How Just Three Letters Can Juice Your Gains by a Factor of Five

     You don't need to call in CSI to figure out who triggered the global economic recession. The U.S. left its fingerprints all over the subprime mortgage and toxic asset wasteland. When the U.S. GDP dropped -6.3% in the fourth quarter of 2008, our economic contraction was felt the world over. Needless to say, we haven't been scoring many points on the international scene.

     But to make matters worse, the economic crisis triggered a series of events that sent the relative value of the U.S. dollar soaring -- at the expense of almost every other world currency.

     The Salt in the World's Wound: The Rising Dollar

     As markets began to slide and volatility began to explode, investors ran to a traditional safe haven -- U.S. Treasuries. The flight to safety drove U.S. Treasury prices up and yields down. The yield on the 3-Month bill was 1.90% at the end of June 2008. By the middle of December it was zero. Over the same period, the yield on the 10-Year Note slid from 3.99% to 2.08%. And as investors clamored for U.S. dollar-denominated government debt, the relative value of the U.S. dollar took off, leaving every other currency in the dust.

     Experienced traders saw it coming. For instance, billionaire financier George Soros shorted the British pound in the summer of 2008, just as the subprime crisis was starting to spread. And sure enough, the British pound hit a 25-year low by the end of January 2009.  

     Soros may have been pleased, but foreign countries were not amused. Some, including China and Russia, even went so far as to call for the creation of a new global reserve currency to replace the U.S. dollar as the world's standard. G20 countries balked at the U.S. proposal for more international stimulus spending. After all, the U.S. could borrow money for its federal spending dirt cheap -- with historically low U.S. Treasury interest rates. Other countries were at a decided disadvantage.

     But the dollar's skyward ascent looks like it's at the end of its run -- and that opens the door to a historic opportunity for U.S. investors.

     The Dollar's Loss Will be ADRs' Five-Fold Gains

     Right now U.S. investors have an opportunity to lock into strong, attractively valued, foreign companies -- some at the cheapest valuations they've been at in decades. But if you buy shares in a foreign company's American Depository Receipts (ADRs) -- you'll get an even bigger bonus. As the U.S. dollar falls, this asset class actually rises -- effectively juicing your gains.
 
     There are almost 170,000 actively traded securities around the world, but there are only 2200 ADRs trading on U.S. stock exchanges. Because of the stricter financial and regulatory guidelines --  along with the listing fees -- only the best and the brightest foreign companies list as ADRs. ADRs represent shares of a foreign company, but they are traded just like stock on U.S. stock exchanges and are valued in U.S. dollars.

     Why are ADRs better when the dollar is falling?
 
     Say you buy ADRs in a British company. Let's assume the company's shares, traded in pounds on the London Exchange, gain +5% by the end of the year. If the relative valuation of the pound and dollar stay the same, you can expect your dollar-based ADRs to also rise +5%. But let's assume the British pound recovers just half the valuation it lost against the dollar by then. Instead of a gain of just +5% -- ADR holders will end up with a gain of +28.5% -- or more than five times the gains!

     Why? Because each pound is now worth more dollars. And your stake in this British company is also now worth more dollars.

     Why Will the Dollar Fall?

     The dollar is already moving off its relative highs. And going forward, the pressures on the U.S. dollar look to outweigh the pressures on foreign currencies. As investors feel a little more comfortable about risk, they'll move out of U.S. Treasuries, which are currently offering measly yields of 0.15% for the 3-Month bill and 2.85% for the 10-Year note.

     And while the U.S. may absolutely need every penny of stimulus spending and bailouts to jump-start its economy -- adding dollars to the money supply and flooding the market with new Treasuries won't do the value of our currency any good.

    And remember George Soros -- shorting the pound before its relative valuation collapsed? He covered his short position in February, within pennies of its historic low. He's made more than a billion dollars calling the tops and bottoms of currency markets -- and I think he called this one just right. 

     I actually hope the dollars stays near its historic high -- for just a little bit longer, anyway. Just long enough for me to get in on some of the best foreign bargains -- with the best currency advantage -- in decades. 

Always Searching for the Next Great Idea...



-- Amy Calistri
Chief Investment Strategist -- Stock of the Month

StreetAuthority Investor Update

Exchange-traded funds are becoming a serious threat to traditional mutual funds, a trend that will gain pace over the next few years.

That's the word from Financial Research Corp. of Boston, Mass, which released a study on ETFs Monday. In a survey of financial advisers, FRC found that 71% of the advisers it polled used ETFs in 2008, up from just 25% in 2003.

-- The Wall Street Journal

Art prices plunged during the first quarter of the year as cash-strapped collectors looked to unload works by postwar masters that had earlier boomed in price along with the stock market.

The Mei Moses index shows art prices fell 35 per cent in the first quarter, having held up during earlier months of the financial crisis.

-- Financial Times

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