Investing Ideas

Background
Municipal Bonds also known as Munis’ are Bonds issued by State and Local Governments who use the money to finance projects. The payments for these Munis are made from the taxes they collect. It is extremely unlikely (but not totally unheard of) for a Municipality/City/State to go Bankrupt and stop making payments on their Bonds. Most municipalities have credit rating that are relatively low. If they had a higher credit rating they would have to pay lower interest rates on the money they borrow. To get a higher credit rating for their bonds the government entity issuing the bonds can insure them with a AAA credit insurer aka a Monoline insurer. Once insured with a AAA credit insurer the bonds receive a AAA credit rating and have to pay much lower interest rates.

How the subprime mess has affected Muni’s
Most of the companies that provided insurance of Munis also started insuring CDO’s (Collateralized Debt Obligations). The companies have to pay the mortgage companies if the homeowner fails to pay and the house sells for less than the cost of the loan. As everyone has read/heard, there are an unprecedented number of people who are unable to make payments on their house. House prices are down and the mortgage companies are losing money. This in turn means that when they cant recover the original loan the Monoline insurers have to make payments. The market feels that the amount of payments that some of these companies need to make to cover the CDO obligations will leave little capital left to cover the obligations of the Insured Munis. Since the feel that the Monolines wont have money left to pay for insured Munis they are treating the Munis as if they are uninsured.

Whats the opportunity
As I mentioned earlier it is very rare for a government entity issuing Munis to go bankrupt. Another thing is that the interest from Munis is not taxable at the Federal level. If you buy Munis that are issued by entities in the state you live in the income is exempt from state taxes as well. Because the income is not taxed at Federal level and sometimes not taxed at state level, Munis usually have lower yields than US Treasury’s. The reason being that after tax a Muni yield of 6% is similar to a 8% yield that gets taxed at 25% income tax rate.

Here are some examples based on data when i wrote this

US Treasury Yields - 6 Month - 1.56%; 2 Year - 1.55%; 5 year - 2.49%; 10 year - 3.6%
Pimco California Municipal Income Fund - PCQ: 6%
Pimco New York Municipal Income Fund - PNF: 5.4%
Pimco Municipal income Fund - PMF: 6.4%
Individual California Muni Bonds with maturity in the next 5 years

Note : With Managed Funds or Closed End Funds the value of the Fund can go down. Some funds are only allowed to hold bonds with a specific rating eg: A or higher. If the monoline insurers have their credit rating downgraded the rating of some of the bonds the mutual funds hold will also be downgraded and the fund manager may have to sell the Munis at a loss. It may be safer to buy individual Muni Bonds because you can decide to Hold till Maturity. This is not an option when you buy a fund since the fund manager makes the decisions to buy or sell.

Disclosure: I do not hold any Munis but I am considering buying PCQ or individual California Bonds.

Bookmark It

First lets get a few things out of the way.

1. Sears Holdings is a Holding Company and not a Retailer. The current holdings just happen to be 3 retailers.

2. Same store sales. There is no point in increasing sales if it leads to decreasing profits. Would you rather sell 10 items of clothing with $10 profit per item or would you sell 15 items of clothing with $6 profit per item? The fewer sales give a $100 profit v/s $90 profit from the higher sales. An increase in sales does not mean increase in profits and what counts is PROFITS.

Now that we have that out of the way lets value Sears Holdings

Sears Valuation

Sears Canada - Sears owns 70% of Sears Canada which is worth $2 Billion
Brands - DieHard, Kenmore,Craftsman could be sold in a Bond valued at $1.8 billion.
Lands End - Sears paid $1.9 Billion for Lands End in 2002
Home services
Real Estate - Sears is a 115 year old company. Some of its real estate was purchased before Walmart even existed. The real estate is carried on their books at the price they paid for it 10, 20 and possibly in some cases 50 or more years ago. It currently owns about 110 Million square feet of real estate. A lot of this real estate is in prime locations around the US.

