Mutual Finance

When this president’s father was in the Oval Office, he was fond of singing the praises of the “New World Order” that was to arrive. The phrase carried a lot of baggage, especially with conservatives who had long heard the term associated with a one-world government with little room for individual rights. Some believe the first George Bush’s attachment to this term hurt his chances for re-election, and contributed to the movement that brought Ross Perot into the fray and split the conservative vote.

The current president has steered clear of the specific terminology, but only an ostrich with his head in the sand would say that we are not moving headlong toward a reorganization of the world system, and it has become clear that individual rights are at risk. The war in Afghanistan was not only inevitable, but was probably desirable. Iraq was no ones’ friend, and even those of us who questioned the wisdom of invasion had difficulty opposing the end of such an abusive regime. However the trend is disturbing as we now speak casually of invading Syria, Iran, or North Korea. Not only does the war posturing make us globally unpopular (and therefore unable to extol the virtues of free markets), wars also bring with them serious limits on freedom at home. We’ve begun to see some of that.

Laws like the Patriot Act are so comprehensive that most of us are likely violating a half dozen edicts without knowing it. The difference this time is that conservatives are largely supportive of all these actions. Strangely, all the things that Bill Clinton could never have gotten past the Republican Congress are sailing through with little forethought.

Meanwhile, we have lost the attention of nations around the world. We imagined that the menace of communist based philosophies died with the Berlin Wall, but now we are faced with socialists winning elections worldwide. The new look of the “World Order” is not a pretty one, and clearly not one that values freedom. Yet we have no voice in world affairs, where many smaller nations have begun to view America as a bully. The fact that we are “in the right” isn’t important in this area, as one cannot force freedom’s acceptance. It is a tenuous choice that a nation must make for itself. The approach we’ve taken recently has limited our ability to offer our wisdom.

In light of these world changes, it may be wise to consider our investment strategies. It is fair to say that investing overseas may meet with some difficulty, but if trends continue, we may see trouble here as well. Alas, so much of American business success is due to exports, yet we’re faced with protectionist barriers coming up against us in many nations. Some of this is justified, because although other nations tend to have much higher barriers, America has recently begun to impose rather restrictive tariffs as well. The idea of a free-trade zone, such as NAFTA, actually is an enemy to true free trade, because it actually prevents free trade with nations outside the limited trade bloc.

All of this may eventually impact American companies, as they find international trade opportunities severely restricted. The past two decades were a time of relative freedom internationally for travel, trade, and discussion. That may change, and if it does, the impact could be devastating. The last time we restricted world trade to this extent, the period culminated in the great depression. We’re a long way from that today, but without some wise leadership, we may find ourselves facing further difficulties. Thus far, sadly, this administration has shown little strength in economic issues.

Changes in the world make our investment strategies critical to our future. More than ever, a careful plan is vital to our ability to weather the storms that may come in the economy.

To send comments or to learn more about Scott Pearson’s Investment Management Service, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor’s Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

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Expectations drive the market. Every stock price is driven by what people expect the company to do. That’s why all the talk about a strong or weak economy has such an impact.
But those aren’t the only expectations moving us. We’ve seen the impact of war and terrorism worries on markets and the impact of SARS concerns on Asian markets.

Markets move on a combination of expectations and reality, and every reality leads us to new expectations. Great earnings? I expect the company will earn more. A sales slump? I expect the company to struggle next year too. The question is: if all decisions are made on expectations (and they are), how can things turn around? If our expectations are so colored by past events, we’ll expect the future to be as grim as the past, and nothing can ever change, can it? Ah, but we have long memories. Ask yourself: what would it take for you to change your outlook? What would it take for all of us to change our outlook? The answer to that last question effectively tells us when the market will turn, because when everyone is upbeat and buying, the market will fly.

Consistently rising earnings will change expectations, but how much positive news is necessary before the turn begins? Will some companies turn before the market? Consider Constellation Brands or Fortune Brands, two of our recommendations that haven’t seen any drops, and in fact are defying estimates of weakness. Should we expect those shares to rise based upon their own positive trends, or will the market turn first?

The answers aren’t simple or uniform. There’s no answer, only conjecture. We can make estimations. In the past, we’ve seen market turnarounds led by small stocks or led by big stocks, led by technology, or led by consumer goods. So, as we near the turn, you’ll likely hear all kinds of suggestions for where the upturn will begin. Preserve your sanity with a little skepticism. I suspect the first to turn will be the ones that have had the best results for a long time. That’s precisely why we’re so aggressive in our recommendations of companies like Fortune and Constellation. If they are successful in maintaining their records, this type of firm will rise sooner than the rest.

