Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

Global Markets Drunk, Defy Severity of Credit Destruction

Montreal, Canada.

Nobody said global investing was a rational discipline. And judging by the massive rallies we’ve seen for most assets since the March 9 lows, an investor could be forgiven for forgetting we just suffered the worst crash in more than 75 years last fall.

As trading gets underway in New York this morning the MSCI World Index has surged more than 45% since March 9 while the S&P 500 Index has gained 34%. More impressively, the MSCI Emerging Markets Index has skyrocketed 58% since March 9 while gaining 72% since hitting a bottom on October 27.

The party expands beyond just equities. With the exception of government bond markets in the industrialized world, asset classes ranging from commodities to hedge funds to distressed debt have exploded higher over the last three months. And, as risk has returned, the U.S. dollar has resumed its status as “Dog” currency of the world as traders sell the currency for foreign securities and hard assets like oil and gold.

In many ways this broad-based rally smells just like pre-August 2007. The same assets that ran wild from 2003 until mid-2007 are the same ones appreciating the most since March; the only missing ingredients are high leverage, sustainable earnings and a lack of credit to consumers and businesses.

Over the last four weeks the financial press has laced business headlines with “green shoots” or signs of a budding economic recovery developing worldwide. Traders and investors apparently subscribe to this view and markets are off to the races again.

This is not a bull market. Although similarities between the 1930s Great Depression and this credit crisis are indeed shockingly similar there are some differences; still, the fact that we are living in a period of unprecedented credit destruction, bank insolvencies and the massive socialization of the economy is enough to warrant extreme caution. This will not be a v-shaped recovery like previous post-recessions but instead a long Japanese-style u-turn heavily dependent of government fiscal spending and intervention.

In my view, this is the Mother of bear market rallies. As the market eventually sniffs a false dawn and begins to discount the end of government fiscal spending for this round and the lack of organic domestic consumption amid rising layoffs, stocks, commodities and foreign currencies will hit the floor again. And the dollar will recover as deflation fears return. I also expect short and intermediate-term Treasury bonds and German bunds to recover smartly – despite supply concerns weighing on prices. Deflation is still very much alive; inflation is inevitable but this transition is still a few years away at best.

Once again, I’ve included a table depicting the big rallies and crashes in the 1930s (see above table). I think it’s instructive to analyze what happened during this period because this is a credit bear market – the first such economic phenomenon in the post-WW II era.

In the post-1929 period, the Dow mustered bear market rallies averaging 10.1 weeks with an average gain of 31.7% before collapsing again until a final bottom was achieved in the summer of 1932. Thus far, we’re into the 12th week of the post-March 9 rally with stocks up 34%.

If history is any guide – and I believe it is – then we’re not far from the cliff. I’m not sure what will trigger the next sell-off, nor am I sure we’ll re-test the March 9 lows in 2009; yet it seems quite probable to me that investors are living in a Fantasyland as they depend on government to successfully rescue the economy. Sorry, but that’s not the right way to invest. Government efforts in some cases have been noble, if not necessary; but the history of government intervention is a sad story accompanied by a sequence of botched efforts ultimately leading to more hardship. I highly doubt this crisis will be any different.

Have a good weekend. See you on Monday.

Are Treasury Bonds a Buy?

Amazing how the tables can turn so quickly in a span of just six months…

In 2008, Treasury bonds were the only fixed income category to post a profit amid total market chaos as investors shunned riskier debt. In 2009, Treasury bonds are the only fixed income sector in the loss column while riskier bonds have skyrocketed in value.

In 2009, benchmark ten-year T-bonds are down 2.6%, including interest income while 30-year T-bonds have plunged 15% -- their worst calendar year of performance since 1994.

Back in December the yield on the benchmark ten-year U.S. Treasury bond yielded 2.25% -- the lowest effective yield since the mid-1950s. Driven sharply lower by deflation fears, bank insolvencies and the rush to liquidity, investors drove yields down to absurdly low levels.

