Chinese Imports to the US

Newspaper headlines are dominated these days about the rise of China as a global economic source.  Frequently, Chinese imports are blamed for joblessness in the US.  But how much of today's unemployment picture relates to Chinese imports?  How much do we really buy from China?  The San Francisco Federal Reserve Board's web site includes the results of a recent study concerning the percentage of goods and services sold in the US that are sourced from China.  The authors, Galina Hale and Bart Hobjin, conclude the following:

Of the 2.7% of U.S. consumer purchases going to goods labeled “Made in China,” only 1.2% actually represents China-produced content. If we take into account imported intermediate goods, about 13.9% of U.S. consumer spending is attributable to imports, including 1.9% imported from China.

Since the share of PCE [personal consumption expenditures] attributable to imports from China is less than 2% and some of this can be traced to production in other countries, it is unlikely that recent increases in labor costs and inflation in China will generate broad-based inflationary pressures in the United States. 

The entire article may be read at the following link:

http://www.frbsf.org/publications/economics/letter/2011/el2011-25.html?utm_source=home

Investing in Stocks

I sometimes get asked about how I decide what stocks to buy for client portfolios.  The answer is not easy or simple, however, a general summary might give some insight into the process.

Investing in stocks requires original research.  Research can be looked at in two ways:  macro and micro.  I define macro as looking at “the big picture”.  This includes international economic trends, international politics, domestic (U.S.) politics and domestic economic trends, what is happening in the bond market and commodities markets.  Macro research also covers industry trends.  For example, I ask the question: Which economic sectors should outperform and underperform, given the outlook for international and domestic economic and political trends?  Normally, in a bad economy, or heading into a bad economy, so-called “defensive” industries tend to do better than ones that will suffer in an economic downturn.  Procter & Gamble is a classic “defensive” stock.  Everyone has to wash clothes, eat, and spend money on grooming products, regardless of the economy.  People might trade down from name brands that P&G sells, but nevertheless, companies that sell everyday necessities that are consumable products are a natural investment option in a bad economy.

Micro-level research involves researching specific companies.  For example, before I invest in a stock, I look at research reports from various research providers, but I also do my own research by looking at the current annual report and SEC-mandated 10-K report to assess a company’s prospects.  I have specific criteria that I use when evaluating a company’s financial strength, future prospects and ownership structure.  Once I decide that a company meets my criteria, and if the time is right from a macro level, that stock may be purchased for client portfolios.

Because I am more a strategic than a tactical investor, I tend to hold stocks for a longer time than a typical mutual fund.  This holds down taxes for clients who have standard accounts that are subject to tax whenever a sale is made in their portfolios.  It also helps hold down transaction costs for all clients, including clients who own IRA accounts and other types of tax-deferred accounts.

Another Opinion About Investing in Gold

The investment manager of the First Eagle Gold Fund, Rachel Benepe, has an interesting take on gold, and the best way to buy it.  Her answer is not to buy gold bullion; rather, it is to buy a mutual fund with a diversified portfolio that includes gold bullion as well as the stocks of many companies that mine for gold.  The interview of Ms. Benepe can be found at the following link:

http://finance.fortune.cnn.com/2011/08/16/golds-climb-is-perfectly-rational/

Wells Fargo: Gold is a "Bubble Poised to Burst"

Check out this short article which discusses Wells Fargo analysts' belief that gold is in a bubble that is poised to burst.  It also lists who is buying and who is selling gold.

http://www.fa-mag.com/fa-news/8225-gold-a-bubble-poised-to-burst-wells-fargo-says.html

Effect of S&P's Downgrade on US Treasury Debt on the Stock Market

How will the stock market open on Monday, August 8, after Standard and Poor's downgraded US Treasury debt from AAA to AA+?  It could go either way -- up or down -- depending on whether or not investors were already expecting the downgrade. 

Surely, S&P had been telegraphing for weeks its intentions, depending on how the debate on Capitol Hill related to the debt ceiling turned out.  S&P stated previously that unless there was a credible plan put on the table to reduce spending by $4 trillion dollars that the company would downgrade US Treasuries.  When the final agreement came in with a proposed reduction in spending (from the "baseline" level) at about $2.1 trillion over a 10 year period, it should have come as no surprise that S&P would downgrade the US government's debt.

However, investors may not have paid enough attention to the specifics of S&P's warnings. In this case, we could expect a negative tone to the stock market on Monday.  It all depends on how professional investors and retail investors react to the news.

It is very likely that the news leaked out to Wall Street's professional investors just before we saw the 512 point drop of the Dow Jones Industrial Average on Thursday.  After all, S&P contacted the Treasury Department before the downgrade, and it would have been pretty easy for the news to have filtered out to Wall Street traders before the downgrade was publicly announced on Friday evening.  If the news had already leaked, and had been incorporated into the stock market's valuation, then Monday may not be a down day for the stock market.

But don't discount the power of retail investors (those who do not manage money professionally, but instead manage their own money, work for a living and have not been keeping up with the possible implications of the debt ceiling deal) to make a statement of their own.  If they were caught unawares, it is quite possible that this contingent will make its feelings known on Monday.  If this is the case, we can expect a drop in the stock market averages, perhaps a big one.

Right now, I am preparing my shopping list for when the time will be right to invest the cash in my client accounts that is now sitting on the sidelines.