That’s if you believe a Nobel economist, of course. His crude “experiment” was the start of “modern portfolio theory” decades ago. The downside, however, was that with a reduction of risk came a dampening of profits. So scratch that idea.

How about this? A startling study in the late 1970s showed that owning a portfolio of large U.S. companies with international divisions drops your risk 10% below a domestic stock portfolio. Much better. But that wasn’t the eye-popper…

The study also found that owning stocks in international companies cuts your risk in half…

Take that, “efficiency” theorists! Yet the stuffy professors still tried to refute these results. It was a losing battle, though, as more studies emerged, laden with more evidence that international stocks reduce risk.

But the most startling thing? The studies indicate that adding international stocks to your domestic portfolio may even increase your average profits.

But how do you buy stocks in foreign companies trading in London, Hong Kong, or São Paulo? By investing in ADRs… let me explain.

How to Go Overseas Without Even Getting On a Plane

Let’s say you want to buy shares of an English company, trading on the FTSE-100 index. You’d have to convert your cash to pounds, buy the stock, wait to sell it at a profit, then convert it all back to U.S. dollars.

If the greenback weakened, you’d make a profit on the stock but lose on the conversion!

In a word: Ugh.

This is why the vast majority of investors buy a managed international mutual fund. This allows the “experts” to run overseas with your bag of cash and make the investments for you.

But is this really smart?

As early as the 1960s, some economists confirmed that fund managers can’t forecast stock prices well enough to cover their own expenses, let alone make you a profit. In the end, all economists – regardless of their background – agreed that the performance of a managed mutual fund is worse than throwing darts at a list.

Here’s a better way…

Investing in ADRs: Harness JP Morgan’s Secret Weapon

In 1927, a chain of retail stores wanted to list on the NYSE.

Problem was, all the stores were in England!

Even for JP Morgan (NYSE:JPM) – the greatest investment banker of all time – this one was tricky. But he came up with a solution: He bought a big block of the retailer’s shares on the London Stock Exchange and put them in a trust.

Then he sold shares of the trust on the NYSE. These shares were called American Depository Receipts – or ADRs for short.

The company was Selfridges. And with Americans able to invest in a well-managed foreign company with far less risk, the shares sold like hotcakes. And thanks in no small part to this early access to American money, Selfridges is renowned and still thriving today.

So if you want to toss darts around, you could randomly add 3-7 ADRs to your portfolio – a move that will cut your portfolio risk in half, while increasing your profits.

For example, you can go to www.adr.com and throw darts at companies like Holland’s Aegon NV (NYSE: AEG), China’s Acorn International Inc (NYSE: ATV), or Brazil’s Aracruz Celulose SA (NYSE: ARA).

But randomly picking foreign companies is pretty reckless. Here’s how to invest in international stocks properly…

The Four Advantages of Investing in ADRs

What if you knew which international companies were primed to explode in share price? That’s exactly the kind of profitable information that New Frontier Trader readers get all the time.

So here’s my four-point guide for selecting the best foreign ADRs and how they can roll back your risk, even as they ramp up your returns.

• ADR Advantage #1: International Markets Don’t Move Together:

One of the main advantages that ADRs offer is that stocks in two different countries don’t move together.

When you hit the ground in most foreign countries, it’s a whole new economic, political and cultural landscape.

So even if your U.S. stocks are going down, your ADRs might be rising. Take Argentina’s Banco Macro (NYSE: BMA), for example. You could have bought it on July 6 for $16.34. It’s currently trading around $22.85. That’s a 40% return in just two months.

The New Frontier Tip: Buy at least three different high potential ADR stocks, operating in at least three different international countries.

• ADR Advantage #2: Hardship Breeds Managerial Excellence:

Okay, so what about countries that are chaotic – either economically, politically, or in terms of corruption? Places where managers tread in fear day by day.

Check out Transparency International’s Corruption Perception Index. It’s a good measure of social disarray. The United States has a relatively low corruption score of 18, while Somalia has the highest at 180.

