Jim McCaughan: Invest in Companies Whose Business Is in the US

Monday, 24 Sep 2012 08:04 AM

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U.S. stocks represent attractive long-term investments right now despite many profit warnings issued by companies such as FedEx, Intel and Norfolk Southern in recent weeks, said Jim McCaughan, CEO of Principal Global Investors.

The global economy is cooling and uncertainty abounds, especially in Europe, where a debt crisis continues to run its course.

In China, the pace of growth has disappointed and sparked talk of a fresh round of rate cuts and other measures to jolt the Asian giant’s economy.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist. 

Uncertainty tends to send investors parking their money in the U.S. dollar and U.S. government debt, as the greenback is a liquid asset that is ripe for investors seeking safe haven, despite paltry returns.

Thus, the dollar strengthens, and a strong dollar will benefit many big U.S. companies that depend heavily on the domestic market for business.

“The fundamentals of U.S. business, innovation, technology and improving productivity are enough to justify most of the returns this year,” McCaughan told CNBC.

Richard Bernstein, CEO of Richard Bernstein Advisors, agrees, adding that multinationals in demand early this year and late last year are hurting today due to their exposure abroad.

“That international exposure is coming back to haunt all these companies that were out telling everybody that that was their avenue of growth,” Bernstein told CNBC.

Companies focusing on the United States stand a better chance of succeeding.

“I don’t think the mainstream realizes yet that the rest of the world is in much worse shape than we are,” Bernstein added.

“Corporate profits in the rest of the world are abysmal compared with the U.S.”

Logistics firm FedEx recently cut its profit forecasts and warned of slower business for the rest of 2012 thanks to sluggish demand abroad.

“[W]eakness in the global economy constrained revenue growth at FedEx Express during our first quarter and affected our earnings,” said chief executive Frederick Smith, according to The Associated Press.

The Federal Reserve recently announced plans to stimulate the U.S. economy with a fresh of bond purchases from banks, a monetary policy tool known as quantitative easing (QE).

Since the 2008 financial crisis, the Fed has rolled out three rounds of QE, under which the U.S. central bank buys bonds held by banks, pumping liquidity into the financial system in a way that drives down interest rates across the broader economy to spur recovery.

The first and second rounds saw the Fed buy $2.3 trillion in mortgage-backed securities and Treasury holdings from banks.

The recently announced third round will see the Fed buy $40 billion a month in mortgage-backed securities on an open-ended basis.

QE tends to send stock prices gaining, and investors will keep their eyes on the U.S. for a while.

“Since QE3 was announced, the focus has backed off of Europe and onto the U.S. economy,” said Joe Bell, senior equity analyst with Schaeffer’s Investment Research, according to CNNMoney.

“This week, there will be a lot of focus on data to get a feel on whether the economy is improving at all.”

The U.S. government will release its final read on second-quarter gross domestic product this week.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist. 

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