The Money Map Advantage
Friday, March 10, 2006
By Horacio Marquez
Email – #32
** Treasury Refunding Episode Revisited – Start Loading the Boat
Yesterday, almost flying below all radar screens of market commentators, the U.S. Treasury effected its anticipated re-opening of the 10-year bond to issue another $8 billion. Unlike regular refunding issues, U.S. Treasury bond re-openings are not heavily attended by foreign central banks. Adding to uncertainties, we are closing in to the March 31 Japanese fiscal year ending, which brings the necessary unwinding of large speculative positions held by financial participants in Japan, which will be re-initiated starting on April 1.
Compounding this scenario globally, the markets were nervously expecting the Bank of Japan decision on its monetary policy. To cap the story, the markets were also expecting the release this morning of the U.S. non-farm payrolls for February (see chart below). This is why some participants, especially Wall Street, were not too eager to take in 10-year paper without a large yield concession. As they place this paper, the market should calm down and catch a strong bid. This is already happening today.
Because of all of these uncertainties and Iran, I have not added positions recently, looking for better entry points and avoiding costly initial losses. Also, it is not surprising that these uncertainties have contributed to weakness in U.S. Treasuries. What is surprising is the extent of the weakness in the commodities-cyclical-emerging market plays – yet, these are only short-term incidents, so the risk-reward equation warranted keeping our positions, looking for much larger medium-term appreciations. After all, the U.S., Japan, Europe and emerging markets are growing solidly, and G7 is landing softly. This will prolong the multiyear emerging market rally.
On Thursday, March 2, the U.S. 10-year bond started edging up in yield, later blowing through key one-year technical highs around the 4.62% level. It is now trading close to 4.77% with technicals pointing to a possible test of the 4.87% two-year high soon. At these levels, we have to start thinking strong reversals of the recent sell-off.
With at least 80-85% of the move behind us, if not all, we should start buying weakness.
I confirmed that some important and smart institutional market participants are already doing so in the U.S. and in Brazil. Even in emerging market bond-land I also confirmed calm in savvy investors, despite the recent downward re-pricing of the asset class, with the possibility of further appreciation as Brazil and Russia, awash with cash, retire debt and improve their creditworthiness. Hence, further drop in rates in those countries is expected, boosting their economies and equity markets. Brazil’s central bank reduced its short-term rates yesterday by 0.75 to 16.5%, while inflation is down to a record low of 7.4%. Brazil has plenty of room to drop rates and will probably lower rates by a full 1% in its next meeting on April 19 – and keep going, accelerating GDP and equity markets.
This rise in U.S. Treasury yields, together with the tightening of monetary policy by the ECB, BoJ and the Fed, prompted some to prematurely declare “the end of the commodity rally” with the implication that Latin America, given its large exposure to commodities would also tank. Hedge fund fast money quickly made a play on this mini-trade. A similar sell-off occurred in the first half of February going into the U.S. Treasury quarterly refunding, only to see Latin America rise some 10% in the last 15 days of February as long term interest rates stabilized.
The reality is that the U.S. economy, which suffered a labor and economic activity downward shock in the fourth quarter of 2005 with the Katrina-Rita hits, is now experiencing the anticipated bounce-back in the first quarter of 2006. Yet, it is occurring with core inflation and wages under control. And in the second half of the year, the U.S. economy will land softly, achieving a GDP growth rate of some 3%-3.5% for 2006. This will allow the Fed to pause early, rather than late.
The same players that had urged the Fed to pause then are the ones that have been calling for the Fed to keep going now, and they are spooking the markets with their “end of global growth” story. Yet, the Fed looked through the valley and will likely now look through this short-lived first-quarter peak in economic activity.
Again, with core CPI well-behaved at around 2%, and unequivocal signs of the housing market slowdown, the increase in long term rates has to be attributed more to the poor timing of the re-opening, just after an ECB tightening and the BoJ ending of the quantitative easing policy and the day before of the very volatile payrolls number.
Thus, we remain firmly committed to our positions and we are going to start adding emerging markets and energy on weakness. So with a nice entry point, an accelerating economy, and dropping short-term rates, we can add Unibanco (NYSE: UBB). UBB is the third-largest iron ore producer in the world (CVRD is the largest) and will benefit from the acceleration on the economy, the expansion in credit because of lower rates, and the appreciating local currency.
Action to take:
Add Unibanco (NYSE: UBB) at current market price. Shares are currently trading for about $79.50.
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 Rick Pfiefer at 800.438.3040 or 407.667.4729.
Stock & Symbol
Current Price
Comments
Unibanco (NYSE: UBB)
NEW
Buy at market.
Peabody Energy (NYSE: BTU)
$45.92
Buy. Sell stop is $35.
IShares Brazil Fund (Amex: EWZ)
$39.29
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$34.70
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$37.95
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$84.39
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$14.32
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$13.62
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$177.60
Buy. Sell stop is $117.27.
MSCI Austria Fund (AMEX: EWO)
$29.25
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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