred to the optimistic world leaders in Davos as a crowd “dancing on the Titanic.” He seems to think that the housing market bubble burst will kill two-thirds of the U.S. economy (the consumer). In addition, he does not see how it can be replaced in the global economy, given its huge importance. But is he right, or is he talking up this gloom-and-doom scenario with a political objective? The U.S. mid-term elections maybe?
I believe that he missed several things: The growing importance of growth elsewhere in the world, and the many cushions to the consumer purchasing power coming in play. Let me explain…
First, the BRICs (Brazil, Russia, India and China) are growing like gangbusters and accelerating. Similarly, the rest of emerging markets, including Eastern Europe, Japan and core Europe are also accelerating. Increasingly, this growth is not powered exclusively by exports to the U.S., but by structural reforms across the globe and the deepening of their internal financial markets.
All of this, plus the global savings glut being deployed in these promising economies, is leading to higher global consumer purchasing power. International sales are thriving for most U.S. multinationals. The global economy is here. Therefore, this growth is much less dependent on the U.S. remaining the premier engine of the global economy.
Secondly, the consumer will not die precipitously, as Soros fears. The housing market will keep cooling off in demand and prices, rather than falling of a cliff, because of strong demographics and rising compensation.
New home sales this morning beat the Street consensus slightly. And help is on its way for the consumer: The wealth effect from the housing price appreciation is going to give way to the wealth effect of rising equity prices. And finally, corporate America is going to kick in with additional compensation.
Compensation typically rises well into the cycle, as the labor market tightens and productivity gains are well ingrained. So expect much better pay in many of the winning industries (like aerospace, mining and energy, which are thriving). Better pay and rising equity prices will replace the home price rises and help consumers deal with higher interest rates and energy prices.
As if this were not enough, the ongoing U.S. dollar weakness will prop export growth and will soften any slowdown of the U.S. economy from the consumer side by propping up investment, especially in selective high tech (wireless being the prima donna). It will also make U.S. equities cheaper to international buyers, and will greatly boost profits and equity prices of U.S. exporters and multinationals. All of this should result in the U.S. economy growing some 3%-3.5% this year.
So, good try, George. I think that what the dropping inflation and the rest of the recent bad economic news really means is that the Fed will be done raising rates maybe as soon as this coming Tuesday, or by March 28 for sure. I have raised my own probability of the Fed stopping rate hikes this coming Tuesday, up from 40% last week to 55% today. The market is similarly adjusting and it is buying selectively (all our favorites are on their list).
Finally, with all this being nice and dandy, what of Iran?
The U.S. administration is following a prudent and stern course to deal with this threat by working strenuously with Europe and with Iran’s key allies, Russia and China – also key trading partners for the U.S. and our European allies. This has decompressed the crisis for the moment, but its resurgence cannot be ruled out. If the worse comes to pass and it leads to a war that nobody wants in the coming months, military action should be over in a month or so, and the market should be up above pre-war levels before it is over, as has historically been the case.
OPEC assures us that there is enough spare capacity to meet any Iran shortfall. I am not that sure. So stay long energy, and the worst-case scenario is that the non-energy part of the portfolio will look bad for a few weeks, providing yet another buying opportunity.
I am waiting for the Fed action next Tuesday to see when to deploy my next picks, which are almost ripe. So stay long, buy dips into Tuesday and stay tuned.
Enjoy and profit,
Horacio Márquez
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.
Current Portfolio:
Stock
Symbol
Current Price
Comments
IShares Brazil Fund
(Amex: EWZ)
$40.60
Buy. Sell stop is $33.79.
BHP Billiton
(NYSE: BHP)
$39.39
Buy. Sell stop is $32.70.
Banco Bradesco
(NYSE: BBD)
$38.23
Buy. Sell stop is $29.45.
Petrobras
(NYSE: PBR)
$89.97
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan.
(NYSE: MTU)
$14.18
Buy. Sell stop is $12.93.
iShares Japan Fund
(AMEX: EWJ)
$13.99
Buy. Sell stop is $12.83.
Tenaris
(NYSE: TS)
$160.00
Buy. Sell stop is $117.27.
MSCI Austria Fund
(AMEX: EWO)
$30.39
Buy. Sell stop is $26.51.
Market Watch
NASDAQ
1528.95
0.00
SP 500
813.88
0.00
DJIA
7749.81
+89.84
As Of 6:12AM 3/26/2009
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