The Money Map Advantage
Friday, April 28, 2006
By Horacio Marquez
Email – #41
** Bernanke Hints at Rate Hike End, and the Market Gets a Boost
Prudence is the mother of all virtues. It keeps our actions appropriate and measured to the realities around us. And Mr. Bernanke, much like his predecessor, Alan Greenspan, exudes this desirable quality. With many Fed Governors already worrying that the Fed has done enough, and a minority saying that some more tightening is desirable, Bernanke has Solomonically implemented the prudent middle ground.
A key issue is that some 40% of the consumer price index (CPI) is housing costs; and with housing costs declining, the Fed is already achieving its objective of containing inflation. The reality is that prices in the real estate market are dropping fast, but not cataclysmically.
Fearing that long-term interest rates are climbing, some people have rushed in to purchase homes… But prices have declined from a year ago, as inventories of unsold condos and homes keep rising, people are getting squeezed by the resetting of higher adjustable-rate mortgages and higher long-term rates, and builders are undercutting prices with more incentives as the only remedy to deal with lower activity. It is increasingly becoming a buyer’s market.
But there are many uncertainties in all of this for the Fed, such as the speed and the size of the ongoing drop in housing prices. And also uncertain are the prices of oil and other commodities, and the lags with which the rate increases already in effect will affect growth and inflation.
The situation is evolving according to our view of a soft landing of the economy, and it is prudent for Bernanke to stop here until he can get more evidence of the type of economic landing – soft or hard – that we are facing. But in order to avoid getting runaway speculations on commodities that could eventually force him to resume hiking rates, he kept the option of increasing interest rates at later meetings on the table.
With the announcement of this possibility at yesterday’s Congressional testimony, interest rates dropped, giving the markets a boost. But the party was put on hold until this morning’s first-quarter GDP number was released, which was good. It showed a slower-than-expected pace of economic growth, and, very importantly, no wage pressures, despite the tight labor market.
And Bernanke’s actions are right in line with what the Bank of China “happened” to do yesterday overnight. Call it coordinated intervention, if you will. In a globalized economy, monetary policy is not the realm of a sole central bank. What other central banks do is inter-related to the policies adopted by the leading economies.
And it does not surprise me that just after Chinese President Hu’s recent U.S. visit, China gave the U.S. further proof of goodwill in its increasing integration into the global economy. In fact, they raised the benchmark one-year lending rate to 5.85% from 5.58%.
This interest rate increase should help alleviate some of the pressures of Chinese demand for commodities, and help restrain inflation by keeping economic growth in China from maintaining the current torrid 10%-plus rate.
So, with housing not collapsing, but landing softly in the U.S., China allowing for some token cooling off of its economy and Mexico looking to accelerate, we go to Brazil.
Not Your Mother’s Brazil: An Economy Dancing at the Rhythm of Samba
There are plenty of skeptics on Brazil today – another reason I love Brazil. With an economy expanding and sound for years to come, and current skepticism by some market players, Brazil is poised for large gains when its performance becomes obvious.
Critics, who are short Brazil and our banks at the moment, cite record low spreads of Brazilian bonds to U.S. Treasuries, and the risk that the government might be tempted to throw fiscal discipline in order to ensure a win for President Lula in the upcoming election.
But Brazil has reassured investors that it will continue in its path to fiscal discipline, naming a stellar group of renowned economists, formerly with top international banks. I have verified this with Brazilian and U.S. top executives. Today, the country has about one-fourth the external financing needs it had only five years ago, after having retired debt, massively increased reserves on the back of its large current account surpluses, and seen huge investment inflows into industries and its local markets.
And with the presidential elections in October, Brazil should keep on its course of reducing interest rates and accelerating the economy. Inflation came down, as measured by the government’s IPCA price index, to 4.89% through mid-April, the lowest since July 1999, from 5.3% at the end of March. But the pace of interest rate reductions will decrease in order to prevent an over-acceleration of the economy. Once more, this situation should greatly favor our Brazilian positions, especially the banks, Bradesco (NYSE: BBD) and Unibanco (NYSE: UBB).
Both stocks seem at the end of a consolidation process and ready to break away from upside resistance any day. The catalysts that propel them higher will be the results they will report on the 8th and 11th of May, respectively – coinciding with the next meeting of the Fed on May 10, when it should become certain that the Fed will pause raising interest rates.
And my Mexican surprise electoral development is already well on its way to fulfillment…
Our last pick: Televisa (NYSE: TV), the Mexican media leader, reported earnings yesterday afternoon, more than doubling first-quarter profits. In addition, the company is exploring the idea of increasing its minority stake in U.S. Hispanic TV leader Univision (NYSE: UVN), which could greatly benefit from Televisa’s Azcárraga’s disciplined leadership.
Our key interest is the increased viewership and advertising it will receive in the Mexican presidential elections in July and soccer’s World Cup in Germany… as well as the economy’s acceleration into the elections, with Banco de Mexico’s recent reduction in interest rates and the much-increased spending in construction and other social programs by the current government, all of which typically occurs in these final pre-election months.
Last, but by far not least, my contrarian view of the election’s result: While most analysts expect a triumph of the leftist candidate Manuel Lopez Obrador, who has led in the polls for the last couple of years, I am calling for a surprise reversal with a win for Felipe Calderón, former energy Minister of Vicente Fox. In the most recent poll, published a couple of days ago, Calderón is already leading Lopez Obrador for the first time in two years – 38% to 35%.
And this hugely positive momentum for Calderón is ahead of last night’s first presidential debate, where Lopez Obrador was not present. So sure has Lopez Obrador been of his victory that he declined to participate weeks ago, fearing attacks from the other candidates. His empty seat will give the other candidates plenty of opportunity to continue characterizing him as a Chavez clone with no viable alternatives, and playing on the audiences fears about the possible loss of jobs from foreign investment pull-outs should Lopez Obrador win.
So with the leadership in the polls and momentum in his favor, Calderón should soon start helping Mexican stocks.
Recommendation:
Increase the positions in Bradesco (NYSE: BBD) and Unibanco (NYSE: UBB) by 50% at the market today. Aggressive investors should buy the Unibanco May $85 calls UBB EQ. Do not pay more than $1.10.
Enjoy and profit,
Horacio Márquez
P.S. Elsewhere in our portfolio, Tenaris (NYSE: TS) split 5-for-1 yesterday.
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$21.46
Buy. Sell stop is $16.45.
Unibanco (NYSE: UBB)
$79.10
Buy. Sell stop is $59.58.
Peabody Energy (NYSE: BTU)
$62.74
Buy. Sell stop is $47.
IShares Brazil Fund (Amex: EWZ)
$43.80
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$45.05
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$38.17
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$97.58
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$15.74
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$14.86
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$45.22
Buy. Sell stop is $32.40.
Stock split 5-for-1.
MSCI Austria Fund (AMEX: EWO)
$32.84
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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