As you like it: Bolsa hits all-time high on 3Q reports, hope of reforms.

Just as everybody was foreseeing a parched end to the year, market players have managed to squeeze even more juice from this rally. October can be dubbed a consolidation month, where shares remained flat awaiting news that would give investors a clearer direction. The news arrived in November and propelled the IPC index to an all-time high of 8,455 points--surpassing the previous high posted in March 2000 following the country's award of investment grade by Moody's Investors Service.

There are three principal factors behind this most recent breakout. The first is the U.S. recovery, which is gathering steam with upbeat economic data--especially where manufacturing and employment are concerned.

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The second factor has been the strength of local companies' third-quarter results. Several large names surprised to the upside, notably Telmex, a stock we have labeled as a potential market shifter, while others have continued to show strong organic growth or the shoots of recovery. The two big ones to watch are Walmart de Mexico and America Movil, which have been the main drivers behind the recent surge, both hitting new all-time highs at the same time as the IPC.

The third breakout factor is the growing belief that some concrete reforms may actually occur. Like two years ago, the clock is ticking, but the wild card here is Mexico City Mayor Andres Manuel Lopez Obrador. While the PRI and PAN bicker, Lopez Obrador's popularity soars, and he has garnered a powerful backer in Carlos Slim. This PRD threat to the two-party hegemony may force lawmakers' hands into finally pushing through something tangible.

On the market side, optimism has been supported by increased liquidity in stocks, with daily volumes regularly topping 100 million. There has been a flurry of activity off the radar screen too. We had a successful IPO of building firm Sare, and there has been some interesting portfolio juggling by some of the market's biggest players.

SLIM GETS ACTIVE

However, the biggest corporate news of the month concerns market magnate Carlos Slim and his ever-expanding empire. The latest target for Mexico's Midas is struggling construction firm ICA. Slim is after a 51% stake in the company, which despite poor results and an even poorer cash flow, has some lucrative government contracts lined up, specifically the El Cajon hydroelectric project--the biggest public work of the Fox administration.

Speculators also believe this purchase may be a precursor to Slim getting into the electricity industry, should Congress open up that sector (see cover story, p. 34).

ICA was rewarded with an amazing 68% surge in just eight days, and market players are betting on its continuing strength. Meanwhile, Slim's dormant giant, Telmex, has finally stirred, buying the assets of AT&T Latin America in late October for US$200 million, thus laying tracks for further expansion southward and a link-up with America Movil's Latin American units.

As if that weren't enough, stocks of Slim's other biggie, Grupo Carso, are in heavy demand due to its cost-cutting effectiveness and healthy third-quarter results, getting rewarded by a gain of 17% in the month.

However, it hasn't all been about Slim--a number of other important companies are also riding the recovery well. Comercial Mexicana has been extremely slick since the middle of last year and has consolidated its position as the nation's No. 2 retailer. A strong advertising campaign and a nod to Walmart's economic model has been rewarded with a 68% gain in the last two months. But the threat of a VAT increase could squeeze margins of retailers across the board.

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So while the telecom and industrial sectors may be popping the corks of recovery at the New Year, the threat of a tax increase may have the retail sector waking up to a nasty hangover.

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Index                            31 October      NOMINAL

                                             Monthly  Accrued

Stock Market                         INDEX

IPC                               8,064.83   3.1%       31.6%
INMEX                               458.17   3.3%       37.2%

Mutual Funds

Equity                            2,519.13   2.3%       24.0%
Debt for Individuals              4,100.67   0.3%        4.8%
Debt for Corporations             1,063.47   0.4%        4.7%

Economic Activity

Industrial                        3,033.86   9.2%       20.3%
Retail                           10,980.53   1.7%       19.6%
Non-Financial Services            5,966.86   0.2%        2.2%
Insurance and Banks               3,949.35   2.3%       17.2%
Broker Firms                        414.03   0.0%        0.0%
Financial Groups                    322.47   3.6%       24.6%

Sector

Mining                            6,744.64  13.7%       72.1%
Industrials                       2,653.79  -0.6%        6.6%
Construction                     13,491.22   0.5%       31.4%
Retail                           14,665.91   0.8%       30.0%
Communications & Transportation  33,562.82   4.7%       36.2%
Services                          1,070.09   3.1%       27.9%
Holding Companies                 2,870.54   8.0%       31.3%

Index                                 REAL (1)       DOLLARS (2)

                                 Monthly  Accrued  Monthly  Accrued

Stock Market

IPC                                 2.7%  28.2%     1.4%    22.2%
INMEX                               2.9%  36.6%     1.6%    27.4%

Mutual Funds

Equity                              2.0%  20.8%     0.7%    15.1%
Debt for Individuals                0.0%   2.1%    -1.3%    -2.7%
Debt for Corporations               0.0%   2.0%    -1.3%    -2.8%

Economic Activity

Industrial                          8.8%  17.2%     7.4%    11.7%
Retail                              1.4%  16.4%     0.1%    11.0%
Non-Financial Services             -0.2%  -0.5%    -1.5%    -5.2%
Insurance and Banks                 2.0%  14.2%     0.7%     8.8%
Broker Firms                       -0.4%  -2.6%    -1.6%    -7.2%
Financial Groups                    3.3%  21.3%     2.0%    15.7%

Sector

Mining                             13.3%  67.6%    11.9%    59.8%
Industrials                        -1.0%   3.9%    -2.2%    -1.0%
Construction                        0.2%  28.0%    -1.1%    22.0%
Retail                              0.5%  26.6%    -0.8%    20.7%
Communications & Transportation     4.3%  32.6%     3.0%    26.4%
Services                            2.7%  24.6%     1.4%    18.8%
Holding Companies                   7.6%  27.9%     6.3%    21.9%

(1) October inflation: 0.37% January-October inflation: 2.68%
(2) October depreciation: 1.67% January-October depreciation: 7.68%

Commentary by Gianluca Baratti

Gianluca Baratti works as a stock market analyst at Finamex Casa de Bolsa.