The Big Picture For The Week Of October 28, 2007

A good question came in asking about how I weight foreign equities into accounts, how to choose what to own and where US multinationals fit in.

Before I figure where I want to be domestic/foreign I first assess what weighting I want to give to each of the big ten S&P 500 sectors. This is usually based on my perception of where we are in the stock market cycle and the economic cycle. Our point in these cycles contributes to how much foreign I want to own. The first number derived for foreign is sort of fuzzy. As I start to fill out each of the sectors, knowing I want roughly 1/3 or roughly 1/2 or whatever in foreign. As I go along I fine tune the number.

On another sheet of metaphoric paper I assess the merits of other investment destinations, think about how much to weight to these countries and what is the best way to work them into the portfolio.

Most of the foreign countries I own only have a 2-3% weight but England as an example is a little heavier. I was asked about this on a panel I participated in last June in NYC. One of the other panelists owned iShares Sweden (EWD). I specifically mentioned preferring a Swedish industrial stock over the ETF.

I have liked Sweden for several macro reasons for a long time but the problem that I see with EWD is its heavy weighting in Ericsson (ERIC). It's weighting now is 16% but I believe it was closer to 20% before ERIC got recently crushed. I did not like ERIC, further what I knew about Sweden lead me to decide it was not a place I wanted to add volatility to the portfolio. Contrast that with Brazil, a country where I did want to add volatility.

So in going down the list of countries (Australia, Ireland, Norway and so on) I try to figure out the best way to capture each of them stock or product, if a stock what sector?

At the same time, I need to seed in domestic companies into each sector too. So there needs to be a blending of things like yield and volatility as I fill out each sector. There will tend to be more choices with domestic names.

That a domestic stock might be a multinational plays no role whatsoever in my topdown thinking. It can matter when I get to the bottom up stock picking but a US company, the way I view the world, is simply not a proxy for foreign anything.

It can make for a better company and could be the deciding factor in choosing between two stocks. A few years ago that Caterpillar (CAT) sells a lot of equipment in China lead me to choose it over Deere (DE). This turned out to be the right call for most of the time I have owned it but CAT has lagged recently. CAT, no matter how many units it sells in China, is not a proxy for China, IMO, but it obviously benefits from China, so too might it get hurt if China ever implodes.

Some of the gaps, like knowing I did not want exposure to Ericsson, come from the reading I do, this takes up most of my work time. The process outlined above requires learning about a lot of countries, currencies, companies, commodities and then monitoring all that.

I mentioned Kazakhstan the other day. Some exposure at some point in the future seems plausible. I started learning about it maybe a year ago, I follow it but it might be several years, if ever, before I step in there. Ditto Egypt.

I do not know how common my approach is but I feel that it makes my job easier. A mediocre stock in a very hot market adds a lot to a portfolio.

This is my full time job. I realize do-it-yourselfers may not have the time to do all the topdown work described here and I haven't really even touched on the bottom up that also needs to be done.

Friday after the close Joellyn and I hung up some blinds in our living room. While were doing this I had Fox Business on the tube and Happy Hour came on...."hey its Happy Hour!" Wow. After about five minutes Joellyn asked if we could put on Kudlow instead, lol.