The Money Map Advantage
Thursday, June 8, 2006
By Horacio Marquez
Email – #46
** Buying Opportunity: Our Entire Portfolio Is “On Sale”
In my last alert, I explained how the market had held on to key levels and was oversold. After I made those comments, the market kept rallying strongly for a couple of days into the long U.S. weekend, and today, we are testing the recent lows.
What has happened since the last alert to warrant this re-testing of recent lows? On one side, we saw market-supportive economic data coming, with a well behaved, weak employment number, superb productivity growth, a cooling housing market, and weakening consumer confidence. All of these indicators point to disinflationary forces well at work. On the other side, Fed Chairman Ben Bernanke came with his very stern condemnation of inflation, and five other Fed governors came out on the same side.
Now, all of a sudden, the market took the notion that the U.S. is in danger of entering into “stagflation.” That rare phenomenon, whose name was coined in the 1970s to accommodate the rarity of recession with inflation, is very far from occurring in the U.S. The so-dreadfully feared commodity price inflation accounts for only about 10% to 15% of the consumer price index (CPI). The rest is driven by either salaries or housing, principally. Pricing of housing is dropping off, and there are no inflationary wage pressures, because labor productivity growth is running way above compensation growth. The stagflation focus is an exaggeration.
And if you don’t believe me, Hank McKinnell, Chairman and CEO of Pfizer (NYSE: PFE) and head of the Business Roundtable, a group of leading American CEOs, came out saying that there is no pricing power, and that the U.S. economy will slow down to a more sustainable long-term trend. That’s precisely my view.
Also, former Fed Chairman Alan Greenspan testified before Congress on foreign trade and emphasized some weakness in the U.S. economy, especially at the consumer level, due to the high prices of oil.
The picture is quite clear: The economy is clearly decelerating, and this drop in the rate of growth is going to deal with all the local sources of inflation.
Now, applying hard brakes on the U.S. economy to avoid higher commodity prices, which are mainly driven by China, India and other emerging economies and G7 growth, which is coincidentally robust, would not be the appropriate policy response. But some on Wall Street are demanding exactly this from the Fed under the excuse that Dr. Bernanke “has to earn his anti-inflationary stripes,” much like former Fed Chairmen Volcker and Greenspan did by standing very firm against inflation in their time.
But inflation under Volcker was running at double-digit rates, and under Greenspan, it was much higher, too – not running at barely 2.1% (core), with housing in bubble areas crashing as we speak. And the only source of concern was that core was “misbehaved” (barely, I say), by coming in at 0.3% last two months, 0.1% above consensus twice.
And this “misbehaving” is on a lagging indicator that lags well after the economy peaks and whose control has been assured by the 4% rate increase that the Fed has already implemented, which also works with a lag.
So, in the wake of these “bond vigilante” demands and slightly misbehaved inflation, the Fed has come out with this “verbal intervention.” And the ECB (European Central Bank) this morning helped the Fed out by increasing interest rates by 0.25%, as expected. The central banks of Korea, India and Turkey also increased rates, and Bank of England took a pass at raising them. This will also reduce the need for further Fed tightening.
But this concession to the inflation-phobics, which has brought the S&P down a cumulative 6.5% from the recent top will have to be tested next week against reality: May PPI on Tuesday and May CPI on Wednesday.
May saw lower prices of oil than April, and the weakness in consumer sales should have helped, so I expect an improvement in both headline and core inflation in both PPI and CPI. Core CPI should come in at 0.2% and could even surprise to the downside. And the so-called danger of commodities escalating out of control has already been averted with gold, silver copper and pro-cyclical equities, and countries falling precipitously as over-leveraged positions get liquidated forcefully and momentum buyers went short.
Maybe Bernanke’s speech itself accomplished much more than a mere extra 0.25% probable increase next June 29. For all we know, the 0.25% increase that the market discounts almost entirely today might not even occur if we see the current market weakness and well-behaved commodities persist. And the 10-year bond yield is already saying that there is no inflation fear – it’s trading at 4.96%, below the current 5% Fed funds rate, which signals fear of recession (Bernanke over-tightening) rather than fear of inflation.
So, how do we play this sell-off?
The market has been rallying for months without a 10% correction. A 6% correction was to be expected.
The situation feels more like the 1994 rate-hike cycle, where the market corrected 8%, emerging markets and commodities got similarly slammed and then went on to post superb returns. It was, similarly, a mid-cycle slowdown like 1994, when the market, after having suffered the fear of death with brisk Fed tightening, went on to post some of the best returns ever from then on up to 2000, including in emerging markets up to 1997.
While deciding what is a market bottom is an exercise in futility, especially these days with hedge funds swinging some $1.3 trillion around, traders will make quick money shorting at times, with great risk, but level-headed investors will make the bigger money by picking up melted-down bargains and holding them.
The reality is that the inflation scare is way overblown and the market discourse should soon switch to how the U.S. economy is weakening and how prices of commodities and assets in emerging economies represent a great buying opportunity. And the global economy will keep growing very robustly with inflation under control in this multiyear global expansion.
Adding to this, the oversold nature of the market is compounded by the fact that hedge funds appear to have de-leveraged big time, and in the process established shorts, together with Wall Street, to actually make a dollar out of panicky newcomers to the asset classes in which we are invested. We are not going to join the panic.
Rather, we are going to take advantage of it for the longer term, NOT expecting instant satisfaction. We are going to add a new commodity pick once we see the inflation number next Wednesday. If you are a new subscriber, feel free to start adding cautiously our entire portfolio at these prices. It is a great entry point. Cautiously means in steps, dividing your investable funds in parts and spreading it over a few weeks, on market weakness. When prices drop, we are buyers.
Enjoy and profit,
Horacio Márquez
Current Portfolio:
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$17.44
Buy
Unibanco (NYSE: UBB)
$59.19
Buy
Peabody Energy (NYSE: BTU)
$53.14
Buy
IShares Brazil Fund (Amex: EWZ)
$34.78
Buy
BHP Billiton (NYSE: BHP)
$38.57
Buy
Banco Bradesco (NYSE: BBD)
$27.76
Buy
Petrobras (NYSE: PBR)
$78.49
Buy
Mitsubishi UFJ Finan. (NYSE: MTU)
$12.55
Buy
iShares Japan Fund (AMEX: EWJ)
$12.80
Buy
Tenaris (NYSE: TS)
$33.88
Buy
MSCI Austria Fund (AMEX: EWO)
$28.00
Buy
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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