It's Time for U.S. Investors to Grab a
Bigger Piece of the Global Growth Pie!

Today's comment is by Mike Burnick, Senior Editor & Global Markets Analyst and editor of Global Market Investor.

Dear A-Letter Reader,

Fast-growing emerging markets are in the spotlight again. In fact, the Fed's recent half-point cut in the discount rate and the prospect of more where that came from have the speculative juices flowing again in financial markets. As a result, emerging markets are outpacing U.S. stocks by a wide margin. In my view, they are likely to shoot even higher.

It's earnings season again on Wall Street, but expectations for S&P 500 firms call for just 1% or so growth from the same period a year ago. That's the worst earnings performance for the index since 2002. But the numbers would look even worse - in fact we would likely be witnessing an earnings recession in the U.S. already - if not for the fast-paced earnings growth at the overseas subsidiaries of S&P 500 firms!

Increased globalization means a growing share of U.S. corporate profits are coming from international markets, rather than domestic consumers and businesses. In fact, about 44% of the S&P 500's 2006 sales came from overseas markets, compared with just 32% in 2001, according to data from Standard & Poor's (S&P). That's a huge increase.

U.S. is a Shrinking Piece of the Global Economic Pie

Globalization is having a big impact on all-American S&P 500 earnings too - in a very positive way. You may not know this from reading Wall Street's slanted research, but profit growth for the blue-chip index actually peaked in 2004. It's also been drifting lower ever since, according to BCA Research.

If you examine national income data, you'll find that profits of "domestic based companies" rose by a paltry 4.2% in the four-quarters ended June 2007, while the profits of U.S. firms' overseas subsidiaries surged nearly 15%! This is just another sign that the U.S. economy is an ever shrinking piece of the global economic pie, as more dynamic emerging economies in Asia, Eastern Europe, and Latin America grow ever larger.

In fact, according to IMF data, the U.S. represented only 12% of global GDP growth last year. Emerging markets accounted for nearly 70% of the expansion in total worldwide output.

Economies in the developing world "grew at a blistering pace of 7.3% last year, according to the World Bank, compared with 3.1% growth in developed countries," reports the Wall Street Journal.

Faster EM Economic Growth =
Superior Market Returns

This gap of more than 2-to-1 in output growth enjoyed by emerging markets typically translates into more robust stock market returns as well. S&P forecasts economic growth in the U.S., Europe and Japan will advance just 2% to 2.2% next year. Meanwhile, Asia (not counting Japan) is expected to grow nearly 8%, emerging Europe is expected to grow 6.2%, and Latin America is growing almost 5% in 2008.

After slumping to barely 1% in the third quarter, S&P 500 profit growth should grow about 8% overall this year. Earnings growth is forecast to pickup to 12% in 2008. Let's just say I'm "highly suspicious" of that forecast in the aftermath of a U.S. housing market recession that has yet to find a bottom. I wouldn't be surprised to see low-to-mid single digit profit growth in 2008, if at all.

Meanwhile, emerging market earnings per share should expand nearly 14% in 2008, according to S&P. That's almost twice the 7.8% profit growth forecast for developed markets. Yet, in spite of this robust growth, developing markets still maintain an edge in terms of valuation.

The emerging market index, even after surging 35% higher so far this year, still trades at just 13 times 2008 estimated profits. The U.S. trades at about 15 times earnings, and other developed international markets are valued at 13.2 times next year's profits.

This obvious performance gap between fast-growing, attractively valued emerging markets, and stagnating developed markets, is only bound to increase going forward.

The Fed's easy-money policy, the slide of the U.S. dollar, and dimming domestic growth prospects will see to that.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: In November's issue of our The Sovereign Individual, Mike will be recommending a special exchange traded fund that gives you exposure to four of the hottest emerging markets on the planet. Look for this recommendation coming in your next issue. Don't receive our members-only newsletter? Try out a Sovereign Society membership today so you can read all about this dynamite ETF next month.

The Global Attack on the U.S. Dollar

For some time, I've been saying the U.S. dollar could get whacked by blows from both the Middle East and the Far East.

And now, it's starting to happen. Recently, Saudi Arabia has been backing away from its allegiance to the greenback, and now other countries throughout the Gulf - and Asia - could soon do the same thing.

Now, we're hearing even more rumblings from both fronts...

First, The Saigon Times just reported that the State Bank of Vietnam will no longer try to hold down the value of its currency against the greenback.

Until now, they've been buying dollars in large quantities. Now, they will probably stop.

Second, oil-rich Qatar said its US$50 billion Sovereign Wealth Fund (SWF) cut its dollar allocation by more than half - from 99% to 40%! Where did Qatar shift its state-controlled investment fund to? Into investments in China, Japan and other Asian countries.

Third, Iran announced that it will stop accepting dollars for its oil exports in the near future.

This move is not a surprise, but Iran's insistence on being paid in a "more credible currency" is starting to sound less fanatical every day.

With all this happening, no wonder the dollar keeps working its way lower and lower. Better start diversifying now - while you still can.

JACK CROOKS, Currency Director

EDITOR'S NOTE: This currency comment originally appeared in My Two Cents yesterday. Click here to receive all currency insights absolutely FREE.

Privacy & Rights

Don't Let Someone Steal Your Offshore Account

If you read the "fine print" when you open an offshore bank account, you'll likely find a clause similar to this one:

"The bank is entitled, but is not obliged to rely upon and act in accordance with any notice, demand or other communication...by any verbal, telephone, telegraphic, telex, or electronic message if believed by the bank to be genuine and to be presented or delivered by or on behalf of the customer, without incurring liability should it be false or there be any ambiguity therein...The bank shall not be liable for consequences of forgery unless such forgery should through observance of due diligence have been readily detected."

This clause, or one similar to it, immunizes the bank against a lawsuit if they mistakenly disburse funds you've not authorized.

How might this occur? One possibility would be if your bank statement is misdirected. Several years ago, for instance, I received a statement from my offshore bank. Only, it wasn't my statement - it was someone else's, with a much larger balance than my own. It's possible that with the name of the bank customer and his account number, I could have ordered a disbursement from that account to another account that I controlled.

Most offshore banks have sophisticated systems in place to prevent this from occurring. I don't know of any cases where a depositor in an offshore bank has been defrauded this way. But it's certainly possible - otherwise, offshore banks wouldn't include this type of disclaimer in their client agreement.

There are several precautions you can take to guard against this potential loss:

Establish a code word that must be provided to the bank before disbursing funds.
You can ask your bank to hold your bank statements, rather than mailing them to you.
Open a numbered account whereby you're identified only by a number and code word, rather than by your own name. (You must disclose your identity to set up the account, however.)

Instruct the bank not disburse funds unless you personally appear at the bank to authorize the disbursement. Instruct the bank not to disburse funds unless you send them written instructions with a signature guarantee from a notary.

Whether your offshore bank is willing to accept any of these conditions will naturally depend on its particular policy. The larger an account you have, the more willing the bank is likely to be to cooperate with you.

Forewarned is forearmed.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

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