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US Economy Looks at Recession; Whilst China Consumer Boom Takes Off

Economics / US Economy Sep 18, 2007 - 12:24 PM GMT

By: Money_and_Markets


Tony Sagami writes: If you watch much CNBC or read the financial newspapers, you probably noticed a small-but-growing stream of Wall Street experts forecasting a recession for our country.

Right now, economists put the odds of a U.S. recession at one in three. But, in my view, they might want to consider ratcheting up their forecasts …

Six Signs of a Coming Recession in the U.S.

#1. Our economy lost 4,000 jobs in the month of August and the share of the working-age population that reports holding a job — has fallen to its lowest level in nearly two years.

#2. Oil hit $80 a barrel for the first time ever last week. Other commodities, such as wheat, also hit all-time highs and are up 89% in the last five months.

#3. Gold also crept up to $709.60 a troy ounce despite last week's stock market rally; the metal has rallied for four straight weeks and is approaching its all-time high!

#4. The Commerce Department reported that retail sales rose by an unimpressive 0.3% in August. What's more, if you back out autos, retail sales would have actually dropped by 0.4%.

Economists see a 1-in-3 chance of a U.S. recession. Others are less optimistic …

#5. The National Association of Realtors reported that pending home sales plunged 12.2% between June and July. That's the worst one-month fall on record! Some 5.12% of the country's mortgages are also now delinquent, meaning the borrower is at least 30 days behind on payments. That's the highest in five years.

#6. The U.S. dollar is in a free fall. The euro just touched a new record high against the greenback, and Canada's currency is trading at its highest level relative to the dollar in 30 years.

I could go on and on about the fundamental economic problems.
And if you believe that stock prices follow earnings, you should also believe that earnings follow economic growth. So ask yourself,

Should the S&P 500 Be Trading at Fourteen Times Forward Earnings?

As you know, investors often assess whether a stock is cheap or expensive by its price-to-earnings ratio (P/E). And a multiple of fourteen might not sound that expensive at first glance.

However, you have to know two more important things:

First, that number is based on an estimate of what corporate profits will be in 2008.

Second, the current assumption is that corporate profits will increase by 11% next year.

Fat chance! Not only do I think that 11% is too optimistic, don't be surprised if corporate earnings actually drop in 2008. If I'm right, that will make the market go from reasonably priced to horribly overvalued right before your eyes.

The key, of course, is what happens with our economy. I just gave you six reasons why I'm in the pessimistic camp.

Of course, even in a less extreme case, there's very little disagreement from any corner of Wall Street that our economy is at least slowing.

Most of the experts are looking for low single-digit GDP — 1%, 2%, 3% tops. Those are hardly numbers to get excited about, and hardly any reason to believe in double-digit corporate profit growth.

Meanwhile, China's Economy Shows No Sign of Slowing Down Any Time Soon

The World Bank just raised its 2007 growth forecast for China from 10.4% to 11.3%. Of course, the World Bank is just catching up to reality as China reported a staggering 11.9% annualized growth rate last quarter!

According to the World Bank,

"China's macroeconomic prospects remain good.

"China is well-placed to deal with the possible impact of slower global growth. The impact on China from a credit tightening which we have seen in some of the other emerging markets [is] all fairly limited."

See, China has been able to avoid the subprime mess that's plaguing the U.S. right now. I've mentioned it before, but a full 83% of China's homes were purchased with cash. Moreover, the Chinese Central Bank said it doesn't own any subprime debt in its US$1.3 trillion of reserves.

What about concerns that a slowdown in the U.S. will hurt China's exports?

My answer: Sure, they're a huge chunk of the Chinese economy, but rising incomes and a growing middle class is fueling China's own consumer-driven growth engine.

In short, domestic consumption is starting to play a greater part in China's growth, and it's offsetting the country's reliance on foreign sales.

The proof is in the latest data. China's retail sales expanded at the fastest rate in more than three years! In August, retail sales rose 17.1% over the same period last year, and they were up by 16.4% on a year-to-date basis. So …

Figure Out What Chinese Consumers Are Buying, And You Could Make a Bundle! One Place to Look …

Ferraris are becoming a much more common sight in Beijing.

My #1 rule of successful investing for the next decade is "Get long whatever the Chinese are buying." One of those things is certainly high-end status symbols:

China bought 12% of the world's luxury goods last year.

It is now the third-largest luxury-goods-consuming country.

Through the first seven months of 2007, China's imports of luxury consumer goods skyrocketed 27.6% year-over-year, reaching US$4.85 billion.

That's almost $5 billion being spent on luxury cars, designer clothes, fashion accessories, and jewelry! And most estimates I've seen predict that China will become the #1 market for luxury goods within a decade!

Does that have some investment implications for you? Absolutely! And that's why my next trip to China is going to include a keen focus on which luxury retailers are doing the best there.

Sure, some U.S. companies — Tiffanys, Coach, Polo and Ralph Lauren — are doing very well in China. However, don't overlook the trendy European names, either.

Reason: Chinese yuppies are just as label conscious as American yuppies, and they gravitate toward names like Compagnie Financière Richemont, Pinault-Printemps-Redoute, LVMH, and Harry Winston.



Best wishes,

by Tony Sagami

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