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React And Adapt

“I join the pessimists,” writes Retirement Planning Guru Paul Terhorst. “I have little faith that the United States can turn things around. I predict a sluggish U.S. economy for years to come.

“However, I’m beginning to think that even if the U.S. economy fails to recover any time soon, the U.S. stock market should do well.

“To put it another way: I’m beginning to see a disconnect between Main Street and Wall Street.

“On Main Street some 18 million people lack the jobs they want. Many have fallen behind on their mortgages. Those mortgaged homes are often worth less than the balances on the loans. Main Street seems to be going nowhere.

“But on Wall Street we see record earnings. Stocks have risen dramatically since the lows of March 2009. Future earnings look bright, and stock prices should move up as earnings improve even more.

“So how do companies manage to make more and more money doing business on broken-down Main Street? They don’t. Rather, American companies look overseas.

“Within the next five years, the S&P 500 companies could get as much as 70% of their earnings from overseas.

“Take Wal-Mart as an example. Wal-Mart has reported declining same store sales in the United States for eight quarters in a row. Yet Wal-Mart’s earnings improved every quarter. That’s mainly because Wal-Mart makes more and more money abroad. Thanks to a weak dollar, those overseas earnings translate into big bucks in the U.S.

“I also suspect Wal-Mart milks the U.S. business; they view it as a cash cow. So even though Wal-Mart sells less, they wring more profits out of each dollar of sales.

“Other American companies look overseas, too. Think Microsoft and Intel, Exxon and General Electric, Procter and Gamble and Colgate. So what if demand in the U.S. weakens? Look for sales in Brazil and Mexico. So what if U.S. labor costs go up? Hire people in Vietnam. So what if the U.S. economy implodes? Sell more into the booming economies of China and India.

“If I’m right–if the disconnect between Main Street and Wall Street holds–stocks should do well even if Main Street stays in the dumps for a while longer.

“We’ve seen this disconnect before, in other parts of the world. England at the beginning of the last century led the world in standard of living. The sun never set on the Empire. London controlled worldwide financial markets that profited hugely from U.S. expansion. All roads led to London.

“Over the succeeding hundred years the English economy self-destructed.

Today England is like a movie set…lovely to look at and photograph, but missing the productive guts.

“Still, the English stock market over those hundred years did extremely well, rising 287 times after dividends and inflation. Economy bad, stocks good.

“I can think of other reasons for the stock market to go up, too. For example, the Fed has flooded world markets with liquidity. All that cash must eventually drive up stocks and other asset classes. Also, individual investors have largely pulled out of this market. When they decide to get back in, their fresh money will drive prices upward.

“The formula I suspect we might see becomes: lousy economy, great earnings, great stock prices. Beware of concluding that, just because the U.S. economy looks to remain weak, the stock market will fall. Recognize that economic growth and stock prices can go separate ways in both the short and long term.

“Stocks over the long haul continue to look attractive.

“If we published this article in the main stream press, readers would write in to denounce American business. Managers who look overseas to improve earnings would be called heartless, money-grubbing, insensitive, unpatriotic, and more.

“For sure we’d hear calls for government action.

“But you and I know better. You and I know that to stay in business companies must ferret out new profit sources. If Starbucks makes better money selling coffee and dairy products overseas, Starbucks invests overseas.

“Businesses and investors–you and I–react and adapt. Government action would only make things worse.

“The world we live in looks messed up for sure. Our hearts go out to those who have lost their homes, their jobs, their savings, and their sense of well-being. We can only wonder what will become of the American way of life.

“But in the meantime, as I said, we react and adapt.”

Kathleen Peddicord

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