Money & Business
China Finds a Sexier Place for Its Dollars
China's $3 billion investment in Blackstone, one of the world's largest private-equity firms, raised eyebrows—and questions—on Wall Street last week. Why is the Chinese government jumping on the private-equity bandwagon at the same time Beijing is trying to rid its own stock market of irrational exuberance? Is this a sign that China intends to use its financial muscle to gobble up U.S. firms?
Of course, if China really wanted to make a fast buck, it would simply plow its massive savings into Chinese stocks. They have soared more than 60 percent over the past year, although former Federal Reserve Chairman Alan Greenspan said last week that he feared a "dramatic contraction" in the Chinese market. China's nonvoting stake in Blackstone is really part of a global search for more lucrative parking places than U.S. treasuries for its more than $1 trillion in currency reserves—most of it in dollar-backed assets. As China buys American ($46.9 billion in net new investment in the first three months of 2007 alone), Japan and Europe (excluding the United Kingdom) have pulled a net $42.1 billion out of this country—and out of U.S. dollars.
Place Your Stock Bets—and Don't Count on Consumers
Just about everyone on Wall Street knows it has been a fool's bet to wager against the American consumer. No matter the crisis—war, terrorism, economic slowdown, or debt—households have found a way in recent years to keep on spending. But with key family budget items—food, gasoline, and medication—collectively up 11 percent in the past year, betting against the consumer now seems profitable. Merrill Lynch economist David Rosenberg says that shares in traditional consumer industries like apparel, home improvement, and specialty retail are down 5 percent on average this year. By comparison, the Dow Jones industrial average is up about 8 percent year to date. A recent survey of money managers found that more investors are going light on consumer stocks in their portfolios. "It's a strategy to be maintained," Rosenberg says. So, where to invest? Two sectors that are less consumer oriented are technology and healthcare.
The Pension Marches Toward Full Retirement
It's too soon to tell what the full impact of the Pension Protection Act of 2006 will be, but one thing seems sure: The drumbeat to get rid of traditional guaranteed pensions will only get louder. According to the consulting firm Watson Wyatt, only 58 companies in the Fortune 100 offered new workers a traditional pension at the end of last year. That was down from 63 in 2005 and 90 in 1998. Meanwhile, the number of large U.S. firms that offer employees only a 401(k) or similar savings plan—in which the worker assumes all the investment risk but can control where his money is going—has shot up to 42, from 10 in 1998.
The Fed's Thinking
How long this nearly five-year-old bull market survives may depend on how soon the Federal Reserve Board begins to lower interest rates to spur the economy. And how quickly the Fed trims rates will depend on how concerned the nation's central bankers, including Chairman Ben Bernanke, are about rising prices. This week, Wall Street will get a sense of the Fed's anxiety level when the minutes of its May policy meeting are released. Economists and investors will scour the report for any clues that Bernanke and company are satisfied with the current level of core inflation—in other words, inflation for all goods minus food and energy. Some analysts are hopeful. Bob Doll, vice chairman of the investment management firm BlackRock, says "the combination of slower economic growth and easing inflation should prompt the Federal Reserve to begin cutting interest rates before the year is out."
The Big Number
Though the stock market is rising, it's clear the economy is slowing. How much will become more evident this week, when the Commerce Department is set to revise its preliminary assessment of first-quarter growth in gross domestic product.
This story appears in the June 4, 2007 print edition of U.S. News & World Report.
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