• Sears Mall stores 518 with Avg Sqft of 134,000
• Sears Essentials/Grand 20 with Avg Sqft of 113,000
• Kmart Discount 139 with Avg Sqft of 93,000
• Kmart Supercentres 34 with Avg Sqft of 165,000
• Sears HQ - 2 Million Sqft + 200 Acres of land
• Warehouse and Distribution Centres - 15 Million Sqft

Total = 107.2 Million Sqft * 160 (S&P/GRA Commercial Real Estate Indices) = 17.1 Billion

This gives Sears Holdings a minimum Valuation of 22.8 Billion the company is selling for 14 Billion.
Liquidation Value of SHLD in my opinion is $164+/share.

Additional value that could not be calculated due to lack of sufficient data

• Sears Speciality - Unknown size of stores so counted as zero
• Sears also has extremely favorable leases on a lot of its other stores. They control about 150Million sqft of leased properties usually at below market rates. It could sell its leases or sublease these stores. But detailed data on the lease agreements is unavailable so this has also been counted as zero.
• Valuation for HomeServices and the actual Sears business is also counted as zero

Who else is investing in Sears?
Eddie Lampert - ESL investments
Bruce Berkowitz - Fairholme
Bill Ackman - Pershing Square
Bill Miller - Legg Mason Value

Full Disclosure : I own shares of Sears Holdings and am planning to buy more.

Bookmark It

Please investigate investment suitability and your own tax implications before investing in Royalty trusts. The details i have provided may be incomplete or inaccurate.

What is a Royalty Trust?
Royalty Trusts are natural resource companies that because of their company structure do not have to pay taxes at the company level as long as they pay out 90% or more of their earnings to shareholders. Canadian Royalty trusts pay very high dividends typically in the range of 10-20%. Canadian trusts (unlike US trusts) are set up to perform exploration and development and/or aquire new proporties to replenish their reserves. They are set up to operate indefenitely.

Whats this new Tax Rule I hear about and what effect will it have?
The finance minister has a proposal that starting in 2011 all existing trusts should pay corporate taxes.

If the proposal goes thru, in the 4 years till 2011 you will recieve back 40-72% of your investment in the form of dividends. While the company is paying out 90% of its earnings there is very little left to aquire additional reserves. After 2011 most of these companies will use the money to fund expansion of their resource base. The dividend payment will drop to about 3-5% because the companies dont need to pay out their income. However because of increases in reserves dividend payments in the future will grow at a much faster rate. If the proposal does not become law (the trusts are lobbying against it or asking for an extension to 10 years) companies will keep paying dividends at these high rates and the stocks will climb as dividend investors pour back in.

List of CanRoys

• Advantage Energy Income Fund (AAV) - 14.16%
• Baytex Energy Trust (BTE) - 10.75%
• Canetic Resources Trust (CNE) - 15.97%
• Enerplus Resources Fund (ERF) - 9.63%
• Harvest Energy (HTE) - 16.7%
• Pengrowth Energy Trust (PGH) - 15.06%
• Penn West Energy Trust (PWE) - 11.53%
• PrimeWest Energy Trust (PWI) - 13.11%
• Provident Energy Trust (PVX) - 11.46%

My favourite is Penn West Energy (PWE) the largest energy trust in North America. It is an exploration and production company which converted to a trust in 2005 to increase shareholder returns. I think the company can increase their production significantly without the need for additonal capital. It has 89% working interest in 4 million acres of undeveloped land which is suitable for oil and natural gas exploration and production. The management is also very good at making acquisitions. To top it all Murray Edwards who used to be chairman of PWE is still one of the biggest shareholders in the company. Since the company has a history of being an exploration and production company it should do well post 2011 compared with other energy trusts.

What about taxes?
The Canadian government applies a 15% non-resident withholding tax on distributions to U.S. investors. You can apply for a refund of a portion of the amount withheld. If you hold the shares in a taxable account (non IRA) then you can claim it on your US tax return as a foreign tax that you paid. You can claim the foreign tax credit on your 1040. The limit is $300.00 single or $600.00 filing jointly per year. If the amount is greater than what you can fill out on your 1o40 then you need to use IRS Form 1116. If your marginal tax bracket is over 15% you should get a full refund. If below 15% then you will only get a partial refund.

For more details check IRS publication 514 (You need to select the document from the list and then retrieve it)

Conflicts: I do not own shares in any of the companies mentioned but am considering PWE.

