Contra-Dollar Investments

12/24/2004 12:00 am EST

Focus:

"There will be dollar rallies," says Martin Weiss. "But don't let these minor moves derail you from positions in contra-dollar investments. Dollar rallies are an opportune time for you to add to your positions in such sectors as gold and energy." Here are some of his favorites.

"The US dollar recently fell to an 8-year low against a basket of currencies and still another all-time low against the euro. It is falling rapidly in terms of how much it can buy in steel, copper, paper, and virtually every commodity under the sun. Its value has just suffered the worst one-month decline against consumer goods in 16 months, and the worst one-month plunge against producer goods in 14 years. This has been good new for our contra-dollar investments such as gold, timber, and energy trusts. These are investments that almost invariably go up when the dollar declines — investments we've been moving you into, step by step, for many months. They are nicely outperforming virtually all other sectors, and I have every reason to believe they will continue to do so in 2005, even when the overall market turns sour.

"Will your contra-dollar investments surge in a straight line, with no interruptions or corrections? No. But corrections will only be temporary. Any attempts by central banks to artificially goose up the dollar's value or soften its decline will be an exercise in futility. They cannot and will not succeed unless we start resolving the fundamental forces that are driving the dollar down, such as a budget process that is out of control, the worst trade deficit in history, abnormally low short-term interest rates, and the US borrowing and spending craze.

"Why is the US trade imbalance so bad? The main reason is the surging US appetite for foreign imports, driven by one of the wildest and most irrational spending binges I've witnessed in my lifetime. Indeed, since 2000, spending growth has consistently outpaced income growth in the United States. And to make up for the gap, US households have borrowed through the nose on credit cards, home refinancings, and zero-down, zero-payment auto deals. More than any other single factor, this American lust for borrowing and spending is what's driving our trade balance into the gutter, and our dollar into an abyss. As long as it continues, expect a further dollar decline.

"Despite these concerns, stock could continue to rally. Right now, American investors are being told by Washington and Wall Street that the dollar decline should actually be good for the U.S. economy. So they continue to pour their money into stocks. Further, short-term technical indicators for the stock market are pointing upward, suggesting the stock market rally could continue for a while, despite a dollar decline. We note that we witnessed a very similar pattern in 1987, as the dollar plunge began in earnest in April, but the stock market crash didn't strike until October. History proves that, over the long term, a weak dollar policy has never worked: Since the 1960s, even though the dollar has been going mostly down, our trade balance has been getting steadily worse.

"Looking ahead, what's the best way to play a market that's moving up but still vulnerable to a sharp decline in the near future? Continue to avoid tech stocks and most blue chips. Instead, add stocks in those sectors that are driven by the declining dollar and its immediate consequences — rising oil, gold and commodities. These sectors are not rising primarily because of the rising tide in stocks. Rather, their upward thrust is driven primarily by the falling dollar, a trend that is neither weak nor temporary. Buck the falling dollar, and I'm afraid you will be sorry. Stay on the right side of the falling dollar and you should continue to make a lot of money.

"We also continue to hold the Prudent Global Income Fund (PSAFX). We recommended this fund to help protect you against a dollar decline, and it has done just that, rising 10% in just 18 weeks. Our recommendation for US Global Natural Resources Fund (PSPFX) has also been a sparkling success, rising 36%. We also recommend adding to our position in iShares MSCI Canada Index (EWC AMEX). There's hardly a better instrument for cashing in on the bull market in commodities and, at the same time, the plunging dollar, than this exchange traded fund. My reasons are threefold: First, Canada's economy has deep roots in natural resources. 12.6% of Canada's GDP is derived directly or indirectly from commodities, minerals, and other sectors that involve natural resources. And when these are in a long-term bull market, as they are now, Canada benefits. Second, the plunging U.S. dollar is the corollary to a soaring Canadian dollar, helping to boost your return in EWC. Indeed, a key reason EWC is doing so well — up 33% since its May low — is because of the appreciation in the currency. Third, EWC is made up of a basket of Canadian stocks, including energy and materials stocks such as Suncor Energy, Encana and Alcan, which are a hefty 39% of its portfolio.

"Until recently, gold was rising in tandem with the dollar's decline — good news for all investors with a solid stake in gold and gold shares. Now, however, it's getting even better: Gold is not only rising against the dollar, it's also appreciating against other currencies — to new multi-year highs against the yen, and on the verge of doing the same against the British pound, the euro, the Australian dollar, and the Canadian dollar. Once that happens, don't be surprised if gold prices go ballistic in an across-the-board advance that rewards not only investors in gold, but virtually all our counter-dollar assets. Here are some of our gold holdings; for not yet on board, we recommending buying.

"Newmont Mining (NEM NYSE) is a must-hold blue chip mining company. And now it's setting new 8-year highs. I expect it to challenge its all-time high of $60.79 set in February 1996. Agnico Eagle Mining (AEM NYSE) is now on the verge of setting new 2- year highs. Next stop: Its all-time high of $20.96 set in 1996 — another 33% rise from current levels. And Cambior (CBJ AMEX) fell from $16 per share in 1996 to a paltry 19 cents per share at its low in December 2000. But now this stock is beginning to fire up for a big move; it is up 50% since May, and over 1500% since its December 2000 low. I think it has the potential to hit at least $6.50 per share as gold soars. In addition, USGI World Precious Minerals Fund (UNWPX ), a top-ranked fund, is up over 47% just since its August low as natural resources fly. I expect the fund to exceed its all-time high of $24.21 sometime next year.

"We also continue holdings several recommended energy trusts: Enerplus (ERF NYSE), BP Prudhoe Bay Royalty Trust (BPT NYSE), and Mesa Petroleum (MTR NYSE). We recommended these energy trusts primarily for the high dividend yields. However, we would note that higher stock prices that result from high oil prices are icing on the cake. In addition, which have a new recommendation in the oil sector - Ship Finance International (SFL NYSE) .This is a relatively conservative way to take advantage of the burgeoning demand for oil. SFL pays a dividend yield of 7% dividend ($1.80 per share), has a solid revenue flow, and sports a ‘kicker’ that could boost your total return substantially in the near future. The company has bought 46 oil tankers from the British shipping company Frontline and then leased them back for the next decade. Frontline guarantees the lease payments, which, in turn, covers Ship Finance's dividends paid to shareholders. In addition, when Frontline earns revenues in excess of a fixed rate, Ship Finance gets an extra bonus of 20% of the revenues. The fixed rates decline gradually over the years. That's good because the lower the fixed rates, the better the kicker. In October, for example, rates for the VLCC tankers on some routes soared 34% to nearly $200,000 a day. That means the company's 20% share would amount to some hefty extra revenues, and potentially higher dividends for investors. One caveat: 18 of the company's 46 ships are single-hulled, which means that after 2010, they will no longer be allowed to operate in most ports. However, at current scrap metal prices, just the salvage value on those ships alone is worth somewhere in the range of $11 to $15 a share, not to mention the value of the other 28 double-hulled ships. Bottom line: We believe the 7% dividend yield is the least you can expect, with a solid opportunity to do a lot better."

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