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.