FALLS CHURCH, Va.—Sectors of the economy said to lag others in terms of firing people are now starting to shed employees. Nonresidential construction, manufacturing (although the pace isn’t as bad as you might think), financial services and retail are doing some serious job-cutting.

At the same time, the US dollar and the Japanese yen are in rally mode, while emerging market currencies are being sold off, as is the euro. The dollar can remain strong for sometime, primarily because investors around the world need to believe the dollar still holds most of its shine. Otherwise it will be very difficult to justify buying US Treasuries, and thus support the great bailout.

For now the majority doesn’t care, either for long-term fundamentals or specific characteristics of individual economies. You have to survive the short-term in order to be around for the long-tem is how an acquaintance recently put it to me

He’s absolutely right. When it comes to Asia, the turmoil from the credit crisis has taken us to the brink of the worst bear market in the last 35 years. The positives for the markets right now are the cheap valuations, the bearish sentiment and the efforts by governments around the world to prevent an outright collapse of the financial system. Under different circumstance, the first two would be sufficient to justify an outright “buy” recommendation, but the third holds the key.

Consequently, the investment recommendation here is to focus on companies with strong cash flows, sustainable and solid dividend yields, and to selectively buy companies in sectors the majority doesn’t want to own. People can’t sell what they don’t own.

For now, though, stay focused; manage your hedging positions correctly (see below) and identify companies to own for the future. It’s a slow process to emerge from problems such as those facing the global economy. And it will be a slow process for the markets to come back.

Early and gradual positioning across sectors and countries will ensure, though, that the nimble investor will be the ultimate beneficiary. That is as it should be and almost always is.

Time will test everybody’s theories, but history has shown that during all the economic/market bottoms, the world and its societies have profoundly changed. I expect this to be the case this time around, too, and this is why I don’t subscribe to the theory that suggests that after all is said and done, things will go back to the status quo. Things never do, and won’t this time. See Silk, 15 October 2008, Banking with the Government.

Please follow the Fresh Money Buys list if you want to allocate money to long positions. The list is organized in order of preference from top to bottom and by preferred sector (in parentheses) for each locale.

China Numbers

China continues to deliver respectable growth numbers, even as the third quarter came in at 9 percent year-over-year. The Chinese economy is on its way to an 8 percent GDP growth next year, so this weakness is to be expected.

Because the global economy is going to be in recession, expect China’s exports to slow, although for now they’re holding up rather well. Machinery and electronic goods, both big contributors to total experts, rose by 24 percent year-over-year.

Weakness in inflation has helped real income to remain elevated, something that should continue as inflation decelerates further. Retail sales are still holding up, rising 23.2 percent in September, and although they should slow, healthy income levels should cushion the blow.

Source: Bloomberg

The main question when it comes to China is the same as it is for almost every other economy in the world: What will be the response to the easier monetary policy that’s now being implemented?

The desired outcome will be for credit demand to perk up, especially because China didn’t experience a credit boom these past couple years; the supply of money was actually held down, as the chart below indicates. The expectation, then, that credit will expand as stimulus measures are enacted is legitimate.

Housing, in particular, could be a big beneficiary–relatively strong incomes and easier credit could revitalize the sector. It remains to be seen, however, if people will borrow.

I don’t mean to suggest China won’t experience a rise in non-performing loans, but investors shouldn’t expect to anything remotely close to what we’re witnessing in the developed economies.

Source: Bloomberg

Portfolio

This week I’m reducing the Portfolio’s exposure to Singapore by closing the United Overseas Bank (OTC: UOVEY) position. Keppel (OTC: KPELY), the long-term favorite, and Singapore Telecom (OTC: SGAPY) remain as my two recommended Singapore-based companies.

I’ll be making more changes in the Portfolio, perhaps adding stocks in between issues.

The Permanent Hedges

Permanent hedges have performed well as a balance to long-only positions. Gold is up 28 percent since its original recommendation, US Treasuries have returned 22 percent, and shorting the American consumer has produced a gain of 43 percent.

iShares Investment Grade Corporate Bond Fund (NYSE: LQD), which I recommended in late January, is down 14 percent, but I consider this a good performance given the current environment; the S&P 500 is down around 37 percent. This position makes even more sense now because of the synchronized efforts to combat the credit crisis.

Readers who have some gains in Consumer Discretionary SPDR (AMEX: XLY) short should take some money off the table and reallocate it to iShares Investment Grade Corporate Bond Fund, which offers a 6 percent yield.

Fresh Money Buys

The investment process is constant. If you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• China (machinery, Consumer, Banks, coal, port, e-commerce)
• Hong Kong (real estate, banking)
• Russia (energy, telecommunications)
• India (pharmaceuticals)
• Japan (banking)
• Philippines (telecommunications)
• Taiwan (ETF)
• Singapore (Industrial, telecommunications)
• Vietnam (ETF)
• Cambodia (casino/hotels)
• Macau (casino/hotels)