The Money Map Advantage
Tuesday, May 9, 2006
By Horacio Marquez
Email – #43
** Cashing In 2/3 of Our Unibanco Calls For a 172% Profit
On April 27, I recommended increasing your positions in Banco Bradesco and Unibanco by 50%, and adding out-of-the-money call options in Unibanc the May 2006 85 calls (UBB EQ). These are up from our entry price of $1.10, to $3 today.
The reason?
Since we bought, we have seen a feeding frenzy commence on Brazilian banks (as I predicted) – not only by investors, but by other banks, as well. In fact, Bank of America sold its Bank of Boston operations in Brazil to Banco Itaú. With this, Banco Itaú not only became the largest non-government bank in Brazil, edging out Bradesco, but also is now partly owned by Bank of America.
With this consolidation, not only is competition lower in Brazil, helping banking profits in the sector, but the possibility now exists that in the future Bank of America might decide to expand the ownership of Banco Itaú, forcing the other top Brazilian banks to look for similar partners.
And more impetus toward consolidation with international banks did not have to wait for long. In a brilliant move today, Swiss banking giant UBS bought the last independent investment bank, privately owned Banco Pactual. And in the last couple of days, both Bradesco and Itaú reported strong earnings expansion, despite February’s slow economy. This means March must have shown a very nice acceleration, which should continue gaining strong momentum into the October elections.
Although I do not invest based exclusively on takeover speculation, the next acquisition target could very well be Unibanco.
What to do?
My outlook for Brazil and Brazilian banks continues to be very positive, and they soon should be posting all-time highs. So we will keep our stock positions. And tomorrow – if, as I expect, Ben Bernanke gives us another 0.25% fed funds hike to 5% and announces a pause in the process to evaluate the 4% raise’s long-term effects in the economy – then the dollar will continue weaker… commodities, emerging and international markets will continue strengthening… and our picks, especially the Brazilian banks, will continue posting strong gains. So, we are not taking any profits in the stocks.
Adding fuel to the fire, some of China’s economists are urging the country to quadruple its gold reserves to 2,500 tons from 600 tons. If China indeed proceeds along this path, it will put more pressure on the U.S. dollar, and our commodity and international plays will work even better. And there are rumors that President Bush might seek easing import tariffs in ethanol, which should greatly benefit Brazil’s trade surplus, if and when it passes.
So, in order to minimize our exposure to a short-term surprise from Ben Bernanke tomorrow, which I do not expect, we should take profits on 2/3 of our existing position of Unibanco call options. Let the rest fly. If everything goes as expected tomorrow, they could show an abnormally high return.
Recommendation: Sell 2/3 of the position in Unibanco May $85 calls (UBB EQ). Do not accept less than $2.80.
Enjoy and profit,
Horacio Márquez
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$22.74
Buy. Sell stop is $16.45.
Unibanco (NYSE: UBB)
$86.17
Buy. Sell stop is $59.58.
Peabody Energy (NYSE: BTU)
$71.92
Buy. Sell stop is $47.
IShares Brazil Fund (Amex: EWZ)
$46.90
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$49.14
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$39.91
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$106.80
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$16.64
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$15.53
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$44.41
Buy. Sell stop is $32.40.
MSCI Austria Fund (AMEX: EWO)
$34.02
Buy. Sell stop is $26.51.
Market Watch
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As Of 6:12AM 3/26/2009
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