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For U.S. investors, there’s no
such thing as a conservative foreign stock investment.
Given the beating many
foreign equity investors have undoubtedly taken in 2005 thanks to the rally
in the U.S. Dollar, this may not exactly sound like news, but I still suspect
the impact of currency fluctuation isn’t well understood, so let me say
this again: if you’re a U.S. citizen living here in America,
there’s no such thing as a low-risk, conservative foreign stock
investment.
This doesn’t mean
that in the proper balance some measure of foreign equity exposure
isn’t right for many investors—heck, my own firm is quite unique
in providing such trading access to international markets and many of my own
clients maintain some exposure to such holdings, albeit less than
normal— but it does mean it would be the height of foolishness and
arrogance to bet the farm on non-Dollar exposure and that individual foreign
equities typically aren’t appropriate for Grandma’s portfolio.
The
Powerful Case for Understanding Currency Risk
The best way I can
illustrate and defend the comments above is with a couple of real-life
examples I experienced earlier this year with my own clients. On April 15th, for instance, a client
I’ve worked with for 10 years was considering the sale of a foreign
holding that had performed admirably, one he had held for 2 years. When I reviewed the stock’s
performance with him, he was shocked to learn that despite the fact he was
sitting on a capital gain of 35%, the stock itself had increased by only one
cent! There’s no trick
answer here, like this was a penny stock for which a one-cent move accounted
for a large percentage gain; this was, in fact, one of the largest-cap stocks
traded on the New Zealand
market! The huge move in the Kiwi
had simply carried the day.
Another client, one that
had held a different foreign equity for approximately 18 months, was
surprised to learn even earlier this year that the share price of the
restaurant operator he was about to sell for an 11.5% gain (excluding
dividends, which in this case were substantial) was actually down 4% in its local market!
That is how powerful,
indeed crucial, it is to get currency movements right when looking to invest
abroad.
Imagine, then, what
investors experienced in recent years from their foreign stock holdings that
actually increased in value!
Truly, it’s not hard to achieve huge returns when you have the
following trend moving in your favor:
4-year Aussie Dollar chart:
 
Think how intoxicating such
returns must have been to investors who were exposed to the proper currencies
over the last few years! Just
holding shares in a simple, predictable business like a utility can provide
internet-type returns if held in the right foreign market with a currency
that’s flying your favor; in fact, investors
probably hadn’t seen anything like it since, oh, I don’t know,
say their prevalent use of margin during the tech boom.
And that is the way to
think of foreign equity investing: for American investors, it carries
volatility risk that can at least be roughly equated to the use of margin
leverage here at home. The
problem is, most investors started to forget that such risks are a two-way
street, as a 10-year chart of the same Australian Dollar shows:
When a foreign currency is
on the rise, it’s hard for American investors holding stocks in that
market to go wrong. Likewise,
it’ll be very difficult for American investors to make much headway in
foreign markets at times when the U.S. Dollar is rallying. Knowing when to over- or under-weight
your foreign equity exposure based simply on the currency outlook is of vital
importance to investors, something most people (and some advisors)
don’t seem to understand well enough.
Investors, then, need to
seriously consider the potential double-whammy of a simultaneous decline in
their foreign stocks and currencies, realize how deeply such a combination
could cut into their portfolio’s value and carefully re-evaluate their
exposure to such risk.
Don’t
Let the Dogma Bite You
Just as it was easy to get
caught up in the new era promises of the dot-com boom, it has been tempting,
especially for investors that experienced at least a taste of recent foreign
equity market success, to get caught up in recent promises of the end of
American Empire or the supposed risk of waking up one day soon to find the
Dollar worth literally nothing.
Indeed, part of the reason for my own confidence late last year in
calling for a reversal in the US Dollar was the fact many of my own clients
had quite clearly fallen in love with their foreign equity holdings, an awful
sign from a contrary standpoint.
To highlight how such
investment dogma can be a killer, however, I refer you to a recent article
from the thoughtful Peter Brimelow at CBSMarketwatch: http://www.marketwatch.com/news/story.asp?dist=morenews¶m=archive&siteid=mktw&guid=%7B75E85C53%2DABE3%2D4171%2DA952%2D4FD0E72968C0%7D&garden=&minisite
The focus of Mr. Brimelow’s article is on an advisor whose recent
track record has been outstanding, but who presents a conundrum for the
newsletter-rating service at Marketwatch because
the same manager’s track record is absolutely abysmal in the longer
run. The only part of the article
that baffles me is why this might confuse the folks at Marketwatch;
the article seems to make the story quite clear, that as a perma-bear on the stock market, this newsletter
writer’s performance stunk when the U.S. was experiencing a bull
market and shined when the bear came to visit.
Isn’t this precisely
the outcome one should expect from a stopped clock?
