5 global stocks for a gloomy market

By Jim Jubak

All the trends are running against U.S. stocks -- except one.

However, that one, global money supply, is the 800-pound gorilla of global financial markets. And with an already-rising tide of global cash set to rise even more -- not to mention another interest-rate cut likely Wednesday -- this is a good time to place some modest bets on growth stocks despite a plethora of bad news.

I don't advise going out on a limb here because another piece of bad news might be enough to saw it off. I want growth stocks with enough profile to attract momentum money in case we do get an end-of-the-year rally, but I also want a strong enough company-specific growth story to keep a stock afloat even if the flood of cash isn't enough to support prices across the board.

And I'd like each of these growth stocks to have an overseas angle, since I think the U.S. stock market and economy will continue to be the most challenged in the world for the next six months or longer.

I called my Sept. 11 column "Growth stocks for pessimists." I haven't gotten more optimistic since then, so let's say these five equities are growth stocks for even-more-pessimistic pessimists.

Where the cash is

No one has to go looking for bad financial news right now. It's everywhere: oil prices rising, home sales falling and massive losses at banks and brokerages leading the way to what could well be the first quarter of negative profit growth since the fourth quarter of 2001.

You have to really dig to find the good news for stocks. But if dig you do, you come up big. Thanks to the crisis in global debt markets, thanks to soaring oil prices and thanks to continued huge trade surpluses in China and elsewhere in the developing world, the financial markets are awash in cash.

Let's count the money:

• In the United States, the Federal Reserve shows M2, the broadest measure of the money supply that the government still tracks, grew at an annual rate of 6.7% from September 2006 to September 2007. That's $465 billion in new money.

• In Europe, M3, a broader measure of money supply still tracked by the European Central Bank, climbed at an annualized 11.6% rate in August. That's 875 billion in new euros, or about $1.25 trillion U.S., added to the money supply.

• China, of course, makes everybody else in the world look like models of monetary prudence. M2 in China grew at an 18.5% annual rate in September. That's 6.2 trillion yuan, or about $815 billion U.S., added to the money supply.

• And I haven't counted Saudi Arabia, Russia and the rest of the oil-producing world, or the new money being created in the other export economies of the developing world.

Why is this growth in global money supply important to stock prices? Because growth in the money supply, above what's needed to fund economic growth, winds up inflating the prices of assets from stocks to Shanghai real estate to Spanish condominiums, as well as the prices of goods and services in the general economy.

An outflow of money

Nothing guarantees that assets in the United States will get a proportionate share of that global cash. After all, the prospect that the U.S. dollar will continue to fall in value is hardly an inducement to overseas investors. A falling dollar reduces the value of their investments once they're translated into their local currencies. And the meltdown in the U.S. debt markets has been, well, immensely damaging to U.S. financial stocks.

As of Oct. 24, the troubles at Merrill Lynch (MER, news, msgs) had sent shares down $32.50 from their June 1 price and destroyed $27.8 billion in shareholder wealth. At Citigroup (C, news, msgs), the stock-market loss to shareholders since June 1 was $67.6 billion.

Think that's enough to scare overseas investors and keep some of that cash at home? You bet. Foreign investors sold a net $70 billion in U.S. securities in August, during the worst of the subprime-mortgage panic, according to the U.S. Treasury. That was the biggest outflow since 1990.

So while I believe that the supply of global cash is hefty enough to lift all stock-market boats, the U.S. boat isn't likely to float to as big a gain as other markets. In fact, the U.S. stock market may be dead in the water because so much bad news centers on trouble in the U.S. debt market, the U.S. financial sector and the U.S. economy. And that means I'd like to find an overseas connection in any growth stock I buy now.

Continued: 5 stocks to consider

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