Eating at the Asian Buffett

Ive been watching a steady stream of Wall Street experts salivate over the fact that the Dow Jones is approaching a new all-time high. Well, I think the bulls should wipe away the drool.

Sure, the Dow has been jumping, mainly because its energy and natural resource sectors have been on fire. However, Wall Street is also ignoring the fact that Americas darling tech stocks are still floundering.

Have they not noticed that the Nasdaq is still more than 50% below its all-time high of 5,132, set in March of 2000? Tech stocks would have to double from current levels just to match those levels.

Meanwhile, the story has been very different for Asian tech stocks. Just last week:

The Morgan Stanley Asia-Pacific Index hit a record 363.04.
The Taiwan Taiex index climbed as high as 7,455 the highest level since September 6, 2000.
Both the Hong Kong Hang Seng and Japanese Nikkei index punched through 17,000.

Of course, Ive been telling you to include foreign companies in your portfolio many times before. Just last week, in Cracking the DeVice Code, I gave you two new foreign stocks to consider.

Now, the worlds most famous investor is singing that same tune …

The Overseas Oracle

Last week, Warren Buffett made his first ever purchase of a non-U.S. company when Berkshire Hathaway bought 80% of privately held Israeli metal-cutting tool maker Iscar Metalworking in a transaction valued at $4 billion.

With that one single investment, Buffett is now one of the largest foreign investors in Israel. When Buffett goes, he goes big.

Im not an expert on Iscar Metalworking. But I do know that Buffett is sending a clear message with this purchase. In his own words:

“[Iscar is] the first business we’ve purchased that’s based outside the U.S. You will probably look back on this in five or 10 years as a very significant event in Berkshire’s history.

Significant event? Absolutely!

Buffetts move implies that many of the best opportunities are to be found outside the U.S. At the end of March, Berkshire had about $37 billion in cash, and I expect a lot more of this money to go into foreign companies.

Why? Because there are tons of great firms operating overseas. And many of them represent tremendous value.

Moreover, Buffett is not one to jump on bandwagons. If hes getting into foreign markets, youd better believe theres significant upside left.

In addition, I think Buffetts move signals something else that the dollar is going to continue its decline.

Extra Juice from
The Falling Dollar

Ill give you one simple rule to remember: When the dollar is falling, stand up and listen.

In 2002, Buffett made billion dollar bets against the dollar. More recently, he boosted his money in the pot.

And hes been mostly right: In its 2005 annual report, Berkshire Hathaway reported roughly $2 billion in profits from its bets against the dollar.

Buffetts investment in Iscar is probably following this same strategy, only in a slightly more interesting way. Not only does Buffett expect his investment in Iscar Metalworking to increase in value, he also anticipates a boost from currency gains. Thats because his investments denominated in foreign currencies will increase in value as the dollar falls.

I think Buffett is dead right in playing the falling dollar. And I think the strategy will work especially well with Asian stocks. I say that because I expect the dollar to be especially weak against the Japanese yen, and against virtually all major currencies.

We are currently running huge trade deficits with each of these countries. And as Martin explained yesterday, the long-delayed day of reckoning for the deficit-laden dollar is now upon us.

Meanwhile, Asian countries are collaborating to help speed the dollars decline. The Asian Development Bank met in India last week. There, finance ministers from South Korea, China, and Japan agreed to form an Asian monetary union. Their long-term goal? To create a common Asian currency that could compete with the euro, and ultimately, the dollar as well.

Heck, not too long ago, someone visiting France, Germany and Italy would have needed a wallet full of francs, marks, and lire. Now all they need is a pocketful of euros. Similarly, the Asian Development Bank is pushing the concept of one Asian currency unit.

Admittedly, that might be a ways off. But until then, these three finance ministers agreed to coordinate their foreign-exchange policies and immediately launch discussions on the road map for the system to coordinate foreign exchange policy.

That policy could include a coordinated reduction of U.S. dollar holdings.

