Shares drop for products made in U.S.

Posted on Thu, Dec. 07, 2006

A nonprofit's study says imports are beating them in almost all engineered and industrial categories.
By Bob Fernandez
Inquirer Staff Writer

U.S.-made products are losing market share to imports across a wide range of core industries in the United States, according to a new study.

Among 114 product categories, U.S.-based producers boosted their domestic market share in only three categories between 1997 and 2005: heavy trucks and chassis, computer storage devices, and computer chips. Imports gained market share in 111 categories.

The survey from the U.S. Business and Industry Council, a nonprofit group in Washington of small and midsize manufacturers and a critic of U.S. trade policy, used Census Bureau data. The survey excluded inexpensive consumer products found in Wal-Marts, Targets and dollar stores. Toys, clothing, sporting goods and other products in those retail stores are typically blamed for the soaring trade deficit.

Instead, the study focused on industrial and engineered products, such as wireless equipment, plumbing fixtures, tire cord, navigation and guidance systems, power boilers, and heat exchangers.

Alan Tonelson, a research fellow at the council and author of the study, said yesterday that the study showed that the United States "is failing to pass the test of global competition." He said the country appeared to no longer be a place where many manufacturers want to invest in advanced factories.

A spokesman for the National Association of Manufacturers, the main trade group for manufacturing companies, said yesterday that there was a "mixed picture" for U.S. manufacturers and dismissed Tonelson's study as too pessimistic. "Manufacturing is still the heart and soul of the U.S. economy," spokesman Hank Cox said. U.S. manufacturers are losing market share, but the entire market is growing, allowing them to expand, Cox said.

"To be sure, U.S. manufacturing companies have a lot of problems," Cox said. "But to have Alan Tonelson and Lou Dobbs running around waving a bloody shirt, saying 'we've been sold down the river' does not help." Dobbs, a CNN commentator, has criticized U.S. trade policy.

The last recession pounded the manufacturing sector, causing it to shed about three million jobs. Profits at U.S. manufacturing companies have rebounded modestly in recent years. But job losses from earlier in the decade appear permanent, as factory employment has remained stuck at 14.3 million to 14.4 million since mid-2003.

"The reality is that until there is a change in the trade situation, there won't be new manufacturing jobs," said Daniel Meckstroth, chief economist with the Manufacturers Alliance, a nonprofit educational and business-research organization. The group is free-trade-oriented.

Meckstroth said the number of U.S. factories declined every year between 1997 and 2005, falling to 334,700 from 374,600. Meckstroth said he expected the factory level to stabilize this year. He said the nation's trade deficit as a share of the economy, now at about 6 percent, is unsustainable.

Many economists have said a weaker dollar might help manufacturing companies. But Tonelson said he believed import penetration rates would keep rising even when the U.S. dollar was weak. "Anyone who thinks that a major U.S. devaluation will be a cure-all for U.S. manufacturing is really kidding themselves," he said.

Tonelson also said it was unlikely that U.S.-made products were capturing a higher share of foreign markets, which would offset losses at home.

"It does not make sense to suppose that U.S. products are doing better in foreign markets than in their home U.S. market," Tonelson said.

Contact staff writer Bob Fernandez at 215-854-5897 or bob.fernandez@phillynews.com.

Expect 20 hedge funds to collapse each year, warns FSA

The Times December 09, 2006

Patrick Hosking, Banking and Finance Editor

Call for more information on fees
Promise to look at relaxing rules

Day of the locust

More than 20 hedge funds are likely to collapse each year, the chairman of the Financial Services Authority predicted, as he called for more transparency from the industry.

Sir Callum McCarthy said that the failure rate of hedge funds was relatively small at 0.3 per cent, but, with 8,000 funds worldwide, “we might expect slightly over 20 to come to collapse this year”.

The chief City regulator called on the industry to provide more information on fees, redemption penalties and other opaque areas before plans to open it up to small investors.

It was “increasingly anomalous” that UK retail investors were prevented from investing in funds of hedge funds, he said, promising a consultation early in 2007 to relax the rules.

Referring to the implosion of Amaranth Advisors, the American hedge fund that lost its investors about $7 billion (£3.6 billion) in September after being wrongfooted by naturual gas prices, Sir Callum said that investors had been undaunted by its failure. He said that the FSA was relaxed about hedge fund failures as long as there was no danger to the stability of the financial system. Addressing fellow regulators in Germany, Sir Callum tried to diffuse German hostility to hedge funds, arguing that demonising the industry was to miss the point.

