Agora Financial’s Rude Awakening

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Laguna Beach, California

• Minting fortunes on the back of the booming US exporters,
• Bargain-hunting while the American dollar is on sale,
• Half-full shot glasses, doom and boom and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Your editor’s here at the Rude Awakening have spilled a lot of digital ink over the years warning about the demise of the U.S. dollar. And even after spilling all that ink, we’ve continued to worry and fret about the dollar’s slump from all-time lows to even lower all-time lows.

But amidst all of our warning and worrying and fretting, we have not forgotten to suggest specific ways to hedge against the dollar’s downward slide. In fact, our friend and colleague, Addison Wiggin, just issued the “fully revised and updated” edition of his best-seller, “The Demise of the Dollar…and Why it’s Even Better for Your Investments.”

Sure, we worry sometimes, but we worry for a reason. We worry to avoid catastrophic investment errors. We don’t care so much about the big gains, as long as we can steer clear of the big pains.

Avoiding catastrophe is fun!

So you see, we’re not all doom and gloom around here. Let no one call us pessimists. Our shot glasses are always half-full! With this thought in mind, we turn today to our colleague, Chris Mayer, who will share a handful of reasons why the slumping dollar is not ALL bad…

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Good News! The Dollar is Tumbling!
By Chris Mayer

American exporters may be entering a golden age. A string of observations from my recent vacation in South Carolina tells the tale…

During our first dinner in town, an English couple “on holiday” sat at the table beside us, merrily ordering lots of wine with dinner before diving into the desserts. The next day at lunch, I asked the man at the next table for his ketchup. “Shar, ye can ‘ave it,” he said. Irish, surely.

Elsewhere in the city, we came across a variety of foreigners: two ladies from Germany, a couple from South Africa and a large family from who-knows-where that wore socks with their sandals.

It was very common to hear foreign tongues and accents in Charleston, the main business of which is tourism. But there is more at work than that…

America is on sale. The dollar has shed about 25% of its value since 2002 and foreigners are taking advantage of the situation. But they are not alone. American exporting companies are also prospering.

But what about us investors? How can we profit from the dollar’s demise? Let’s dig in and take a closer look…

While vacationing in Charleston, I found constant reminders of the effects of a weak dollar. The European tourists were one reminder. For them, America is a cheap vacation. The Commerce Department recently announced that America ran a tourism trade surplus of $17.8 billion in 2007. That’s more than double the 2006 figure. Travel and tourism now account for 8% of America’s exports. (It may seem odd, but tourism counts as an export.)

A weak dollar, then, helps America’s hospitality industry. It’s a double advantage, too, because a weak dollar makes traveling overseas expensive for Americans. More and more will choose to take their vacations closer to home.

And so we draw our first investment idea. Maybe America’s hospitality industry deserves another look, especially those outlets that cater to a fair number of foreign travelers. Vail Resorts is one example. The New York Times recently reported that the Colorado ski slopes lure many foreign visitors these days. These visitors spend about $300 per day, too. That’s more than double what an American typically spends.

A weak dollar also puts America’s assets “on sale” for foreign buyers. So we find foreign investment in the U.S. is also up. It rose by 25% in 2007. In South Carolina, there is visible evidence of that.

Statewide, unemployment is nearly 7% - well above the national average - and as high as 10-15% in some counties. The region suffered with the exodus of American manufacturing (a sector that still loses 50,000 jobs per month). But guess who’s stepping in?

Foreign ventures put $407 billion to work in the U.S. in 2007. That was a 93% increase over 2006. The Chinese, in particular, were an active bunch. Chinese investment soared from only $66 million in 2006 to $9.6 billion last year.

In South Carolina, you see that trend more powerfully than you might in other places. Here, foreign companies employ nearly 21% of the manufacturing work force. That’s the biggest percentage in the union, excepting Hawaii.

While in town, I read a story by The (Charleston) Post & Courier about projects designed to attract foreign investment. Specifically, they aim to “bring in Chinese manufacturing and assembly plants.” The paper quotes Gregg Robinson, a director of the local development commission. Says he: “Get ready for the incoming tsunami of trade.”

American assets should attract even more foreign buyers this year. The Chinese are eyeing American timberlands, for example. American farmland, mines and other hard assets must also seem cheap.

But a limp dollar also affects the flow of what goes in and out of our ports…

Walking around Charleston Harbor, we see the old USS Yorktown sitting proudly in its berth. And motoring in from the twinkling blue sea, a large freighter with the words “China Shipping Line” emblazoned on its stern and its deck laden with containers piled high.

The port itself is a field of containers of a variety of colors neatly stacked on top of each other. Cranes loom over the entire port. Rail cars of CSX, Burlington Northern and Norfolk Southern line the multitude of tracks running in and out. The busy harbor is nothing new for this city.

Charleston owes its early successes to its status as an important port. The first great fortunes of Charleston were amassed by merchants. The first prime exports were skins and furs. Later, naval stores (lumber, turpentine, tar and more). But the trade of rice, indigo and slaves formed the tripod supporting its hugely successful economy. The exportation of rice created such great fortunes that people began to call it “Carolina gold.” The merchants soon became the wealthy planters we tend to associate with the peak of Southern prosperity.

Historian Robert Rosen writes: “The rice planters of Carolina grew rich, so rich they became the wealthiest people in the American colonies. And rice became one of the staple crops shipped through the port of Charleston.”

Even today, Charleston remains the fourth busiest port on the Eastern seaboard. The weak dollar affects this in a couple of ways. On the one hand, it makes imports more expensive. So far, a weak dollar has not stopped imports from growing nationally, though it has slowed the pace. On the other hand, the weak dollar has revved up America’s export engine.

Exports grew twice as fast as imports in 2007. For the first time since 1995, the gap between the two narrowed. America’s commodity producers get a lot of help when the dollar falls. They incur their costs in dollars. Yet they sell into the global market for metals, minerals and other commodities. Global prices are all near multiyear highs, thanks in some measure to the weak purchasing power of the dollar.

America’s manufacturers - what’s left of them - also gain. Strong demand from overseas drives their sales. Suddenly, America’s goods look cheap. “Foreign demand for advanced machinery is huge,” reports The Economist. “Civilian aircraft, drilling tools, agricultural machinery and excavators all rose at double-digit rates in 2007.”

Companies with significant sales overseas ought to prosper. Graco (GGG:nyse), a company I recommended to the subscribers of my investment letter Capital & Crisis, is one such company. Graco makes advanced industrial machinery; about 40% of sales come from overseas markets. That’s the fastest growing part of its business.

“Carolina gold” made many a fortune back in the day for exporters. Today’s exporters might also mint fortunes if the dollar stays weak over the next few years.

[Joel's Note: If you would like to grab the lastest issue of Chris’ Capital & Crisis, a newsletter we consider mandatory reading here at Rude H.Q., here’s a quick gander at what you can expect to find.

We’ll be back tomorrow with your usual dose of Rude insight from the Agora Financial editors.

Until then…

Cheers,

Joel Bowman
Rude Awakening