Bookmark It

For a founder of a company, the company is usually his/her life’s work. A legacy to leave behind. Its his baby. He/she remembers starting it with a small amount of money, remembers the difficult times, the growing pains. Founders are emotionally attached to their company and it would devastate them if the company ever failed. They will always make decisions that are in the best long term interests of the company. Unlike most managerial morons who are clueless about the company/industry, the founders are usually people that understand the company and the industry inside out. Founders are usually frugal and avoid unnecessary expenses or expensive stock options. They focus on keeping the company profitable, the customers satisfied and the employees happy. They generally stick to what they understand and avoid the dumb mergers and acquisitions that the managerial mercinaries from business schools seem to be so fond of. They take care of the company and the stock follows the growth in the business. Usually companies will significantly outperform the market when they still have their founders as the CEOs.

Here is a list of great companies run by founders.
Apple, Steve Jobs
Berkshire Hathaway, Warren Buffett
Capital One Financial, Richard Fairbanks
Carmax, Austin Ligon
Chesapeake Energy, Aubrey Mcledon
CostCo, James Sinegal
Echostar, Charles Ergen
FedEx, Fredrick Smith
Kinder Morgan, Richard Kinder
News Corp, Rupert Murdoch
Toll Brothers, Robert Toll
Whole Foods, John Mackey

Also watch Dell whose founder Michael Dell is back as CEO.

Bookmark It

One of the best places to get some great investing ideas is the 2nd Value Investing Congress which is in progress as i write this. The Value Investing Congress is a collection of some of the best and brightest value investors in the country. Most of the the speakers at this congress follow the Graham/Fisher/Buffett form of investing and will be sharing their best investment ideas.

This year the Speakers and their investment ideas are

I cannot guarantee the accuracy of the list above since im collecting the information from other articles and blog posts. The table above will keep getting updated as I find out which other investments have been recommended. Any help in gathering this information is greatly appreciated.

Thanks
Ameya Desigar

Bookmark It

Bill Gates the founder of Microsoft has often been described as “The best businessman in the World”. What made Microsoft such a successful company? It doesnt make the best products, it is not a true innovator either. The success of Microsoft is the business acumen of Bill Gates. So what is Bill Gates investing in? Most of his investments are managed through a Private Investment firm called Cascade Investments. There is no way to find out which private companies Cascade invests in but its relatively easy to find their investments in Public Companies because they need to buy so many shares that they usually appear in the top 10 shareholders of the company.

Here is a partial list of companies held by Bill Gates’ Cascade Investments

AGL Resources(ATG)
Berkshire Hathaway (BRK.A)
Canadian National Railway (CNI)
Costco (COST)
Fisher Communications Inc (FSCI)
Four Seasons Hotel (FS)
Grupo Televisa (TV)
Otter Tail Corp (OTTR)
Pacific Ethanol (PEIX)
PNM Resources (PNM)
Republic Services (RSG)
Scholastic Corp(SCHL)
Seattle Genetics (SGEN)
Six Flags (SIX)

Bookmark It

Every investor wishes he had bought Berkshire Hathaway shares 25 years ago. If you had $10,000 invested with Warren Buffett in 1982 the shares would be worth $1,280,000 in 2006. Berkshire Hathaway shares are undervalued at the moment and will have consistent and above average growth for years to come, but the law of large numbers dictates that the company is too big. You cant get the same 25-30% annual returns from Berkshire Hathaway anymore. We missed out on Berkshire Hathaway but we could look for companies that may turn out to be “The Next Berkshire Hathaway”.

What to look for in the search for the next Berkshire or Buffet

• Company is run by a Brilliant money manager(s)
• It follows value oriented investing
• The investments are diversified across industries so a downturn wont affect the business.
• Insurance backed so the company can use float generated with positive underwriting to create wealth. Free money is always good.
• High levels of Management ownership, which orients management goals with those of the shareholders
• Focus on long term growth of Shareholder value and not on keeping the dumb anylasts on wall street happy every quarter.
  

It will be nearly impossible to find a perfect match but we can look for companies that match 2 or more criteria.

