Stocks that Benefit from a Weak Dollar (Investopedia)

Stocks That Benefit From A Weak Dollar
Posted: Oct 12, 2009 09:23 AM by Sham Gad

There's a lot of talk today about the future of the dollar. If left unchecked or without an appropriate exit strategy, our massive stimulus programs will have a crippling effect on the value of the dollar. It's simple economics: if you increase supply without a similar increase in demand, the price of your product drops.


What to Consider
Exporters benefit when their home currency weakens relative to the rest of the world because their trading partners can now buy their product for less. This is why China's currency has been undervalued for years. The Chinese government does not let the yuan float freely, which leads many to cite that as the reason China's exports are so incredibly cheap.

Oil and gold also benefit from a weak dollar. Gold is often perceived as a safe haven during periods of asset devaluation. Oil benefits because it's priced in dollars. As we've seen with the oil price over the past few months, that indeed seems to be the case.

Quality Always Matters
So commodity businesses that have pricing power and U.S. companies that do brisk business abroad benefit from a weaker dollar. But let me go on record as saying over the long run, it's not beneficial for a country to continually suffer from a weak currency. In the case of the U.S., that rings even more true since the greenback is regarded as the world's premier currency.

Nonetheless, major oil companies like ConocoPhillips (NYSE:COP) and ExxonMobil (NYSE:XOM) that have substantial operations abroad will be OK. And since a weak dollar also benefits the price of oil, the majors doubly benefit. Construction and engineering firm KBR (NYSE:KBR), a debt-free $3.6 billion company, does a bulk of its work overseas. And because the bulk of KBR's work comes from government agencies, the company continues to prosper as best as one can during a recession.

Foreign Investing
Another option is investing in businesses located outside the U.S. that earn money in other currencies that are likely to strengthen against the U.S. dollar. But such a move poses some risk because the other currency must appreciate and the company needs to maintain its profitability. So while the Japanese yen has gotten stronger against the greenback lately, many Japanese businesses have a tough time of it.

Nations like Brazil and Australia, which are rich in commodities, are expected to resume a healthy GDP going forward. Up north in Canada, you have commodity giant Teck Resources (NYSE:TCK), which does business all over the world and has the Canadian dollar as the functional currency.

Bottom Line
The market rally continues to propel shares higher, including those mentioned above. It's never wise to make any investment based solely on a single macro bet, especially if the prices aren't bargains. But if the dollar does continue to weaken long-term, then businesses with characteristics like those above will benefit.

Safety First (from Barrons)

Monday, September 15, 2008




Retirement: Safety First
By KAREN HUBE

Risk experts explain how to keep your nest egg from cracking in shaky markets. Also, which investments offer the most stable returns during slumps? And, exotic real estate -- with an American twist.

THESE ARE SCARY TIMES FOR INVESTORS TRYING to protect and increase their retirement portfolios. With stock prices gyrating and major financial institutions crumbling, the mattress may look like as good a place as any to stash your holdings.

Not so fast. Take it from five titans of risk management: There are steps you can take to protect your nest egg for as longs the tumult lasts -- steps that will make sharp market dips much easier to endure.

Even better, without sacrificing those safeguards, you can position your retirement funds to participate in the earliest gains as the stock market begins to recover. And yes, these experts say, the market will recover.

So heed the practical advice and recommendations of the intellects whose views you'll read on the following pages -- Barton Briggs, Peter Bernstein, Charles Ellis, David Darst and Jeremy Siegel -- and reserve that mattress for some peaceful sleep.


Brad Trent
Peter Bernstein
Founder, Peter L. Bernstein Inc.

After almost six decades of contemplating market risk, Peter Bernstein knows how to spot investors' worst-case scenarios before they do. These days, what he sees concerns him deeply.





As the current economic crisis unfolds in ways that even the most bearish Wall Street strategists never predicted, Bernstein says any number of disasters could still be in store for investors. For those saving for retirement, in particular, taking protective measures is critical.

"The goal for investors right now should be survival, not making a killing," says Bernstein, who has been an economics professor and money manager, and is the author of several books, including Against the Gods, a classic on risk. "You should be thinking about how to hedge against extreme outcomes."

With markets down and unemployment and home foreclosures rising, what more could happen?

"A major bank failure, causing a run on banks in general," Bernstein speculates. Or "a run on the dollar, perhaps provoked by what foreigners view as too big a fiscal deficit."

Or runaway inflation or deflation, either of which could be disastrous for long-term retirement investors.