Theres certainly been talk of such action. Just last Friday, the Prime Minister of India, Manmohan Singh, urged his Asian neighbors to divert their vast savings and trade surpluses away from foreign currency instruments and into regional development projects. He said:

Given the potential for investment demand in the region, we must find ways of making better use of our savings.

Warning: When the Asians start dumping dollars, watch out below. The dollar will sink like a rock!

What to Do Now

Follow Buffetts lead and start diversifying out of the U.S. and into carefully selected foreign markets.

Right now, the fastest growing part of the world is Asia. So thats where Im looking first.

And one of the easiest ways to get immediate international exposure is by investing in exchange traded funds (ETFs) that target specific countries in Asia.

Look: Over the last 12 months, every Asian ETF has climbed by at least 10%. And they show no sign of slowing down.

My favorites:

iShares MSCI Japan Index (EWJ): Although these iShares are up the least of the Asian ETFs so far this year, Japan is quite simply the blue chip way to participate in the Asian growth story. Like the story of the hare and the tortoise, its not always who gets off to the fastest start; rather who maintains a sustainable pace. Thats why the EWJ could ultimately prove to be the most productive Asian ETF over the long haul.

iShares FTSE/Xinhua China 25 Index (FXI): With the Chinese economy growing at more than 10% a year, this fund is certainly worth your consideration. FXI invests in the 25 largest and most liquid Chinese companies, such as CNOOC (NYSE: CEO), China Life Insurance (NYSE: LFC), and China Mobile (NYSE: CHL). That makes it the Chinese equivalent of the Dow Jones U.S. index.

Note: If you prefer regular ol mutual funds, you may want to look at U.S. Global China (USCOX), a traditional mutual fund that specializes in Chinese investments.

iShares MSCI Hong Kong Index (EWH): China may get all the headlines, but Hong Kong is one of the very best ways to participate in Chinas growth. This diversified basket of Hong Kong companies currently emphasizes banking, financial services, and real estate companies. However, the Hong Kong stock exchange is rapidly becoming the listing destination for a growing number of companies in mainland China.

iShares MSCI Taiwan Index (EWT): I really believe there are three economic giants in the Chinese region: China, Hong Kong and Taiwan. China and Hong Kong are growing at astounding paces, but Taiwan may very well end up being the most productive way to participate in that growth. Better yet, Taiwanese stocks have been out of favor because of political tensions between Taiwan and China. I think those problems will get ironed out. And when they do, Taiwans stocks could surge!

iShares MSCI Singapore Index (EWS): Think China is growing fast? Take a look at Singapore, one of the fastest growing economies in the world. Their economy probably expanded by at least 9.1% in the first quarter of 2006. However, the Straights Times Index of Singapore stocks trades at a bargain 16 times earnings. If you want a lot of bang for your buck, the EWS ETF could be the best deal in all of Asia.

iShares MSCI Korea Index (EWY): The Chinese economy may be expanding the fastest in Asia, but corporate profits are rising faster in two other places one of them is South Korea (13%). When it comes to translating economic growth into cold, hard profits, South Korea is a good bet. Of course, Japan is posting even faster profit growth (15%), which is why you should check out

iShares MSCI Malaysia Index (EWM): Malaysia reported a $4.8 billion current account surplus in the fourth quarter of 2005, and thats expected to increase another 6% this year. More importantly, Malaysia produces 800,000 barrels of oil a day, but only consumes 500,000 of them. That means energy independence and big profits!

Now, Im not suggesting that you rush out and buy all of these ETFs all at once. As always, timing is critical. Use pockets of weakness as buying opportunities.

More importantly, try to think like Warren Buffett: Recognize that there are tremendous investment opportunities overseas.

Many foreign countries offer the perfect combination of rapidly growing economies and discount stock valuations. Their stories are just too compelling to ignore.

*And even if the stocks do absolutely nothing, a declining dollar would still allow your investments to appreciate significantly. Thats like being invited to an Asian buffet, having your green tea ice cream and eating an extra scoop.

Best Wishes,

Tony

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About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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