Horacio Marquez: Strategies for the Current Crisis

The following was taken from the transcript of this week's TFN Smart Trading Action Alert video featuring Horacio Marquez. Watch this video.

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Laura Cadden: As the U.S. banking crisis and the resulting credit crunch threatened to choke off the American economy, investors are cashing out of U.S. stock markets and dollar assets. With real estate gone as a risk-free investment, what markets still offer safe havens? I've invited Horacio Marquez, editor of the Money Map Report to provide some answers.

So Horacio, what is your take on this American crisis right now? Are we indeed in crisis?

Horacio Marquez: Yes, we are in crisis, but the good news is that we're coming out of it. Basically, the trouble we had was prompted by huge losses in subprime mortgages that in turn created losses throughout the financial system, both in banks and investment banks. That prompted a huge amount of de-leveraging, which caused this incredible market turmoil.

Because of this and the fact that the viability of many financial firms came into question -- ending up in the situation that we saw with Bear Stearns where it had to be bailed out -- the government and the Fed intervened to prevent a spread of this crisis of confidence throughout other financials. And this situation is very supportive of the markets going forward.

Laura Cadden: Some analysts claim that the global economy has largely successfully decoupled from the U.S. economy. So even in the event of a recession it really won't have an impact. Do you think that's true for, Shanghai and Tokyo and Hong Kong?

Horacio Marquez: Well, if we wouldn't have had the type of global credit crunch that we are experiencing, that would have been true. Unfortunately, this credit crunch has spilled all over the globe because it has affected global banks. And because of that situation, we have to differentiate between economic decoupling and financial decoupling.

Since there are positions that are maintained throughout the globe by global banks and global hedge funds, this forced de-leveraging has increased the correlation amongst the asset classes to almost one, and that has created market dislocations in countries that are doing very, very well economically, like Australia, Hong Kong, etc.

Therefore, once the bottom is put through the run on the financial side of investment banks, what we will see is that the economic decoupling will take over, and you will see a financial decoupling. That is, the markets of these countries that have very good fundamentals pick up and rally far stronger than other countries.

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Laura Cadden: Let's talk about China and India for a moment. Many believe that they have developed enough momentum at this point to not be affected by a recession. Do you think that that is true?

Horacio Marquez: Even so, the WTO numbers estimate China will be growing at 7 or 8 percent per year; still more than enough too offset that decline in exports. That's why we're seeing copper start to rebound due to China's continued demand. We're actually seeing this decoupling happen now.

Laura Cadden: So about copper, the supplies are quite tight, is that correct?

Horacio Marquez: Well, we have to differentiate because China right now is fighting an inflationary problem. The Chinese economy has been growing at levels of more than 10 percent for a number of years, and that has already created very significant inflationary pressures.

As an example, the Chinese have resorted to curbing steel exports in order to create a local oversupply of export to try to keep the prices of steel down internally and with that, inflation. In addition, we just learned that the Chinese have increased the reserve requirements of the banks in order to try to withdraw some liquidity from the Chinese economy that, again, in order to try to curb inflation. That will, in a way, reduce the level of growth in China from what we were expecting.

In the case of India, they are not having the inflationary problems that China is having. Therefore, they are resorting to fiscal stimulus in order to actually compensate for the slight loss of demand from the U.S.

I have to say as well, that in the case of China and India, we have seen that demand from other emerging markets has more than compensated for the loss of demand from the U.S. slowdown. So in a way, the answer is that yes, they are decoupling economically.

Laura Cadden: What markets are you advising that people go to as a safe haven right now as opposed to the U.S.?

Horacio Marquez: Well,obviously going into the situation, it was advisable not to be overly leveraged in order not to be taken out of worthy positions, as highly leveraged players were forced to liquidate positions at prices that they would normally not would not have liked to sell. Some amount of cash in your account was advisable in the first couple of months in the year.

Now, as we see prices very low and the spread of the run on the financial set has been contained, it is advisable to start putting some of that money to work. For people that have a strong stomach, they could start playing in financials; they can start playing in pro-cyclical plays in the U.S., like materials, energy, industrials.

But people that do not have a very high tolerance for risk, they can go with the mega caps in the U.S. and around the world that benefit from this global growth process. And especially in the U.S. because of the drop in the value of the dollar, the U.S. companies will have very significant translation gains when they bring those profits that they made abroad and translate them into U.S. dollars.

Laura Cadden: What specific stocks are you recommending to your readers?

Horacio Marquez: Well, again, we have to differentiate between the people that have a strong stomach and the people that have lower risk tolerances. In the latter category, stocks like GE – industrials like GE (GE), Coca-Cola (KO), Procter and Gamble (PG).

For people that have a very high risk tolerance, I think this is a very good moment to start edging into financials and pro-cyclicals like materials, for example steels are red hot, not only in the U.S. but around the world. Energy, you could play it with the XLE, the energy SPDR and industrials.

So in general, as the U.S. economy reaccelerates into the second half, it is good to position one's self into the sectors that reaccelerate, even though right now they're extremely volatile.

Disclosure: None