But starting in January the trend in Treasury bond prices had already shifted to a gradual ratcheting in interest rate premiums on expectations the Treasury would flood the system with record bond auctions. And flood the system it did; in 2009, Treasury is projected to issue a cumulative $2 trillion dollars’ worth of Treasury securities. With the exception of short-term bonds, Treasury is struggling to sell the longer end of the yield curve as inflation and supply fears mount.

The ten-year benchmark is important because it sets the tone for mortgage rates and consumer loans – something the Fed is trying to wrestle to lower levels to boost mortgage financing and consumer installment debt.

What’s even more alarming about this bear market in longer dated T-bonds is the fact the Federal Reserve has failed to influence long-term rates despite spending more than $125 billion dollars’ worth of Treasury bonds this year.

In other words, Bernanke is losing control of the yield curve, or the difference between short-term and long-term interest rates. That’s an important relationship because the economy is still deflating, loan growth is anemic and domestic consumption is barely growing since last fall. Yet the market is growing increasingly tired of the flood in Treasury issuance and still driving long rates higher. This is a bad sign for the economy, the Fed and consumption. The economy can’t handle higher rates, particularly in the mortgage area.

But if the economy is expected to post a sluggish recovery later this year then maybe Treasury bonds are a good speculation at these bombed-out levels. Benchmark ten-year T-bonds start looking attractive again north of 4%, especially if the economy posts another contraction in 2010 following the exhaustion of Obama’s $787 billion dollar stimulus plan – now hitting the real economy.

It’s pretty hard to make a strong case for a sustainable corporate earnings recovery in this environment because these are truly uncertain times. The consumer is finally out of the game, focusing on frugality, rebuilding his savings and certainly not looking to take on more debt. And the government cannot continue legislating spending packages without inviting some serious inflationary consequences.

In the absence of organic domestic consumption supported by rising employment – which is not the case now – just how is consumer spending supposed to meaningfully improve?

U.S. Treasury bonds and German bunds have both been mauled over the last four weeks. Yet I suspect these securities will offer some of the best and safest returns later in 2009 or 2010 as the global economy heads back into the gutter, starved for a new round of stimulus spending.

Bonds anyone?

Insider Selling Gains Momentum as Stock Prices Rally

If you’re looking for a reason to sell stocks then here’s a powerful catalyst…

I first documented the bearish development among corporate insiders in late April as
InsiderScore.com reported heavy sales. The trend in insider selling has accelerated markedly since then as technology and healthcare CEOs and directors in the United States dump company shares amid an ongoing bear market rally.

Insider selling is not a perfect science, of course. But one thing is for sure: Insiders know the fortunes of their company better than stockbrokers, money managers or other investment professionals. And they vote with their wallets. If an insider is buying millions of dollars’ worth of company stock it’s for one reason – prices are expected to rise. Insiders, however, might sell shares for several reasons. But when there’s a big cluster of selling en masse it’s usually a bearish sign.

According to InsiderScore.com, officers and directors of publicly traded American companies have increased their selling of company stock since early May to their highest levels since 2006.

Why are insiders increasing their sales? The bulls point to a major recovery ahead driven by massive government spending and concerted cost cutting across American companies.

Obviously, there’s something wrong with this picture.

What’s really telling is where the major concentration of net selling is coming from in the United States. Technology stocks, which have dominated the post-March rally until recently, are home to the biggest cluster of combined insider selling since early May. Historically, technology insiders have done a good job calling their respective tops and bottoms in the stock market cycle; this latest dumping binge is bad news for the bulls.

Also, despite a near doubling of its stocks since March some executives at Morgan Stanley are lining up at the door to sell shares.

According to another insider tracking firm, InsiderInsights.com, two executives at Morgan Stanley sold $2.9 million dollars of company stock this month even as the market continued to climb. Morgan Stanley’s stock price nosedived to an intraday low of $6.71 last October amid a global market meltdown; the stock has gained a cumulative 332% since October.

