Investing Ideas

The more i think about Microsoft’s new business model the more I like it.

• Customers win because they buy items cheaper. A 2-3% saving is as good as what you get from a cashback rewards card.
• Advertisers win because they are guaranteed to make money. No more click fraud. No more paying for clicks without converting to sales.
• Microsoft wins because they could increase search market share. Im not sure how successful this will be but it will have at least some impact on Microsoft’s share of the search market.

 Disclosure: I own shares of Microsoft

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Microsoft today released a brilliant new business model for search. After reading the views and comments of a lot of opinions I find that the business model is misunderstood by many. Here is a link to one such misunderstood article by Henry Blodget

His first reason why this wont work is

“1 million $1 clicks generate $1 million of revenue for Google, but even if Microsoft gives 50% cash back on each click, that’s only 50 cents per user per transaction. If you’re buying a $5 item, 50 cents is a nice refund, but if you’re buying, say, a $25 item, it’s chump change. “

What Microsoft is proposing is competely different. Microsoft is saying to advertisers, dont pay us for clicks, pay us when you SELL something. Microsoft will then share their revenue with the buyer similar to Cashback programs from Credit Card companies. This cashback amount isnt a percentage of click, its a percentage of the price of the item sold. If microsoft offers cashback of 3 to 5% on most of their items they could save consumers hundereds of dollars a year by switching from other search engines to Microsoft. Here is an example of Circuit city is offering 13% cashback or $11.70 on a $90 camera Samsung S860 Digital Camer. You can see an excerpt from the Microsoft press release.

Participating merchants choose to pay Microsoft a CPA fee each time a customer completes a sale through Live Search cashback. The fee is a percentage of the retail price, and when that transaction is complete, Microsoft returns that fee to the consumer in the form of a cash rebate.

Take a look at Microsoft list of stores shows hundereds of stores offering cashback offers on thousands of products and we can simply ignore the second reason which was “The program only covers “participating” retailers and “participating” products, at least initially. Finally whether or not Google or Yahoo fight back with a similar plan is pure speculation. Lets see how they respond. If they do follow Microsoft’s lead and offer cash back it will cut into profits and it will take them some time to come up with the platform to offer this service.

This is a leap (not just a step) in the right direction for Microsoft in the search business.

Full Disclosure : I own shares of Microsoft.

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The first step to understanding deleveraing is to understand leveraging.

What is Margin?

Margin buying is buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one’s own cash used. This difference has to stay above a minimum margin requirement. This is to protect the broker against a fall in the value of the securities to the point that they no longer cover the loan.

Example: Universal XYZ trades at $10 per share and John has $200.

If the shares rise to $12
Without Margin: John can buy 20 shares of the company. If the shares rise to $12. John can sell his shares for $240 and make a profit of $40 with an investment of $200.
With Margin: John can buy 100 shares of Universal XYZ for $1000, using $200 of his own money, and $800 borrowed from his broker. The net value (share - loan) is $200. The broker wants a minimum margin requirement of $100. If the shares rise to $12 he can sell for $1200 and make a profit of $200 with an investment of $200. Five times what he made without margin. (He will have to pay some interest on the loan)

If the share price drops to $8

Without Margin: John can buy 20 shares of the company. If the shares fall to $8. John can hold his shares or sell for $160 for a loss of $40 on an investment of $200.
With Margin: John can buy 100 shares of Universal XYZ for $1000, using $200 of his own money, and $800 borrowed from his broker. The net value (share - loan) is $200. The broker wants a minimum margin requirement of $100. If the shares fall to $8, the net value is now zero, and John will either have to sell the shares or repay part of the loan (so that the net value of his position is again above $100).

So whats happening in the markets?
Margin is used by companies, private equity and hedge funds the same way that it is used by individuals, but on a much larger scale. There are companies which have taken on leverage to buy large amount of mortgage debt. They borrowed money from Citigroup, JP Morgan, Goldman Sachs and other such companies. They bought mortgage debt that paid a higher percentage of interest than what they would pay to the companies they borrowed from.  As housing prices have declined so has the value of the mortgages held by these entities. The companies that lent them the money are now issuing margin calls to increase the net value or they will sell off the assets. The problem is that mortgage debt is considered toxic by the street and no one wants to buy it unless they can buy it at a huge discount.  If the motgage sells at a discount (which is the only way it would sell in this market), the lower sale decreases the market value of debt held by other institutions which in turn get a margin call and might in turn get liquidated and it continues. A deleveraging domino effect.

Fallout
In my opinion the the dominoes effect can cause closure/redemptions at a lot of funds that hold mortgage debt. It can also affect entities that hold mortgage debt along with other securities. These entities may try to stay afloat by selling stocks and bonds they hold instead of selling their mortgage debt at depressed prices. This will result in  spillover into other markets.

