The Money Map Advantage
Tuesday, July 11, 2006
By Horacio Marquez
Email – #49
The dreaded government employment report was actually BELOW market consensus last Friday. I had explained that the ADP employment report released on Wednesday had been correct in predicting the direction – but not the magnitude – of the under- or over-estimation by the Street, and that some Wall Street economists were jumping the gun in rushing to increase their estimates significantly, based on the ADP report.
I was dead right. The report failed in predicting both direction and magnitude: The government’s employment report showed 121,000 new jobs, vis a vis the 175,000 that the Street expected. ADP had predicted a whopping 368,000 gain. The miscalculation by the ADP report was most probably due to very volatile summer employment situations – the government’s report probably accounted for these effects more accurately.
Weak employment, weaker-than-expected retail sales figures, the unequivocal cool-off of the housing market, and some notable pre-announcements all emphasize the fact that the U.S. economy is far from overheated, and that the Fed monetary tightening is already showing its teeth. The rise of 0.5% in payroll average is not inflationary since it is still below the very strong productivity gains we have seen. These developments should be enough for the Fed to pause at the next meeting with or without another 25 basis points raise in the Fed Funds rate.
Talking about central banks, the European Central Bank (ECB) might raise rates on August 3 from 2.75% today. Also, Bank of Japan (BOJ) is widely expected to raise interest rates this Friday from 0% to 0.25%. The BOJ action, which I expect to be the first of many very slow rate hikes, emphasizes the strength of the Japanese economy, which has finally come out of 10 years of deflation. With strength in the economy and strong loan growth, our pick, Mitsubishi UFJ Financial, the largest bank in the world, rallied some 5.5% on Monday.
With BOJ and the ECB in monetary tightening mode, the yen and the euro should restart their rally against the U.S. dollar, which is very good for our picks and commodities. This afternoon, despite weakness in the U.S. and global indexes, mining companies are up: BHP Billiton (up 1.63%), Rio Tinto (up 2.33%), and Phelps Dodge (up 1.14%) are all trading near their post-correction highs.
The notable exception is CVRD, which is down 1.58%, driven by Brazil factors that I’ll explain below.
We are not alone in our bullish stance. Funds are increasing exposure to miners and pro-cyclical companies. In this regard, this morning I saw Klaus Martini, Global Chief Investment Officer of Deutsche Bank Private Wealth Management, come out with precisely our view on Bloomberg TV. Mr. Martini believes, as I do, that we are in a mid-cycle slowdown, and that the U.S. market is cheap and will benefit from globalization, as growth in China, Japan and Europe takes over some of the “locomotive” role in driving the global economy away from the U.S. Mr. Martini was equally bullish on commodities for that reason.
In a similar camp, yesterday, I saw a top Wilmington Trust investment officer come out bullish on emerging markets, among other things.
Also, let me quote part of Bob Doll’s weekly message today. Bob Doll is President and Chief Investment Officer of Merrill Lynch Investment Managers:
“…we believe the fundamental health of the world economy and good valuation levels should ultimately prevail, which is why we continue to view the recent setback in prices as a bull market correction rather than as the start of a bear market.”
Once the Fed pauses, which I believe will happen on August 8, we will see the U.S. and global markets take off. In the meantime, we will see slow appreciation in the pro-cyclical sectors that span our portfolio. Market weakness should be bought!
But What About Brazil, Which Is Leading Down Our Portfolio Today?
The weakness in higher risk sectors, like emerging markets in general, is due to the BOJ’s Friday interest rate decision and is exacerbated by weakness in global markets due to the Mumbai bombings. The news is affecting these stocks temporarily, after having seen strong recovery from the recent correction. But the correct response to market weakness due to terror attacks is to buy, as we did after the London subway attacks of July 7, 2005 (we were correct, and we profited).
We would be buying ahead of 1) the BOJ decision, which should be no surprise, as the 0.25% is already discounted; 2) the very possible Fed pause on August 3; and 3) the deployment of some $5 trillion in cash held by investors in money market and savings accounts as they finally realize that the world is not coming to an end and they can make a lot more than 5% in the stock market as the dollar sells off. Once more, a buying opportunity across the board, but especially in Brazil.
Enjoy and profit,
Horacio Márquez
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$19.40
Buy
Unibanco (NYSE: UBB)
$65.66
Buy
Peabody Energy (NYSE: BTU)
$56.70
Buy
IShares Brazil Fund (Amex: EWZ)
$38.95
Buy
BHP Billiton (NYSE: BHP)
$44.10
Buy
Banco Bradesco (NYSE: BBD)
$31.33
Buy
Petrobras (NYSE: PBR)
$89.50
Buy
Mitsubishi UFJ Finan. (NYSE: MTU)
$14.34
Buy
iShares Japan Fund (AMEX: EWJ)
$13.68
Buy
Tenaris (NYSE: TS)
$40.41
Buy
MSCI Austria Fund (AMEX: EWO)
$31.13
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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