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The Money Map Advantage
Friday, March 24, 2006
By Horacio Marquez
#35
** New Home Sales Confirm Our Fed Predictions
We learned this week that iron ore supply seems maxed out for Companhia Vale do Rio Doce (NYSE: RIO), the largest producer in the world. Its production is fully placed and their railroad capacity is fully utilized. The company explained yesterday that some Indian blockades of its railroad deliveries, in protest of some of Brazil’s benefits policies, have cost CVRD some 1 million tons (about 1/30) of its 2005 port shipments.
This can only be good news for the other major iron ore producers, including BHP Billiton (NYSE: BHP), which we hold and which rallied nicely yesterday. Iron ore price hikes are being negotiated and are expected to be in the low double-digit range. In addition, Nucor (NYSE: NUE) guided up, showing the ability of U.S. steel producers to pass on higher prices down the line. This reveals their ability to possibly absorb higher prices of iron ore.
In Brazil, permanent employment is rising at its strongest pace in the last five mo nths, bank lending is growing strongly, and manufacturers are preparing to ramp up output to take advantage of the descending interest rates. This is good news for the banking sector, which should reward us later as its improved profit outlook – coupled with gains in the local currency – transpires.
On the other hand, U.S. February existing home sales were up 5.2%, mainly because of unusually warm weather in the Northeast and in the rest of the country. The less weather-sensitive areas in the South showed less strength, and the West showed actual 10% declines. Inventories of unsold homes were up 5% in the month and are 30% higher than last year – the worst levels since 1998. Also, unemployment claims were slightly lower, revealing a tight labor market, although the three-month moving average is actually up from the December lows.
Despite yesterday’s negative market reaction to a more robust housing and employment situation than expected, the overall picture is one of a nationwide soft landing in real estate, with harder landings in speculative bubble areas. Together with a strong – but slightly decelerating – economy, this will moderate already well-behaved inflationary pressures in the economy later in the year. In other words, we are seeing the Goldilocks scenario for stocks.
Bernanke’s March 20 speech highlighted the fact that a much more transparent and gradual Fed monetary policy has prevented the knee-jerk market reactions of the past, justifying lower rises of long-term interest rates and minimizing unnecessary market volatility. So far, it’s just the scenario that we have been expecting and handily profiting from.
Speech link: (http://www.federalreserve.gov/boarddocs/speeches/2006/20060320/default.htm )
And reinforcing our view that the Fed will be done raising rates sooner than the market expects, Bernanke says:
“…For example, some observers have pointed to factors that may create a longer-term drag on the growth in household spending, including high energy costs, the likelihood of slower growth in house prices, and a possible reversal of recent declines in saving rates. If these drags on the growth of spending do materialize, then a lower real interest rate will be needed to sustain aggregate demand and keep the economy near full employment. To be consistent with a lower long-term real rate, the short-term policy rate might have to be lower than it would otherwise be, as well.”
While Bernanke stops short of embracing this latter explanation for the “Greenspan conundrum” of low long-term rates, I believe that the overwhelming evidence points to these reasons for the low long-term rates.
Also, Bernanke mentions the global nature of markets, where the high-saving Asian, oil exporting, and export-driven economies have been growing dramatically, thus favorably affecting the demand equation for U.S. Treasury securities. All of this points to an early end of Fed rate hikes – a positive surprise for the market, which is currently discounting a much tighter monetary action (three or four more rate hikes).
Adding to this, market commentators totally forgot the effect of the Japanese fiscal year ending on March 31, which takes away major liquidity and demand from the market and bodes well for April and May.
Finally, some more disruptions in Nigeria brought light crude oil back up to $64, well within its $60-$66 range, and gave new impulse to our energy holdings in Peabody Energy (NYSE: BTU), up 3% yesterday, while Tenaris (NYSE: TS) is preparing to challenge its all-time high of $186.62 and take off once more.
I am looking at quite a number of situations that are popping on the Money Map System radar, and finishing the number crunching. In a few cases, I am just waiting for the right alignment of technicals to pull the trigger.
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
Current Price
Comments
Unibanco (NYSE: UBB)
$80.80
Buy. Sell stop is $59.58.
Peabody Energy (NYSE: BTU)
$48.49
Buy. Sell stop is $35.
IShares Brazil Fund (Amex: EWZ)
$40.31
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$37.59
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$38.78
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$85.83
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$14.45
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$14.01
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$182.10
Buy. Sell stop is $117.27.
MSCI Austria Fund (AMEX: EWO)
$30.50
Buy. Sell stop is $26.51.
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