Hedge funds were converging with so-called traditional fund managers and many banks, brokers and insurers were already carrying out trades indistinguishable from hedge funds.

In an oblique reference to one senior German politician’s famous attack on hedge funds as “locusts” two years ago, Sir Callum said: “Luckily. . . I am a regulator and not an entomologist.”

Sir Callum called for hedge fund managers to spell out details of their fee structures. Typically they charge 2 per cent of funds under management plus 20 per cent of profits. Yet the true cost to investors is often buried in complex conditions governing hurdle rates of return and allowable expenses.

“Any hedge fund manager, like other asset managers, should disclose these clearly to potential investors,” Sir Callum said.

They should also fully disclose redemption arrangements, including the existence of so-called side letters, documents conferring favourable terms on some investors. There also needed to be more detail on valuation procedures, a controversial area for hedge funds that often own illiquid assets for which there is no market price. Sir Callum said there was “potential for dishonesty” in valuing complex instruments like collateralised debt obligations and catastrophe bonds.

Ageing bull

Buttonwood

Dec 7th 2006 | NEW YORK
From The Economist print edition

With few places left to turn, investors have pinned their hopes on the stockmarket

ROCKY is returning to American cinemas this Christmas. And the financial markets increasingly resemble Sylvester Stallone's ageing pugilist: they may get knocked aecout a bit, but they always seem to bounce back.

In recent weeks disappointing economic data have pointed to the possibility of an American recession in 2007. The dollar has weakened sharply, raising the spectre of the complete collapse that bears have been predicting for years. And on December 4th Pfizer, the pharmaceuticals giant, saw its share price plunge after yet another drug failed the testing process (see article).

But the stockmarket has rolled with the punches. And other asset classes have been similarly buoyant. The spreads (extra yields) on corporate bonds and emerging-market debt are low by historical standards; commercial-property valuations in America and Britain are high.

The general explanation for this bullishness is that the world is flush with liquidity. But liquidity is one of those catchall phrases that is not as good as it sounds—a bit like saying “there are more buyers than sellers”, which is itself a cliché of dubious merit (for every buyer who makes a trade, there must be a seller).

What does appear to be clear is that investors are happy to take on risk and eager to buy any asset that offers a higher yield than government bonds. And even those investors who do worry about the American recovery, or about political risks in the Middle East, have to think twice before they sell. The corporate sector is still increasing profits and churning out cash in the form of dividends and share buy-backs. Every Monday seems to bring news of a mega-merger; on December 4th, it was the combination of Bank of New York and Mellon Financial (see article). Potential bid targets from the private-equity sector get larger and larger (the latest tittle-tattle is about Home Depot, worth over $100 billion if you throw in debt). Why sell your shares if someone might be willing to buy them tomorrow at a 20% premium?

As for the dollar, the reason to worry would be if a falling currency prompted foreign investors to demand higher yields on American Treasury bonds to compensate them for the risk. That might really push America into recession. But it is not happening so far; yields have been falling.

All this adds up to what Jim Cramer, the hyperactive pundit of American financial television, describes as “one of the best markets I've ever seen.” Bulls are talking about double-digit stockmarket returns in 2007, thanks to a combination of stockmarket rerating (higher price-earnings multiple) and growing profits.

So what might spoil the party? One problem, as the producers of the Rocky series know only too well, is that sequels are subject to the laws of diminishing returns. Once bond spreads and property yields are low, there is no longer much scope for further capital gains.

That is why investors' hopes are pinned on the stockmarket in 2007; share valuations are only at historically average levels. But company profits are at a 40-year high as a share of American GDP. If profits were about to revert to the mean, share multiples should fall below average.

The bulls do not think that will happen soon. But whereas one more year of above-average profits growth is possible, three or four more are hard to imagine.

Clearly, the use of borrowed money to enhance returns (often referred to as the “carry trade”) means that the markets are vulnerable to a change in sentiment. When the trend changes, as it did in May, there will be a mad rush for the exits. As Bill Gross of Pimco, a bond giant, writes: “I have a strong sense that the ability to lever any or all asset returns via increasing leverage is reaching a climax.”

