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Monday, September 11, 2006

As Goes The US, So Goes The World & A Look At Rising Expenses Of Corporations

By Yaser Anwar, CSC of Equity Investment Ideas

Many investors are hopeful that the global economy can comfortably withstand the unfolding U.S. economic slowdown.

History suggests otherwise. U.S. import demand correlates very closely with the U.S. economic cycle, indicating a significant further weakening of U.S. import demand lies ahead, even assuming the U.S. experiences a soft landing.

Companies are having to deal with higher costs for such things as raw materials, energy and health care. Many are trying to pass those on to customers by raising prices, but that doesn't always work.

Depreciation expenses are also beginning to creep higher relative to sales as companies, which have been somewhat careful in their capital outlays, decide once again to plunge money into those investments.

While the consumer-products manufacturer has been able to raise the price of such things as bathroom tissue and paper towels, the prices of its personal-care items fell 1 percent in the first quarter partly because of a price increase that didn't stick. Late last year, rival Procter & Gamble Co. rolled back price increases on diapers, forcing Kimberly-Clark to follow suit.

There is also a strong correlation between U.S. import demand and world exports; the implication is that weaker U.S. import demand will exert a clear restraint on global export activity.

There have been 13 consecutive quarter of double-digit earnings growth for the S&P 500 index. Since 1950, there has only been one other instance of that happening, the fourth quarter of 1992 through the fourth quarter of 1995, according to Thomson.

The bottom line is that slower U.S. economic growth heralds a moderation in global growth as well, the signs of which are just beginning to emerge.

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