Here I feel the need to repeat the same
analogy I have used before: just as Henry Blodget
was merely at the right place at the right time, an internet stock analyst in
the internet era, today’s Dollar perma-bears
are merely having (or, if my suspicion is correct, have already had) their
day in the sun. Unfortunately,
unwitting investors have simply found some of today’s anti-Dollar Blodgets too recently to know that many of them have been
promising the demise of the Greenback almost since the dawn of time,
dangerous stuff for shareholders in the wrong currency climate.
In fact, getting wildly
over-concentrated is simply one of the silliest things an investor can
do. And if one’s portfolio
has reached that state due to the advice of a “professional,”
it’s even more unforgivable.
Think I’m over-stating things? This is what the excellent site, SecuritiesSleuth.com,
has to say about what it calls this basic “broker fraud:”
Over
Concentration. “Over
concentration has been a big problem. Many brokers acted like lemmings and
put their customers in high tech's only. When the
market crashed the brokers want(ed) to shirk
responsibility. A prudent advisor would have suggested a mixture of
investment sectors such as consumer goods, energy stocks, and not just high
tech.”
My suggestion: substitute
the words “non-dollar holdings” in place of “high
tech” in the paragraph above and re-read the passage. You get the picture… those that
advocate nothing but non-Dollar investments are doing investors no service,
something that only becomes visible when the trend turns against them.
Think about it: would you,
as an experienced investor, allow a broker or newsletter writer to convince
you to put all of your assets into tech stocks? Not after witnessing the dot-com bust,
to be sure. Many of you reading
this essay are do-it-yourself types of investors; if the passage above
represents one of the most frowned-upon practices in which an advisor engage,
why, then, would you do it to yourself in any asset class?
About
a Dollar Pullback
Moving to the subject of a
possible correction in the U.S. Dollar, here’s one last thought that
some might find valuable: it’s simple, S-I-M-P-L-E, to see that the
Dollar’s surge is now very extended, anti-Euro sentiment is running red
hot and the Dollar is being embraced in a way it hasn’t in quite some
time. Now, I’m still a bit
different because most analysts continue to see this as a counter-trend rally
in an ongoing bear market for the Greenback, whereas I suspect that perhaps
something has changed and we may actually be in the early stages of a Dollar
bull market. That being said,
however, some counter-trend (I.E. non-Dollar) trading moves should be ripe
for the picking at the moment.
For those who might try to nibble at such opportunities, allow me to
make the following suggestion: gravitate toward strength.
When trading, my anecdotal
experience suggests that assets that hold up best when their sectors are
falling tend also to rally the most when the trend turns their way. As I’m currently sizing up
trading opportunities, I’m personally looking at silver (with its
notable, downright suspicious recent strength) as more attractive than gold
and the Canadian Dollar as preferable to the more obviously oversold Euro, as
examples. Again, it would be my
broad generalization that for traders, this is a savvy way to go about
searching for possible short-term winners.
As for the rest of you who
aren’t going to try and aggressively trade a short-term pullback in the
U.S. Dollar: tune out the dogma, learn exactly how much currency gains have
contributed to your recent foreign equity success and be prepared to protect
yourself should the U.S. Dollar give you a break and pullback, as it seems
poised to do.
A
Couple of Unrelated Notes:
Note #1: While I have been
making the case for a Dollar rally in 2005, 4 gold-related websites,
have continued to post my articles.
To their credit—to their immense credit—Kitco.com,
Gold-eagle.com, 321gold.com and 24hpm.com have kept carrying my commentaries
throughout, despite the fact that my thesis of a rally in the US Dollar is
inherently negative for the products they promote, precious metals. And these sites show no signs of
letting up, not knowing whether I’ll continue to be a Dollar bull for
another week or another year (truth is, I don’t know myself). Kudos to these great websites, who
obviously care enough about their readers to look past their own short-term
business interests and share conflicting opinions with them.
Note #2: My apologies to
those of you who tried to access the link in my last commentary which was
supposed to take readers to my original December article that called for a
Dollar rally in 2005 (before I even established Delta Global in January). At the time I submitted my last essay,
that link worked, but the fact it no longer does is something I cannot
control. One can only speculate
as to who would be working so feverishly to erase that call from
investors’ minds and why.
Chip Hanlon
President
Delta Global Advisors, Inc.
A renowned
technical analyst, Mr. Hanlon served as the C.O.O./Chief Domestic Strategist
at Euro Pacific Capital prior to taking the reigns at Delta Global. He had previously been the President
of Unfunds, Inc. and spent 7 years prior with Sutro & Company as a Vice President and the company's
Los Angeles Director of Syndicate Offerings. His current firm provides direct
trading access to international markets and he is also a regularly-published
expert on commodities and precious metals.
19051 Goldenwest, #106-116
Huntington Beach, CA 92648
Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
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