Opportunities from a Falling Dollar

12/22/2006 12:00 am EST


James Stack

President, Stack Financial Management

Agreeing with the Adens on the direction of the dollar, economic expert James Stack offers additional investments for taking advantage of the forecasted decline. Additionally, he takes a second look at one of his previous recommendations.

"A dynamic decline in the dollar can affect confidence and liquidity in financial markets, and it can send bond yields higher. When this dangerous combination occurs, the risk on Wall Street increases. Such a storm was a major contributor to the 1987 stock market crash.

"To offset the potential effects of a falling dollar, we advise adding international investments that serve as dollar hedges and diversify outside the US. We favor international mutual funds, with emphasis on Japan and Asia to take advantage of regional growth and because the yen has not appreciated as much as the euro. Also consider foreign domiciled companies--like BCE (BCE NYSE) and Diageo (DEO NYSE)--which trade as ADRs, or look for US firms that derive profits from foreign markets. Earnings at these companies can benefit from a falling dollar.

"While some mutual funds and ETFs that invest in foreign currencies or derivatives to hedge a weak dollar, we aren't particularly keen on these. Currency markets are notoriously volatile and unpredictable. The better and safer profit opportunities are generally in foreign equities, where you gain both from the currency play and growth in foreign markets.

"We placed a hold on BCE in October, based on the company's proposed change in corporate structure (conversion to an income trust) and share price appreciation.

"One of our reservations was quickly realized when the Finance Minister of Canada surprised the market with an official announcement that Canada was planning for the first time to tax dividends on income trusts. The move was aimed at closing a loophole that is costing the Canadian government over C$500 million in lost corporate-tax revenue.

"But in the company's much-anticipated annual business review conference call, BCE announced that it was not moving forward with the planned conversion to an income trust. However, it still plans to simplify its corporate structure and eliminate its holding corp. status; and it will change its name to Bell Canada, Inc. This is consistent with the firm's recent divestitures and restructuring over the past two years to become purely a provider of communications services.

"BCE also announced an 11% dividend increase and a renewed share buyback program. These actions, along with a moderate share price retracement and increased confidence in the company's ability to focus on the growth areas (wireless, video, and high-speed Internet services), have persuaded us to reinstate our buy recommendation."

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