It seems odd to me that directors at Morgan Stanley would be selling stock if the worst was truly behind us; with all probability we have not seen the lows for this bear market credit-inflicted disaster as banks still require significant capital and for the most part are not lending.

The trend in U.S. insider selling is worth heeding. The data might not be foolproof or highly predictive of future market trends but it’s definitely not a positive development with stock prices now up more than 30% since March 9. CEOs, CFOs and directors should be buying, not selling, if we’re truly at the cusp of a new bull market.

Another Dent in Consumers’ Wallets

The new Bill of Rights legislation signed by President Obama last Friday will probably do more harm than good to an already battle-scarred consumer. The outcome might even accelerate the trend in tight credit as subprime borrowers are denied credit card access and deepen the contraction in spending since late 2008.

Consumer spending, which crashed in Q4 2008, has recently posted some upside momentum in April. But the trend is undeniably bearish as Americans grow more frugal, reduce debt levels and rebuild battered savings again following massive losses on financial assets and housing since late 2007.

The new bill aims at preventing credit cards from gouging consumers – admittedly a good thing since credit card companies have gone mad charging 18%-plus interest rates on unpaid balances for years while prime lending rates were in the mid-single digits. The spread, or difference in interest rates levied by credit cards, is almost insanity, punishing borrowers while earning a fortune on those interest rate premiums in the process.

But the new law will also close the door on subprime borrowers who previously relied on credit cards to provide intermittent financing between paychecks. This bill might just do the opposite or prevent borrowers from accessing desperate credit amid a severe recession.

Available consumer credit contracted by a record $11.1 billion dollars in March, according to the Federal Reserve. That drop is the largest since 1990 and portends to severe headwinds facing cash starved consumers as the new bill hits credit card companies and their customers.

Unfortunately, the unintended consequences might be less credit available by money-center banks and credit card issuers. That’s exactly the wrong prescription for an economy trying to mend its way to recovery this quarter after a huge contraction in Q1 output.

The consumer has started to show signs of life since April and that’s bullish for the economy. Yet, I imagine this is only a blip as sustainable long-term domestic consumption will remain impaired by growing job losses and personal balance sheet repair. The government cannot supplement organic consumption indefinitely through monster-sized fiscal spending packages; at some point, the air in this balloon will pop. Consumers are just not spending like they did prior to 2008.

In the end, new credit card lending standards and the interest rates superimposed by these companies will probably accelerate the trend in deflation and tight credit. This is the right bill but at the wrong time.

Is the Dollar the Next Domino to Fall?

With the United States closed for Memorial Day, the next 24 hours might prove to be pivotal for dollar-based investors.

The majority of currencies are up against the dollar this month. So far in May, the dollar has plunged 5.8% versus the euro, 6.1% versus the Canadian dollar, 3.5% against the Norwegian kroner and 3.6% versus the Japanese yen.

Once again, the dollar is declining sharply vis-a-vis gold -- down 7.3% in May. In fact, gold is rising against all major and peripheral currencies over the same period and since 2005 has posted cumulative gains against all currencies.

On Friday, Standard & Poor's placed the AAA credit rating of the United Kingdom on watch for a possible downgrade. The United States, also amassing gobs of debt, is feared to be joining the U.K. as deficits run out of control and threaten America's AAA credit rating. In all honesty, more than half of the sovereign nations in industrialized world probably don't deserve AAA or AA credit ratings because of rising deficits, declining tax revenues and unprecedented fiscal spending in the worst economic recession since at least 1980-81.

The dollar currently trades at 1.40 versus the euro -- a key technical trading level that might mark the next phase of this crisis if it's violated.

As global risk aversion has returned like a thunder-bolt since early March lifting all riskier assets, the dollar has started to lose important technical support.

Fundamentally, the dollar belongs in the basement as a toxic combination of mushrooming budget deficits, two overseas military conflicts and a seemingly never-ending credit crisis force the dollar lower. The budget deficit alone is simply mind-boggling; the United States is projected to amass a $9.9 trillion dollar budget deficit from now until 2019 representing an 80% debt-to-GDP ratio. And keep in mind this estimate is courtesy of the Congressional Budget Office (CBO) so it might be too conservative.

