The Money Map Advantage
Thursday, June 22, 2006
By Horacio Marquez
Email – #48
** Some stability after the rally… Buying the dips starts working well as trapped shorts struggle to cover and long term buyers recognize value and increase positions.
After the massive rally yesterday, something weird happened this morning. Latin America (the iShares Latin America ETF), the Brazil ETF (which I recommended last Friday) and other emerging market, mining and pro-cyclical plays outperformed the market. Why?
There are many forces at work here:
· Overreaction to “inflation fears” and fear of the Fed overdoing the rate hikes has created a lot of value in the pro-cyclical stocks, which came down the most in May and beginning of June.
· Short positions are very high.
· We are going into both a Fed meeting and closing of first half books.
· We are entering earnings season, and we just saw positive surprises in cyclical stocks.
· Large fund “window dressing” starts as we close the first half.
· Many late-entrant investors are long in positions “under water.”
All of these factors (but the last one) are very supportive of higher prices. In addition, the market just “discovered” yesterday that the global economy is growing nicely and expected to do well through Fedex’s very strong earnings announcement. We have been predicating this thesis for a long time.
Similarly, Morgan Stanley beat analysts expectations by a mile… And to add insult to injury on the bears’ faces, the Chinese steelmakers finally fell in line with the rest of the world and recognized the 19% price increase on iron ore for our recommended BHP Billiton (NYSE: BHP) and for its main competitors CVRD (NYSE: RIO), as well as Rio Tinto (RTP). So now we know there is no weakness forthcoming for iron ore.
As if this were not enough, railcar shipments remained very strong and the largest nickel producer in the world, Inco (NYSE: N), increased earnings guidance and posted historical high profits, as it is involved in trying to take over base metals producer Falconbrodge (NYSE: FAL) and fend off a hostile takeover from Teck Cominco (BB: TCKAF.PK). Nickel is a metal that has innumerable uses in the global economy. All of this is very supportive of continued strength and upside surprises as we enter the earnings season.
What to do?
For the huge fast money, this is what happened. The “easy” first step was to sell out of these types of positions in the beginning of May, and then short huge amounts of stocks against the formerly preferred sectors. This forced liquidation of the leveraged players and shook out the weak hands. It was a all very successful, of course at your expense. And despite the couple of instances of short-covering efforts, where prices flew dramatically upwards, many market players are still insisting in this tactic and remain very short. But time is running out…
Why? Because the market participants that can execute such a move are the fast money, sophisticated, very large market players – and they close their quarter on June 30. And because it is much better to show a profit taken than a paper profit, their bias will be strong towards taking profits in their shorts. And this is simultaneous with the fact that some formerly skeptical large mutual funds are seeing value at these levels and buying.
And on June 29 we have the next Fed decision, which is a great uncertainty..
After the flip-flopping that Bernanke underwent, going from his Congressional testimony, “we might pause,” to his reported comment to CNBC’s María Bartiromo, to his even more hawkish Fed statement on May 10, mentioning commodities as a potential source for inflation… we can expect the Fed to hike another 0.25%. But the jury is out about whether the Fed will stop there or continue hiking and choke U.S. and global growth in order to placate nervous bondholders over a trailing indicator: inflation.
His interventions so far have achieved the punishment of wild commodity speculators, which indeed had posed some risk to inflation. Now he could very well pause or maybe hike for the next meeting. In any case, as Goldman Sachs’ Abby Joseph Cohen opined, another hike or two does not make much of a difference when the S&P is trading at such low multiples and the global economy is so constructive.
So with all this supportive evidence and speculators out of our positions, we continue to recommend adding on any weakness like this afternoon. At some point all the forcefully liquidated positions will be in strong hands, and everybody will jump all over these low valuations.
Enjoy and profit,
Horacio Márquez
Stock
Current Price
Comments
Telivisa (NYSE: TV)
$18.10
Buy
Unibanco (NYSE: UBB)
$61.11
Buy
Peabody Energy (NYSE: BTU)
$49.63
Buy
IShares Brazil Fund (Amex: EWZ)
$35.40
Buy
BHP Billiton (NYSE: BHP)
$40.67
Buy
Banco Bradesco (NYSE: BBD)
$27.93
Buy
Petrobras (NYSE: PBR)
$79.35
Buy
Mitsubishi UFJ Finan. (NYSE: MTU)
$12.72
Buy
iShares Japan Fund (AMEX: EWJ)
$12.97
Buy
Tenaris (NYSE: TS)
$35.29
Buy
MSCI Austria Fund (AMEX: EWO)
$28.79
Buy
Market Watch
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