Timing, however, is notoriously difficult. Bears can point to low share volatility, as measured by the Chicago Board Options Exchange's VIX gauge, as a sign of investor complacency. But it may merely be that investors have seen no need to incur the costs of insuring their portfolios against loss.

The markets will thus need some sort of shove to push them off today's course. Higher unemployment would be one possibility: it might turn the housing-market correction into a rout. If the nuclear dispute with Iran were to escalate so that, say, the straits of Hormuz were blocked and crude jumped to $100 a barrel, investor confidence would take a hit.

But predicting such events is more in the realms of astrology than financial punditry. Sceptical fund managers have been forced into a position of being “fully invested and scared as hell.” The knockout blow will undoubtedly come (probably in the credit markets). But just like the Rocky franchise, bull runs on financial markets have a habit of going on much longer than most people expect.

Dr Doom

Ask the expert

Published: November 30 2006 17:03 | Last updated: December 5 2006 16:23

Marc Faber is one of the great contrariarn investors of our times. Nicknamed Dr Doom, Mr Faber has often stood against a tide of bullish sentiment, forecasting difficult times ahead. He also has long been a champion of the potential of Asia and a critic of the structural economic problems facing the US and Europe.

A follower of long-term cycles, he believes the world is seeing such a marked seismic shift in the in the global centre of gravity eastwards that even relatively short-term investors must appreciate its import or lose out.

Through his Gloom, Boom, Doom subscriber newsletter, the Thailand-based Mr Faber also has been a long bull on gold as investment, drawing on trends stretching as far back as Napoleonic era.

Mr Faber answers questions on the outlook for financial markets, which countries he prefers for investment, the prospects for the dollar, how high gold prices will rise and whether the commodity cycle has peaked.

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Does history offer any guides as to how US stocks would react to a sudden and severe drop of the US dollar? How would their prices react in real terms, given that they are denominated in dollars?
Mike Kruger

Marc Faber: I suggest you look at Latin America in the 1980s. We then saw weak currencies, rising inflation, rising equities in nominal terms and a collapse in gold and dollar terms.

You should read The Economics of Inflation by Bresciano Turroni.

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If asset prices have been inflated due to lax monetary policy and debt levels have ballooned then how will this translate into goods inflation if the economy in the US slows down?
Jelena Jovetic, London

Marc Faber: Consumer spending will eventually slow down a lot in real terms, however, if there is eventually money printing, goods inflation will pick up via the weaker dollar and rising import prices and wages.

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Could you share your thoughts about recent large scale IPOs of large Chinese state banks including ICBC and CCB. Do you see an investment opportunity in them for the long term investor.
Mesut Ellialtioglu, Istanbul

Marc Faber: Banking potential is huge in China, Vietnam and India. Prices are already high but banks look attractive long term.

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This time last year you were recommending investors should buy Volkswagen shares and gold. What are you recommending today?
Charlie Jeffries, Paris

Marc Faber: I still like precious metals and farmland.

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In your previous market commentary you mention that the most likely next bubble candidate is Asian property. Can you run through your ideas on Asian property? What is your view on rubber?
Clara Lee, US

Marc Faber: Rubber should recover. Asian asset prices, stocks and property could be the next big bubble, but in the case of property this may be years away - except property in financial centres, which are vulnerable to financial market downturns.

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Will Asian governments do anything about continued environmental degradation, or is the sacrifice in terms of GDP simply unacceptable,despite the increasingly obvious longer term negative implications of ignoring the problem. Thailand is implementing new controls to try to stem the rise of the THB. This follows on almost a decade after the imposition of controls, to prevent the THB from weakening during the Asian crises. Capital controls then did not work and it seems unlikely they will work now. Can the THB and other Asian currencies return to levels last seen prior to the Asian crises?
Chris Moser

Marc Faber: Asian currencies can rise against the dollar to pre-crisis levels if the US prints too much money and Asian central banks pursue tight money policies, which I doubt they will.

The environment has been destroyed by the US and the west - not by Asia.

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With all the world’s stock markets breaking out to new highs, should we not be happy and confident that the good times are going to continue?
John Little, Pembroke Pines, FL USA

Marc Faber: Not necessarily - remember 1929. Also, in gold terms most markets are way below previous peaks.

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Going forward, do you expect that agricultural commodities may be the only asset class that are not positively correlated with the financial markets? What weighting of agricultural are you recommending?
Theo Zhang, Sydney

Marc Faber: Everything is now correlated, but agricultural land is less so than other assets. Weighting really depends on an individual’s financial position.

