Contrarian Madness! Trade Up Your Euro and Canuck Bucks for Cheap U.S. Large-Caps

Today's comment is by Eric Roseman, our Investment Director and Editor of Commodity Trend Alert.

Dear A-Letter Reader,

I think this article will definitely raise some eyebrows today, but I've got tell you how I feel just the same.

U.S. large-cap stocks are probably one of the best bargains in the world today, and not just for local currency investors in the United States. For European investors, including British sterling-based and Canadian dollar-based investors, American multinationals are literally one of the best deals of the decade. And they're getting cheaper by the day as the U.S dollar continues to slide.

The American buck is now trading at a 15-year low versus major world currencies. The slumping buck is also at par-value vis-à-vis the Canadian dollar for the first time since 1976.

The Best Bargains in the World Today

S&P 500 Looks MUCH Better in Dollars

The above chart of the S&P 500 Index shows the value of the broader market expressed in dollars. But if we converted the same chart to euros, the cumulative 36% total return since September 2004 would be reduced to just 24% in euro terms. Over the last 12 months, the same index has gained 13.5% in dollars. But it's only 3.2% in euro, as the dollar's been dropping.

The Canadian dollar has soared more than 60% since hitting a 125-year low six years ago versus the greenback. So for Canadian dollar investors, American stocks look even cheaper.

The Canadian dollar has gained a cumulative 26% since September 2004. If a Canadian dollar-based investor bought the broader market in the United States three years ago, his resulting net gain would be just 10% after adjusting for the Canadian dollar rally.

You Want the "Other Guy's" Currency to Be Cheap

The best time to buy stocks in a foreign market is when your currency is expensive and the target market stocks are undervalued in local currency terms. That's the case now with stocks in the United States, Japan and most fast-growing markets in Asia and even parts of Africa.

Over the next 12 months, the U.S. broader market is going to post double-digit gains. This is going to shock most investors who are still bearish on the U.S. economy in general. Historically, stock market declines have preceded economic recessions. But thus far, stocks are just 2% from their all-time highs. Credit spreads are still tight and commodities prices are soaring - hardly a macro environment for a recession.

U.S. stocks are the bargain of the decade for foreign investors because the dollar is dirt-cheap and earnings are still growing. As a result, American multinationals will yield a bonanza from overseas corporate earnings over the next few quarters following a U.S. dollar nosedive.

Call me contrarian, but 12 months from now, you'll be happy you sold some expensive euro and Canadian dollars for undervalued U.S. blue-chip stocks.

ERIC ROSEMAN, Investment Director

Change in Panama? Not Really!

Regular readers know that we recommend Panama as one of the world's leading asset protection and tax havens. It's an inviting menu for offshore investors featuring trusts, exempt corporations, world-class banking and even family foundations to manage wealth.

Unlike too many other jurisdictions, Panama stands by its iron-clad financial privacy laws. Panama only waives these privileges for probable cause of criminal activity. Panama has no tax treaties with any other nation and it doesn't tax foreigners who live there or base their offshore businesses there. Add to all that special residential and citizenship laws designed to attract foreigners, and you have some mighty inviting choices.

But whenever I recite this impressive litany, invariable I am asked, usually by an American: "How do you know that all this won't change? What if Panama sells out?"

Of course nothing in life is certain, except eventual death. Not even taxes. And certainly not real estate prices, (more below). But the peculiar history of this tiny nation, (with asset protections laws dating back to the 1920's), makes it a wary friend of the United States government.

A century ago, America helped create Panama for Washington's geopolitical convenience. But the U.S. colonial control ended on January 1, 2000. The U.S. left behind a healthy Panamanian skepticism towards Uncle Sam, the Colossus of the North. Both that closeness and distance works to maintain Panama as an ideal tax haven that's not under the thumb of any nation. Compare that to the hapless British overseas territories whose offshore financial attractions have been curbed by the Labour government in London.

Let's face it. The big downer in Panama at the moment is the upward spiral of real estate prices, mainly in condo-saturated Panama City.