1. Sears Holdings led by Eddie Lampert (SHLD).
Eddie Lampert started ESL investments in 1988 with 28 million. ESL has averaged 28% a year for the last 18 years. Eddie Lampert is one of the best money managers in the world. Recently he took a bankrupt K-mart and turned it into a cash cow. He merged k-mart with sears to form sears holdings. The stock has been on a tear since Kmart came out of bankruptcy, it opened for trading at $16 in May 2003 and now trades at $160. Eddie searches for companies that are seriously undervalued, he also sticks to companies whose industries he understands. The board has given Lampert the freedom to invest the profits from sears holdings any way he sees fit. Just as Buffett did with Berkshire Hathaway in the 60s. If any person will take over from Buffett as the greatest money manager of the current generation it looks to be Eddie lampert, and the vehicle through which he will reach there is Sears Holdings.

• Brilliant money manager(s) - Yes
• Value oriented - Yes
• Diversified - Not yet but board has given Eddie Lampert the flexibility to do so.
• Insurance backed - No
• Management ownership - Yes
• Long term growth - Yes

2. Brookfield Asset Management (BAM).
A canadian asset management company which focuses on industries that need lots of capital such as real estate, natural resources, energy and financial service. Assets include 70 office properties, 120 power-generating plants, thousands of acres of timber and a property development operation under the Brookfield brand name. The stock has moved from $8 to $50 in 5 years thanks to the brilliant investments its management has made.

• Brilliant money manager(s) - Yes but not in same league as Buffett.
• Value oriented - Yes
• Diversified - Yes
• Insurance backed - No - Brookfield uses low cost debt which is the next best thing to insurance.
• Management ownership - Yes
• Long term growth - Yes

3. Leucadia National Corp led by Ian Cumming (LUK).
Leucadia is an investment company run by two brilliant money managers Ian Cumming and Joseph Steinberg. The company invests in anything that can make the shareholders money. Their preferred investments are generally turnaround plays. Leucadia will buy large stakes in a distressed company. They revive the company, improve performance and then sell it off at a nice profit. The company is currently diversified into telecom, manufacturing, healthcare, banking, real estate and wineries.

• Brilliant money manager(s) - Yes
• Value oriented - Yes but riskier than Berkshire as Ian cumming seems to go for higher risk companies
• Diversified - Somewhat. Cumming occasionally likes to make extremely big investment bets.
• Insurance backed - No
• Management ownership - Yes
• Long term growth - Yes

4. Markel (MKL)
Markel is an insurance holding company. The company is a mini Berkshire any way you look at it. Extremely steady and consistent growth. Like Berkshire the company has never declared a split and the shares have risen from their 1986 IPO price of $8.33 to nearly $400 in 2006. The company holds diversified investments in a large number of stocks. The top 10 current holdings are Berkshire Hathaway, Carmax, Diageo, Fairfax Financial Holdings, Anheuser-Busch, General Electric, White Moutains Insurance, Citigroup, Exel Ltd, Brookfield Asset Management. Its funny how they seem to like Berkshire and other companies that look like Berkshire.

• Brilliant money manager(s) - Yes but not in the same league as Buffett
• Value oriented - Yes
• Diversified - Yes.
• Insurance backed - Yes
• Management ownership - Yes
• Long term growth - Yes

5. White Mountains Insurance (WTM).
This company has Buffetts blessings. White Mountains is 16% owned by Berkshire Hathaway. The way the company operates it seems to be another mini Berkshire. The operating principles, view of the management and their operating principles are an exact match with Berkshire.

Operating Principles - White Mountains cares most about the following.

• Underwriting Comes First
• Maintain a Disciplined Balance Sheet
• Invest for Total Return
• Think Like Owners

Other Excerpts - “Intellectually we really don’t care much about leaving our capital lying fallow for years at a time. Better to leave it fallow and to wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we just all went to play golf.”

“We also admire Benjamin Graham who said: “In the short run the market is a voting machine; in the long run it is a weighing machine.”

• Brilliant money manager(s) - Yes but not in the same league as Buffett
• Value oriented - Yes
• Diversified - Yes
• Insurance backed - Yes
• Management ownership - Yes
• Focus on long term growth - Yes

6. Interactive Corp led by Barry Diller - A Futuristic Berkshire Hathaway
Barry Diller (the CEO of IACI) says the comparison is “undeserved at present but not my hopes and dreams”. He also says that the web will help IACI fit its pieces together in a manner that Berkshire’s parts from Insurers to Manufacturing, just cant. IACI has sales that will reach 7 bilion this year and a ton of cash but the company trades at just 8.5 billion. The company is spread across a lot on industries including Retailing which includes Home Shopping network; Ticketing with Ticketmaster; Real Estate with Lending Tree, RealEstate.com and others, Online search includes Ask.com, Excite, etc..

