The Money Map Advantage
Thursday, March 30, 2006
By Horacio Marquez
Email – #36
** Commodities Are On Fire and Brazil Is On Sale
Ben Bernanke had a stellar debut yesterday at the Fed. A few investors were playing, like me, the hopeful view that the current demise of speculative investment in the housing bubble would prompt the Fed Chairman to signal a pause, or even an end, to the rate-hiking process.
However, such hopes were disappointed for the moment. While he raised Fed fund rates another 25 basis points to 4.75%, as expected, the Fed’s statement still kept the possibility of another hike wide open: “…some further policy firming may be needed.”
Translation: Expect another 25 bps up on May 10. With this language, Ben Bernanke is hammering another nail in the coffin of speculative real estate investing, which last Friday showed a 30% drop in sales of new homes in the west and a 10.5% drop nationwide. Money keeps flowing from real estate to the global equity markets.
This language – which practically guarantees that by May 10 we will see Fed funds at 5% – surprised many investors, including me. We expected a more ambiguous statement, leaving the door open for a pause. In all fairness, should something break and Bernanke need to pause, he did leave himself a little room by saying not only that inflation expectations are contained, but that “the Committee will respond to changes in economic prospects as needed,” which allows him to pause or even cut rates, should something drastic warrant it.
By surprising the few remaining housing bulls, he adds to his strong inflation-fighting credentials while the U.S. economy is receiving a temporary boost in the first quarter from the Katrina-Rita bounce-back. And he is ensuring that the economy slows down to a soft landing in the second half. So, while my forecast for a maximum Fed funds rate of 4.75% is seriously at risk, my forecast for global synchronous growth is safe, since there is no inflation in sight and Bernanke is on the last inning of rate hikes. The commodity price rally we saw today confirms it, as well as the impending showdown around April 1 between CVRD and the Chinese over iron ore prices.
So, with the commodity-emerging markets global stock rally alive and well, why did we see such surprising weakness in Brazil?
Current Brazilian president Lula is widely ahead of his opponent for October’s upcoming presidential elections. And we just saw one more instance of the typical political soap opera that has characterized the country for decades. As the elections approach, the opposition continues with their efforts to weaken the Lula government, which they have been attacking on corruption charges. And they have been on the trail of Antonio Palocci, the Minister of Finance who orchestrated the current economic success of strong growth and low inflation, through orthodox tight monetary and fiscal policies. Palocci was forced to resign last Monday, after some facts became public that could point to him intervening to suppress some evidence.
Palocci was seen as the guarantor of economic and monetary orthodoxy and his resignation was a shock to the market. Within hours, the new Minister of Finance, Guido Mantega, who was leading Brazil’s powerful National Development Bank, started calming the markets. Lula himself affirmed support for Mantega to effect “hard decisions,” should he need it. And for further effect, Lula reaffirmed the current president of the Central Bank, Henrique Meirelles in his post.
All of these reaffirming statements were critical: The market nightmare would be that Lula, in his desire to ensure reelection, might throw the current exemplary fiscal and monetary discipline away. Brazil’s accelerating economy, the significant room for easing that the country has within the current very tight budget and interest rates, and Lula’s wide leadership in the polls do not require him to resort to such extreme measures.
After the Minister of Finance replacement, the current market consensus is that Lula will retain the market-loved 4.25% primary fiscal surplus target, which they are over-performing year to date, and that interest rates will keep falling at the current pace of about 0.75% per Central Bank meeting.
With these assurances, the market reacted strongly and much upside is still on the table. Investors are still waiting to see the team that Mantega assembles and looking for further assurances. As these assurances become clearer, the economy accelerates and interest rates drop further, the banks and other Brazilian companies will surprise with earnings to the upside, as has overwhelmingly been the case across Latin America in this type of economic scenario ahead of elections.
Therefore, our current Brazilian bank holdings and the Brazil ETF are firmly recouping from their recent weakness and should move to new highs in the next couple of months, as it becomes clear that the economy keeps accelerating and fiscal and monetary policy are on track.
Validating these views, the day following Palocci’s resignation, Fiat committed to investing $1.1 billion in Brazil over the next three years, and Intel committed to invest $50 million in its own venture capital fund to develop high tech in Brazil.
Also, this morning Joseph Ackerman, the influential head of the Institute of International Finance (the global banks’ think tank) and president of Deutsche Bank’s board of directors and Citibank’s legendary emerging markets executive, Bill Rhodes, both concurred on minimizing the change of ministers and expecting the continuation of current policies.
And the economic numbers released this morning show Brazil coasting along with higher growth and lower inflation. On all this news, the currency is retracing recent losses and the Bovespa local stock market index is up.
Hence, we remain committed to our positions in Brazil, looking for an important appreciation. I would add positions here, but we already have three strong stocks in our portfolio. If you have joined lately and have not purchased Brazil yet, you should add all three now.
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)
$74.89
Buy. Sell stop is $59.58.
Peabody Energy (NYSE: BTU)
$50.25
Buy. Sell stop is $35.
IShares Brazil Fund (Amex: EWZ)
$39.80
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$40.00
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$36.16
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$86.53
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$15.32
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$14.44
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$180.66
Buy. Sell stop is $117.27.
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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