Monday, November 07, 2005

China Allows Its Currency to Inch Up Against Dollar - New York Times

China Allows Its Currency to Inch Up Against Dollar - New York Times

OOPS! Europeans and others around the world are getting hit by a double whammy. The movement of the US dollar to higher ground has incresed the cost of oil in addition to the nominal price increase. Now China is allowing its currency to float up against the dollar.

The cost of goods and services purchased by "the others" is going up for multiple reasons. The response is that there is at least talk that the European Central Bank will raise interest rates for the first time in 5 years.

Many will be alarmed to learn that short interest rates are going up around the world. However, investors should note that increases in rates is the primary method central banks have of putting the brakes on inflation. The fear of deflation is over. The average GNP around the world is growing. It took some old fashioned "pump priming" by the USA to help the world economy grow. Now the US is leading the way to level off the excess.

The next few years will be years of economic expansion. The problem in a few years will be that profit margins have shrunk as world wide production has increased. As it becomes increasingly difficult to make profits, one should move ones portfolio to a more defensive posture, but not yet. The next move is going to be a strong move that will left most boats. One can throw a dart at the stock page to pick winners over the next several months.

Never-the-less, ones bias should be to sell off the small stocks on rallies and buy the big safe secure ones on pull backs. You may know that the big solid companies somtimes actually go up during recessions. The key is that you want to make the "flight to quality" well before the markets move to these sectors. Right now, Proctor and Gamble, Colgate, Pepsi, Wrigley, Wal-Mart, Johnson and Johnson, PFE and other solid old growth stocks will hold up well when the going gets tough.


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