Whether you’re looking to grow tomatoes or your investment portfolio, one of the first things you need to find is fertile ground.
Planting seeds in the wrong place is simply a waste of time. Likewise, investing your money in a stagnant economy will prove fruitless.
And right now, there’s no question in my mind that most of the U.S. economy is infertile territory.
Just last week, Ben Bernanke told the Senate Banking Committee,
“Our economy is entering a period of transition … The anticipated moderation in economic growth now seems to be under way … That moderation appears most evident in the household sector. In particular, consumer spending, which makes up more than two-thirds of aggregate spending … decelerated during the spring.â€
That’s his mumbo-jumbo way of saying that our economy is withering on the vine, and that the American consumer is wilting under the heat of higher oil prices and interest rates.
Bernanke and his Fed buddies weren’t alone. The Conference Board, a not-for-profit group that collects and disseminates business data, said
“The U.S. economy is cooling at mid-year … [data] suggest that the economy could cool even more in the third and fourth quarters. Economic growth should continue, but at a slow-to-moderate rate in the near term.â€
That statement was released along with the latest information on the group’s Index of Leading Economic Indicators (LEI).
The result: A 0.1% increase in June. Now, a 0.1% gain is a change from the declines that we saw in April and May, but it isn’t worth doing cartwheels over. The big trend: The LEI index has posted a 0.3% decline so far this year.
Plus, I see five more signs that U.S. consumers are running out of money:
Sign #1: Retailer Target said July same-store sales should rise 3% or 4%. That may not sound bad, but it’s a big drop from the 4% to 6% same-store growth that Target was bragging about just three weeks ago. To me, this indicates that neither Wall Street nor corporate America has been prepared for an economic slowdown.
Sign #2: Wal-Mart has been saying for months that its customers are spending less money because of higher gas prices.
The new twist: Wal-Mart now says that its shoppers are buying mostly food and consumables instead of discretionary items. In other words, most Americans are now doing little more than just getting by.
Sign #3: Brunswick, which makes leisure products like boats and pool tables, slashed the heck out of its full-year 2006 earnings forecast. It was expecting per-share profits of $3 to $3.15; it now expects to make something in the range of $2.40 to $2.55.
The company explained the revised forecast by saying,
“Throughout the key second-quarter selling season for 2006-model-year marine products, however, we have experienced significant declines in retail demand, which has resulted in an increase in pipeline inventories.â€
Significant declines in retail demand? Increase in inventories? Translation: Most consumers have stopped buying boats. And you can bet they’ve stopped buying a lot of other things, too.
Sign #4: D.R. Horton — the largest homebuilder in America — reported that second-quarter orders fell 4.4%, while the value of homes sold dropped from $4.1 billion last year to $3.8 billion.
Worse yet, D.R. Horton lowered its third-quarter profit forecast from $1.30 to $0.93. According to the company,
“The current home sales environment is characterized by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets.â€
Translation: Demand is weak, unsold inventory is piling up, and it’s taking heavy discounting and incentives to make sales.
Sign #5: Home furnishings retailer Williams-Sonoma chopped its second-quarter revenue outlook because of weaker-than-expected sales at its Pottery Barn stores.
The company now says second-quarter sales will come in between $823 million to $837 million. Previously, the company predicted sales in the range of $842 million to $856 million.
Bottom line: It’s time for Wall Street to stop cheerleading: A slowing economy almost certainly means slowing, if not downright lower, corporate profits, especially for companies in the hardest-hit sectors.
So Why Are Investors
In These Companies
Still Sticking Around?
What really puzzles me is why investors act like their feet are planted along Wall Street.
Heck, if the U.S. economy is decelerating dangerously, move your crop someplace else, where the economy is booming.
How about Singapore or China? In just the last week:
Singapore reported that its exports rose by almost twice as much in the first six months of the year as last year: 16% versus 8.2% in 2005. That’s the fifth consecutive quarter of economic acceleration.
Better yet, the government raised its 2006 forecast of non-oil export growth from a range of 5% to 7% to a range of 10% to 12%.
China’s economy has been on a rip-roaring tear. The country recently surpassed the U.K as the fourth largest economy in the world.
And according to the latest quarterly numbers, China isn’t slowing down. The country’s economy expanded by an amazing 11.3%. For perspective, that’s:
- The fastest pace in more than a decade.
- The biggest quarterly expansion since 1994, when the Chinese economy was one-quarter of its current size.
- Well above the 10.4% growth Wall Street was expecting.
And get this: The Shanghai stock market has surged by 44% this year.
The U.S. stock market, of course, hasn’t delivered anywhere near that return. The Nasdaq might have posted a nice gain yesterday, but since the start of July, it’s fallen more than 100 points — a painful double-digit loss. And if not for the 200-plus-point Bernanke rally last Wednesday, those numbers would be even worse.
But there was one not-so-obvious hiding place in the U.S. markets. A group of stocks that not only sidestepped the downdraft, but actually went up in value.
I’m talking about China and Taiwan American Depository Receipts (ADRs). These are foreign company issues that trade on either the New York Stock Exchange or the Nasdaq.
Take a look at the table to see how they fared.
| Company | Country | June 30 Price | July 24 Price | Gain/(Loss) |
| AU Optronics (AUO) | Taiwan | 14.24 | 15.16 | 6.5% |
| Bidu.com (BIDU) | China | 82.53 | 89.40 | 8.3% |
| China Life (LFC) | China | 63.30 | 65.99 | 4.2% |
| CNOOC Ltd (CEO) | China | 80.38 | 84.33 | 4.9% |
| China Mobile (CHL) | China | 28.61 | 30.41 | 6.3% |
| eLong (LONG) | China | 13.92 | 13.78 | (1%) |
| Petro China (PTR) | China | 107.97 | 112.58 | 4.3% |
| Shanda Interactive (SNDA) | China | 12.96 | 13.27 | 2.4% |
Now, I’m not suggesting that you rush out and buy any of these stocks. As always, timing is everything.
However I can tell you that there’s a good reason why these stocks went up in value while the U.S. market tanked: The Chinese economy is growing so fast that it’s pulling these stocks up with it.
Sadly, when I ask most investors how much of their portfolios are devoted to the fastest growing region of the world, most of them answer zero.
That, my friends, is the most costly decision you can make this decade. Even if you have to start small, please plant at least a couple of seeds in Asia. Like a plant fed with Miracle-Gro, the results could be amazing.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
© 2006 by Weiss Research, Inc. All rights reserved.
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