Thursday, December 01, 2005

Brazil economic growth slows in 3Q

Brazil economic growth slows in 3Q

When countries with large populations, such as China and Brazil, slow their economic growth, the slow down in demand for goods and services is felt around the globe. In the face of rising oil prices (Brazil is a resource rich country but not blessed with great oil reserves), Brazil raised interest rates dramatically. The interest rates have reduced inflation but the economy is slowing. China's economy is slowing. The European Central Bank may increase short rates tomorrow in order to fight inflation. US increases in rates has boosted the US dollar and increased the inflation of our trading partners. The responding rate increases will slow the demand for gold and oil.

Today's economy is a global economy. Markets trade together more often than not. Indeed, the correlation coefficient of world markets is now over 70%. However, one should not be confused by economic growth and stock market prices. Stock prices often start going up when economies slow. Folks miss the best buys because they often occur right in the middle of the worst recessions.

The China stock market has not been a top performer for quite some time. Now that a slowdown is there, better markets are not far away. Brazil is different in that its stock market has been on fire and it has taken very high interest rates to slow down inflation. Instead of trying to hit winners in these developing countries, it is wise to buy US shares.

The US stock market will do very well as resource prices decline. Oil has trended down for the past couple of months. This is normal during the winter slow travel months but I believe this winters decline will be larger than usual. Refineries are catching up with demand. Demand has declined while supplies continue to gradually come on line (a new pipeline opened this week across Turkey). December and January may see additional declines. It is ironic that the oil companies that were being accused of gouging two months ago are now suffering through a time when the gasoline crack spread has virtually disappeared. Wholesale gas is selling for $1.40 and retail is approaching $2.00. The tax man is making about 4 times as much as the refiners.

Energy companies are going to see a decline in earnings. For the next several years, companies with steady earnings will out perform most others. The steady earners include everything from the big conglomerates such as GE to Proctor and Gamble. In the old days, AT&T would be the place to hide when cyclical companies began to struggle. SBC has done well for the past several weeks but this "new" AT&T continues to lose customers in its core business, the communications world is a changing world.

I don't buy the idea that the banks are going to do well when short rates stop rising. Maybe short-term but anticipated loan losses in the next recession could hold bank prices down.

I know that economics and stock prices tend to lead one through circles of logic. Investing can be confusing but it is really not that complicated. Take the long term view and you solve a lot of problems.

I continue to chuckle at all the bad advice one can find on the web. Today I read a commit from a trader suggesting one should take quick $1 profits whenever possible. I do not believe you can make money in the market taking quick 80% profits!

Jack Fields, a highly successful broker in Greensboro, NC in the 70's, taught folks not tor trade for 80% profits or less. John Allen Paulous, "A Mathematician Plays The Stock Market", wrote about the same idea.

John Allen assumed that a trader is able to make 80% on one trade and then loses 60% on the next. This trader turns $10,000 into $18,000 quickly but then takes it all the way down to $7,200 on the next trade. I can hear the whines now, that only a fool lets a loss run to 50%. The idea still proves the point. After commissions, spreads and taxes, one cannot make money consistently by trading actively.

On the other hand, the risk of owning stocks is less than the risk of owning bonds for long term investors! It always seems counter intuitive but it is still true. Those who hold a diversified basket of stocks for 30 years will always make more than those who own a mixture that includes bonds or money market accounts.

I think it was in one of Jeremy Siegel's books where the concept is presented best. The actual best returns in the past 80 years or so would have been made by the investor who was long stocks 185% and short bonds 85%. Don't hold me to the exact numbers as it has been a while since I have seen the material. I just checked my copy of "The Future for Investors" I see shows that stocks do indeed outperform bonds and cash with less risk over 30 years.

Slow China, slow Brazil, strong USA, sounds like a good situation. Buy the Bull! The US market is currently overbought but it can still move higher. There is some risk of a pull back but since a lot of people are looking for one, it might not happen anytime soon. An increase in ECB rates and a drop in Chinese demand could be the catalyst to move this market to the next level!