I know IACI is a far stretch but the company is undervalued, has leading sites in their business segments a great CEO.

• Brilliant money manager(s) - Barry diller is an ok money manager but hes a brilliant CEO
• Value oriented - If theres such a thing as a value based investment on the internet
• Diversified - Yes
• Insurance backed - No
• Management ownership - Yes
• Focus on long term growth - Yes

Conflicts : I own shares of Berkshire hathaway and Interactive Corp.

Bookmark It

The video games industry is one of the fastest growing industries in the world. Its the creation of a new form of interactive entertainment. The industry is growing rapidly and will soon be bigger than the movie industry.

The “King of games”.
For years Nintendo was the king of video games, every competitor that challenged it was summarily demolished. The NES and SNES (Famicom in Japan) made Nintendo a synonym for video games. Their high quality in-house games and memorable characters like Mario, Zelda, StarFox, DonkeyKong started franchises that still sell games by the millions. Nintendo also introduced quality control of third party developers to made sure that customers had great games to play. As the video games industry took off competitors introduced competing consoles like Sega MegaDrive/Genesis, 3DO, Atari Jaguar, Sega Saturn, but they all failed because they didn’t have the games to back up the hardware.

The new kid on the block.
It was not until the PlayStation launch in 1994 by Sony that Nintendo faced its first true competition. The PlayStation was first to market. Sony introduced the CD format which had 10 times the capacity of a Nintendo cartridge which gave game developers creative freedom they never had on 32MB cartridges. The PlayStation was much easier to program than the N64 which helped Sony attract a lot of third party developers to PlayStation. When Nintendo released it Nintendo 64(N64), Sony already had a stranglehold on the market. What Sony saw was the creation of a new form of entertainment. The PSX has gone on to sell 100 Million units over 11 years and the PS2 surpassed that number in 7 years.

Two is company, three is a crowd.
Microsoft got its taste of the video game industry when it developed the operating system and development tools for the Sega Dreamcast. The growing video games market seemed to threaten the PC market which generated most of Microsoft’s revenue. The XBox was also a chance for for Microsoft to diversify it’s revenue stream, it joined the console wars in 2001.

What next?
The Next-gen Console wars are upon us. The competitors are Microsoft, Sony, Nintendo. The victor will receive control over a hundered million households.

Console Manufacturers
The money is made not in the hardware sales, usually consoles are sold at a loss. The profits flow in from licensing deals with software developers who want to publish games for the console. The more games that get developed and sold the higher the profit for the console manufacturer. The number of games developed and sold is directly proportional to the number of units sold.

Sony PS3 (SNE): The PS3 is a difficult release for Sony. Game developers like consoles to be positioned exclusively for gaming and not as media units. Selling a console as a media unit means game developers have no idea how many units were purchased for the purpose of gaming. Another risk factor for Sony is the price point, usually consoles sell for around $299-$399 at launch. At launch the PS3 will sell for $599-$699, agreed that it has a Blu-Ray player but the price is twice the XBox360. Sony lost the VHS v/s Betamax wars and is trying to win the HD-DVD v/s Blu-Ray wars. I’m afraid Sony may win the Hi-Def wars but lose the console wars.

Microsoft XBOX 360 (MSFT): First out of the block its projected to have 10 million units shipped before PS3 or Nintendo Wii make it to market. Improved production lines mean it will be able to cut prices when the new consoles launch, further improving unit sales.

Nintendo Wii (NTDOY): The new unique controller with motion detectors will provide a unique gaming experience. The Nintendo image of high quality kids friendly games will sell units to pre-teen audiences. Nintendo’s gaming franchises will also help sell a lot of consoles, especially in Japan. It wont win the console wars but it will be extremely profitable. Unlike Microsoft and Sony, Nintendo doesn’t depend on third party developers. It has the best game development unit in the world. The company can release a Mario, Zelda or Pokemon game and sell 5-7 million consoles.

