October 4, 2007 - 'Decoupling' Is a Popular Bet; That's the Rub

It's increasing clear that the U.S. isn't any longer the sole engine of global growth- that other economies have, in effect, decoupled from it. For U.S. investors looking to cut exposure to a weaker U.S. economy, the key is to find companies that benefit from global growth and avoid those that are domestically focused or have big exposures to the housing market. Strong global demand makes energy and basic-materials companies obvious between, particularly since oil and raw materials are good hedges against a weakening dollar. Industrial companies with big overseas sales, such as Boeing and Deere, also make sense, as do most technology firms. On the other side of the ledger, department stores, media companies, restaurants and other so-called consumer-discretionary companies could get hurt by a slowdown in the consumer spending at the same time that they see some of their costs driven higher by the global boom. Many regional banks and other financial companies are getting hit by mortgage troubles. Firms with exposure to housing are in the worst straits. There's a big hidden risk here. When so many investors place bets on the same idea - no matter how good it is - even the slightest bit of unexpected bad news can inflict widespread pain as everyone tires to unwind those trades.