The next step of this crisis is hard to predict, Bernstein says, because the crisis is so unusual. "Nothing like this has ever happened before," he continues. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary."

He suggests diversifying a portfolio so that it is not only exposed to many different markets, but also to ensure it can weather all kinds of scenarios.

For example, to guard against rampant inflation, every portfolio should contain at least a sprinkling of Treasury inflation-protected securities and short-term Treasuries, Bernstein suggests.

The TIPS come with a guaranteed return above inflation, and short-term Treasuries enable you to roll your money into higher-yielding issues every 90 days if inflation rises and interest rates follow.

"Short-term Treasuries aren't a very good holding under normal conditions, but they are a hedge against extreme conditions," Bernstein says. Long-term Treasuries are a good hedge against deflation, he adds.

Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide they no longer want to invest as much in U.S. Treasuries. "In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold," he says.

You don't have to buy much gold to have an effective hedge, he adds, noting that "if everything hits the fan, gold could be worth several thousand dollars an ounce." It is now valued at about $750 an ounce.

Above all, don't let your defensive attitude waver, Bernstein counsels.

"Every day, we are faced by the possibility that something we never dreamed of will happen," he cautions.

"In 1958, I'd been in the business for seven years when, for the first time in history, bonds yielded more than stocks. My associates said, 'It's an anomaly, don't worry, it will be reversed.' It's 50 years later, and I'm still waiting."


Gary Spector
Charles Ellis
Founder, Greenwich Associates

In Japan, investors fill their stock portfolios primarily with Japanese companies. The French place their biggest bets on French companies. The story is the same in New Zealand, India, Russia, and around the globe: Investors favor their own countries' stocks.

For U.S. investors it's easy to criticize foreign investors for being provincial. But Charles Ellis, a former chair of Yale's Investment Committee and a consultant for institutional investors, has a suggestion for them: Look in the mirror.

The typical U.S. investor holds at least 85% of his stock portfolio in domestic stocks, even though the U.S. stock market accounts for only 40% to 45% of the world's total stock-market value.

"People feel more comfortable emphasizing their own country, because they recognize the company names," says Ellis, whose internationally renowned book is Winning the Loser's Game. "But from a pure investment point of view, it doesn't do any good" -- particularly for folks investing for retirement and other long-term goals, he says.

A U.S.-centric stock portfolio creates high levels of volatility, and denies investors the benefit of surging markets around the world, Ellis notes.

The best risk-adjusted returns over the long term can be scored by matching the market capitalization weightings of the world's markets, Ellis says. That would mean putting 45% in domestic stocks, 47% in developed foreign markets and 8% in developing foreign markets.

The idea is to have no bets on whether one market or another will be stronger in coming months.

"If you said, 'I don't really have a smart idea about the direction of the markets, I'm just a sensible person, what should I do?,' the answer is to go to a global index and start there," Ellis says. "If you have reason to make any changes from there...then you can adjust it from a neutral to an opinionated portfolio."

Traditionally, investors have been hesitant to plunge more deeply into foreign markets -- because of perceptions that foreign-currency exposure presents too much risk, foreign companies don't get enough oversight from their governments, and foreign markets are simply too volatile.

To Ellis, however, the truly global allocation of assets trumps all those concerns.

"There really is a free lunch, and it's called diversification," he says. "By diversifying, you reduce your risk substantially. It doesn't cost anything, and you get something for it."


Evan Kafka
Barton Biggs
Managing Partner, Traxis Partners

When the herd zigs, Barton Biggs zags. So it shouldn't be a surprise that while U.S. investors can't dump their technology stocks fast enough these days, Biggs has been declaring that now is the time to get into the trampled tech sector.

The best values right now, he says, are in large-cap, high-quality stocks around the world, "but particularly in the U.S., and within that category, technology appeals to me the most."

Biggs, co-founder and managing partner of the $1.3 billion hedge fund Traxis Partners in New York, is the former global investment strategist at Morgan Stanley.

"We've been in a period of stagnation in terms of tech spending since the bubble burst in 2000. The next recovery is going to be marked by unusual spending in all types of technology...and the sector will be one of the first areas to pick up as the U.S. and the world begin to recover," Biggs says.

A market recovery, he believes, will begin in the first half of 2009. By then, oil prices should be consistently below $120 a barrel, and the housing market should have started stabilizing.

Due to the government's takeover of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- which he characterizes as "one of the most important events of the last 20 years" -- further declines in home prices are likely to be more moderate than expected earlier.