Managers become slothful when business is easy. But imagine trying to do honest trade in a pirate haven like Somalia?!

And how about the BRIC economies – Brazil, Russia, India, and China? The corruption score is 96. In fact, Russia alone scores a whopping 147 on the global “Dewey, Cheatem & Howe” scale. Not even Superman’s x-ray vision would help an economist’s macro analysis.

But intense social disarray breeds the toughest managers, and the companies that rise to the top, despite the chaos, are often the pick of the bunch.

One such firm is Ecopetrol (NYSE: EC). It’s the largest integrated oil company in Colombia. You could have bought it on May 18 for $19.31 per share. By Labor Day weekend, it was trading at $26.41 for a tidy return of 37%!

The New Frontier Tip: Look for outstanding management where Wall Street doesn’t expect to find any.

• ADR Advantage #3: Muddy Waters Hide Big Fish:

Studies have proven that Wall Street analysts are incapable of honestly reporting opportunities in their home market. And they’re even more misleading if you try to follow them overseas.

The analyst’s real job is directing traffic where Wall Street’s CEOs and their boards want order flow to go. If executives need to cash out their options, the analyst’s opinion is suddenly upgraded to a green light.

Frankly, Wall Street doesn’t make a dime helping you find a potential fortune in developing countries.

But there are a few outstanding individuals like Warren Buffett, who are skilled at spotting hidden jewels. So you could just buy Berkshire Hathaway (NYSE: BRK.B).

But we have a better way: Go direct!

Take China, for instance. Getting solid information from this murky, mass-demand economy is like pulling teeth from a shark!

But if you had the edge, you could have bought shares in the massive Chinese Holiday Inn, with more than 500 budget hotels in more than 90 Chinese cities. Had you bought Home Inns & Hotel Management (Nasdaq: HMIN) at $15.19 on May 12, you’d be sitting on an 88.1% gain in just four months.

The New Frontier Tip: Target markets that Wall Street doesn’t want you to understand.

• ADR Advantage #4: Hunt Down Profits That American Conglomerates Can’t Touch:

Foreign companies located in faraway lands that rise to the top of their regional markets are special. By the time the world’s biggest investment banks invite them to become an ADR, they’re pumping out profits like one of J. Paul Getty’s oil rigs.

South America has hidden Copa Airlines (NYSE: CPA) from American investors until just recently. You could have bought the stock for $32.22 on May 27. Today, it’s trading for $43 – a fast return of 33.4%. In addition, the firm’s operating margin is 20.3%. Compare that to margins at Southwest (2.1%), Jet Blue (6.5%), or American (-3.4%).

The Single Best Way for Investing in ADRs…

Each of the returns I’ve mentioned above were recommendations in Alex Green’s New Frontier Trader newsletter. This service gives you an edge over the crowd in grabbing the best gains from investing in ADRs.

And the rest of the track record speaks for itself. This year, the service has closed out nine double-digit winners on international stock positions and six triple-digit winners by playing foreign stock options.

Time after time, history has shown that the best way to combine reduced risk with explosive returns is to invest in overseas markets, where Wall Street doesn’t want you to look.

If you’d like to start enjoying the kind of profits that the New Frontier Trader has kicked out to subscribers, simply check out this report.

It all starts with education,

Dr. Scott Brown

Source: Investing in ADRs: The Most Powerful Way to Reduce Market Risk

This caused the federal debt clock to add a 14th digit (by breaking the $10 trillion dollar mark).

We’ve also got an out-of-control trade deficit. For having a 40% share of the world’s economy, we certainly don’t produce that many goods.

Finally, we have a credit crisis that is causing many to worry that our lenders, like China and Japan, will turn off the tap.

With this nightmarish scenario we find ourselves in, it wouldn’t surprise us if the US’ credit rating fell. That would cause an immediate panic in the currency markets and send the buying power of the dollar into a tailspin.

I guess what we’re saying is get out of the dollar as fast as possible!

There are a couple of ways to go about this:

Currency Protection Strategy No. 1: Sell the Dollar

The easiest way to get out of the dollar is to trade in the cash you don’t need to live on for another currency. You might even be able to hold other currencies in your brokerage account.

