What Will Happen to the Export Engine?

Many investors for the past year or two have been gravitating to the companies who sell many products overseas. The export boom has driven the earnings of many global companies based in the United States. As the U. S. economy has weekend, those companies have stood tall and outperformed their domestic only brethren. Is the party over?

Economic trouble and the financial crisis have finally reached across our borders as financial institutions have required government bailouts in countries such as the United Kingdom, Germany, Belgium, Netherlands, Luxembourg, Italy, and Ireland. I am sure there are others that are having problems also but it is clear that Europe is following the slippery slope of the United States.

The Federal Reserve has been consistently injecting liquidity into the financial system as a means to unlock the illiquid credit markets and in order to stimulate lending amongst banks globally. Mr. Bernanke's European counterparts have been acting in concert to provide additional liquidity. It seems clear that the next move could be a coordinated drop in interest rates. Will this help? It is hard to say but it won't hurt. The scare of triggering inflation has been mitigated by the sudden collapse of commodity prices and the Fed is likely to let rates ratchet down to zero.

Corporations who have depended on that export demand to drive their businesses are likely to see some revenue softness in the next few quarters. Of course their bottom lines may not decline as much in the short-term as they benefit from lower commodity costs but in time, earnings will also slow. The stock market may appear cheap to many experts but if a global recession ensues, earnings projections will be cut, and stock prices will continue to fall. It is important in these declining markets to maintain sufficient liquidity in treasury bills and notes to be able to take advantage of the many opportunities ahead. If you are buying stocks in this volatile market, don't buy a full position right away. Buy a little at a time as the price declines and only buy well capitalized companies with plenty of free cash flow.