Tuesday, December 26, 2006

Why I have faith in a mild slowdown

Forecasts should always be taken with a grain of salt.
"Global growth as a whole is projected to slow a tad to 4.9 percent next year from an estimated 5.1 percent this year, the International Monetary Fund predicts."
Sounds pretty spunky to me, especially given a cooling of the US economy.

Why are economists so positive? China is growing 10% and India is not far behind at 9%. Then there are the liberated economies of Eastern Europe. Not only have free-market reforms brought strong, sustainable growth, but the internet is driving massive global economic efficiencies.

I've been thinking a lot about how the global economy has changed so much since the last economic downturn in 2001. See, until 2001, the internet was mainly a US phenomenon in the businessplace. A defining element in a downturn is when production capacity exceeds demand (caused by either slackening demand or overcapacity from investment in manufacturing capacity). Either way, we see a lot of factory unused and it happens suddenly. Who can forget the dot.com crash that surprised network equipment makers because their customers swore to a demand that didn't materialize.

This time, the internet has gone global. That makes the economy more in step when we talk about inventories and manufacturing supplies. It removes a lot of the volatility caused by excess. While a US downturn will hurt India and China, the pain will be less than it has been in the past. That in turn moderates the pain and keeps things moving forward instead of grinding to a halt.

Stronger global efficiencies coupled with economic growth as economies enter the age of capitalism - this is a recipe for growth that offsets the slowdown of the more mature economies.

It also means that there will continue to be strong demand for the products that drive economic growth, like networking, and for the luxury items that accompany better standards of living.

That is why I remain bullish on global oriented stocks.

Quick Thoughts

I apologize for the long absence. A combination of personal medical issues rose up.

We are entering an interesting period of time as investors fret about the future
* Earnings season
* Consumer spending data
* End of year profit taking
* Fears about the future slowdown (GDP, inflation)
* Housing fears

This is a period of FUD (fear, uncertainty and doubt) and leads to greater stock price volatility.

Take, for example, the overblown fears about shopping mall traffic and spending. While it may have been slower than desired, I bet the online shopping was off-the-hook. The combination of the two will be strong sales.

But the fear is tangible and it is fear of the future.

Many of the stocks I own or have put into the LiveRocket model portfolio are small or mid-cap. They will show the most volatility. That has made me somewhat reluctant to set a stop price (UCTT for example has dropped quite a bit). Because they will gyrate a lot up and a lot down. I would rather stay focused on the prize: excellent earnings reports.

I promise you this:
1. Back to the weekly performance updates
2. A stock news review. A lot of positive news is out but I haven't had a chance to share it.

For now, thanks for your patience. Happy investing