Here at Lifetime Income Report, we don’t recommend currencies directly. We’re here to help you find income, not to pick currencies.

Exchanging currencies is one way to protect your wealth from a potential dollar disaster. But it’s not the only way…

Currency Protection Strategy No. 2: Buy Precious Metals

There’s probably no safer way to protect your wealth in the world than to own gold and silver. There are many Web sites and exchanges where you can do this, as well as coin dealers that can help you make this move.

While we personally think precious metals are going to continue increasing in value, you probably shouldn’t just spend all your money on gold nuggets. There’s a big difference between the spot prices and what you would pay. Gold coins, for instance, are trading at a hefty premium over spot.

Currency Protection Strategy No. 3: Buy US Companies With International Exposure

Again, this shouldn’t be a surprise. We have many US companies in our portfolio. After all, we are here for income, not to be global traders. But you’ll probably notice that most of our US companies have plenty of international exposure.

Currency Protection Strategy No. 4: Buy American Depositary Receipts

We saved the best for last. This is the theme we have been hitting the hardest in recent months. ADRs have been a cornerstone of this newsletter. From the very first issue, we had at least two ADRs in our portfolio. This month, we are adding another.

There’s a huge reason why we buy ADRs instead of the currencies themselves. Instead of just the upside of foreign currency to US dollars, we also get the benefit of fast-growing emerging markets and mega income from international players.

You see, foreign markets, especially now, have huge dividend yields.

The US is near the bottom of the list of places for income investors to look. The smart money is in companies staying out of the dollar.

Regards,

Jim Nelson

Source: 4 Ways to Protect Against a Falling Dollar

Felipe Reis, an analyst for Banco Santander SA (ADR: STD), yesterday (Monday) slashed his target price for the U.S.-listed shares by more than half, stating that the worldwide outlook has become “more challenging.”

Reis, who previously had placed a year-end 2009 price target of $40 a share Vale’s U.S.-listed American Depository Receipts (ADRs), now says the shares of the Rio De Janeiro-based mining-and-metals heavyweight will trade at $18 at next year’s close. If you’re keeping score, that’s a reduction of 55% from his prior target. But it still represents a 59% gain from yesterday’s closing price of $11.32 a share.

”We are adjusting our estimates for Vale in order to reflect the more challenging scenario in the commodities market,” Reis wrote in a research missive, noting that the reduced target price takes into account “the significant global economic slowdown.”

In related news yesterday, Merrill Lynch & Co. Inc. (MER) cut its 2009 economic-growth forecast for Brazil to 2.9%, from a previous estimate of 3.1%, as the lagging effect of scarcer credit may be deeper than thought.

The Brazil exchange-traded fund, theiShares MSCI Brazil Index (NYSE: EWZ), was the focus of a recent Money Morning “Buy, Sell or Hold” column, and soared as much as 42% in six days after it was recommended as a “Buy.”

Source: Hot Stocks: Despite Lowered Target, Vale Still Poses Potential 59% Gain, Analyst Says

Editors Note: “Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the sixth installment of this ongoing investment series.

Brazil’s economy is booming. Brazilian companies are breaking-out onto the world stage. And its share market has been the best performer among the world’s twenty biggest this year.

The Bovespa Index is up by 13% since the beginning of 2008. Compare that to the FTSE – it’s fallen 5.6% since the start of the year!

The Brazilian stampede: Rich investors are piling in!

But here’s the most telling thing…

The majority of the action in Brazilian shares has NOT been happening in Sao Paulo… but in New York. In fact, the value of Brazilian shares traded in the U.S. has surpassed the daily average in Sao Paula since the beginning of this year.

The average daily trading in Brazilian American Depositary Receipts (ADRs) was $4.07 billion so far this month through May 26, topping the previous record in January of $3.99 billion. In the same period, trading on the Bovespa stock exchange in Sao Paulo averaged $3.59 billion a day.

Why is this significant?

