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US Headwinds Force Investors to Look Elsewhere

Corporations are sitting on trillons in cash

Recent economic data showing a slowdown in manufacturing, a dip in retail sales and the lowest level of consumer confidence in the last 11 months all contributed to the Dow’s 260-point wipeout on Friday.

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Tom Grill | Photographer's Choice | Getty Images

Even before these numbers were released, I have been struck in recent weeks by how concerned investors, business leaders and economists were when I spoke with them. The reasons are the headwinds buffeting the U.S. economy, which I would say can be summarized as follows:

1. Business inventories: In the first half of this year, businesses were rebuilding their inventories after cutting back during the recession. Businesses now have the inventory but lackluster demand. As White House Office of Management and Budget Director Peter Orszag told me, some of that spending that drove growth in the first half of the year will likely dry up during the second half.

2. Europe’s debt crisis: There has been incremental progress in Europe, but the crisis is by no means over. Consumers in Europe are not spending (U.S. consumers have slowed their spending as well), and growth there remains anemic. I talked about this as well with Peter Orszag, who said that roughly 20%–30% of U.S. exports go to Europe, so a slow economy there is clearly felt in the U.S.

3. Unemployment: The unemployment rate has hardly budged this year, and I’m increasingly hearing companies say they are not going to add employees to the payroll when they know their expenses will be higher in 2011.

4. Uncertainty: Higher costs of employment are one thing if you know what they are going to be and can plan accordingly, but in many cases, it’s hard for businesses to get a read on just how much they need to account for. This is the situation on the heels of both health care and financial reform, and energy reform is also on the Obama administration’s agenda. Taxes are another question as some of the cuts from President Bush’s term are scheduled to expire at the end of this year, which affects not only individuals but businesses as well, especially small businesses.

5. Sitting on cash: Along those lines, corporations are sitting on roughly $1.8 trillion in cash right now, which is staggering. The key word here is “sitting.” They’re not doing much with it in because of what we’ve just discussed. Case in point: Intelrecently reported that it has nearly $18 billion in cash, about 60% more than a year ago.

When corporations do put cash to work, they are more likely to spend it international markets, and that is why global investing remains the story for investors as we begin the second half of 2010.

"I think the U.S. has its challenges and what we’re focused on is the world beyond the U.S., where we think that there are a lot of opportunities." -Wintergreen Fund, David Winters

David Winters, fund manager of the Wintergreen Fund , tells me in the new issue of my Wall Street newsletter that he has more international exposure (70%) now than he ever has, and he has been investing globally a long time.

“I think the U.S. has its challenges,” he told me, “and what we’re focused on is the world beyond the U.S., where we think that there are a lot of opportunities. The sentiment here has been so terrible, as you know, Maria, but the fundamentals of many of the businesses that we at Wintergreen have invested in are really quite good.”

The current headwinds in the U.S. along with robust growth in many other countries and the interconnectedness of our world have created a fundamental shift for investors, who now must consider opportunities internationally.

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