But don't wait for an economic recovery in order to step into large domestic stocks and global tech stocks, or "the markets will already be up," Biggs says. "I wouldn't be surprised if later, in retrospect, we will find that the stock market is at its bottom about now."

Biggs is a notoriously trend-bucking strategist, which has sometimes paid off massively for those who follow him. In the late 1990s, he spared his clients huge losses by predicting the technology-driven bull market was going to plummet. And in 2003, when investors were steering clear of Japan, he moved into the Japanese stock market, adding untold wealth to clients' portfolios in the following three years as Japan soared.

Today, while many Wall Street strategists are recommending an underweighted position in stocks, Biggs is defiantly upbeat." The public has been selling stocks and has an incredible amount of liquidity, and so have institutions and hedge funds," he says.

"The fact that everyone is cautious has raised a lot of investable funds, and that's bullish," he adds. "We're in a stage where ordinary investors ought to be buying on weakness," says Biggs.

Some of his top picks: Cisco (CSCO), IBM (IBM) and Google (GOOG).

Biggs is steering clear, for now, of stocks in the materials, energy, agricultural and industrial- and oil-commodity sectors, but notes that "those will come on strong again -- but not until further into the recovery."


Dave Moser
Jeremy Siegel,
Professor, Wharton School

To most investors, dividend-paying stocks seem about as cutting edge as a corded telephone. Yet Jeremy Siegel talks about stock dividends with the enthusiasm and sense of discovery of a first-time iPhone user.

Through his recent research, Siegel, a finance professor at the University of Pennsylvania's Wharton School of Business, has become enamored of the dividend, and hopes to elevate its status from a humdrum staple for retirement-income seekers to a punch-packing contributor to younger investors' retirement portfolios.

He argues that the tendency of investors to look solely at the growth rates of earnings, sales and cash flow hurts them in the long run. The bias toward high-growth companies causes them to miss out on the high dividend-paying companies whose total returns, contrary to popular perception, have historically outshined the performance of growth stocks over time, he says.

"Everyone thinks it's old-fashioned to think about dividends, but investors have historically gotten about an extra two or three percentage points a year of higher returns by investing in the highest dividend-yielding stocks and reinvesting the dividends," says Siegel, author of The Future for Investors, Stocks for The Long Run, and other books.

One of his most striking examples is the difference in fortunes between people who invested in IBM rather than Standard Oil, now ExxonMobil (XOM), in 1950. Over the next five decades, through 2003, IBM trounced Standard Oil in per-share growth of revenue, dividends and earnings. But Standard Oil had a higher total return: A $1,000 investment in Standard Oil would have grown to $1.26 million with dividends reinvested, compared to $961,000 -- 24% less -- for IBM investors. "And that was before the recent energy price increases," Siegel says.

While financial companies historically have been reliable dividend payers, the dividends on Fannie Mae and Freddie Mac have been halted, and 21 financial-services firms have cut their payouts since the beginning of this year, according to Standard & Poor's. In a typical year, two or three financial firms cut their dividends, but the majority of them increase their payouts.

Long a supporter of index investing, Siegel now favors index funds that rebalance on a dividend-weighted basis. Siegel is a senior investment strategy adviser at WisdomTree, which has developed a series of funds that operate this way.

A dividend-weighted index rebalances regularly to favor stocks that pay the highest dividend. Most indexed portfolios, in contrast, rebalance based on the market capitalization of the stocks. With a dividend-weighted index, investors end up buying stocks when their prices are low relative to their fundamentals. A high dividend yield is a strong indication that a stock is undervalued, Siegel says.

Throughout history, dividend-paying stocks have gotten the spotlight. When the tech bubble burst in 2000, many investors sought out dividend-paying stocks to try to steady their portfolios. In 2003, payouts got a boost when the tax rate on dividends was changed to the 15% capital-gains rate, versus the higher income-tax rates.

Some of this tax benefit may get rolled back if Sen. Barack Obama (D.-Ill.) is elected president; he has said he would raise the dividend tax rate to 20% -- "but that's still a preferred rate," Siegel points out. He adds that investors who keep a steady spotlight on the high dividend-paying stocks in their portfolios are likely to have a brighter retirement.


Gary Spector
David Darst
Global Wealth Management Group,
Morgan Stanley

David Darst is the Iron Chef of the investment world. As chief investment strategist at Morgan Stanley's Global Wealth Management Group for the past 11 years and one of Wall Street's foremost experts on asset allocation, Darst spends much of his time considering the perfect ingredients -- of a portfolio, that is. He takes a little of this, blends it with a little of that, and -- voilà! -- produces nourishing retirement portfolios.