It shows huge foreign interest in Brazilian shares – and with very good reason…

Brazilian companies have become global leaders in key industries.

Companhia Vale do Rio Doce is now the world’s biggest iron-ore producer. State-owned oil company, Petrobras, overtook Mircrosoft to become the world’s sixth-biggest company by market capitalisation last week. Petrobras is sitting on the Western Hemisphere’s largest oil discovery in three decades. Possibly even the third-biggest oil field in the world!

These are names that are going to become much more familiar to us in the decades ahead.

Brazil isn’t just an emerging oil giant… it’s also the biggest producer of the only truly commercially viable alternative to oil – sugar-based ethanol.

In fact, it produces so much of the stuff that the country has been dubbed the “Saudi Arabia of ethanol”.

But Brazil isn’t just a commodities play either…

It has a strong services-based economic sector as well. In fact Profit Hunter rode the country’s banking boom to healthy profit last August through our investment in Banco Itau. [Note: Past performance is no indication of future results]

A five hundred year growth story

Brazil has seen fantastic growth in recent years.

Measured in 1990 dollars, the entire Brazilian economy was worth about $400 million in 1500 A.D. That would have put the country at about number 325 on this year’s Times Rich List. By 1900, that had grown to $12.2 billion – respectable, but hardly impressive.

The real economic boom began in the 20th century.

By 2000, Brazil’s economy had reached $975.44 billion – a massive gain of 7895% since the beginning of the century. And Brazil is perfectly placed to keep up that pace into this century as well.

The IMF predicts the country’s economy will grow 4.75% this year, despite the global economic slowdown.

That’s three times faster than the UK’s expected to grow!

Here at Profit Hunter we’re in no doubt the Brazilian growth story still has a long way to run. And we’re looking for the next under-the-radar play on this amazing economy.

The best way to profit from Booming Brazil

The easiest way to ride this boom would be to get in through an ETF that tracks the Bovespa Index. But that isn’t the smartest way in.

You see, one result of all the trading in Brazilian shares in New York could be to divert investment away from the Brazilian market itself.

That’s been good for the companies, but it might act as a drag on the Bovespa Index going forward.

Instead, we’re looking at a ‘backdoor’ way to get into this story.

That’s not easy when you’ve got the whole world trying to pile into this market. But we’ll keep looking, and we’ll let you know very soon.

Manraaj Singh
Editor
Profit Hunter

Source: Brazil, The World’s Best Performing Stock Market

A special report jointly developed by U.K. affiliate MoneyWeek Magazine and the experts at Money Morning explores the automobile industry and how investors can benefit. For more information on MoneyWeek, please click here.

Every automobile on the roads of the world reflects a long and complex chain of industrial production and energy usage. Yet we live in a world where many of the highest quality resources and energy supplies have already been exploited and lower quality resources are more expensive to extract and exploit, if they are even available. So the world’s automobile industry is in the midst of a revolution in both resource availability and energy consumption.

Today the automobile business is vast. It is a global industry that has evolved by leaps and bounds in the 100 years since Henry Ford made his famous remark in 1908 about building “a car for the great multitude.” The worldwide customer base includes at least a billion people – spread over six continents – who have sufficient income to buy a car or small truck.

According to figures assembled at the MIT Sloan Automotive Laboratory, there are about 700 million automobiles and light trucks in the world. About 30% of those vehicles are in North America.

Every car requires steel, aluminum, copper and lead. Each car requires rubber, plastic, and myriad of other petroleum and natural gas by-products. And there is much else in the long industrial ladder of automobile production. Just think in terms of the energy that goes into processing materials, fabricating parts, building components, assembling a finished product – and all the transportation along the way.

In addition to the basic energy and material resources that go into manufacturing an automobile, the sheer number of vehicles reflects a lot of fuel tanks to fill with gasoline and diesel. And this does not even touch on the energy and resources that go into building road systems.

Oil Crises – 25 Years Ago and Today

The oil shocks of the 1970s – in both price and availability – spurred improvements in auto energy efficiency within the United States as well as worldwide. In the United States, the increase in fuel efficiency was related to rising costs for gasoline, as well as government mandates for higher fuel efficiency dating from the late 1970s.