It doesn’t matter whether the companies are big or small, techie or traditional. The best companies will start the upward move. Without support from a strengthening economy and a rising market, even these success stories can’t rise far. That’s why expectations of the broader economy are important. That’s where we’ll have to wait and see. Expectations should rise now with the ending war (with stock prices and consumer spending following). Expect some good news for a while. Surprises from companies like McDonald’s will also provide a boost. Surprises shake people out of expectation ruts. When we’ve become too negative (or too positive), a shock can wake us up to the change.
Let’s hope that McDonald’s profit boost is a harbinger of things to come.

While the longer term still holds some uncertainty, there is hope. Success is largely a matter of recognizing expectations, and following through when we see an opening. For the moment, at least, there appears to be an opening. We don’t know yet what the future holds, but the present looks good.

To send comments or to learn more about Scott Pearson’s Investment Advisor Services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor’s Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

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IT’S NO LONGER NEWS THAT CHINA IS BECOMING A MAJOR player on the world economic scene. Yet, as we’ve noted in past editions, investing in China is fraught with uncertainty, due to a still un-free political situation, and insecure property rights. Despite our current lack of interest in Chinese stocks, China’s renaissance clearly has implications for investor decisions worldwide, simply due to its market’s enormous size.

Recently, China’s newfound economic strength has become fodder for political electioneering, and talk of protectionism is once again rearing its ugly head. Candidates are falling over each other to see who can blame the Chinese more effectively than their opponents. Of course, our readers recognize such ranting as nothing more than political gamesmanship. Nonetheless, all efforts to “save jobs” at the expense of free trade can only be dangerous to the US economy. Looking back in history, identical rhetoric led to trade barriers, and the Great Depression.

For the moment, the greater issue may be what the future holds for China, and what impact that may have globally. The key to the future centers on China’s currency and their banking system. Trade with the US, while important, is truly a secondary issue. So far, every story in the press involving China’s economy seems to focus on trade issues, business growth, and cheap labor. Those are interesting. But an issue that is getting little or no press dwarfs them.

China has two overwhelmingly significant flaws in its economic structure that must converge in the relatively near future to cause a devastating collapse. When that happens, politicians and reporters who have focused on trade issues will look silly at best. Only recently have we begun to see unfocused stories about China’s economic bubble. They cite skyrocketing real estate prices, and over-investment in specific industries such as automotive or aluminum, but they miss the bigger picture. Blame is cast upon Chinese peoples’ penchant for gambling, as though it is the citizens who have brought this upon themselves.

As usual, we know to look to the government for most of the fault. China’s financial system is a relic from the past: a dinosaur from the days before competition entered the economy. The nation’s financial system primarily comprises four government-owned banks, which may be privatized in the near future. Thus far, these institutions have been shielded from competition and guaranteed by the government. Those who remember the savings & loan fiasco here know that thrusting such incompetent institutions into a competitive world is disastrous.
Long overdue for reform and utterly unprepared for the pressures of competition, the problem with China’s financial system doesn’t end there. China’s economy has grown impressively over the past decade but much of that growth has resulted from tricks played by the government related to its currency and exchange rates. Over the past decade, the Chinese government has carefully “managed” exchange rates in such a way to devalue its own currency. This has made Chinese goods unnaturally cheaper for foreign currency holders, simultaneously impoverishing segments of the Chinese population.

To accomplish this valuation, China has had to hold vast sums of dollars, yen, and other currencies, instead of exchanging them for yuan. This leaves other countries holding their yuan, and causes their value to fall. The falling yuan makes Chinese trade goods more attractive to the rest of the world, but the citizens suffer in the short-term, due to their weak currency.
We hear that the “new” administration in China (which is directly related to the “old” administration) has an interest in seeking a more responsible balance of payments and reducing inflation, but we find this unimpressive. Until actions follow the talk, there is little evidence that any real change will develop.

The combination of currency disruption and a weak banking system is a recipe for near-sure collapse. This leads us to recommend against the rush to Chinese stocks. However, the bigger question is what impact this collapse will have on the world economy. It is difficult to determine how devastating the repercussions would be, but suffice to say, it won’t be good. We’d imagine that stable economies will hold up best, but the very size of China’s economy would likely affect everyone. On the other hand, due to the nation’s relative isolation, it is possible that problems will be somewhat muted. The greatest threat would normally be a trade disruption. We might see some price increases in Chinese-produced goods, but the impact on the U.S. economy or those of other developed economies would not seem to be incredibly susceptible.

The greater fear may be that when China runs into trouble, it will start spending all those dollars they’ve been holding. The result may be further pushes toward inflation in the US, an outcome we’ve already predicted. In these days of rabid spending, and increasing debt, an inflation rate that pushes interest rates higher cannot be good. These concerns are not immediate, but a long-term investment plan requires some foresight.

Despite our concerns about the longer term, we are still quite confident that the economy, and hence the market, will perform relatively well through the elections in November. As a result, we strongly recommend making the best of it, as the longer-term outlook is uncertain. Perhaps when November comes, we will have a clearer view of the future, but for now, investing for the present is all that can be done.

To send comments or to learn more about Scott Pearson’s Investment Management Services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor’s Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

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