The Money Map Advantage
Tuesday, May 16, 2006
By Horacio Marquez
Email – #44
** A Great Buying Opportunity In Emerging Markets
When one sees forced selling and transitory illiquidity in the market, one must recognize the opportunity and selectively put money to work. This cool-headed assuredness is precisely the distinction of one of the most admired, experienced and successful emerging markets investors in the world: Mark Mobius, emerging market funds manager at Templeton, the pioneer in the asset class. Mr. Mobius has consistently outperformed the market with his disciplined macroeconomic and microeconomic analysis.
Mr. Mobius was featured in The Financial Times last Wednesday, the first day of pronounced decline for the market – Mark Mobius has a bullish fundamental view of emerging markets, which is, in fact, very similar to mine. And he mentioned that 19% of his fund, his top country exposure, is in Brazilian stocks. The article also disclosed that within his top 10 exposures, he has both our Banco Bradesco and Unibanco.
Als “the boom in the number of initial public offerings and money coming from hedge funds will push stocks in emerging markets up further in the next few months.”
To cap this, last Thursday, at about 11 a.m. EST, the volume in both Unibanco and Bradesco went up dramatically, showing more than 200,000 shares in each changing hands in an uptick (revealing a huge player buying into weakness). I do not know whether it was Mark Mobius or some other large investor, but that is precisely the kind of opportunity that the best fund managers seek for entry points: buy into marked weakness in excellent companies with sound fundamentals.
Why Is This Important?
Because we know that some of the smartest and largest money in the world is with us, with a similar view, acting accordingly. Not only did Bank of America accept shares in Banco Itaú (instead of asking for cash for their Brazilian Bank of Boston assets), and CSFB bought Banco Pactual, but large volume has driven into Bradesco and Unibanco into weakness while the legendary expert in emerging markets reveals he expects, like us, a lot more from his large exposures in both Bradesco and Unibanco.
And the fundamentals support us. Inflation is dropping in Brazil, which allows the Central Bank to reduce rates fast, as they have been doing from these “ridiculously high rates” (quoting a friend who runs a global hedge fund from Sao Paulo). This fact, an accelerating economy, will greatly favor bank profits in the months to come. And the currency, which has sold off in the last few days, should keep appreciating in view of huge current account surpluses; and very high real rates of interest will translate those profits in local currency into a lot more U.S. dollars, resulting in much higher stock prices.
In fact, I confirmed yesterday morning that investors were buying local currency at the market open, to take advantage of the opportunity.
Within the volatility, the market did not notice that Congress passed a two-year extension on the reduced rates of taxation for capital gains and dividends. This should be additional support for equity markets.
No inflation In Sight – The Market Should Bounce Back This Week From the Quick Sell-off
We did well in cashing two-thirds of the May call options on Unibanco on Tuesday of last week (the day before the FOMC meeting), locking in a huge profit. The calls were very short-dated and we could not run the risk of seeing great gains evaporate. The question that many will ask is why we did not cash the stock positions on Unibanco and Bradesco, as well as some other emerging market positions. Even though they have declined substantially in the last four trading days, the fundamentals of Brazil, the banks and the global economy are strong, as we (and others, including Mark Mobius) expressed.
These are not the conditions in which bear markets appear. Let me explain…
Many market players, enthused by Ben Bernanke’s congressional testimony and some Fed governors’ statements, have been invested with a lot of leverage in commodities and in stocks, especially in international ones. The expected outcome was that Bernanke would pause interest-rate hikes and the market would “explode” upwards. When he did not make it crystal clear, and instead kept open the possibility of further hikes down the road, some market participants started voicing concerns about inflation; they took off their leveraged plays, and their selling caused what I believe is a transitory market indigestion.
The bears that missed the last anticipatory rally have seized the opportunity to make the argument that commodity prices are creating inflationary risks that will force Central Banks around the world to tighten. Joining this camp, notably, David Malpass, Chief Global Economist from Bear Stearns, published a very hawkish article in The Wall Street Journal last Thursday that some point to as the beginning of the sell-off.
This indigestion was compounded by the fact that Wall Street has made room in its books for the U.S. Treasury 10-year auction and record issuance of corporate bonds. I have explained similar occurrences of Wall Street risk-reduction in the past. Like in all the prior auctions, yields moved up prior to the auction and should stabilize after the auction. What’s more, technically, the 10-year bond has been rapidly increasing in yield, with no respite, and was sitting at the top end of a yield rally.
But yesterday morning, confirming my views, the NY Empire manufacturing index came in much slower than expected, housing also keeps disappointing big time, and core PPI came out today at 0.1%, reducing the risk of further Fed tightening. Finally, the disclosure of purchases of U.S. Treasuries (deferred by two months) of foreign central banks were fine. With all of this, U.S. Treasuries are rallying, the VIX volatility index (which had blasted) is now crashing, along with dropping bond yields, and money continuing to flow into Brazilian banks.
So far, bears had their heads handed on a platter over the last couple of years, as my outlook for global, non-inflationary, synchronous growth has played out by the book. So much so that recently, the venerable “voice of reason,” Steven Roach at Morgan Stanley, turned around from his usual protestations about the massive current account imbalances and came closer to my position: They are being dealt with in a gradual, orderly way.
And indeed, Friday morning’s shrinking trade gap, which positively surprised Wall Street, proved it. As I have been maintaining all along, the high-growing emerging economies would increase their demand for U.S. products, and our cooling-off (already on its way) would also cool off import growth and inflationary pressures, allowing the Fed to pause… in stark contrast with David Malpass’ outlook.
Tomorrow, core CPI, the other inflation gauge most watched by the Fed, should confirm the fact that inflation remains well under control and the market should take off. As Bob Doll, President and Chief Investment Officer of Merrill Lynch Investment Managers, said in his investment newsletter yesterday, “Global disinflationary forces remain strong as a result of productivity and technological gains, which should help temper inflationary forces in the United States.”
Recommendation:
Add 25% to our positions in Unibanco (NYSE: UBB) and Bradesco (NYSE: BBD). Aggressive investors can buy the June $80 Unibanco calls (UBB FP) at no more than $2.40.
Enjoy and profit,
Horacio Márquez
P.S. If you would like to read The Financial Times article mentioned above, you can find it here.
Current Portfolio:
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$20.97
Buy. Sell stop is $16.45.
Unibanco (NYSE: UBB)
$76.72
Buy. Sell stop is $59.58.
Peabody Energy (NYSE: BTU)
$64.07
Buy. Sell stop is $47.
IShares Brazil Fund (Amex: EWZ)
$42.33
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$45.45
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$36.20
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$98.91
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$15.76
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$14.88
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$39.52
Buy. Sell stop is $32.40.
MSCI Austria Fund (AMEX: EWO)
$32.58
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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