The great appeal to foreigners used to be the ability to buy a 3-bedroom, 2-bath condo with ocean view, a golf course town home, or a beach front cottage, for a third or half of what it cost in south Florida or California. With Panama City area prices now almost paralleling those in the U.S., practical foreigners eyeing residential Panama are less than impressed. (There are still many good bargains in beachfront and mountain properties away from the city, but you have to be careful and do your shopping.)

Understand that the unfortunate change I have described is economic and confined to real estate prices. The real estate bubble does not have a major impact on Panama as a tax haven, a financial privacy haven, an offshore banking center or as a place to base your global business - all tax free. Its infrastructure is first-world and many of its offshore professionals are excellent. (Again, you need to be careful - just as you should when doing business in America.)

Life is making do with what is best and at hand. For those who want legal tax savings, asset protection and privacy, history has made Panama an ideal 21st century offshore haven in a world where few remain.

Panama has not "sold out." Yes, its real estate moguls and condo flippers have oversold themselves right out of the market. But just because the hot air is slowly leaking out of the Panama real estate bubble, (just as it has with a vengeance in the U.S.), does not mean Panama's other important attributes have disappeared.

As a world-class tax haven Panama still ranks at the top - it's a nice place to have your cash and assets, even if, at the moment, you might not want to live there.

BOB BAUMAN, Legal Counsel

P.S. Interested in using Panama as an offshore base for your banking or business? At our Offshore Advantage Academy this November 7 - 10, I'll explain exactly how to make this happen. This entire four-day event focuses on the "nuts and bolts" of the offshore investing world. Our various "professors," (including myself) will be explaining the basics of offshore investments, tax strategies and offshore banking. Interested in expanding your horizons offshore at this event? You better hurry. You only have two days left to claim your early bird discount. So don't wait, get the full details on the 2007 Offshore Advantage Academy right now.

Currencies

An Odd Twist of Dollar Fate

It's no secret that the U.S. dollar fell to 15-year low recently. Traders are dumping dollars with a vengeance and adding to the negative dollar sentiment. And as you know, the Fed just kicked the dollar while it was already down by cutting rates.

There's the odd chance that in the midst of all this negative dollar news, we could see an interesting consequence come out of the Far East. We could see China give the world what it wants - a much faster increase in the value of the yuan. Up until this point, China policymakers have been working overtime to keep the value of their currency low, but that may soon change.

Why? It's because inflation is ramping up quickly. And inflation in China is a serious social problem, more so than in the West. Chinese families spend a much greater percentage of their average budget on food, energy, housing, etc. than Western families. Food, energy and housing are the items that are inflating the fastest, so Chinese families are forced to spend more, or go hungry and freeze. This obviously creates social unrest.

And of course, if the Chinese do finally allow their currency to appreciate to fight this domestic inflation, they won't need to hold as many U.S. dollars in their reserves. They won't have to hold dollars to keep their currency undervalued if they're going to let it appreciate anyway.

And dollar for dollar, they can buy more oil with a stronger currency (and every other major raw material they input - including pigs - a staple of Chinese diet). At minimum, if this plays out and the Chinese let their currency appreciate, the dollar would get slammed once again.

But, if for some reason (political, environmental, financial) China stumbles here, the dynamics for the buck could change quickly. For it seems China is the key to the global growth story.

No other country has the clout to make that kind of change. Relative bad news from the U.K. hasn't done it. A big slowdown in the Eurozone services reported last week hasn't done it. Japanese political turmoil hasn't done it.

So, you know the old saying, as China goes, so goes the dollar.

JACK CROOKS, Editor
World Currency Options

• Buy a luxury home at a 60% discount to comparable properties and pay NO REAL ESTATE TAXES for the next 15 years
• Legally shield your wealth from predatory lawyers and other busybodies; with iron-clad financial privacy laws
• Create your own international corporation and do business anywhere in the world - without leaving home, filing financial accounts or paying taxes to the local government
• Discover how the very same opportunities are now waiting for you in Panama