The Money Map Advantage
Tuesday, September 5, 2006
By Horacio Marquez
Email – #56
** Another Bond Vigilante Bites the Dust – Economic Numbers Keep Confirming Our View
In my last update, I told you how I visited with a top investment bank and a top hedge fund to confront their end-of-creation scenario. The investment bank was one of the utmost inflation vigilantes and the hedge fund is in the hard-landing scenario.
On one side, the “inflation fear” camp believes that the Fed is 50 basis points from ending its rate hikes, and that the market should sell off as soon as it recognizes that inflation pressures are still too dangerous. On the other side, the hard landing doomsayers sustain that the housing bubble will collapse stridently – bringing down not only the U.S., but also global growth.
As we have been predicating here, the reality lies somewhere in between – soft, non-inflationary landing, which is terrific for U.S. and global markets. Let me explain.
On the inflation front, the fears are exaggerated. Inflation – which always lags the economy in its moves up and down – keeps showing benign indicators, confirming the recent trend down. The Fed’s preferred gauge, personal consumption expenditure, came out fine; and unemployment rate and non-farm payrolls keep showing enough growth to ensure the consumer is not dead… but not enough to be afraid of additional inflationary pressures.
The globalization of the economy is helping on both fronts: keeping inflation down and helping to keep growth going. This confirms our view of a soft, non-inflationary landing.
All of this data prompted Drew Matus, the economist at Lehman who has been expecting 50 basis points more in Fed interest rates hikes, to move back his timing of these hikes. I suspect this is the first move before having to adjust further and come to our view that the Fed is done raising rates – and will soon be easing rates.
On the hard-landing side, the argument hinges on the massive downturn that is well underway in the U.S. housing market. However, we are seeing many mitigating factors that will enable the U.S. economy to “survive” this doom and gloom:
- There is no national real estate market; only the areas where speculation was rampant are beginning to suffer dramatic price drops.
- The drop in long-term interest rates will allow the people caught in adjustable-rate mortgages to refinance to a predictable 30-year mortgage to avoid getting squeezed more than they are now.
- Employment continues and income gains are decent; therefore, the consumer will not disintegrate, but rather slow down.
- On the other side, business construction is thriving, which will keep construction companies busy, and demand for cement, steel and other construction materials firm (see graph below).
Adding to this, the European Central bank did not increase interest rates last week, and Japan is also seen as very slow in doing so. Both are key liquidity providers to the ongoing global growth phenomena. Also last week, Brazil lowered interest rates another 50 basis point, surprising half of the analysts – the quality of its debt got upgraded one notch by Moody’s and its debt-to-GDP ratio dropped to 50.6%.
With its currency appreciating, lower inflation and rates, and a huge trade surplus, Brazil stocks keep outperforming as we expected. Our September options on the Brazil ETF (EWZIH) closed very near our entry price, and Unibanco (NYSE: UBB) closed a mere 3% below our entry price of March. Brazil has a very strong momentum into the next three weeks.
Also, BHP Billiton concluded negotiations with its workers in Chile’s Escondida mines, and keeps seeing strong metals prices, with notable spikes in nickel and the consistent rally in uranium.
On the energy side, the recent decline in oil is more a function of the drop in refrigeration needs, as the hot weather has abated and will likely continue until the beginning of winter, which should be unusually cold. We will add to our energy position in this weakness period.
We will be adding positions next week, as players are back from vacations and ready for action.
Enjoy and profit,
Horacio Márquez
Stock & Symbol
Current Price
Comments
Telivisa (NYSE: TV)
$19.19
Buy.
Unibanco (NYSE: UBB)
$74.80
Buy.
Peabody Energy (NYSE: BTU)
$44.70
Buy.
IShares Brazil Fund (Amex: EWZ)
$40.10
Buy.
BHP Billiton (NYSE: BHP)
$42.67
Buy.
Banco Bradesco (NYSE: BBD)
$33.38
Buy.
Petrobras (NYSE: PBR)
$90.68
Buy.
Mitsubishi UFJ Finan. (NYSE: MTU)
$13.75
Buy.
iShares Japan Fund (AMEX: EWJ)
$13.83
Buy.
Tenaris (NYSE: TS)
$37.80
Buy.
MSCI Austria Fund (AMEX: EWO)
$31.56
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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