The dollar has swooned recently as investors dump Treasury securities and the dollar in favor of everything with a risk bias, including junk bonds, emerging market stocks, small-caps, commodities, etc. If risk has truly returned then the dollar is poised to head lower. But if we suffer another major stock market sell-off -- which I expect -- then the dollar might snap back very quickly as investors run to safe-havens.

To be sure, the latest periodic market declines we've experienced since April have resulted in a weaker, not stronger, dollar. It will be interesting to see how the dollar responds amid the next big stock market sell-off. Stocks have already gained more than 35% since March 9 while many emerging markets have almost doubled since late October.

I'll be watching the 1.4055 level very closely this week on the dollar/euro cross. If this is violated then I'll be buying small positions in Canadian dollars, Norwegian kroner, Japanese yen and euro. And any dollar correction from these levels or higher should be viewed as an opportunity to sell more U.S. dollars.

Evidently, the cliff is approaching for the dollar -- perhaps an event welcomed by the government since it encourages a monetary phenomenon in desperate shortage -- inflation.

Austria's Darkest Hour

Since 1996 I've visited Vienna about 25-30 times or roughly three times per year. Vienna is home to my largest private banking relationship for asset management and remains a flagship domicile for my clients worldwide. About 40% of the assets I manage for investors is based in Austria all through a Swiss-owned private bank operating in Vienna.

Austria, however, is under pressure this year following a decade of intensive cross-border investments in the region where it acts as the biggest lender and largest foreign investor. For Austria's purposes, it is a major lender in nearby Hungary, Poland, the Czech Republic, Bulgaria, Romania and other Balkan nations.

Today, the weather is gorgeous in Vienna, the cafe's are bustling and by first glance you wouldn't think for a second this nation of 8.3 million people is in the midst of its worst financial crisis in 75 years.

Since the emergence of the credit crisis in August 2007, regional economies in Eastern and Central Europe have been hit hard by the unwinding of leverage, cross-border finance and the impact of speculating in domestic mortgages vis-a-vis foreign currencies like the Swiss franc.

Though Austrian government credit spreads have started to decline versus benchmark German bunds, they remain historically elevated at 0.58% compared 0.56% for Spain. This still compares favorably to weaker euro-zone countries like Ireland and Greece where credit spreads are still high at 1.67% and 1.59%, respectively.

The markets have placed a risk premium on Austrian paper because of heavy debt issuance largely to recapitalize its banks - many sputtering because of significant loan exposure across the region.

The Austrian banks have loaned about €278 billion ($386 billion) to Eastern Europe – the largest exposure among euro-zone members. Western banks are saddled with $1.6 trillion dollars’ worth of Eastern European loans, mostly tied to banks in Austria, Germany, Italy, France, Belgium and Sweden, according to the Bank of International Settlements. Whereas the Austrians went overboard lending to Central and Eastern Europe, the Swedes have aggressively expanded credit to the Baltic nations where GDP has literally crashed more than 10% since last fall.

Local banks rank as the largest investors in the Czech Republic, Hungary and Romania ($142 billion dollars) with several Austrian banks now attempting to secure government guarantees – including Raiffeisen Zentralbank, one of the largest lenders in the region along with Erste Bank. The IMF or the International Monetary Fund has already loaned billions to Hungary and will probably extend new loan guarantees to other weaker credits soon, including Romania and Bulgaria.

Poland and the Czech Republic, though suffering from a collapse of exports -- harbor much stronger banking systems than peripheral neighbors. Poland, similarly to Hungary and Bulgaria, is trying to clean-up a mortgage-backed disaster whereby local borrowers financed their purchases of homes in low-yielding Swiss francs earlier this decade; that carry-trade has crashed since last year as the zloty and other regional currencies tank versus the franc thereby rendering those loans extremely difficult to service.

