Profit From the Global Boom
The stock market is trying hard to ignore the negative headlines at home. Surveys of investors and consumer confidence suggest that the U.S. economy may be sinking towards recession, dragged down by declining housing values and the plunging dollar. To understand the market's potential to weather the clouds, take a look at the multinationals.
IBM (symbol IBM) and Boeing (BA) don't just run computer systems and build airplanes. They're driving a shift in stock market psychology from fearful and grumpy a few weeks ago to confident today. It's no surprise that shares of both companies rose after they reported first-quarter results in late April. The IT software and support business is healthy, and airlines the world over are making money (for a change) and have the wherewithal to buy new planes.
But there's more to these developments than two important companies reporting nice numbers. What their reports signify is that a growing proportion of the sales and profits of U.S. companies comes from the lands of euros and yen and even Brazilian reais and Russian rubles. For the 30 companies in the Dow Jones industrial average, 48% of revenues originate outside of the U.S.
Because of the weakness of the greenback, those overseas revenues get translated into growing piles of dollars. And that, in turn, allows many companies -- and the market -- to endure lackluster business conditions at home and still watch their stocks move higher. It even has investors who are worried about the housing slump and the subprime mortgage disaster acknowledging that there are other, positive economic stories. "There's a Gulf Stream of trade surrounding the U.S.," says Jim Swanson, chief investment strategist for Massachusetts Financial Services. Swanson thinks housing problems may slice as much as one percentage point from the U.S. economy's growth rate. But he's not bearish, and corporate America's ability to generate strong profits overseas is one of the reasons why.
Zach Karabell, chief economist for Fred Alger & Co., says the global growth theme "manifestly augments the bottom line in U.S. companies. And, anyway, what is American? What's global? We're definitely focused on that theme."
IBM is one of the beneficiaries of booming foreign economies. IBM noted that although first-quarter domestic and Latin American revenues were up only 1%, sales in Europe and the Middle East grew by 13% and in Asia by 10%. Overall earnings for the quarter were up 12%, helping to push the stock past $100. IBM also raised its quarterly dividend from 30 cents to 40 cents a share and announced that it would buy back more of its stock. But the strength of the underlying business, the source of the cash that pays for the dividends and the buybacks, lies outside the U.S.
The same one-world footprint is true at companies as different as Deere (DE), Gilead Sciences (GILD), Illinois Tool Works (ITW) and Praxair (PX). All have seen double-digit share-price increases so far in 2007 and are likely to perform well for the rest of the year.
In sum, it's ludicrous to think that the number of foreclosed homes in Las Vegas carries more clout among investors than the participation of great U.S. companies in booming economies around the globe.