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After the coup in Thailand, you were still lukewarm about the performance of stock market. How do you foresee the SET performance in 2007. I would also appreciate your views on Taiwan if the US economy slumps.
Lionel Desjardins, Canada

Marc Faber: I think Thailand offers some value but it isn’t an outstanding investment opportunity. Taiwan should for now perform. Further into the future I am less sure about it.

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With the probability of recession in US increasing, how do you think it will pan out for indian equity markets? Also, where do you see Indian markets heading three to five years down the line?
Ajay Mattoo, Bangalore, India

Marc Faber: India is closely correlated to international financial markets. When markets peak out, the Indian market will be very vulnerable. In three to five, who knows?

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Do you believe in technical analysis for stocks?
Lise Anderson, Stockholm

Marc Faber: It is a tool, which I use, but it has little forecasting ability.

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How low will oil prices go during the coming recession?
Don Martin, California

Marc Faber: If Mr Bernanke prints money - and he will - then energy prices may not decline but rise. But they could rise less than say precious metals. It would be wrong to assume that a weak economy implies automatically lower inflation - see Latin America in the 1980s.

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What is your outlook for the UK and US housing sector? What forces besides interest rates drove the overheating of these markets - how might they play out from here? Also, will the utility sector retrace its gains? Will the US economy go into a slump?
Alex Limion, Toronto, Ontario

Marc Faber: In real terms, housing prices will decline. Most likely also in nominal terms for a while until money printing starts in earnest.

Utilities will correct, but with rate increases they should be OK. The US economy and global economy will eventually slump but amidst money printing markets they may still rise - even in a slump.

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Do you believe the yen carry trade is a big deal? Might a strengthening yen become self-propelled as shorts get squeezed out like dominoes? What assets might be affected? Could we see a perverse market action like a declining dollar, but longs in silver and gold being squeezed out by the yen movement? Or is the current run-up, especially in silver, perhaps on better foundations on this go-around?
Anon

Marc Faber: I suppose that the yen carry trade will unwind one day when global liquidity becomes tight. Since all asset prices rose between 2002 and the present day, all asset prices will then suffer. Then money printing by the Fed comes in and leads to high inflation and a weak global economy. Precious metals will then perform “relatively” well.

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Even if inflation does not pick up, does not the continued proliferation of excess currency reserves (and the accompanying unwillingness of most countries to let their currencies appreciate) imply that precious metals will continue to be a ‘safe’ haven against all this excess world-wide liquidity?
Don Benson, Johannesburg, South Africa

Marc Faber: Correct. The only “currency with integrity” are precious metals.

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I am looking to make a major commitment towards the raw material sector, both career-wise as well as an investor. Would you be kind enough to share your view on the raw material cycle in general and the cycles of the sub-sectors being energy, industrial and precious metals and finally soft commodities.
Ralph E. Guyot, Zurich

Marc Faber: Energy is likely to continue to rise for a long time, especially with the US or Israel likely to bomb Iran in the future and rising geopolitical tensions.

I also like precious metals as the US has no other option but to print money.

I suppose that commodities have an inverse correlation with the intelligence of US presidents - this will assure a very LT bull market!

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What are your predictions for the dollar/euro exchange rate and the dollar/gold price by the year end 2007?
Peter Seilern, London

Marc Faber: I am not so sure dollar will collapse against Euro. However, I suppose dollar is in a well entrenched bear market against gold that will last a long time under Mr. Bernanke!

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I have been an IFA in Latin America and my girlfriend now a currency and commodity broker here. What do you think she should advise her clients as far as weightings between foreign currency and commodities and share trading? Should I advise my clients to look seriously at the shorter term market opportunities or go long haul in gold and Asia. My instinct tells me renewable energies look a good bet. Do you agree?
Chris Green, Cyprus

Marc Faber: This all depends on client’s objectives and their personal financial position, risk appetite and so on. I suggest she focuses on Asia and on precious metals. All energy related investments look attractive again right now.

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How do think the potential gains for gold compare with the potential gains for silver for US investors?
Wayne Holloway, Lenoir City, TN

Marc Faber: Silver is likely to out-perform gold both up and down. It is easier to store a ton of gold than a ton of silver.