The European Central Bank (ECB) and the IMF will probably end up rescuing several regional countries before this crisis is over. Already, Hungary is a bailout recipient and others will follow. Still, I'm not losing sleep over Austria. This remains a strong country governed by sound money principles and for the most part, its banks have sufficient capital to avoid a German or ECB-led bailout. A further compression in bond spreads recently is good news for domestic investors as risk continues to decline.

Austria will remain a beacon for cross-border regional finance and trade. The country is ideally situated right in the heart of Eastern Europe and once this credit crisis finally draws to a conclusion, the trend in securing highly-skilled low-cost labor will re-emerge for Western European manufacturers; admittedly, it will be a long time until the pre-2007 economic landscape resumes. The region, like the rest of non-Asia OECD markets will remain tied to long-term de-leveraging as banks continue to raise capital and reduce their bad loans.

Have a good weekend. See you on Monday.

The View from Norway: An Oil Titan Rich with Surpluses

Norway is oil-rich and is home to one of the strongest currencies in the world this decade. It’s also an incredible country gifted by warm people and a strong work ethic.

Prior to my arrival last Sunday, I had last visited Norway back in 1997. That trip was short – barely three hours following a quick stop from Copenhagen via an overnight cruise.

But my arrival in Oslo on Sunday was certainly memorable…

May 17 is Norwegian Independence Day. Oslo was overwhelmed by a massive parade celebrating the country’s independence from Sweden in 1814. Driving home the celebratory mood was also Norway’s victory in Moscow as it won the Eurovision Song Contest. What a party! I didn’t sleep that night – nor did anyone else in Oslo because festivities didn’t end until about 3am.

I was in Oslo to make presentations to Norwegian insurance and investment management companies. I was impressed by the Norwegians, their candid opinions, warmth and deep intellect. I was also fascinated by the cities’ modern design – heavily influenced by wood, similarly to Denmark.

Norway is home to the best-performing currency in Europe this year. In fact, since 2000 the Norwegian kroner has remained strong vis-à-vis its largest trading partners; the currency has also blasted higher against the sagging dollar this decade rising a cumulative 17%. Though it has lagged against the euro since 2000, the kroner has appreciated versus its Swedish neighbor.

Norways means oil – big oil. This is one of the richest countries in the world whereby the state pension fund has an enormous US$324 billion dollars in assets. That sum equals roughly $80,000 per citizen. Through its vast surpluses, the Norwegian government has prudently invested its assets this decade but like other state pensions worldwide, it did suffer losses in 2008’s market meltdown. The recent strong outperformance of the NOK versus foreign currencies has also adversely impacted first quarter results, down 8.7%.

Norwegians, however, are very domestic when it comes to investing.

Many Norwegians prefer to invest locally and refrain from global investing. The country is home to the largest energy-related asset management infrastructure with dozens of oil and gas mutual funds and other collective investment products. Also, if you’re looking for high quality investment-grade oil-related bonds, Norwegian mid-cap companies are still selling at a discount to par and offer attractive interest rates in kroner.

My message to Norwegians this week can be applied to other investors, too.

With the Norwegian kroner strong in 2009, my advice was to start selling the currency in favor of gold. As an investor, you always want to sell from a position of strength, not weakness.

Since 2005, gold prices have appreciated versus all major currencies, including the kroner. And while the Norwegian kroner is probably the best-managed currency in the world, its future is tied to oil and gas.

Norway is still exploring in the North Sea but has yet to find a major new offshore oil discovery this decade and like other major producers is struggling to replace its annual production. Peak Oil has arrived in Norway just like it has in Russia and many other oil-producing countries in and outside of OPEC.

No currency can remain strong indefinitely. As oil prices collapsed last July, the kroner quickly plunged. It has since recovered along with the price of oil. Yet this was a reminder that despite Norway’s strong balance-sheet its performance is tied to energy prices.