Microsoft and Sony will sell more consoles but the video game revenues are a small part for both companies. As a pure play on video games Nintendo wins. Even without the console market Nintendo would do fine because its Game-Boy dominates the handheld market. The PSP isn’t even worth mentioning

Game Developers
As consoles improve independent game developers are closing down. Better hardware mean the customer expects better looking games. They want games that look as good as movies. The production costs of games are skyrocketing, with some games costing as much to develop as blockbuster movies. This has led to significant consolidation in the industry. The only companies that will survive are the big publishers.

Electronic Arts (ERTS): EA has excellent sports franchises which lets them publish sports games with minor tweaks every year that sell millions. It also controls franchises like The Sims, Battlefield, Medal of Honor etcetra that are million unit sellers. The best part about EA’s business is that it develops all games for all consoles, so it doesn’t matter which hardware manufacturer wins EA get its software sales.

Konami (KNM): The company that created the Dance Dance Revolution craze (I’m sure you’ve seen kids dancing on the floor-mats) has a lot of franchises like Metal Gear, Bomberman and Silent Hill, each of which will be made into multiple games for various consoles. The company posses a brand recognition in Japan that ensures its games will be blockbusters.

I like the consistency in earnings of Konami over EA. The majority of Konami’s revenue comes from console games but Konami also has some Arcade, Toy, Mobile and Casino gaming exposure that helps it weather the downturns in the industry at the end of each console generation.

Others: I do not like any of the other game manufacturers like Activision(ATVI), THQ(THQI), Atari (ATAR) and Taketwo(TTWO). They dont have the size, financial strength or game library/franchises that EA and Konami have. The one company i would love to own is Blizzard (Vivendi), too bad its not an individual company

Services
The only ones i know of are Shanda(SNDA), Netease(NTES) and The9 (NCTY). The companies provide services for On-line gaming and on-line communities. They’re just too risky.

Retail
Wal-mart and Best-Buy sell a lot of consoles and video games but there is only one company that is exclusively a video game retailer.

GameStop(GME): is the world’s largest video game retailer. The company operates 4,500+ retail stores throughout the United States, Austria, Australia, Canada, Denmark, Finland, Germany, Italy, Ireland, New Zealand, Norway, Puerto Rico, Spain, Sweden, Switzerland and the United Kingdom. To GameStop it doesn’t matter who wins the console wars and it doesn’t matter which game developer get the next blockbuster franchise. If the industry grows GameStop will mint money.

Best way to invest in video games : GameStop(GME)
Alternative : Nintendo (NTDOY)

Bookmark It

So you’re invested in dollars? You heard on TV or someone told you that the dollar is losing value. Is this true? Yes. The reason is simple. The US trade deficit for the last 12 months is 800 Billion, thats the annual GDP of countriles like Brazil or India. You want to know how to invest to protect against the dollar’s decline? If you want to protect yourself against the dollars decline the simple answer is to invest internationally. There are lots of ways to invest internationally and I will look at each of them.

Currencies: When the US dollar goes down, it reduces in value compared to other currencies. So an easy way to protect against the decline is to invest in foreign currencies. This is an option i do not like because investing and trading foreign currencies is extremely risky. The other reason is buying currencies is a short term hedge, once the dollar declines the trade is over. You get one time returns on the actual decline but that’s all. Investing in companies is a better way to go as i’ll explain later.

A series of new Trusts have started trading on the NYSE that allow people to own various currencies. I dislike investing in currencies and would never recommend them. They are extremely risky. I just included them for completness.

• Euro Currency (FXE)
• British Pound Sterling (FXB)
• Canadian Dollar (FXC)
• Australian Dollar (FXA)
• Swiss Franc (FXF)
• Swedish Krona (FXS)
• Mexican Peso (FXM)

Two mutual fund families have started new funds that protect against the falling dollar. These are professionally managed but still risky especially high risk is the Direxion Dollar Bear which seeks daily invstment returns of 2.5x the inverse of the dollar.

• ProFunds Falling U.S. Dollar Investor
• ProFunds Falling U.S. Dollar Service
• Rydex Dynamic Weakening Dollar A
• Rydex Dynamic Weakening Dollar C
• Rydex Dynamic Weakening Dollar H
• Direxion Dollar Bear 2.5X Inv

Why Companies over currency?
A declining dollar helps US/Foreign companies that have a lot of international sales. This is because they earn the same amount in international currencies but when its converted into US dollars they earn a lot in dollar terms. Lets take Coca-Cola in a hypothetical example.