Investors who have seen the air sucked out of their retirement portfolios lately might need convincing. The problem in the typical portfolio, Darst suspects, is that most people skimp on alternative investments like commodities, real estate and hedge funds.

"The perception is that they're too risky, but we view the benefits of alternatives more by the reduced volatility they bring to a portfolio than by an increased return," says Darst, who recommends that folks with $1 million to $20 million to allocate 20% to alternative investments, and those with less, 8%.

While any particular alternative investment may, indeed, be more volatile than the broad stock or bond markets, a portfolio diversified across stocks, fixed income, and a number of different alternatives will likely be less risky than one with fewer asset classes -- and it may even score higher returns, Darst says.

Consider a portfolio with 40% invested in stocks and the rest split between commodities and real estate. That may sound risky, but according to Ned Davis Research, in the 35 years through 2007, such a portfolio had the same risk as a portfolio with 40% invested in stocks and 60% in bonds. Yet it gained almost two percentage points more per year -- 12.47% versus 10.5%.

Within an alternative-investment portfolio, Darst recommends a 50% weighting in hedge funds, which gives investors the potential to benefit from talented money managers who have the freedom to invest where and how they see fit, without constraint.

Some 20% should be in real assets, such as commodities and gold. Both provide a hedge against inflation, and gold in particular has been a historic refuge in times of turmoil in the financial markets, political instability, or other crises.

Another 20% should be directed to managed-futures funds, Darst says. These invest by going long or short futures contracts in a broad basket of commodities and other investments, including metals, grains, sugar, foreign currencies, stocks and bonds.

Managed-futures funds provide a cushion to portfolios in down markets, because they typically are inversely related to the stock market, Darst says.

During the period 2000 to 2002, when the tech bubble burst and the Standard & Poor's 500 cratered 31%, the Barclay CTA Index of Managed Futures Funds was up 20%. In the fourth quarter of 1987, when the U.S. stock market crashed and the S&P 500 lost 22.5%, the Barclay index was up 13.8%. This year through August, the S&P 500 was down 14%, while the Barclay index was up 6.95%.

Lastly, Darst recommends placing 10% of a portfolio in Treasury inflation-protected securities to get their risk-dampening benefits, Darst says.

While he has usually included real estate in the alternative-investments portfolio through direct investments or REITs (real-estate investment trusts), he predicted enormous volatility in the sector last December and made a tactical move to eliminate real estate from his models.

For the average investor, however, it would take a rare event to prompt the removal of an asset class from the alternative-investments portfolio, because that could mean missing its next surge.

Says Darst: "You want to have all of your relatives at the table. Not just the 17-year-old singer in the family that everyone has always listened to, but the quiet nephew who turns out to win the Pulitzer Prize."

Follow advice like that, and investors themselves just might take home a prize.


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Dividend Stocks - International (from WSJ)

The Dividends From Far, Far Away

By Shefali Anand, The Wall Street Journal
Last update: 11:08 a.m. EDT Aug. 18, 2008Dividend-seeking investors should cast their gaze abroad.

Foreign stocks have much more attractive yields these days. A leading index of big-cap stocks in developed overseas markets yielded a 3.7% payout as of July 31, compared with a 2.4% rate for similar U.S. stocks.
As aging baby-boomers in the U.S. look for ways to get income, a number of mutual funds and exchange-traded funds have been launched with a focus on dividend-paying foreign stocks. Most recently, fund giant American Funds, which rarely trots out new funds, filed for an income-oriented foreign-stock fund to be introduced this fall.

Dividend-paying funds and stocks are traditionally safer bets in difficult markets such as the current one. But many of the highest yielding stocks in the U.S. are financials, which have been hurt by the turmoil in the mortgage market.
No one knows when companies such as Citigroup
will dig their way out of the current mess, so buying their shares is hardly a conservative bet right now. A number of banks including Citigroup, Wachovia Corp. and National City Corp. have chopped their dividends to conserve capital.
Overseas too, a lot of the high-yielding stocks are financials. Some, such as UBS AG are embroiled in the U.S. mortgage-market rout. But others stocks, such as HSBC Holdings PLC, which yields 5.4%, Lloyds TSB Group PLC, with a 12% yield, and Barclays PLC, with a 9.8% yield, have been hurt less by the U.S. mortgage market.
•
The News: When it comes to dividends, foreign stocks have better yields than U.S. ones.
•
Investors' Call: There are several mutual funds and exchange-traded funds that focus on dividend-paying foreign stocks, and could be worth a look.
•
Caveats: High-yielding foreign stocks have risks. If foreign banks get slammed it could be a problem. And foreign stocks won't be as tasty if the dollar keeps rising.