Diversification is essential even for a strong balance-sheet like Norway. I’d be reducing my exposure to the kroner in favor of gold – still the ultimate currency and eventually the only inflation-hedge ahead of a rapid expansion of the monetary base virtually everywhere since late 2008.

My next stop is Vienna…more on Austria tomorrow.

Cost of Global Borrowing Tops $12 Trillion in 2009

According to the OECD or the Organization for Economic Co-operation and Development, the cost of borrowing requirements in 2009 will approximate $12 trillion dollars – the most since the 1930s in inflation-adjusted terms.

The United States will require about $1.8 trillion dollars or 15% of this total as the cost of financing massive bail-outs and fiscal spending plans sends its budget deficit into record territory through at least 2012.

In 2007, total OECD borrowing topped $9 trillion dollars and is projected to have risen to $10.6 trillion dollars in 2009.

The supply of government debt has already caused several European bond auctions to fail since last October or has significantly reduced the size of targeted auctions.

Germany, the second most liquid bond market in the world after the United States has already recorded at least four failed or reduced bond auctions since the fourth quarter. Other Euro-zone countries continue to struggle, including Greece, Ireland, Italy and Belgium and have been forced to pay investors higher rates of interest on their government-issued paper.

The United States, by far the world’s largest debtor nation, has not been immune to the trend in bond issuance saturation; over the last several weeks long-term Treasury bonds have struggled to raise auction targets – despite the Federal Reserve’s quantitative easing (QE) program, which essentially monetizes its own debt. Other countries have already started their own QE programs, including Switzerland, Canada and the United Kingdom.

The United Kingdom has especially been forced to pay higher interest rates for longer term financing as gilts or government debt markets struggle to raise auction targets. Britain is the worst casualty after Ireland among Western European nations with a bulging debt-to-GDP ratio now exceeding the size of its economy’s production.

Indeed, global bond yields have already begun to rise since last January as the intermediate and long-term segment of the yield curve has steepened, meaning interest rates are rising. What’s truly alarming about this recent increase in long-term rates is the fact it’s occurring despite aggressive central bank QE intervention.

In 2007, just as the sub-prime credit crisis was emerging, total government debt issuance in Japan, the United States and the Euro-zone stood at $18.5 trillion dollars – double the level compared to a decade earlier, according to the OECD.

One of the best speculations for aggressive investors is to short or bet against long-term government bonds.

The Sovereign Society’s Portfolio (TSI Portfolio) initiated this trade earlier in 2009 and continues to recommend buying a reverse-index long-term Treasury exchange-traded-fund to hedge bond market exposure. This trade can also be applied to the Euro-zone but only later this year as Europe remains behind the United States in this economic cycle.

Another excellent long-term hedge against huge government debt issuance and future inflation are TIPS or Treasury Inflation Protected Securities.

TIPS are the best value in government bonds right now amid deflation or falling inflation. Prices collapsed starting last July as commodities peaked and now project ten-year U.S. inflation averaging just 1.66% from now until 2019. The odds of the United States averaging a lowly 1.66% inflation rate over the next ten years is next to nil, considering the size and duration of debt issuance required to recapitalize the banking system and possibly, another Obama New Deal spending package later in 2010 or 2011.Inflation is now “on sale.”

For government bond investors the risk of heightened volatility is highly likely in the future as funding costs head to the Moon. The destruction of credit since 2007 and its subsequent replacement imply an inflation premium will arise at some point later in 2009 or in 2010.

Avoid intermediate and long-term government debt, buy TIPS and short or bet against 20-year and 30-year government bonds. Also, consider replacing intermediate government bonds with high quality non-financial investment-grade debt such as those issued by Néstle, Kraft Foods and General Mills – strong companies supported by organic cash-flow and low net debt levels.

The Bad News Rails

The best performing segment of the Dow Jones Transportation Average over the last several years belongs to the rails. Companies like Union Pacific and CSX enjoyed healthy margins as U.S. railroad freight traffic boomed from coast to coast.

