The Money Map Advantage
Friday, February 3, 2006
By Horacio Marquez
Alert - #27
** Measuring the Market’s Three Major Pressure Points
I am eyeing the possibility of adding more energy to the Money Map portfolio, but Iran, employment numbers, and Tuesday’s $25 billion treasury refunding auction will all play a part in this decision. Let me explain…
Despite oil prices declining from recent peaks, there’s been a large jump in the VIX volatility index, even though Iran keeps saying it will continue its efforts to enrich uranium.
The International Atomic Energy Agency (IAEA) is ready to refer Iran to the UN’s Security Council, and the U.S. and its allies are building the case.
And this situation seems to be escalating – not decompressing – as we speak, even though the next key date seems to be far away (March 6). As CBS News reported: “The Security Council, which U.S. Ambassador John Bolton presides over this month, is likely to agree to wait for a further, and more detailed, IAEA report due March 6 before taking any action.”
This is the reasonable thing to do.
This diplomatic pause, to allow for plenty of negotiations with allies across the world, is what provided some relief to the oil markets today. But over the next month, if diplomacy is not successful – let’s pray that it is – oil should be creeping up again. I tend to be skeptical given Iran’s seemingly deranged rhetoric.
Not all is bad news in that part of the world. The terrorist group Hamas, which won the elections in Palestine, has recently declared it “would consider negotiating with the international community for a truce with Israel.” Although this is reminiscent of the Arafat tactic of talking peace only to disappoint later, we need to give it a try.
Bernanke Takes the Helm
Alan Greenspan left the door wide open for Ben Bernanke in his departing actions last Tuesday. While hiking Fed Funds another 0.25% up to 4.5%, the statement said that the economy “appears to be solid,” despite the uneven data – that is, they did not side with my view that the economy is already slowing down, as evidenced in a much softer housing market and a pickup in the proportion of corporate earnings misses.
On the other side, they said that inflation is low and future inflation expectations are under control. But they did highlight two inflationary risks: high resource utilization and high energy prices.
What this all means is that now, at the helm of the Fed, Bernanke can choose which way he wants to go – stop at the next meeting with one more hike… or keep going.
To make matters more difficult, this morning’s employment number fell short in new jobs for January, but added upward revisions to the past months, bringing the moving average up (January was extremely warm; and employment should have gotten a boost from the Katrina bounce-back and the increasing rebuilding efforts).
However, the same thing happened with average hourly earnings, indicating that the consumer is far from dead, as I was discussing last week. This is putting more upside pressure on U.S. Treasury yields at a critical moment.
Impending Auction… And An Unexpected Dollar Boost
All of this uncertainty about the strength of the economy and future monetary policy is occurring just ahead of the mammoth U.S. Treasury refunding coming next Tuesday – some $25 billion in three-year notes, $10 billion in 10-year notes and $14 billion in the reborn 30-year bonds that had been absent from auctions since 2001.
This amount of bonds that the primary dealers must buy ahead of their institutional clients and central banks is not small. Even when the Basle II regulations for the international banks allow them to have zero reserves against these positions, the banks do have to account for the price volatility of the paper they ingest.
And with Fed Funds at 4.5%, the yield spread between the new issue bonds and the banks’ cost of funding is inadequate to cover any losses due to price fluctuations. So, with Wall Street not in the business of losing money, it is very understandable that bond yields in the long term have crept up more than 20 basis points in the last week to make a bond indigestion much less likely this coming Tuesday.
Also, they have to “make room” in their portfolios, if only for a little while, to carry this large amount of paper. And these uncertainties, and more importantly, the added liquidity requirement, have prompted them to take profits in their proprietary risk positions in stocks, and especially in the best-performing stocks. Just in case. And higher rates and the expected massive dollar inflow from foreigners buying into Tuesday’s auction are boosting the U.S. dollar.
So, the stronger U.S. dollar, the jobs report and the coming Treasury auction on Tuesday are providing us with a buying opportunity in the market, but especially in energy which should come back to life once the auction is over successfully, bond yields start coming back down and we refocus in the Iran geopolitical situation.
Therefore, should U.S. Treasuries be digested appropriately, as I expect next Tuesday, we should see an equally attractive market rally. In the unlikely case that the auction goes badly, we could see further profit-taking in the market and eventually an energy rally, ahead of UN sanctions on Iran next month.
The overall conclusion is that, with at least two thirds of the downside move already priced in before Tuesday, I prefer to wait for the resolution of Tuesday’s U.S. Treasury auction, where I am eyeing the possibility of adding more energy to the portfolio going into the March 6 showdown with Iran.
Enjoy and profit,
Horacio Márquez
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Stock
Symbol
Current Price
Comments
IShares Brazil Fund
(Amex: EWZ)
$39.79
Buy. Sell stop is $33.79.
BHP Billiton
(NYSE: BHP)
$38.25
Buy. Sell stop is $32.70.
Banco Bradesco
(NYSE: BBD)
$37.62
Buy. Sell stop is $29.45.
Petrobras
(NYSE: PBR)
$88.90
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan.
(NYSE: MTU)
$14.20
Buy. Sell stop is $12.93.
iShares Japan Fund
(AMEX: EWJ)
$13.91
Buy. Sell stop is $12.83.
Tenaris
(NYSE: TS)
$152.94
Buy. Sell stop is $117.27.
MSCI Austria Fund
(AMEX: EWO)
$29.90
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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