So whats the opportunity?
The only opportuniy for individuals with cash will be to buy stocks/bonds at lower prices if there is a fallout into other markets. The big opportunity exists for companies that are sitting on tons of cash and can buy this debt at very cheap rates. Companies like Berkshire Hathaway which has 40Billion in cash and a ton more in bonds could get very good deals. In a recent Q&A session on CNBC Warren Buffett mentioned that he had made a bid on a 3.5 Billion Municipal Bonds portfolio and had offered 75cents on the dollar. I’m sure he would pay a lot less for mortgage debt. Cash rich companies like this could make a lot of money buying mortgage debt at depressed prices, and investors could make good money buying the companies which get great deals on the mortgage debt.

Full Disclosure: I own shares of Berkshire Hathaway, I am not invested or short  Citigroup, JP Morgan, Goldman Sachs.

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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.

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Eddie Lampert has 3.5 billion in Sears Holdings. The merger between Sears and Kmart has gone well. Remember SHLD is not a retailer. SHLD is a holding company that happens to currently own 2 retailers. One thing i like about SHLD is Eddie Lampert is focussed on profitability and not on same store sales growth like most dumb retailers. Yes i know its the industry metric, I dont care. I want growth in profits and thats what Eddie delivers.

Here is a quote from the Sears Holdings message from the Chairman which hints at SHLD becoming a new Berkshire
“My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come.”

Similarities between Eddie Lampert and Buffett.
Both started investing at an early age, have great long term records. Started a partnership/Investment Management companies at a young age with great long term returns. Both have virtually all of their net worth in these companies. Both have recieved special permission to delay filing their stock purchases. Both care about long term value and profitability.

What follows is pure conjecture. DO NOT MAKE ANY INVESTMENT DECISIONS BASED ON WHAT I PULL OUT OF MY HAT.

The long term future for SHLD.
Eddie Lampert will give away shares in SHLD to current ESL Management Partners.
SHLD becomes Eddie Lamperts version of Berkshire Hathaway.

SHLD in the near future
Rumors have been floating around that Eddie Lampert is prowling around for takeover targets. I don’t believe that the rumors about a Home Depot takeover have any substance. Id really like to see Eddie Lampert buy an insurance company like Progressive to manage its float. My candidate for companies that Eddie Lampert can takeover and turnaround OR companies with good Real Estate value which he can unlock are

• Gap Stores
• Radio Shack
• Pier 1 Imports
• Pep Boys
• Six Flags

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No question about it. The Dow and S&P have been going straight up for months. Not even a single triple digit down day.

• The Housing market is crashing - The market doesn’t care.
• Inflation is at the high end of the Feds comfort zone - Fed who? says Mr Market
• North Korea has nukes - Market shrugs it off.
• OPEC cuts oil production - So what says the market.
• Iran/Nigeria/Venezuela problems could spike oil prices - We got reserves.
• Amaranth collapse - Did something happen? Buy Buy Buy.
• Too much money chasing too few investment opportunities - Private Equity buying anything they can for an LBO
• High flying stocks and companies based on eyeball count are back. - Myspace, Facebook, YouTube and anything that’s Web 2.0
• Momentum funds are back - Lets chase the market, what a brilliant idea. NOT
• Mutual Fund Mondays are back - Retail investors chasing mutual funds that have already outperformed.

AND finally

• Frequent use of the scariest words in the investing: “This times its different because….” - Yea right, its different because people want to fool themselves into believing its different

So does that seem like a Goldilocks scenario? To me it seems like a Deja vu from 2000. A lot of people (who seem to live in a Toy story world) are convinced the markets are heading “to infinity and beyond”. Ok I’m exaggerating, but at the very least we need a 5% (600 points) correction to remove froth from the markets. An 8-10% correction would be better IMO.

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Peter Lynch managed the Fidelity Magellan fund from 1977 to 1990 averaging 29% returns over the period of 14 years. At one point the fund grew assets to an unmanageable $100 billion. In recent years the fund became an Index hugger with most stock picks matching the S&P. Factoring in expenses the fund underperformed its category and even the S&P 500 index for years.

Stansky who managed Magellan for nearly a deade retired October last year. He was replaced by Harry Lange. One year later the fund looks a lot more interesting to me. A year ago the top 10 holdings in order of percentage of assets were GE, Microsoft, ExxonMobile, HomeDepot, Citigroup, J&J, Intel, Lowes and Viacom. This year the fund has Nokia, Slumberger, J&J, UnitedHealth, GE, Peabody, AIG, Google, Genentech and Corning. When you manage $45 Billion you need to find good large cap stocks wherever you can, so its great to see Harry Lange is looking at international stocks, the fund has Nokia, Nomura, Canadian Natural Resources and Samsung among its top 25 holdings.

Only time will tell if the fund returns to its glory days but its a step in the right direction.
Conflicts: My 401k is managed by Fidelity and I have avoided the Magellan Fund in the past.

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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.

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Gold is a precious metal that for many centuries had been used as money, a store of value. Gold is an asset that it is rare, tangible and liquid (easily traded). Its high density and high value per unit mass make storing and transportation easy. Gold is unaffected by heat, moisture, oxygen and all corrosive compounds except aqua regia. This made gold the perfect metal for trading and eventually banking.

