Saturday, July 23, 2011

How high can loons fly anyway? (Part III)

As said earlier, the gig may be up for a falling U.S. dollar. The U.S. government is cornered! If they don't control spending the rating agencies will lower the U.S. debt rating from 'AAA' to 'AA'. This would mean that the U.S. can no longer borrow at excessively low rates – just at low rates. When that happens more people would want to invest in those bonds because their interest rate is up, which in turn would drive up the U.S. dollar.

On the other hand, if the political parties do get an agreement on reducing their deficit then the U.S. dollar is likely to rise as well as people are feeling more secure about investing in U.S. debt. So either way, it seems that from now on, the U.S. dollar may start to rise again. A recent survey of major successful investors by City Bank shows that many expect the U.S. dollar to turn around. The Canadian Dollar, in U.S. dollars hasn't been this expensive since the early 1980's and one wonders whether it is realistic to foresee a Canadian dollar price at U.S. $1.20?

Taken this all together, Canadians may never have been able to buy U.S. denominated assets as cheap as today. Real Estate is way too risky. If you don't believe me about the risks on investing in U.S. real estate then listen to one of Canada's foremost real estate experts: Don Campbell and in particular his 6 rules for investing in the US

Overall, the U.S. economy is still weak but on a gradual path of recovery. By investing in U.S. dividend paying stock you get paid while waiting for this recovery. However, even more rewarding may be the fact that many U.S. large cap companies are linked no longer to only the U.S. economy but also to that of the rest of the world and in particular high growth economies such as India and China. You buy many of these U.S. multinationals not only at a severe discount using Canadian dollars to buy U.S. denominated assets but you also buy them currently at a low P/E (share price divided by earnings per share). The earnings of companies such as Apple, Microsoft, MacDonald's, Kraft and Coca-Cola have lately blown off the barn doors but because they are considered part of the lack-lustre U.S. economy rather than of a stronger global economy their valuations are very reasonable. My guess is that the multinationals that make up the Dow Jones are set to take off in a significant way. Not only the charts are indicating this (see ealier post this week) but even more so, the fundamentals are doing so as well. Buy ETFs that mimic the Dow Jones Industrial index or buy the multinationals individually.

Next week, when the U.S. leadership proves not able to reach a compromise about how to reduce their deficit and their failure to raise the debt ceiling, these share prices may temporarily become even cheaper. So be ready with your cash to take advantage of this buying opportunity. Because I think we're not far from the point that our loonie won't fly much higher.

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