On average over the past 25 years, the typical power train of gasoline-fueled automobiles in the United States has improved in efficiency by about 1% per year according to data gathered by MIT. While discrete, 1% improvements may not appear to be much, the compound improvement in the typical U.S. automotive engine over 25 years has been about 30%.

There has been even more progress in the fuel efficiency of diesel engines over the past 25 years. Diesel power trains are no longer the sooty “knock-knock” devices that they were back in the days of disco. Most cars sold today in the European Union (EU), for example, are powered with clean-burning, fuel efficient, smoothly running diesel engines.

In fact, the demand for diesel fuel in Europe is such that EU refineries routinely ship surplus gasoline to sell in the North American market. And in North America the relatively low prices for gasoline throughout the 1980s and 1990s discouraged the use of diesel engines.

So there have been significant improvements in automobile power train efficiencies over the past couple of decades. But have these improvements translated into any overall reduction in demand for fuel? No.

In 2007, motor fuel consumption in the United States was as high as it has ever been (Although according to the American Petroleum Institute, demand for motor fuel may be at a plateau due to price increases at the pump in 2006 and 2007.). In the past 25 years, we’ve seen more people driving more cars for more miles. But compounding the fuel issue, the cars that people are buying and driving tend to weigh more and offer higher performance.

Is a Car-dependent Culture Sustainable?

We live in a world of peaking oil output, and of energy and resource scarcity. So the trend lines for fuel usage by automobiles simply cannot continue for much longer. The most obvious sign is the rising price for oil and by extension for fuel at the pump. Something has got to give, and the energy markets are sending signals of long-term high prices for motor fuel. Where do we go from here?

Well first, people and policy makers have to realize that there is an energy problem. Everyone has to realize that this is something permanent, going forward. “Peak Oil” will not pass if we ignore it long enough. And no one can solve the problem just by bellyaching about the rising price for gasoline.

It helps to view the age of the automobile – and its future – as a systemic whole. And some social critics are out in front of the broad discussion, with a sharp focus on the automobile and what it has brought us as a society. James Kunstler, for example, author of highly regarded books such as The Geography of Nowhere and The Long Emergency, believes that the car-dependent suburban build-out in the United States may be “the greatest misallocation of resources in all of human history.”

You may reasonably ask why you should care. There are, after all, about 183 countries in the world, perhaps 100 of which are more or less democratic in nature, which gives you roughly 30 elections a year to worry about. Figuring out who are the “good guys” in that number of races is absolutely impossible – even in Korea, which is one of our more-important trading partners.

Every now and then, however, an election brings a change that is truly significant, either politically or economically. In Korea, this election has brought significant positive economic change.

Since the Asian crisis of 1997, Korea has been run by the center-left. That group didn’t do too bad a job: Economic growth ticked along at an average annual rate of between 4% and 5%. The per-capita growth rate is about the same, given that Korea has only 0.4% per annum population growth. There’s a budget surplus, and the country also boasts a balance of payments surplus. Overall inflation is only 2.5%. The stock market is around double its 2003 level, which is when the previous [and now-outgoing] government came into power.

As nice a job as the outgoing government managed to do, its policies also included a few that held back growth. For instance, government spending rose from 21% of Gross Domestic Product (GDP) to 28% over the decade the left was in power. That increase in government outlays saps resources from the private sector by diverting the resources into less-productive public sector uses – reducing the economy’s overall productivity growth.

The outgoing government also imprisoned the chairmen of three of Korea’s top six chaebol conglomerates, and placed severe restrictions on their expansion. SK Telecom Co. Ltd. (SKM), for example, part of the Sunkyong Group, was not permitted to increase its cell-phone market share significantly above 50%. Only after Lee’s presidential election victory in December did restrictions start to relax. In February, SK Telecom was permitted to acquire 44% of its competitor, Hanarotelecom.Inc. (OTC: HANAY).

