Downshifting in a climb: market rise stalled as bears cash in, bulls await good news.

Much like a frustrated Periferico commuter during rush hour, the market has finally run into what is known as a congestion zone. In this scenario, most investors will make one of two choices--get off the road and find an alternative route or sit tight and wait for the path to clear.

For the last six months, it has been all go, and the IPC has climbed well above 30%, flirting with its all-time high of more than 8,000 points. However, it is widely acknowledged that markets tend to move in anticipation of the economy, effectively betting on upcoming events. The stagnation we are feeling at the moment--both here and in the United States--is due to investors waiting for the economy to catch up to market gains.

The bears among us have seen enough of this rally and have begun to lock in profits now, willing to write off the fourth quarter in the process. The bulls, on the other hand, have settled into a holding pattern before the next big market movers, third-quarter results, see daylight. As a result, market volume has slipped, and movements have been generally lateral and within previous ranges.

One major factor guiding market sentiment is Mexico's continuing political impasse. While newspapers publish politicians' miracle cures for public finances, progress has been a predictable "no gain." Unfortunately, analysts believe a concrete solution has already been priced into the market. The nerves may begin to jangle as the year comes to an end and a sell-off may result.

THE YEN AND THE YUAN 

The political stalemate has also been partially blamed by Central Bank Gov. Guillermo Ortiz for the frightening slide in the peso exchange rate during the last month. Though this might hold some weight, the cause appears far more international. The yen and yuan situation has been in the minds of traders throughout this downturn, but matters appear to be coming to a head.

Following the G7 meeting--which occurred amid speculation that China and Japan won't alter their monetary policies--the dollar has run into trouble with the yen, the euro and the rand, while the eternal safety play--gold--has hit a seven-year high. With the dollar losing out, the peso has been hit, tumbling to new lows of 11.35 versus the greenback. If this scenario sounds familiar, we just need to look back at the couple of months prior to the Iraq war.

The combination of exchange rate weakness and a tired market has made fixed-income rates a stronger magnet for the investors' peso. Benchmark 28-day Cetes rates leapt back up to almost 5.5% in October, while the strategy of the Bolsa to encourage new issues from the states, the electricity commission and even Pemex may see those gains shored up until the highway is clear again.

Meanwhile, the double-edged sword of a weak peso should be evident in third-quarter results. Whereas the country's exporters will be converting their dollar earnings into pesos with glee, those paying off dollar debt with peso earnings will be unhappy. Bottom lines on a whole will probably not look good.

The names to be most closely watched on the frontline are Walmex and America Movil, the two drivers of the market in the last two years. These names have left former pacesetter Telmex chugging along in the slow lane.

Nonetheless; there has been noise surrounding Telmex recently (including a big bond buyback), and with its experienced navigator. Carlos Slim, we may be hearing some tangible news from the dormant giant soon. Rumors of an acquisition (either in the north or south) have been circling for months now.

Any significant move by Telmex could be well greeted by the market, bringing it in line with gains made by other stocks. This could take the index up to the forecasted levels of 9,000-9,300 by year's end. Slim's foot is hovering aggressively over the gas pedal at the moment. However, Congress has put the hand brake up on Bolsa investors.

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Index                               Sept.30 2003      NOMINAL

                                                   Monthly  Accrued

Stock Market                            INDEX

IPC                                     7,822.48     3.0%    27.7%
INMEX                                     443.47     3.2%    32.8%

Mutual Funds

Equity                                  2,462.16     2.4%    21.2%
Debt for Individuals                    4,086.73     0.4%     4.5%
Debt for Corporations                   1,597.65     0.4%     4.3%

Economic Activity

Industrial                              2,778.60    -3.3%    10.2%
Retail                                 10,795.41     2.1%    17.5%
Non-Financial Services                  5,956.89     0.0%     2.0%
Insurance and Banks                     3,859.13     0.1%    14.5%
Broker Firms                              414.03     0.0%     0.0%
Financial Groups                          311.17     6.2%    20.2%

Sector

Mining                                  5,930.09    21.0%    51.3%
Industrials                             2,669.56     2.0%     7.3%
Construction                           13,421.11     0.9%    30.7%
Retail                                 14,548.55     4.8%    28.9%
Communications and Transportation      32,054.89     1.5%    30.0%
Services                                1,037.84     6.5%    24.1%
Holding Companies                       2,657.23     3.7%    21.6%

Index                                  REAL(1)           DOLLARS(2)

                                   Monthly  Accrued  Monthly  Accrued

Stock Market

IPC                                  2.4%    24.8%     3.1%    20.5%
INMEX                                2.6%    29.8%     3.2%    25.3%

Mutual Funds
Equity                               1.7%    18.5%     2.4%    14.4%
Debt for Individuals                -0.2%     2.1%     0.5%    -1.4%
Debt for Corporation                -0.2%     2.0%     0.4%    -1.5%

Economic Activity
Industrial                          -3.9%     7.7%    -3.2%     4.0%
Retail                               1.5%    14.9%     2.2%    10.9%
Non-Financial Servics               -0.6%    -0.3%     0.1%    -3.8%
Insurance and Banks                 -0.5%    11.9%     0.2%     8.1%
Broker Firms                        -0.6%    -2.3%     0.1%    -5.6%
Financial Groups                     5.6%    17.5%     6.3%    13.5%

Sector
Mining                              20.3%    47.9%    21.1%    42.8%
Industrials                          1.4%     4.8%     2.0%     1.2%
Construction                         0.3%    27.8%     0.9%    23.4%
Retail                               4.1%    26.0%     4.8%    21.7%
Communications and Transportation    0.9%    27.1%     1.5%    22.7%
Services                             5.8%    21.3%     6.5%    17.1%
Holding Companies                    3.1%    18.8%     3.8%    14.7%

(1) September inflation: 0.6% January-September inflation: 2.3% (2)
September depreciation:-0.097% January-September depreciation: 5.96%

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

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