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Brazilian Loan Gets Stocks Doing Samba

Stock proxies were pushing higher today, in no small part thanks to strength in financials, which were rallying following yesterday's approval of a $30 billion loan to Brazil by the International Monetary Fund.

As of 2:24 p.m. EDT, the Dow Jones Industrial Average was up 1.7% to 8601.18, the S&P 500 was higher by 2.1% to 895.1 and the Nasdaq Composite was higher by 1.5% to 1299.51. The Philadelphia Stock Exchange/KBW Bank Index, meanwhile, was up 4.5% paced by money center banks with ( ta-da! ) big Latin America exposure, including Citigroup (C - Get Report), J.P. Morgan (JPM - Get Report) and Fleet Boston Financial (FBF). Separately, Brazilian-based firms such as Brazil Telecom (BRP) were among the day's biggest percentage gainers, lately up 16.1%.

"The IMF package means to dangle a big carrot in front of whomever the Brazilians choose to become President," said Mark Dow, who co-manages the $300 million (MEDIX) fund for MFS Investment Management in Boston. "In the short-term it gives politicians like [Luiz Inacio Lulla da Silva and Ciro Gomes] an incentive to moderate their harsh rhetoric."

The fund produced total returns of 1.50% year to date through July, 12.75% for the 12 months ended July 31 and 19.02% for the three years ended July 31, the latter two were each tops in the fund's peer group.

To the extent the two leftist candidates -- who've each made some antimarket and anti-IMF statements -- do that, a "virtuous cycle where they're perceived as more stable" can emerge, Dow said. "That's the gambit. It's not a sure shot [but] it's a smart move by the IMF."

Dow knows a little something about IMF gambits, having worked at both the IMF and U.S. Treasury before MFS. As an aside, he said that while he was negotiating emerging market countries' debt for the Treasury, there was a strong notion that such actions should not be perceived as a bailout of the banks. Many people, I know, believe the latest IMF action was intended to do just that. But "it's not like the 1980s when you need to bail out banks to give them time to build reserves," Dow countered. "They'll suffer if Brazil goes down but it's not going to kill them. Guys are reading too much into things."

Dow also bucked the conventional wisdom that Brazil's current woes are the result of a "contagion" effect of Argentina's debt default earlier this year, noting Brazil's markets rallied sharply in the months immediate following that event. Back in January , he suggested there was neither economic or portfolio "transmission mechanism" for such contagion, unlike the emerging market crises of 1998 or Uruguay's current situation. Uruguay, conversely, is hurting from the absence of Argentine tourism and the repatriation of assets out of Uruguayan banks, he said.

Brazil is suffering mainly from concerns its next president won't continue the policies of the last few years, which have "kept fragile macroeconomic imbalances at bay," Dow said. "If [the next president] isn't sympathetic, the whole thing unravels." (This could explain the IMF's "gambit" and the Bush administration's flip-flopping on the subject.)

Dow remains cautious on Brazil but is trying to stay liquid in the fund because "it can break either way," he said. "We felt Argentina was a one-way [bet]. This is tougher [although] our bias is slightly negative because of the global backdrop," specifically concerns about the U.S. economy and the inability of banks to extend credit overseas given prior losses in Argentina, Enron, WorldCom, heightened regulatory oversight, etc. etc.

Speaking of the economy, today's unexpected drop in the Producer Price Index and weekly jobless claims also are helping stocks today. The PPI -- which fell 0.2% in July and 0.3% in the core -- is reawakening deflationary fears in some circles, although not, apparently, in the U.S. Treasury market, where prices are lower across the yield curve (i.e. the opposite of what you'd expect if the market was worried about deflation.)

The price of the benchmark 10-year Treasury was recently down 9/32 to 99 22/32, its yield rising to 4.41%. Obviously, Treasuries, which have had a huge rally, are reacting more to developments in the stock market than today's economic news.

Rearguard Action

As some readers have suggested, I should have included the IMF news in the rundown of catalysts for yesterday's late-day rally, although I did post it in RealMoney.com's Columnist Conversation.

Among the other suggestions from readers as to why the market went up was the simple fact that so few traders were looking for it, and the market likes to do what is least expected of it.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task .

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