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Friday, July 25, 2008

International Investing

The Covered Calls Advisor Portfolio(CCAP) uses an asset allocation guideline of:
U.S. Large Cap -- 50%
U.S. Small Cap -- 20%
International -- 25%
Bonds -- 0%
Cash(Money Market) -- 5%

Previous posts have described the approach used for identifying potential U.S. stock selections for purchase consideration in CCAP. The table below is the simple value-oriented model used to rank various international countries by overall investment worthiness. At present for international investments, using a country-specific ETF will normally be the preferred investment method. This approach is preferable at the present time in comparison with investing in individual companies because of the relatively modest amount of detailed and reliable financial data and analysis presently available on individual international company ADRs. As time goes on, it is expected that the availability of more and higher quality financial analysis information will be available for a wider range of ADRs. Also, from a practical viewpoint, the number of liquid call options on ADRs is somewhat limited now but is likely to increase substantially during the next couple of years.

As shown on the spreadsheet below, the current three highest ranked international (i.e. non-U.S.) countries as determined by the valuation model are:
1. Taiwan
2. S Korea
3. China

The sources for the data are:
1. For Estimated GDP Growth and Estimated Inflation %:
Economist Link
2. For Current P/E Ratios and Current Price/Book Ratios:
IndexUniverse Link
The ticker symbol ('spy' in this instance) shown at the end of the URL can be modified to obtain the necessary data separately for each country's ETF.

Finally, the percent weightings for each of the three component factors used to determine the overall 'Weighted Rankings' for each country is:
- Earnings Yield minus Est.Inflation Percent = 40%
- GDP Increase Percent minus Inflation Percent = 30%
- GDP Increase Percent divided by the Price/Book Ratio = 30%

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