Driven by the bull market in commodities demand, including coal, the grains and liquefied natural gas, the rails made investors a bundle. Plus, soaring oil pricing compelled many companies to instead opt for rail services at the expense of trucking. The latter industry has almost collapsed since late 2007 as volumes have crashed, triggered by soaring oil prices until July 2008.

The party for the rails, however, is also over.

U.S. railroad traffic is now running about 20% lower compared to 12 months ago as dismal industrial output has resulted in sharply lower consumption. And the pace of decline has accelerated relative to the first quarter’s big 16% drop, according to Credit Suisse.

What’s happening in the rail industry is not unlike the bearish news affecting trucking, air cargo and dry bulk shipping. All modes of bulk cargo forwarding are now in a freefall since the fourth quarter of 2008 when global trade fell off a cliff. Higher oil prices in the midst of the harshest economic recession in 28 years, adds another blow to the prospect of short-term recovery.

Meanwhile, the trend of the Dow Jones Transportation Average is poor, despite yesterday’s big rally. The index recently broke below important support of 3,000 and is usually the first leading stock market barometer to break down ahead of economic stress. Constituents, which are highly economically sensitive, include the rails, airlines, truckers and other companies in the business of moving goods or passengers.

The fact this index is struggling again confirms my view that any “green shoots” the market is looking for is instead turning into “brown shoots.” The economy is not responding to stimulus as the Dow Transportation Index fails to stabilize.

Asian Stock Dividend Growth Rate Surpasses S&P 500 Index

Historically, Asian stocks have ranked among the lowest-paying dividend issues in the world. But since last year that trend has changed as once low-yielding markets in the region now provide higher payouts than the S&P 500 Index and in some cases, many European equity markets.

Asia, unlike major Western markets, already suffered from an economic depression in 1997-1998 as country after country rolled over as a massive currency and debt crisis smashed into the region. Asia’s quick response to the crisis, mainly China, combined with easy credit financing from the West helped to lessen the severity and duration of the blow.

Currently, the FTSE Asia-Pacific Large-Cap Index (excluding Japan) yields 3.8% while the Tokyo Nikkei yields 2.7%. Both sectors yield more than local government bond markets. The S&P 500 Index currently yields 3% or slightly below the yield on benchmark ten-year Treasury bonds.

Amazingly, Japanese stocks for years barely yielded 1% until the Nikkei began to hemorrhage starting in 2004; increasingly, many Japanese large and small-cap companies have boosted dividends over the last five years, including share buybacks. Some world-class companies in Japan continue to pay attractive dividends, including Canon (3.4%), Nintendo (5.5%), Nippon Oil (3.6%) and Tekeda Pharmaceuticals (4.8%).

Ten years ago Asian equities paid pitifully low dividends following the bull market in the late 1990s. But two major bear markets this decade have brought stock values back down to Earth; as share prices have declined most companies – including financials -- have maintained or even increased their dividends in the region.

What’s truly amazing is how for many decades the United States continued to raise dividend payouts while emerging markets paid little or nothing to shareholders. Now that trend is changing amid the worst credit deflation in 75 years as banks and other companies chop or eliminate dividends to conserve cash.

Dividends in the MSCI Asia Pacific Index are derived from companies in 14 countries with the top ten dividend-paying stocks accounting for about 20% of total dividends paid. In contrast, the top ten dividend stocks in the S&P 500 Index accounted for almost 33% of all dividends paid by that index in 2007.

According to research compiled by the Matthews Asia Pacific Equity Income Fund, between 2002 and 2007 dividends paid by the constituents in the MSCI Asia Pacific Index grew at a compounded annualized rate of 24% compared with 10% for the S&P 500 Index. That trend is accelerating since 2008 as Asian stocks maintain or boost payouts while American companies reduce or eliminate them altogether.

At some point in the future it’s inevitable that currencies in Asia will be revalued vis-à-vis the American dollar. That makes dividend investing in the Pacific even more compelling as the total return equation grows more rewarding for long-term investors.