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Market Crisis: Is this the time to invest in pro-cylicals?

Posted March 22, 2008

"We should see a rebound in the U.S. economy in the second half of the year going into the first half of 2009.  That should bode very well for the U.S. pro-cyclicals." — Horacio Marquez

 

This was taken from Krista Das’ Smart Investing Market Insights video interview with Horacio Marquez.

by Krista Das

Baltimore — (TFN): Krista Das: It’s been a rough week for Bear Stearns, forced to sell all of its shares to JPMorgan Chase for a lowly $2.00 a share. Bear Stearns investors have seen better days. Joining me now to shed light on the situation is the former director of emerging market research for Merrill Lynch and Swiss Bank. Horacio Marquez is the editor of the Money Map Report and the Money Map VIP Trader.
The financial markets are clearly panicking, and the Fed has now become a lender for Wall Street. What do you see happening in the upcoming months in regards to the economy?

Horacio Marquez: Well, fortunately we’ve seen that the Fed took – and the government took — appropriate measures to prevent this run on the investment banks from spreading to the rest of the financial system. In addition, what we’re seeing is that the monetary stimulus that has already been put in place, the drop in the value in the U.S. dollar that has been quite significant and the other types of measures that are being put in place to cushion the drop in housing prices are going to be highly stimulative off of the U.S. economy. 

*** Watch the financial video by clicking right here! ***

We should see a rebound in the U.S. economy in the second half of the year going into the first half of 2009.  That should bode very well for the U.S. pro-cyclicals, and at the same time, we will start seeing the reversal of a credit crunch around the world as well.

KD: Let’s shift our focus to Bear Stearns’ two rivals Lehman Brothers and Goldman Sachs. While still in a profit slump, both posted better-than-expected quarterly results, which appears to have had a positive effect on the Dow. Would you suggest investing in any companies within the credit sector or stay completely away from them?

HM: Actually, I am very bullish on the financial sector. Traditionally, the financial sector tends to bottom a month before the earnings are downgraded by all of Wall Street or coincide with the downgrades in those earnings. Those earnings have already been downgraded, and what we’ve seen already in Goldman and Lehman reporting is that they have beat their estimates, and very importantly, we have seen very small writedowns in the value of their mortgage positions.

Therefore, we can conclude that as we move forward those writedowns that are dreaded by Wall Street and investors… we’ve already seen most of those writedowns in the past, and this will remove a very heavy weight that, right now, is keeping the entire financial sector from rallying. Therefore at this point, I am strongly advising those who have a strong stomach and that can tolerate those very large daily gyrations in market prices to actually edge into financials, as we speak.

KD: Now, what’s your long-term strategy during this painful de-leveraging process?

HM: Let’s start by revealing what is the de-leveraging? The de-leveraging is basically the result of highly leveraged players that have been forced to sell positions that they would have never sold at the prices that they were obliged to sell into just because they were overly leveraged at a moment that you had a credit crunch.

In the same way that people should sell into a short squeeze, people should buy when you see forced sales due to de-leveraging. Now, the problem in  this strategy is that you don’t know when de-leveraging is over. Therefore, what you should do is extend your investment horizon and go into stocks when you see very significant value with a view of holding those stocks, even though – over a medium or longer period of time, even though at times you might be underwater, and at some times, very significantly under water.

KD: Are there any particular markets that you, that we, should turn to for investing right now?

HM: Definitely. As I just indicated, I have a very strong preference for financials right away.  And at the same time, I also like the emerging growth story. And I would like to include within that story the situation in Australia.

Australia, for example, has had a problem that’s very different from that of the U.S.  Australia has had to raise interest rates all the way up to 7.25% because they have seen their economy overheat so much that it was generating inflation. In that process of raising interest rates, the financials have really taken it on the chin in Australia and are selling for very distressed prices. Now, investing in Australian financials in the U.S. is extremely difficult because the ADRs have no liquidity. Therefore, EWA, the Australian ETF, is one way to go. 

At the same time, I also like Brazil, Russia, India and pro-cyclicals in the U.S., that is: materials, energy and industrials.
 

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Posted by Krista Das · Filed Under Investment Strategies 

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