The Money Map Advantage
Tuesday, May 2, 2006
By Horacio Marquez
Email – #42
** Feeding Frenzy Starting In Our Brazilian Banks
You have heard me pound on the table again and again about Brazilian banks. Banks are pro-cyclical; that is, their profits accelerate more than the growth of the economies in which they operate. And Brazil is accelerating with inflation dropping, which allows very tight (but dropping) interest rates to continue their drop.
The currency is rallying and fiscal spending is being loosened, very importantly, WITHIN THE LIMITS COMMITTED BY THE GOVERNMENT FOR THE FISCAL SURPLUS. This week, the government should announce spending cuts to ensure meeting these fiscal targets. All of these are solid fundamentals, and fundamentals always win in the end.
But the market has not been as constructive on Brazilian banks after the excellent January rally. The banks have mainly traded sideways. Last week, I was counting on several catalysts to jump-start our oversold Brazilian banks (UBB and BBD) back to their all-time highs and beyond… namely, their coming earnings reports, which are right around the Fed’s May 10 meeting.
So, while I expect the Fed to pause on May 10, which would be a good boost, I also expect the banks to surprise on the upside with earnings, prompting the market to recognize higher valuations. Banco Bradesco reports earnings on May 8 and Unibanco on May 11.
But this morning we got an unexpected boost. The second-largest Brazilian non-government bank, Banco Itaú, which I own for my own account, has agreed to acquire Bank of Boston’s assets and operations in Brazil from Bank of America and its shares are rallying strongly.
In a typically bad news/good news fashion: The bad news for us (but only mildly) is that with this transaction Banco Itaú overtakes Banco Bradesco as the largest in assets. Obviously, synergies from consolidation and its larger size will allow this bank to increase profits well beyond its current ones.
But the excellent news for us is that Banco Itaú paid a steep price for Bank of Boston, therefore raising valuation expectations in the market. And secondly, consolidation implies less competition in the longer term, which also raises the expectations of profits for the entire system, warranting a higher earnings multiple.
On these catalysts, our banks are rallying strongly and our Unibanco call options have doubled since last Thursday. Feel free to add Unibanco (NYSE: UBB) and Bradesco (NYSE: BBD) shares to our already overweight position, since they have broken through key technical levels and should keep rallying strongly.
Enjoy and profit,
Horacio Márquez
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$21.92
Buy. Sell stop is $16.45.
Unibanco (NYSE: UBB)
$82.78
Buy. Sell stop is $59.58.
Peabody Energy (NYSE: BTU)
$68.82
Buy. Sell stop is $47.
IShares Brazil Fund (Amex: EWZ)
$45.31
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$47.00
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$38.71
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$101.78
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$15.81
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$15.06
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$46.47
Buy. Sell stop is $32.40.
MSCI Austria Fund (AMEX: EWO)
$33.33
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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