Gold prices have been soaring from its 1999 bottom at $252 to $730 in 2006. Prices have dropped off since, but the Gold bulls say the metal will move much higher. Most of them are proponents of Full Reserve banking with gold as the backing asset aka the gold standard. Of course they want full reserve banking, it would increase the value of the gold they own. It sounds good in theory but its not going to happen, lets look at some numbers. It’s estimated that all the gold ever mined totalled 145,000 tonnes, this equates to a value of $3 trillion in April 2006. The US Money supply known as M2 consists of cash, checking, savings, money market and CDs is 6.5 Trillion. So to back up its currency with gold the US would need to buy twice the amount of gold mined in history.

Gold lost any role it had as a form of currency with the end of the Brentton Woods system in 1971. Since then most banks have been selling their gold reserves. Now the only factors that determine gold prices are supply and demand. Excluding its past as a form of currency, gold has limited use. Its major uses are Jewelery, Dentistry and Electronics. Compare this with other metals and you realise that the metal is pretty useless. Unlike base metals gold never gets used up, its advantage of being non corrosive and unaffected by the elements means that virtually all the gold ever mined still exists and can come onto the market at the right price.

“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Warren Buffett - 1998

The few positives for gold are. Its tangible so if the investment is made in the actual commodity the value will never go to zero. In times of war when hyperinflation takes over, currencies become worthless but physical gold will hold its value (Its for gold bugs that fear war, the second depression or armageddon is just around the corner). I personally dont believe in the future of gold unless someone finds commercial use for it. Whatever glitter gold may have had in the past it’s long gone.

For people looking to invest in gold I ve included the bull and bear arguments and the various options to owning gold.

Gold bull argument

• Demand from India, China and the middle east has increased because of increase in disposable incomes.
• Russia, China and a few other central banks may increase gold reserves to protect themselves from overexposure to a falling dollar.
• The huge US trade defecit means the dollar will lose value over the long term and Gold will move higher.
• There is increased demand for gold from investors that can buy small quantities thru ETF’s like Streettrackers Gold GLD
• International conflict, terrorism or uncertanity increases demand for gold because people buy it as a form of insurance.
• The new gold supply is 2500 tonnes while demand is 3500 tonnes. The difference is being made up by Bank sales, scrap sales and hedging.

Gold bear argument

• India, China and middle east economies are based on trade with the US. When the dollar decreases the disposable income in these countries will decrease which will in turn reduce gold demand.
• Currently the Chinese and Indians are in a transition period, their cultural belief of gold as a form of investments and a status symbol coupled with increased incomes has increased gold demand. Both these countries are getting increasingly americanised and in the not too distant future stocks will be their preffered form of investment and gadgets, sports cars etc will take over from gold as status symbols.
• There are better ways to invest against the falling dollar. Gold has doubled in value compared to the US Dollar but most of this gain in due to the dollar falling against currencies like the Euro. If your investments were in Euros the gains would work out to just 35%. Its better to invest in international stocks as a hedge against the falling dollar.
• Its best to buy gold when its low. For now the gold bull market is over. Gold along with energy usually peaks at the top of a stock market cycle. We’ve moved from that phase to the start of a bear when consumer non-cyclicals and healthcare are the new darlings.
• Banks still hold around 25,000 tons which could come onto the market at the right price. Currently all government banks combined are restricted to sell 500 tonnes anually.
• Gold was in a 20 year bear market and unprofitable mines were closed, very little exploration was taking place. With current prices of gold there will be a lot more supply coming online.

Investing options - There are different ways to invest in gold and the investment option depends on the reason for investing in gold. Some people buy it as a form of insurance, while others want to invest in gold as a hedge or to diversify their portfolio.

Insurance: If the reason for investing in gold is to hold it as a form of insurance against Inflation or Hyperinflation the best option is to buy gold Coins or Bars. Coins are easier to trade and they are easier to hide. Another plus for coins is they are gauranteed by governments v/s bars that are gauranteed by mining companies. The coin with the smallest premium over the gold price is usually the South African Krugerrand. The following 1 ounce gold coins are the most common.

• Australian Nugget
• Austrian Philharmonic
• British Britannia
• Canadian Maple Leaf
• Chinese Panda
• South African Krugerrand
• USA Gold Eagle

If you dont want to buy physical gold you could invest in Streettrackers Gold GLD which allows you to own gold without the hassle.

Low Risk Investment - Invest in a Gold or Metals and Mining fund. The safest way to invest in gold stocks.

• Vanguard Precious Metals and Mining (VGPMX)
• Evergreen Precious Metals (EKWAX)
• USAA Precious Metals and Minerals (USAGX)
• First Eagle Gold (SGGDX)
• Oppenheimer Gold and Special Minerals (OPGSX)

Medium risk Investment : Major or low cost Gold Producers, Diversified Mining companies

• Anglo American (AAUK)
• Barrick (ABX)
• Newmont Mining (NEM)
• Goldcorp (GG) - Lowest cost producer but extremely poor management in my opinion.

High risk Investment: Minor Gold producers which are usually takeover targets for major producers to increase their gold reserves.

• Yamana Gold (AUY)
• Crystallex (KRY)
• Tanzanian Royal Exploration (TRE)

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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

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