Glenn Zannotti, a 45-year-old account manager for a nonprofit in Tulsa, Okla., holds a portfolio of U.S.-traded shares of 10 foreign companies, all of which yield more than 4%. Recently, he has been buying financial stocks, such as Barclays, Deutsche Bank AG and Royal Bank of Scotland Group PLC, which he considers "good long-term value" and a complement to his U.S.-stock holdings.
Of course, high-yielding foreign stocks bring their own risks. Foreign banks will be hit hard if the global slowdown intensifies. These firms could get swept up if housing prices get worse in their home markets.
What's more, any U.S. investor owning a foreign stock faces currency risks. In the past few years, foreign currencies have been rising against the dollar, pushing up the value of foreign shares held by U.S. investors. But the dollar has made a comeback in recent weeks, and if this continues, foreign shares could hurt returns for Americans.
Why do foreign companies pay higher dividends? There was a time when U.S. companies had much higher payouts. But over recent decades, U.S. companies have retained more earnings to plow them back into the business. They also have done a lot of share buybacks in recent years.

Meanwhile, many foreign companies take more a traditional approach to dividends: the money they earn belongs to their shareholders, and they return it to investors in the form of rising dividends. Also, earnings growth in some Asian countries such as Taiwan is spurring their companies to start paying dividends or increase the dividends they already pay.
According to calculations by Jesper Madsen, manager of Matthews Asia Pacific Equity Income Fund, dividends from companies included in the MSCI AC Asia Pacific Index have grown at an average of 18% annually between 2003 and 2007, as compared with 6% for companies in the Standard & Poor's 500-stock index, on an equal-weighted basis.
Mr. Madsen notes that in some countries such as Taiwan, some of the highest-dividend-yielding companies are technology companies. That is quite different from the situation in the U.S. where many tech companies don't pay dividends at all.
Vincent McBride, manager of the recently launched Lord Abbett International Dividend Income Fund, says he has been finding gems in foreign companies that are subsidiaries of large multinationals. An example is Telefonica O2 Czech Republic, a unit of one of the world's leading phone companies, Telefónica SA. It yields about 9.8%.
The Morningstar Inc. data base has about two dozen foreign mutual funds that seek out dividend-paying stocks; a third of them are "global," meaning they can invest in the U.S if the manager so wants. Pure foreign dividend funds go by "International Equity Dividend" or "Equity Income" in their titles, while funds that have income only as a secondary objective go by names like "Growth & Income."
The largest fund by assets is the T. Rowe Price International Growth and Income, at $2.9 billion, and is also among the oldest with a 1998 inception. The fund is down 19% this year, thanks partly to its 24% stake in financials, but has a 14% annualized return over the past five years, according to Morningstar. Its 12-month yield is 2.26%.
In addition, there are 22 foreign dividend-oriented exchange-traded funds, mostly launched since 2006. Sixteen of these are from WisdomTree Investments Inc., a company which subscribes to the research of Jeremy Siegel, a professor at the University of Pennsylvania, who believes that dividends are the most objective way to value a company.
The ETFs go from broad ones, such as the PowerShares International Dividend Achievers Porfolio, launched in 2005 and yielding 4.1%, to specialized ones such as the WisdomTree International SmallCap Dividend, which currently yields 2.6%. These are two of the largest such ETFs, with slightly more than $460 million in assets.
The foreign-focused fund with the highest yield currently is Henderson Global Equity Income, with a 12-month yield of 8.8%, followed by the iShares Dow Jones EPAC Select Dividend ETF with an 8.3% yield. The highest-yielding fund may not be suitable for all investors. For instance, the iShares DJ EPAC ETF has 50% of its assets in financials.
Most investors are advised to pick a broadly diversified fund, across countries and sectors. Steve Janachowski, a financial adviser in Tiburon, Calif., suggests looking at a "global" fund, such as the Tweedy, Browne Worldwide High Dividend Yield Value Fund, which was launched last year.
"I would use that as part of my overall foreign and global strategy," Mr. Janachowski says.


Write to Shefali Anand at shefali.anand@wsj.com