Move out of both the US and Canadian Dollar?

Sometimes, you've got to recognize good fortune and take advantage of it. Other times, you've got to move to avoid trouble.

For my blog readers, who seem to be mostly a mix of my fellow Canadians, and my "American Cousins" (yes, I really have some), it seems to be a time for both.

Firstly, the Canadian dollar is now trading at high levels, and just today punctured levels not seen since the currency starting floating in 1970. In other words, a modern era record high. So it may seem unusual that now is the time I'd begin suggesting that it's appropriate for my fellow Canadians - likely with much of their wealth invested in Canadian companies - to begin looking outside the country.

However, while I fully expect that the currency may well continue its climb, prudent investing requires re-balancing, particularly when something has appreciated dramatically. A once in a 37 year event (record high currency) qualifies.

So, I'd suggest that many of you start looking at ways to diversify at least some of your investment portfolio outside of Canada. While this might hurt returns over the short term (no one can really "call the top" of any currency assent), it looks to me to be a prudent move over the longer haul. In other words, buying international assets when they look cheap to us.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

Secondly, for my American Cousins, unfortunately, I wouldn't recommend getting more heavily into US assets at this time. Let's face it, the American fiscal situation is a mess, with the national debt at unprecedented levels (roughly $27,000 per person) and projected to continue growing, and many Americans themselves hampered by heavy -unprecendented really - levels of personal and mortgage debt.

Combine these twin bombs of debt, personal and federal, with many recent announcements by central banks the world over that they intend to reduce their holdings of US currency, and where do you think the currency is headed?

Or perhaps another way to put it would be: Do you really think you're smarter than the these central bankers who are leaving the US currency like a plague?

So, to both my fellow Canadians and my American cousins, I think that now is a good time to begin looking at other internationally-denominated investments. Reducing exposure to your Canadian or American assets at this time seems prudent, and likely to boost long-term returns.


JW

The Confused Capitalist

WallSt.Net Podcast

Welcome to everybody from WallSt.net who came over here because of the podcast interview with Dennis Olson (Haven't heard it? Go here; it'll be on their site on Wed. Aug. 15th). Thanks to Dennis and WallSt.net.

This posting is essentially related to some stuff I talked about on the podcast.

Firstly, anyone interested in buying my book can go here.

Secondly, in terms of some of the stuff I talked about in the podcast about why this blog is a bit different than many out there, I mentioned specifically, dividend investing, and long-tail investing. Here's a couple of articles I've posted that kind of give you a bit of the flavor of these topics, here, here and here. And for those who know me and my bent towards value investing, I re-submit this evidence ...

Now, in terms of stuff I specifically recommended (either avoiding, or moving towards) ...

AVOID

Real estate stocks, especially home-builders (see the reasons why, in an article I wrote in my other life) and avoid sub-prime lenders; the first for three to five years; the second for two plus years. Pessimism after that will be prevalent and then would be the time to buy. There's still too much optimism in the market.

BIG BANKS

Conversely, the really big banks are getting tarred with the "sub-prime" brush, which isn't warranted, in my view. Many of these institutions are tremendously strong, with great balance sheets and will easily weather this storm, and perhaps come out of it with better than ever opportunities. They're also paying great dividends right now, and most have raised their dividend recently. This is another sign that they are probably being mis-priced in the market. Some to look at would include:

• CITIGROUP - yielding about 4.6%



• Wells Fargo - yielding about 3.4%



• Bank of America - yielding about 4.6%



• Wachovia - yielding about 4.6%



• US Bancorp - yielding about 5.0%

Of course, those risk-takers might wait for the next mini-plunge which, if it occurs, might raise these yields by another 50 to 100 basis points (i.e. prices might fall by another 10-20%). However, I think they're good enough deals as they sit. Don't delay too long on these folks - "on sale" today!

EMERGING MARKETS
Emerging markets remain a very-long-term theme that investors will be able to successfully play for a decade at least (provided the stocks don't get overpriced). On a purchasing power parity (PPP) basis, these economies currently account for about 20-25% of world trade, yet most conventional financial advisers suggest a 5% weighting or so. This is a serious backward-looking mistake. No investor with a 20 year horizon can afford to take such a light weighting in these strong growth markets.

While the conventional BRIC countries have been bandied about as "the" emerging country investment destinations, other countries also have strong profiles too. A personal favourite of mine remains South Korea, with nearly an "emerged" economy, yet very cheaply priced.

Here's some ways to play the emerging markets theme, via ETFs, in my personal order of preference:

• Wisdom Tree's ETF - "DEM" - a dividend-weighted emerging market ETF. This ETF should prove more resilient than many emerging market investments during market corrections, while retaining most of the upside during exuberant bull markets.


• The Claymore Investments ETF - "EEB", which is designed to provide exposure to the BRIC countries, through ADRs. Because ADR issuers tend to be large, liquid companies, this also reduces some risk.


• The iShares S.Korea ETF, "EWY" - a narrow singly country focussed ETF.


• The iShares Emerging Market ETF, "EEM" - a very broadly-based emerging market ETF.

AGRICULTURAL COMMODITIES

I think this sector is going to have a huge tailwind going forward, something I've written about here. In later postings, I'll elaborate on how to play this trend.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!


INFRASTRUCTURE BUILD OUT

This is tied in with several other trends, including the re-building of the industrialized world's infrastructure to make it greener (using mass transit for instance, to replace the crappy aging stock of roads and bridges).

