Global Growth Will Improve the Consistency of U.S. Corporate Earnings Growth

Existing home sales and the consumer confidence index were reported Tuesday; both were terrible and the Market went up. But behind the headline number, financial stocks and retailers got whacked and the metals and materials (global growth) stocks did very well--continuing a trend that has been in place for some time. We observed earlier this year that we didn’t see how the Market indices, especially the S&P, could advance without a significant improvement in the price action of the financial stocks (since they are about 25% of the total weighting of that Average). Indeed it those precise mathematics that explain why the DJIA has achieved new heights (financials are a small percentage of this Average), while the S&P has struggled in its trading range since 2000.

I am an amateur when it comes to technical analysis but I do listen to guys who spend all day worrying about these things; and my point here is that it is the opinion of those guys that this kind of dichotomy in Market performance among industry groups usually resolves itself by the industry groups that have been performing well declining versus the industry groups that have been performing poorly rising. In other words according to this analysis, our recent sales (Sell Half transactions) in Smith International, ConocoPhillips and ExxonMobil and our purchases in the financial and retail sectors (Citigroup, Merrill Lynch, Schwab, Federated Investors, Walmart) seem right on.

I know that such an investment strategy may sound somewhat contradictory to my enthusiastic embrace of the global growth thesis; but it really isn’t. My point with global growth is that it will improve the consistency and rate of growth of US corporate earnings. I still believe that is the correct analysis. However, the above point is one of valuation--because so many investors have accepted this thesis, they are driving stock Valuations to unjustifiable levels.

I also know that this seems at odds with owning gold.

In my opinion, the point of owning gold is not to benefit from rising global demand from industry or consumers, but rather investor demand driven by the geopolitical consequences of the aggressive expansion of radical Islam and the economic (inflationary) consequences of a potentially more liberal political agenda (higher taxes, higher spending, more regulation, protectionism) in the US.