The Money Map Advantage
Friday, August 25, 2006
By Horacio Marquez
Email – #55
** Summer Doldrums Until Labor Day, and Prices Hold For U.S. Home Sales… For Now
While in New York last week for an interview with Report on Business Television (see P.S. below), I visited one of the temples of fixed-income markets knowledge… one of the top four investment banks in Wall Street, which distinguishes itself for the superb quality of its domestic and global fixed-income franchises. And from there, I dropped in on a friend who is a partner in one of the largest hedge funds around.
I was on a mission: to confront their assumptions leading to gloom and doom in the U.S. with my views about secular global synchronic growth and let truth reign.
Just as you have read in these pages, and as some of you have heard in my presentations, I strongly believe we are in the midst of a mid-cycle slowdown. The situation is directly comparable with that of 1994, when the U.S. had come out of the 1991 recession very strongly and then-Fed Chairman Alan Greenspan raised rates to prevent an overheating of the U.S. economy, emerging markets and preserve a healthy, non-inflationary ongoing economic expansion that lasted into 2000.
Witness the following chart of the Fed Funds rate coming down aggressively through the recession of 1991 and then back up in 1994. Also, note that the Fed was forced to lower rates in 1995.
When the Fed was done raising rates in 1994 and actually started easing rates in 1995, the result was one of the greatest rallies in equities we have ever experienced, up to the 2000 Nasdaq crash (see the chart below).
We are in the precisely identical situation. We have already experienced the correction (last May and June). And now the Fed has paused, in order not to have to lower rates as dramatically later. I believe that the Fed is done raising rates.
Inflation, the only reason to raise rates, has already started to show benign numbers, though core inflation still prevents the Fed from declaring victory. What did my friends have to say about this?
The major investment bank confirmed to me that the housing market is the major worry for many of their top institutional investing clients: Is it going to be a hard or a soft landing? What is available? A framework for analysis last April pointed to a soft landing, but recent data increasingly pointed toward a hard landing in the most speculative areas. The data this week showed an acceleration in the drop in home sales, but prices have not gone negative on average… yet.
As I have warned since last year, the prevalence of adjustable rate mortgages (typically used to finance 100% of a home’s price plus closing costs, with the aggravation that the pre-qualification for those credits were very magnanimous – if not adventurous – in the criteria) led to a huge speculation in many very hot areas. This is unraveling as we speak.
Speculators’ mortgages are getting reset at much higher interest rates that people cannot afford – which, together with higher energy costs, is forcing a very large rise in unsold inventories (11-year highs) and foreclosures. Today, H&R Block recognized huge losses in sub-prime mortgage lending. These events will further tighten the availability of mortgages to potential buyers.
The reality is that all my conversations with Wall Street, investors and even people close to the Fed point to the same conclusion: Nobody knows how the story will develop. Thus, the prudent pause by the Fed and the huge amount of cash in mutual funds, individual investors and hedge funds. My hedge fund friend confirmed my suspicions: “Hard landing,” he said.
And with most top decision-makers roaming around the Hamptons, the Vineyard or other vacations until Labor Day, don’t expect miracles in the market in the next few days.
Globalization: The Key
In addition to vacations, we have the Jackson Hole junket, where the world’s top economic thinkers and central bankers congregate each year to analyze the prevalent challenge to global economic and monetary developments. This year’s topic is globalization.
Despite its innocuous appearance, globalization is more transformative of the world than the industrial revolution. With the parabolic growth in global trade, and the drop in the costs of communications and transportation, the world has become a hugely integrated economic unit. NAFTA, the EU and Asian trading blocks require the management of economic policies – whether monetary, fiscal, foreign exchange or other – to be increasingly coordinated. And the resulting benefits in terms of productivity and global availability of capital are changing the global economic landscape fast.
This powerful force is not a passing phenomenon, but a multi-decade transformation. And the implications are immense for the formation of wealth. As the former periphery gets access to capital and becomes integrated further into the global economic engine, their infrastructure needs escalate, requiring commodities: steel, coal, iron ore, nickel, copper, etc. As these countries industrialize and improve, internal credit grows and their banks grow dramatically. And we can find many other derivative plays on this phenomena.
The Bottom Line
While at this moment some are declaring global growth done and over, and the U.S. economy heading into recession, the globe will keep growing strongly into the years to come – today’s transitory slowdown is a tremendous buying opportunity.
Just like we saw last week, with Jim Cramer rediscovering Peabody Energy (NYSE: BTU), Merrill Lynch just raised their rating in our pick Tenaris (NYSE: TS) from neutral to buy, as they also recognize that TS is not going away. You heard me reiterate my buy in these pages and in the Sovereign Society’s Panama conference more than two months ago, 13% below today’s price.
More of these market “rediscoveries” to come shortly for the rest of our picks, as the market realizes that the drop we’re seeing in U.S. long-term rates, together with strong employment, easing inflation and continued strong global growth, will cushion the nationwide housing market very well… despite some precipitous drops in the areas where speculative behavior was rampant and the global growth/commodity/emerging market story is alive and well for years to come.
Enjoy and profit,
Horacio Márquez
P.S. On Wednesday I appeared on the Canadian financial markets show Business Morning with Jim O’Connell on Report on Business TV. I have ROB-TV on nonstop whenever I’m not asleep in a Canadian hotel. Here is a link to the interview.
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$19.35
Buy
Unibanco (NYSE: UBB)
$70.06
Buy
Peabody Energy (NYSE: BTU)
$46.49
Buy
IShares Brazil Fund (Amex: EWZ)
$38.51
Buy
BHP Billiton (NYSE: BHP)
$41.64
Buy
Banco Bradesco (NYSE: BBD)
$31.19
Buy
Petrobras (NYSE: PBR)
$90.67
Buy
Mitsubishi UFJ Finan. (NYSE: MTU)
$13.82
Buy
iShares Japan Fund (AMEX: EWJ)
$13.74
Buy
Tenaris (NYSE: TS)
$38.08
Buy
MSCI Austria Fund (AMEX: EWO)
$30.96
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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