Also, the infrastructure build out in the emerging markets is something that's going to continue to occur during the next several decades. For instance, the Chinese GDP per head is about 1/4 of what it is in the US (on a PPP basis), while in India it's about 1/10 (PPP basis). These economies will also obviously be building out their infrastructure. Accordingly, I like some of the very large manufacturers, like General Electric ("GE") & Siemens AG ("SI"), but I especially like the engineering firms that'll obviously be beneficiaries of the design and over-sight work needed here. Some names in this sector include:

• Fluor Corp. - FLR


• Foster-Wheeler - FLWT


• Jacobs Engineering - JEC


• Stantec Inc. - SXC


• SNC Lavalin - SNC (on Canada's Toronto Stock Exchange)
  

Well, that's about all for right now - if you're new to the site, feel free to poke around. If you're a regular, thanks for coming by.

JW

The Confused Capitalist

Analysts "Hot Buys" falling way, way behind their "Dump It" stocks

Back in March, here and here, I detailed two model portfolios, one of which analysts said was going to underperform, while the other portfolio was the subject of numerous "strong buy" analyst recommendations.

As originally suggested, these look like they have turned into valid contra-indicators, with the "strong buy" portfolio, now displaying an average loss of -20.0% (similar median loss), and with only 4 of the stocks having any type of positive return. (Prices measured at market close on Friday Aug 11, 2006)

On the other side of the coin, the underperform portfolios, both in the Canadian and US versions, have both produced a positive average return. This has amounted to an average gain of +5.6% (median of +5.7%) for the Canadian stocks, and +3.7% average (+7.5% median), for the US stocks.

This again suggests that "value" stocks remain consistently underestimated, even (especially?) by professional analysts. (Follow link contained here and here to see possible reasons why).

Makes one wonder why they'd have any money in almost any conventional mutual fund, (with a few notable exceptions [Bill Miller, Marty Whitman, etc.])? Next time your broker trots out the "strong buy" recommendation, it's OK to leave the room screaming,

No, you'll never take me alive ... or my money ...

JW

The Confused Capitalist

The Tortoise and Hare Portfolios

Back in mid-March, I profiled two model portfolios, based on aggregate analyst recommendations. One, nicknamed "The Tortoise" portfolio, was designated by analysts as an "avoid" situation, while analysts were universally effusive in their praise of "The Hare" portfolio.

At the time, I suggested that those rankings could well be reversed in the real world: that is, the Tortoise Portfolio could well outperform the Hare Portfolio.

I recently checked in on them, and as of May 24, here's how they've been doing:

• The US Tortoise portfolio: -5.5% (Benchmark S&P500 [via SPY] -3.7%).

• The US Hare portfolio: -10.9% (Benchmark Nasdaq Index [via QQQQ] -6.1%)

I guess I'd have to give this one to the Tortoise to date; although both lost against their respective benchmarks, because while the Tortoise lost 48% more than the benchmark, the Hare lost 78% more than it's respective benchmark.

• The Canadian Tortoise portfolio lost 1.1% over the same time frame, compared to it's benchmark, the TSX/SP60 index (via XIU) which had a loss of 6.2%.

So, to date, the Tortoise portfolios are beating the Hare portfolio. We'll check in again later to see how they're all doing.


JW

The Confused Capitalist

Analysts say this portfolio will underperform

It's a given that almost all stocks that analysts follow have a "buy" or "hold" rating. For instance, in work done by the The Globe and Mail's Rob Carrick, of the 500 S&P stocks, only four could be found that had a consensus "sell" rating. Only a single S&P500 stock garnered a consensus "strong buy".

So with the idea that these "strong buy" or "sell" ratings could be an indicator of future outperformance (academic work has shown that, on average, "sell" rated stocks outperform the broader market), the S&P500 and Nasdaq stocks that have garnered a consensus "sell" rating are presented, together with their stock symbol and closing price at March 16:

• Aether Holdings - AETH - $3.27
  
• Creative Technology - CREAF - $7.29
  
• Dillards - DDS - $26.43
  
• Eastman Kodak - EK - $29.27
  
• Ford Motor Co. - F - $7.93
  
• General Motors - GM - $22.22
  

The first two are Nasdaq-listed stocks, while the later four form part of the S&P500.

And for our Canadian readers, there a similar analysis of the S&P/TSX composite yielded the following TSX listed-stocks:

• Advantage Energy Income - AVN.UN - $22.95
• InterOil - IOL - $15.99
• Prime West Energy Trust - PWI.UN - $33.59
• Royal Group Technologies - RGY - $10.22
• Sobeys - SBY - $38.30
• Sears Canada - SCC - $17.85
• Tesco -TEO - $21.48
• Torstar - TS.NV.B - $22.85

With the exception of the energy-oriented Canadian companies, most of them appear to be in unloved industries - usually a deep-value investors first good sign! We'll follow this portfolio, euphemistically named "The Tortoise Portfolio", periodically to see how it's doing against the broader market.

Very soon in the future, we'll also present the opposite portfolio; one in which the consensus ratings are only "strong buys", which we'll nickname as "The Hare Portfolio". Due to the boosterism here, a few adjustments had to be made to whittle the list to a manageable amount. Stay tuned.

JW

The Confused Capitalist