Editor's Note

05/31/2007 12:00 am EST


Howard Gold

Founder & President, GoldenEgg Investing

Thursday, May 31, 2007

They say they don't ring a bell at significant market turns, but on Wednesday I could hear the chimes sounding everywhere from Shanghai to New York to Sao Paolo.

The Shanghai Composite index tumbled 6.5% after the Chinese government trebled the stamp tax on stock transactions (to a still-minuscule 0.3%). But after some early antsiness, other markets around the world brushed themselves off and continued to rally.

Here in the US, the Dow Jones Industrial Average set yet another record, while the Standard & Poor's 500, the bellwether for large US stocks, finally surpassed its previous peak scaled in the last days of the dot.com boom.

And that's key: this time was different from late February, when a somewhat larger drop in Shanghai sparked a global selling panic (including a 416-point one-day slide in the Dow)-for two reasons.

First, this big sell-off, unlike the first one, was no Shanghai surprise. A correction in the mainland Chinese markets was the most widely anticipated event since the resignation of Tony Blair as British prime minister. Everyone from Alan Greenspan to Hong Kong billionaire Li Ka-Shing to a gaggle of Chinese government officials had warned about it.

But more importantly, this disconnect between China and the rest of the world may mark the end of an era when world markets all moved in tandem and US stocks acted like the caboose rather than the locomotive. 

As I've written here and here, I expect lagging US blue-chip growth stocks to make up for lost ground and be one of the best-performing asset classes over the next couple of years. (That's already happening: Wednesday's Wall Street Journal reported that the megacap Dow has beaten the small-cap Russell 2000 by two to one since the end of March.)

But as the recent Las Vegas Money Show at the Mandalay Bay Resort and Casino demonstrated, investors' perspectives may have changed permanently. International stocks, once an afterthought, are now integral to US investors' portfolios. Speaker after speaker recommended foreign stocks and exchange traded funds (ETFs) as readily as their US-based counterparts.

One reason that makes sense: it's a lot easier to buy shares of overseas companies today than ten years ago, and ETFs let investors invest in select overseas markets  (like Taiwan or Sweden) in a low-cost way.

American Depositary Receipts (ADRs), which trade on US exchanges, are available for most large and many smaller European, Asian, and Latin American companies. Some online brokerages like E*Trade now let Americans buy stocks directly in some overseas markets. In ten years investors may do that routinely.

This has all led to what John H. Christy III, editor of Forbes International Investment Report, has called the "borderless" economy: "companies happen to be headquartered in one country but do business all over the world," he said during a workshop at the Money Show.

Indeed, when Sony assembles a flat-screen television in Japan, the glass, liquid-crystal display and chips that may have come from all over the world. So, is that TV truly "made in Japan"?

And are Hyundai Sonatas manufactured in Alabama "Korean" or "American" cars? Maybe they're both-or neither. See where the distinctions begin to fade?   

Even the "bulls versus bears" debate at the Money Show, which I moderated, showed little substantive difference among the panelists on this issue. Bulls Louis Navellier and Joe Battipaglia both thought investors should have substantial international holdings, although bears Martin Weiss and Peter Schiff argued the point more vehemently.

Chalk it all up to globalization, which has been hit by a backlash recently but has significantly advanced this whole process. As markets and trade become freer, people in other countries have simply gotten better at competing with once-dominant US enterprises.

One recent example: the Financial Times reported last week that nearly 53,000 Asian students will sit for this year's Chartered Financial Analyst exam, versus 45,000 from the US, the first time that's ever happened. The CFA designation is the ticket of admission to analyst and money-manager jobs at leading global financial firms.

This has little to do with things like Sarbanes-Oxley and everything to do with the spread of knowledge and opportunity to the far corners of the globe.

Technology and the Internet have helped speed up the process, but we in the US shouldn't discount our own role in this. By advocating free markets and free trade and by our own success in putting those principles to work over the last couple of decades, we've set an example that others are trying to emulate. 

As I've said, I think we're at an inflection point where US blue chip stocks will be among the top performers again and overseas markets may lag. These cycles have occurred time and again in the stock market.

But it won't change the big picture: from now on, investors will live in an increasingly borderless world, and we should celebrate and profit from it.

Comments? Please email us at TopProsTopPicks@InterShow.com.

Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions expressed in this commentary are his own and do not necessarily reflect the views of InterShow.

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