I heard on CNBC earlier this week that 50% of all sales by U.S. companies were made in foreign markets. That’s 50%.

And considering those sales are made in foreign currencies that continue rising relative to the greenback, it makes you wonder the real reason earnings reports remain strong.

Considering the dollar just hit a 26-year low against the sterling while the Euro creeps towards record levels against the greenback as well, it seems one would have to factor a portion of this first quarter earnings strength to currency exchange rates.

I also find it a bit disconcerting that American companies seem to rely more and more on foreign consumers.

Let’s face it… American’s have little left to spend. We save nothing, consume by borrowing and rely on a fundamentally and morally bankrupt entitlement system to make the headache all go away.

I’m not calling for the complete collapse of the American empire…but the undeniable shift of capital to foreign markets has to make you stop and think.

According to Tim Hanson at The Motley Fool, nine of the 10 largest IPOs of 2006 and 24 of the 25 largest IPOs of 2005 occurred in foreign markets.

To me, all this means one thing: It makes more and more sense for American investors to start allocating a greater percentage of their portfolios in foreign markets.

Hansen goes on to point out that foreign holdings now account for 17% of all U.S. stock ownership.

Personally, at the moment I have roughly 83% of my entire equity portfolio in foreign stocks.

And even though approximately 50% of the world’s population rests in Asia — the region of the world experiencing the most dynamic growth — I certainly don’t place all of my eggs in the Asian basket. There are plenty of great buys in Latin America and Western Europe as well.

Now there’s no denying that last year alone, the emerging markets around the Pacific rim accounted for more than half the world GDP. They now churn out 43% of the world’s exports and hold 70% of the world’s foreign exchange reserves.

And while real wages in the developed west are either flat or falling, wages among the up and coming nations of Southeast Asia continue growing.

It would be silly to ignore this. But remember, successful investing will require buying shares of businesses at the right prices.

And right now, for what it’s worth, China is anything but cheap.

But we’ll keep looking… This story won’t play out overnight.

Until Next Time,
Christopher Hancock
April 27, 2007

Relation of Small-Caps to Consumer Spending was originally featured in the Penny Sleuth.

The U.S. denomination bearing both Alexander Hamilton and the United States Treasury happens to be the first indoctrinated with this autumn hue.

Are the powers-that-be playing some sort of sick joke?

Meaning, can the crux of the dollar’s precipitous slide be attributed to the note’s mysterious color shift from green to red?

The dollar has tumbled more than 23% since 2002, according to JPMorgan’s trade-weighted exchange rates. And that’s a significant fall (no pun intended) considering Asian central banks keep buying most everything we print.

The Euro appreciated more than 11% against the greenback in 2006 alone.

Our boys at the Treasury claim these color changes impart important security features.

Should we have seen this coming?

Our national currency used to operate on the gold standard. Meaning, the paper money in circulation remained directly linked to fixed amount of stored gold. To produce more paper money required nations to mine (or acquire) more gold. This standard created long-term stability and thwarted inflation.

But the gold standard had one minor flaw: It prevented governments from creating money out of thin air.

And when governments needed money to wage wars and stimulate economies, it naturally became easier to print paper than to mine gold.

The transformation from the gold standard to fiat money occurred within the premises of the West’s obligation to finance the First World War.

By 1933, Franklin Roosevelt revoked America’s direct monetary link to gold altogether. He opted for a fiat currency.

Fiat Money is a currency (like the United States dollar) that isn’t backed by any tangible asset like gold or silver, or even bushels of corn for that matter. It’s a currency that derives its entire worth on nothing more than a promise. It’s a promise by the Federal Government.

The covenant states that paper money is backed by the full faith of the United States government. I’m not really sure what that means exactly. I’m not sure how to quantify or redeem “full faith.”

As American lawyer, lecturer and author, Rene A. Wormser noted in his book Conservatively Speaking: “Before 1933 our Federal Reserve notes contained the promise they could be converted into gold. Later that caption was changed to read that a bill could be exchanged for ‘lawful money’ of the United States ‘except more of the same.’ When finally, someone recognized the absurdity of this legend, it was dropped and our bills now contain merely the comforting legend: ‘In God We Trust.’”

The subtle devaluation of a nation’s universal currency has significant historical precedent.

The Roman’s adopted a national currency. It consisted of coins including the aureus (gold), the denarius (silver), the sestertius (bronze), the dupondius (bronze) and the as (copper).

The only drawback: Romans spent more than they could make. Sound familiar? Do you know any other governments proficient in this practice?

To fuel expansion, the Romans needed money. But silver and gold mining couldn’t keep pace with need to mint more coins. The Romans had a short-term solution. Dilute the value of money! Déjà vu?

The Romans decreased a coin’s intrinsic value: The percentage of precious metal in the coin itself. Before long, silver coins were anything but silver. With the strength of the coin went the strength of the Empire.

Currencies rise and fall like alongside the empires that create them. The U.S. dollar certainly isn’t immune to this phenomenon. Compared to its value in 1913, a dollar today is only worth five cents.

The more I read about currencies, the more it makes sense to invest in companies that derive a majority of their revenues from countries whose currencies are stable or on the rise. Places like China, Canada, Hong Kong, Singapore…or even New Zealand.

Large-cap or small-cap, it doesn’t matter. Companies earning revenues in foreign currencies offer the investor a fantastic way of neutralizing the side effects of a U.S. dollar destined for extinction.

We’ll leave it at that.

Until Next Time,
Christopher Hancock
March 2, 2007

P.S.: If you want to find out how you can profit from the U.S. dollar’s status as an endangered species, be sure to read Addison Wiggin’s bestselling book The Demise of the Dollar.

Demise of the Dollar was originally featured in the Penny Sleuth.