If the company recieves the same 20 P/E in 2007 as it did in 2006 the stock should rise to $50.20. If the US$ drops by 20% the international profits would be reported as $2.11 instead of $1.76 and the company would be valued at $57.23 thats a 14% increase because of the drop in the US$. Every subsequent year that the dollar remains at the lower level the company would report higher EPS by 14% so you benefit every year that you hold the stock over a 1 time benefit in owning a foreign currency.

US Multinational Companies: The best bet is to look for large multinational companies which do business in all major international markets. When the dollar declines these companies will recieve major increases in EPS.

• Coca-Cola(KO) - 70% International
• Johnson & Johnson(JNJ) - 45% International
• Proctor & Gamble(PG) - 40%+ International
• Citigroup(C) - 43% International
• PepsiCo(PEP) - 35% International
• News Corp(NWS)

International Stocks: International Multinationals have the same earnings increase benefit as US multinationals and an added benefit for international stocks is their assets may also get higher value.

• Cadbury Schweppes (CSG)
• Siemens (SI)
• Toyota (TM)
• Sony (SNE)
• ING Group (ING)

Commodities: The last way to play the decline in the dollar is to bet on commodities. Since commodity prices are set in US$ terms they rise in relative value when the dollar declines. All commodities traded in dollars should increase in value if the dollar declines. Companies in the energy, metals and mining industry should perform well.

• Integrated Oil - Exxon Mobile(XOM), Conoco Phillips(COP), PetroChina(PTR).
• Independent Oil and Gas - Encana(ECA), Suncor(SU), Chesapeake Energy(CHK), Devon(DVN), Canadian Natural Resources(CNQ).
• Metals and Mining - Anglo American (AAUK), Rio Tinto (RTP), BHP Billiton (BHP)

Mutual Funds : For anyone that would prefer an International mutual fund (Which is the safest way to play the dollar decline). I list my favourite International Funds.

• Julius Baer International Equity (BJBIX)
• First Eagle Global (SGENX)
• Dodge and Cox International(DODFX)
• Oakmark International(OAKIX)

Note: I would stay away from international stocks that get most of their earnings in US dollars. If you find an international stock that gets most of its earnings from the US market. Since the company is paid in USD When the dollar declines the revenue of that company will drop while their costs will remain the same.

Conflicts : I own shares of Chesapeake Energy

Bookmark It

Heres a question. What will be the richest countries in the world in a few decades? If you answered any of the following USA, UK, Germany, Japan you got it wrong. Try again. Did you think it was China, India, Brazil, Russia? Wrong again.

Where does wealth come from?
Wealth comes from natural resources which can be harvested and sold to those who want them. Wealth also comes from material that can be changed into something more valuable through proper application of knowledge, skill, labor and equipment. So we have 2 ways to generate wealth. Harvesting natural resources and improving resources thru knowledge and labor. With world population bursting at the seams there is an ever increasing availability of people and labor. Natural resources on the other hand are finite.

What makes a country wealthy?
If a country consumes everything it produces it creates no wealth. If a country consumes more than it produces its poor. Only countries that have a surplus are wealthy. You may feel that China fits the bill since it has a trade surplus with most countries. China has an extremely large population that is currently living on basic necessities. As the population starts to become more consumer oriented more of their manufacturing and production will be used to satisfy internal needs. The countries that I feel are the richest are Australia and Canada.

Why these 2 countries?
Lets look at some Figures first

USA - Population 300 Million - Area 9.6 Million sq kms.
Canada - Population 32 Million - Area 9.9 Million sq kms.
Australia - Population 20 million - Area 7.7 Million sq kms.

These two countries have extremely large land masses with barely the population of 2 major american cities. Furthermore Canada and Australia are developed countries with good infrastructure and stable governments unlike the middle east and africa. Geographically Canada’s proximity to the US and Australia’s relative proximity to China gives both these countries major customers that need natural resources.

How to invest?
A simple way to get exposure to these countries is to use an ETF.
IShare MSCI Australia (EWA)
IShare MSCI Canada (EWC)

Bookmark It