The Money Map Advantage
Friday, August 4, 2006
By Horacio Marquez
Email – #51
** The Crumbling of the “Wall of Worry” Accelerates
We are up 11.5% in five and a half weeks. And today our picks gapped up at the opening and they’ve kept going.
In recent weeks I have been pounding the table for readers to get into the market. And not just into the market in general, but specifically into our picks across the board. From the iShares MSCI Japan Index (AMEX: EWJ) and Mitsubishi UFJ Financial (NYSE: MTU), both having super-appreciation potential in the longer-term; to mining, cyclicals and emerging markets, especially Brazil – Banco Bradesco (NYSE: BBD), Unibanco (NYSE: UBB) and the iShares Brazil ETF (AMEX: EWZ).
Indeed, our preferred Brazilian banks are also screaming up: Banco Bradesco, for example, is up 33% from the mid-June low. And, like Unibanco, it has way more to go as Brazil accelerates economic growth into the October 2 presidential elections. In fact, hundreds of millions are flowing into our other Brazilian pick, the iShares Brazil ETF, taking advantage of this incredible buying opportunity.
In fact, EWZ is up 40% since we reiterated the recommendation on June 16, and the September call options we recommended that day are up 118% to $2.40 today. And they are not done yet. It should not be long before we are retesting the May highs in each of our picks.
And even our other preferred companies are up – Peabody Energy (NYSE: BTU), which recently missed earnings estimates and was unduly punished by the market, is already trading at its pre-earnings-miss price. The guttural reaction of the market was to take it down some 16% after the miss.
The “little” detail they seemed to miss is why Peabody Energy missed estimates.
It was not lack of pricing, lack of demand, or an escalation of costs, but TEMPORARY problems in implementing new technology in two key mines, which reduced volumes temporarily.
So, in typical fashion, talking heads extrapolated the earnings miss to oblivion, painting a “new trend” that is just not there, and fast money shorted the stock big-time to shake out the weak holders with unruly and unwarranted price action. Once more a superb buying opportunity was created, weak holders were taken for a ride, and short sellers were whipsawed.
And you did not see any reaction from this corner, other than a stern “buy across the board.” Since my presentations in Portland and San Francisco at the end of June, this simple strategy has returned 11.1% as of this morning. That’s right, in only five and a half weeks. And little has changed in the very strong underpinning of the longest secular cyclical rally you will experience in your lifetime. It is sustained by global synchronic growth that should continue unabated for the rest of the decade.
That is why we never sold, but rather added into the violent profit-taking that started on May 9. So it’s almost three months later, and now we are seeing the fast money throwing in the towel – because tax regulations require them not to keep trading positions for longer than three months. So they must close their shorts before the end of next week.
Remember, the selloff started on May 9… almost exactly three months before the August 8 Fed meeting. Coincidence?
What about the fear of inflation, and the fear that the Fed will keep tightening?
The fixed-income market is telling us that the Federal Reserve is done raising rates and that the economic slowdown will take care of the lagging inflation. Exactly our position. Let me explain…
The entire U.S. Treasuries yield curve is trading below 5%. Since the Fed funds rate is at 5.25%, if you are a financial institution, you have to be extremely sure that the Federal Reserve will soon be easing interest rates, rather than tightening them in order to buy these bonds below the current Fed Funds. This situation is an extreme anomaly. Large financial institutions fund much of their purchases at Fed funds rates, so why should they accept a negative carry?
And the market still remains very oversold and valuations are depressed by the huge “Wall of Worry.” And today a huge uncertainty is getting resolved, lifting an enormous weight off the market’s back: The employment report, which is the best indicator of the economy’s strength, has confirmed the slowdown we saw with the second-quarter GDP last week coming off to 2.5% from the scorching 5.6% of the first quarter.
Again, as we expected, in the first quarter we saw the bounce-back from hurricanes Katrina and Rita, which had depressed GDP in the fourth quarter of last year; and as the bounce-back effect faded and the increase in interest rates started clawing their teeth in economic activity, growth is moderating.
And we sustain that inflationary pressures are moderating as well, as job creation has faded to a pace where unemployment picks up very gradually, and compensation gains continue to be offset completely by productivity gains, preventing any spill-off in inflation from this hugely important factor. The bears have failed in their doom and gloom again.
So, with inflation fears at bay and the market already recognizing that the Fed should pause, the road is paved for Fed Chairman Ben Bernanke to pause next week and allow the current decelerating momentum to do its work.
What to do?
Let’s evaluate market conditions:
- The market remains oversold, with many players still short, unable to close their shorts profitably, and their three-month deadline and the Fed pausing next Tuesday.
- Fund managers and others still have a tremendous amount of cash ($5 trillion). As a class, they are at a bearish peak – which is a contrarian indicator – cowered by the “Wall of Worry.”
- Risk appetites are at their lowest since 9/11.
- There are expectations of corporate profits being vulnerable.
We are seeing a natural profit-taking in low volume on a Friday afternoon of a very positive week. I would like to buy some more Brazil this afternoon on this weakness, since by Tuesday (if and when the Fed pauses), we will see major buying power coming in. But we are already long Brazil, Bradesco, Unibanco and Petrobras, so we will stay put. Actually, this morning somebody bought 21,000 shares of EWZ at the open. So if you are not long Brazil or the options on the iShares Brazil ETF, this is your opportunity to get long before Tuesday’s Fed pause.
Recommendation:
Subscribers who do not already own BBD, UBB and EWZ, should buy them at market. Aggressive investors who do not own call options on the Brazil iShares ETF (AMEX: EWZ) should buy the September $40 calls (EWZ IH). Do not pay more than $2.30
Enjoy and profit,
Horacio Márquez
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$18.74
Buy
Unibanco (NYSE: UBB)
$71.88
Buy
Peabody Energy (NYSE: BTU)
$49.09
Buy
IShares Brazil Fund (Amex: EWZ)
$40.06
Buy
BHP Billiton (NYSE: BHP)
$42.73
Buy
Banco Bradesco (NYSE: BBD)
$33.72
Buy
Petrobras (NYSE: PBR)
$93.55
Buy
Mitsubishi UFJ Finan. (NYSE: MTU)
$13.56
Buy
iShares Japan Fund (AMEX: EWJ)
$13.59
Buy
Tenaris (NYSE: TS)
$38.50
Buy
MSCI Austria Fund (AMEX: EWO)
$31.00
Buy
Market Watch
NASDAQ
1528.95
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SP 500
813.88
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DJIA
7749.81
+89.84
As Of 6:12AM 3/26/2009
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