Annoying Alan and what's that great sucking sound?

Hi, Friends,

This week the world’s markets were roiled again by Alan Greenspan, “Annoying Alan,” who said in a speech that China was heading for a “dramatic correction.” Of course, he’s right, and I chuckled that last week’s Sector Selector Review had discussed China over the weekend and came to the same conclusion. Maybe Alan’s reading our newsletter. 

In all seriousness, though, I’m happy that Alan can make millions on the lecture circuit, but think it would be prudent for him to understand that he can move markets and that perhaps some of the mumbling and arcane comments he was famous for as Fed Chief would also be appropriate in his new role as “Former Fed Chief.”

Maybe “Backstage Ben,” Ben Bernanke, the Current Fed Chief, needs to have a talk with “Annoying Alan” and remind him who’s really in charge.

But China and the foreign markets are symptomatic of the “great sucking sound” that’s going on in world capital markets today. Some years ago, Ross Perot made a run for President and in discussing NAFTA, the North American Free Trade Agreement, said that it would create a “great sucking sound” as jobs left America for foreign shores. And clearly, that has happened, and clearly, that is at least partially responsible for today’s “great sucking sound,” the unprecedented outflow of capital from U.S. capital markets.

In March, 2007, alone, U.S. investors bought $40.3 Billion more of foreign stocks and bonds than they sold, second only to December’s $48.7 Billion. The Investment Company of America reports that Americans bought a total of $160 Billion worth of stock funds last year and that a whopping 93% of those assets went to foreign stocks and mutual funds.

This outflow of capital weakens the dollar which boosts returns on foreign investments, and that leads to more investor enthusiasm and more money chasing these offshore opportunities. And this, of course, helps to explain why, over the last three years, the Dow Jones World Index is up 68% while the U.S. Dow Jones Index is up only 19%.

It’s no secret that international funds have been the place to be the last few years, and I’m happy to report that we have profited handsomely from this powerful trend. That trend seems to be still firmly in place, although short term weakness has clearly entered the market this week with Annoying Alan’s comments. It’s also no secret that one day China’s bubble will explode and that many American investors will get splattered in the explosion. Can anyone say “tech wreck?”

For us as sector investors, we will continue to follow the money, even if it doesn’t make sense from any point of view except for the power of mob psychology. The crowd is right until they’re wrong, and so we’ll be careful not to get overexposed to any one sector, no matter how attractive it may be. And when the worm turns, we’ll plan to be well on our way to other markets long before the rout makes headlines on CNBC.

This weekend, of course, is Memorial Day, and for us, as Americans, it’s a moment to honor our war veterans and fallen U.S. soldiers. Particularly this year, as the war in Iraq continues, it’s more important than ever for us to take a moment from our family gatherings and barbeques and peaceful days by the lake or ocean to honor our U.S. servicemen.

We’re in Carson City, Nevada, for a swim meet this weekend. We’re planning side trips up to Lake Tahoe and Virginia City with our young son, and our oldest is in California at a Speedo Grand Challenge Swim Meet competing against the national teams from Britain and several other countries.

Wherever your holiday weekend takes you, I wish you good memories and safe and happy times.

Till next week,

Your partner in prosperity,

John Nyaradi
Publisher
Wall Street Sector Selector
www.wall-street-sector-selector.com