The Money Map Advantage
Wednesday, July 5, 2006
By Horacio Marquez
Email – #48
** North Korea Tests Its Missiles… What Employment Numbers Mean For the Fed… Mexico’s Election Remains Inconclusive… U.S. Investors Sock Away $5 Trillion… and How You Can Play the Upcoming Soft Landing
The market played out the close of the first half pretty much in line with our last Money Map alert. All the pro-cyclical plays to global growth continued outperforming into the Fed’s balanced statement: Emerging markets – especially Brazil, energy, mining, metals – flew off the shelf. What happened?
As we had anticipated, there were many favorable forces driving our stock picks markedly higher:
Huge shorts in our preferred sectors, as an overreaction to the Fed’s hawkish discourse leading into last week’s meeting, had to be reduced or closed ahead of both the meeting and the first half ending.
Speculators had been washed out in the severe volatility that preceded the meeting.
Price markdowns brought values to very cheap levels, as we go into the earnings season.
“Window dressing” by fund managers at the end of the first half, and new money put to work into the second half, kicked in last week.
The Fed’s statement last Thursday was also supportive of the market. While we all expected the Fed to remain vigilant on inflation, which it correctly characterized as “under control,” they also highlighted risks to growth and the lags with which monetary policy works. They also introduced doubts about the timing of further actions, hinting at a possible pause, should the data warrant it.
Hence, with the Fed almost out of the way, as the economy slows down and inflation comes under control, the Fed should remain on the sidelines to allow for a soft landing. If this occurs, as the market speculated after the meeting, the market should become very constructive for our portfolio at these low values. The abbreviated Monday trading session proved to be also supportive of developments in this direction.
What Happened Today?
As America celebrated its independence yesterday, North Korea launched some test missiles, clearly provoking the U.S. and causing weakness in the Asia markets, as some feared escalating tensions. Yet, the U.S. showed remarkable poise in dealing with the incident, electing to emphasize international diplomacy, and receiving widespread support from its allies should prove to be one more buying opportunity.
North Korea is an economically ravaged nation, a product of dictatorship and an anachronistic system that has failed for decades. From time to time, it resorts to these military theatrics to try to obtain economic advantages from the West in negotiations, given its proximity to South Korea, Japan, and now attempting to escalate its potential reach to the U.S.
Another negative today was the ADP employment report, which is a fairly good predictor of the direction (although not the magnitude) of the all-important employment report coming this Friday. And the report predicted a huge pick-up in jobs in June, which prompted many economists in the street to jump the gun and adjust their June jobs forecasts upwards, in some cases significantly. And if this job prediction materializes, some speculate that might give enough reason for the Fed not to pause in the next meeting.
While this possibility is non-zero, I do not believe it to be significant: Jobs are tricky to analyze in summer, since a lot of temporary jobs cloud the picture during the vacation season. And one number does not a trend make. Jobs have been weak in the last few releases and the ADP report, for what we have seen, has been accurate in predicting the direction of the consensus under or over-estimation, but has exaggerated the magnitude significantly. Therefore, I see today’s market reaction to the number as overdone.
In this regard, I believe that the trade will be to “sell the rumor” (of a Friday overly strong employment, which was done today) and “buy the news” (prior to Friday). Adding fuel to this strategy, we should get a weak June retail sales number tomorrow morning because of the rainy June in the Northeast and the Wal-Mart numbers.
Also adding some pressure to emerging markets were the inconclusive elections in Mexico, where the initial count gave the triumph to come-from-behind candidate Felipe Calderón, as I had predicted a couple of months ago when he was trailing in the polls. A validation of Calderón’s victory, which could be declared as early as next Sunday, would be good for Mexico and Mexican stocks, as it would indicate continuity and more opportunity to attempt structural reform, which has been stalled in a divided congress. However, a Lopez Obrador win – although bad – would not be a disaster, since the Mexican Congress remains deadlocked and therefore much change in either direction is not feasible.
Five Trillion in Cash
On Friday, we found out that U.S. investors hold $5 trillion in money market and savings accounts. As the soft landing of the U.S. economy becomes clearer, the market (which is trading at very low multiples) will take off, creating an irresistible magnet for this cash sitting on the sidelines, cowed by recent volatility. While this shift might take some time, the time to start positioning for the medium term is now, before the reality of a soft landing becomes a generalized conviction. Therefore, I continue to advocate adding to our picks across the board on any weakness.
A final trading note on liquidity: Many large players have taken the entire week off, so liquidity is lower and volatility is exaggerated… so pick your spot to come in. Patience rules these days. For further details on my views, feel free to watch my interview at the Nasdaq last Friday at: http://www.investmentu.com/bin/s/s/Hmarquezrobtv07-06.wmv
Enjoy and profit,
Horacio Márquez
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$19.59
Buy
Unibanco (NYSE: UBB)
$66.49
Buy
Peabody Energy (NYSE: BTU)
$54.92
Buy
IShares Brazil Fund (Amex: EWZ)
$38.47
Buy
BHP Billiton (NYSE: BHP)
$42.36
Buy
Banco Bradesco (NYSE: BBD)
$31.40
Buy
Petrobras (NYSE: PBR)
$87.68
Buy
Mitsubishi UFJ Finan. (NYSE: MTU)
$13.69
Buy
iShares Japan Fund (AMEX: EWJ)
$13.42
Buy
Tenaris (NYSE: TS)
$39.11
Buy
MSCI Austria Fund (AMEX: EWO)
$31.21
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
Attention Money Map Subscribers!
Money Map Report,
New China Trader
& Money Moves Alert
are now found at www.moneymappress.com
