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Shifting East
New York: August 03, 2009
By John Stephenson

The stock market has been giving up some of its strong gains lately, leading some of us to wonder if we've come too far too fast. Perhaps; but the economic news from around the globe is starting to look a little more encouraging, coaxing nervous and shell-shocked investors back into the stock market. And that has led to some pretty hefty gains over the last four months in the world stock market indices. It seems as if the good times may be here again for the global economy and that has investors cautiously optimistic.

And the optimism does not seem to be misplaced. In the U.S. , for the first time since the beginning of 2007, a composite index of residential real estate prices in 20 major American cities was stable, rather than falling. Industrial production is beginning to grow again in Japan , South Korea and China and consumer confidence is beginning to build.

But while the worst of the crisis may have passed, it is becoming increasingly hard to see where U.S. economic growth is going to come from. The most recent bull market was driven by stellar earnings from the financial services sector which grew to represent more than 40 percent of U.S. GDP by the end of 2007. The global economic crisis has decimated the earnings power and reputation of the American financial titans that so dominated the U.S. economy.

The leadership group from the bull market of the 1990s was technology companies. Today, Microsoft stands alone as the only U.S. technology company that has a monopoly, but now its revenues are starting to drop and growth is nowhere to be seen.

A bitter fight to pass health care reform is underway in the U.S. Congress and net household equity is dangerously low. And further erosion in house prices could leave millions more Americans owing more than they own. State and local governments are in their worst shape since the 1930s and the situation is likely to get worse as Washington continues to offload fiscal responsibilities on the states.

Economic growth in America will be hard to come by in the next few years. Government debt is likely to keep piling up as tax revenues continue to plummet and the demands for social assistance increase. Over-borrowed consumers who have just watched open–mouthed as Detroit has sputtered and their own economic futures have clouded will be reluctant to spend. Corporate America , who has just escaped from a near-death experience, will be the only segment of the U.S. economy in the position to spend and that won't be nearly enough to add meaningfully to the growth rate.

But the rest of the world is beginning to grow again. The Canadian dollar has moved from 86 to 92 cents per U.S. dollar in just the last twenty days. China , has continued to post solid economic growth throughout this crisis, with its most recent economic growth clocking in at north of 7.8 percent.

With weakness at home and strength abroad, America 's contribution to global GDP has shrunk from 28 percent to 21 percent of the total over the last year. The percentage of U.S. stock market capitalization to world stock market capitalization has also fallen, as America 's markets have weakened. Ultimately what will finally pull the U.S. out of its economic slump is strong economic growth everywhere else in the world.

If Asia is to lead and America to follow, then it seems obvious that investors should be buying shares in mining and energy companies—companies that produce the commodities that a growing Asia will be demanding.

And while commodities are often dismissed as being too volatile and cyclical, copper has held in at more than $2.50 a pound and oil at over $65 per barrel in spite of the persistent economic weakness. When demand begins to grow again, commodity prices are sure to move sharply higher, benefitting the fortunes of investors that own shares in resource-oriented companies.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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