The Future of the World Economy

Today's Financial News - Posted June 27, 2008

Once you think you have a grasp on which direction one market takes, something
unexpected happens to another economy across the globe.

From the future of banking to rising oil prices, Global Market Specialist and Editor of the Money Map Report and the Money Map VIP Trader, Horacio Marquez answers your questions on a myriad of issues facing the global economy today.

By Krista Das, TodayFinancialNews.com

Baltimore — (TFN): The following is taken from this week’s Market Insights video featuring Horacio Marquez.

Krista Das: When you were last on the show a few months ago, you recommended U.S. Steel and that’s gone up over 38 percent since then. The steel market is still going strong. Which stocks should we focus on?
Watch this Market Insights video NOW.

Horacio Marquez: Well, U.S. Steel is a very good opportunity that still keeps going and I do not intend to recommend a sale right now.

In addition, last week I did recommend investing in Mittal Steel, which is the largest integrated steel producer in the world. Mittal Steel has tremendous competitive advantages because of economies of scale and it’s widespread presence in every continent.

In addition to that we can also say that other steel producers in the U.S. like Nucor and very opportunistically and more as a trading vehicle, GSI, General Steel, is – those stocks are very attractive over here as well.

I would like to also say that the Asian steel makers in Japan for example, Nippon Steel and in other countries, Korea, etc., are also doing very, very well.

Krista Das: Okay. Now let’s switch to the financial sector for a moment. Lehman Brothers is rapidly deteriorating with two of its top executives ousted. This seems reminiscent of Bear Stearns collapse. Is a sale imminent?

Horacio Marquez: Well, I’d say that the stock price action is where all the similarities end because actually Lehman Brothers, after the massive deleveraging that they have conducted in the order of $147 billion as Dick Fuld, its chairman revealed today in the quarterly disclosure, basically and in addition to that the massive recapitalization and reduction of leverage that they’ve done, Lehman Brothers is as capitalized, as liquid and as strong as it has ever been.

Basically what we’re seeing right now is a little bit of backing and filling and basically some investors that initially thought that they did not get the full picture of the situation at Lehman a few months ago that were disenchanted with the stock and have sold off having created an incredible buying opportunity.

Actually we have seen Lehman Brother rise from levels of $20 a share to about $27 a share today. In the last few days the rallying Lehman shares has been fantastic and I expect this situation to continue moving forward.

Krista Das: Talking about the big picture, what’s the big picture with the U.S. economy? Commodity prices are high and labor is weak.

Horacio Marquez: Well, commodity prices have been high basically because of pretty accommodative monetary policies by the U.S., Europe, Japan and many other countries around the world, but that posture has changed.

The European Union has adopted the ECB, the European Central Bank, has adopted a more hawkish stance and the Federal Reserve has followed in those steps as well.

In the meantime we’ve seen tightening of monetary policy in Australia, in Brazil, in Indian. Tightening bias in Korea, in Canada, in many countries around the world because all of these countries are recognizing that the commodity prices have the briskness in the rise of these commodity prices pose a risk to their economies and therefore they’re willing to take a little bit lower growth in order to control those price rises.

On the other side, in the U.S., the fact that unemployment has shot up to 5.5 percent, is actually one of the most bullish buying indicators that we can see. I’ve checked it and for decades when you see unemployment rise in the U.S., the typical market over the next couple of years goes up in the order of 30 percent.

So, because unemployment is a trailing indicator of economic activity and right now the U.S. economy is actually accelerating, having put the weakness behind and it’s accelerating because of a huge drop in interest rates that we’ve gone through because of the fiscal stimulus and because of the low level of the dollar.

Krista Das: Now, there’s a lot of global issues just worldwide and the G8 summit is coming up in a few weeks and will be taking place in Japan. It’s the last one for President Bush and the first for the new British and Japanese Prime Ministers, as well as Russia’s newly elected President.

What impact if any do you think this meeting will have on the U.S. dollar?

Horacio Marquez: Well, it’s a very good question. But in the last few weeks what we’ve seen as we move closer to the G8 meeting, what we’re seeing is that the many leaders around the world are coinciding in the view that the U.S. has to see a rally in the U.S. dollar in order to help curb the prices of commodities in U.S. dollars.

And with that inflation and as it curbs inflation, it will help reactivate the U.S. economy, move more purchasing power from energy and commodities into consumption and with that we can see the global economy expanding its growth once more, which will be very beneficial for the markets.

Krista Das: And last but not least, the great oil conundrum, which is actually pegged to the U.S. dollar. Give us the good, the bad and the ugly. What should we expect in the upcoming months?

Horacio Marquez: Well, the oil market is extremely difficult to call. It’s actually – we’ve seen for example, oil at 122 and three days later it was up to 142, followed by profit taking down to 134 and then up in one day all the way up to 139.

The market is extremely volatile and these type of volatile movements are typical of bubbles. Now, predicting when a bubble will break is extremely difficult, but what we have seen is that the U.S. with its more hawkish stance, the Australia and other countries that have tightened monetary policy and countries like Indonesia and India that have moved away from subsidizes to gasoline are basically favoring a phenomenon called demand destruction.

With demand destruction what we’re seeing is that demand will be curtailed. Supply at the same time, Saudi’s are going to increase production and supply will be increased and logically the long-term equilibrium price of oil should come down.

As we see that demand destruction working through, the institutional investors that are basically trying to front run, have been front running this price increase by going long oil will reverse those positions and that could actually cause a crash in the price of oil.

I see a low probability of that, but you can see a lot of volatility and you can see the price of oil coming down quite significantly from these levels, which would be extremely good for financials and for U.S. stocks.

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