However, President Lee’s more free-market approach seems likely to ratchet Korean growth up a notch. He ran for election on the platform that Korea should expect a growth rate of 7% – not 5% – and with a budget surplus and low inflation rate he is well positioned to deliver his goal. Lee has promised both corporate and individual tax cuts, and a major program of privatization, starting with three state-owned banks – including the Korea Development Bank.

He is also likely to take a tougher stance toward the potentially volatile leadership in North Korea, cutting back on handouts and adopting a harder line against its northern neighbor’s alleged nuclear-weapons programs. This newfound aggressiveness by the South Korean leadership will save money both for the government and for the big conglomerates, since they had been expected to undertake unprofitable prestige projects in the North.

There are five Korean stocks that have American Depository Receipts (ADRs) that are fully listed on the New York Stock Exchange and that trade in reasonable volume. Some of these are more attractive than others-Kookmin Bank and SK Telecom in particular seem especially good bargains. Let’s take a look at each of the five, starting with an overview and including an investment rating on the shares:

• Kookmin Bank: (KB): The largest bank in Korea, KB has been hit by investor disillusionment with the financial services sector; at one point it was down 50% from its 2007 high. However, the stock has rallied recently. The bank’s earnings have continued to make steady progress and it has no exposure to the U.S. subprime mortgage market. Kookmin’s shares are trading at a Price/Earnings ratio of only 7.5 on trailing 12 months’ earnings, and its P/E on projected earnings for the next 12 months is a staggeringly low 6.6. Those earnings are expected to increase in a big way. One last benefit: Kookmin’s shares feature a dividend yield of 4%, which is more than you’ll get out of Treasuries these days. Rating: “Strong Buy.”

• Korea Electric Power Corp.: (KEP): Shares of the Korea’s electric power company are up slightly from where we recommended them back in December. The shares feature a P/E of 11 on projected earnings, and a dividend yield of 2.4%. KEP’s steady growth should benefit from any acceleration in Korea’s economic growth rate, but it is forced to buy coal from overseas, which has doubled in price in the past year. With an election in the offing, it suffered from price controls in the latter part of 2007, but should presumably have more freedom to raise its tariffs going forward. Rating: “Hold.”

• KT Corp.: (KTC): Formerly Korea Telecom, KT is now Korea’s leading “fixed-line” telecommunications provider, which was privatized in 2002. While the P/E ratio on trailing earnings is less than 9, its forward P/E is 11.5 as its margins are under assault from the hyper-competitive Korean telecom market. It has a dividend yield of 4%. Rating: “Hold.”

• Posco: (PKX): Korea’s largest steel company, and the world’s most-efficient steelmaker, Posco’s shares sport a Price/Earnings ratio of about 11, and a dividend yield of 2%. The company is a major exporter into China, making it a key participant in that country’s explosive growth. The company does buy its iron ore from Brazil’s Vale (RIO), and was socked with a 65% price increase in this crucial raw material. But don’t forget that investment guru Warren Buffett made Posco one of the 20 Korean companies he invested in last year. If nothing else, that’s a reminder that Posco will become very attractive when the commodities bubble deflates, even though it may be a tad early to make your move right now. Rating: “Buy/Hold.”

• SK Telecom: (SKM): It’s Korea’s largest mobile phone company, with operations in China and Vietnam. The stock is now trading at only 8.7 times estimated 2008 earnings, and has a hefty 4.9% dividend yield – so income investors do well from it, also. For many years, its market share in Korea was capped at 50%. But now the shackles are coming off; in fact, SKM recently got the green light to buy 44% of Hanarotelecom, Korea’s second-largest cell phone company. In 2006, SKM invested in a $1 billion convertible offering for China Unicom, Mainland China’s No. 2 mobile-phone company; in August 2007, the bonds were converted into a 6.6% in China Unicom with a current value of almost $2 billion. In Vietnam, SKM’s 73% owned Vietnamese subsidiary had 3.5 million subscribers in 2007, and it’s now aiming for 5 million in 2008. Only its U.S. operations are showing losses, but even those could turn around. Rating: “Buy.”