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What do you think is behind the current re-acceleration of the major falls (more than 50 per cent) in most Middle Eastern stock markets this year, and what are their wider implications?
Paul Hodges, London

Marc Faber: It shows that markets can decline even amidst excessive liquidity.

Of course Middle Eastern markets were hugely over-valued a year ago. They may bottom out soon, but new highs are out of the question.

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If the US goes into recession and both the dollar and base metals go down, will base metals drag gold down with them or will gold go up because of the weak dollar?

Marc Faber: I suppose that when the recession is underway, there will be massive interest rate cuts and that inflation will actually accelerate. Weak dollar, recession but rising gold prices.

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The US government is running an annual budget deficit of approximately $700bn. At what point would investors look as the accumulation of debt and demand additional yield?
Jack Brown, UK

Marc Faber: The budget deficit is less the issue than the weak dollar. It is difficult for me to see a weak dollar and still declining yields! I think one of these days interest rates in the US will start to rise and then continue to rise massively over time. The US government is a threat to world peace and to the world’s economy.

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With the vast amounts of capital sloshing around in the market place and how quickly it (and information) can move around global markets, have some of the traditional cyclical rules of thumb changed? For instance, do commodity bull markets still last for 20 year periods? Or are the boom-bust cycles more susceptible to shorter time periods?
Marty Sartin, Nottingham, NH

Marc Faber: Good question. I suppose that with excess liquidity and money printing by central banks, everything needs to be measured in “real terms” or gold terms. As such the LT cycles may still be in place but they are obscured by money printing in nominal terms.

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You have said that an investor have to read newspapers for four hours a day. Do you have other good investment advice?
Janne Karlsen, Copenhagen

Marc Faber: It is important to know one’s limitations and decide on a strategy. For example, I prefer to buy depressed value stocks rather than chase every story that is the flavour of the month. However, I concede that by following a strict strategy some opportunities are lost.

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Which market in the world do you think is the most unstable and overpriced currently? What is your view on the impact of a rapidly falling dollar on the world stock market? Lastly, your view on the world economy and stock market in 2007?
Siong Ket, Malaysia

Marc Faber: Real estate in financial centres and art seems to be very over-priced.

Dollar declines - US assets rise. European stocks will become pricey as a result of the strong euro.

In a world where we do not know how much money central banks, especially the Fed, will print it, is impossible to make predictions. Expect stock markets to peak out soon, then decline, with aggressive interest cuts in the US to follow.

This will lead to a weaker dollar but possibly a strong stock market recovery. Eventually the money printing game will no longer work, but when?

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How long will it take the real estate bubble (residential) in the US to deflate? In addition, will the commercial real estate sector suffer as well?
Patricio Morat, Charlotte, NC

Marc Faber: In real terms it may take several years. Commercial will also be affected

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The minutes of the Bank of England monthly meetings and quarterly inflation reports consistently refer to the growth in the money supply in abstract terms - in a way that implies that it is not under their control. I am sure that my economics A-level course taught that central banks explicitly control the money supply. Which is correct? Are the BoE simply implying that the rampant money supply growth of recent years is not their doing?
Stephen Peacock, St Neots, UK

Marc Faber: I am not sure central bankers know any longer what “money” is. However, they should be able to define tight and easy money. Tight money is when credit growth begins to decelerate meaningfully. And this has not yet happened.

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You say Asia is good for investment . As a potential investor in property -apart from doing due diligence on what marketers of new developments enthuse about - do you have any preferences on overall country opportunities between say Philippines, Thailand, Vietnam and Cambodia? I have been reading up a little on the WTO and Cambodia, imagine it is similar in the other places and would appreciate any insights you have in general.
Ian MacDonald, London

Marc Faber: I like Vietnam the best, but I am sure there are also excellent opportunities in the other countries you mentioned.

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Background

“I go to lots of conferences where I still hear how we Americans and Europeans will do the smart jobs and the Chinese will assemble Nike shoes and the Indians will do call centres,” Mr Faber told the FT earlier this year.

The Swiss-German Mr Faber, who runs the eponymous fund management firm, believes this is misreading of history and the extreme complacency of Western elites astounds him.

“I can’t understand why so many investors are still grossly underweight in Asia. You can have a rich family with a billion dollar portfolio and they might have nothing in India,” he said.

GloomBoomDoom.com

Copyright The Financial Times Limited 2006