I’ve told you before about the enormous number of high-yielding stocks abroad. If you remember, my research team and I found only 25 profitable U.S. companies were paying yields of more than 12%… compared to 93 overseas.

Although the numbers fluctuate daily, that means roughly 79% of the world’s highest yields are found outside of U.S. markets. To me, the amount of high-yield international dividend-payers out there is one of the market’s biggest secrets.

But there’s another big potential benefit to investing in international companies that most investors fail to consider.

This simple move could make investors extra gains of 10% or more — even in a single year. It doesn’t require any extra effort… in fact, it happens automatically when you invest in international companies. 

Here’s how it works…

Say five years ago you took the trip of a lifetime to Australia. Back then, $1.00 Australian was worth roughly $0.65 U.S. dollars. That means a hotel room priced at $100 Australian dollars only cost about $65 U.S. dollars thanks to a favorable exchange rate.

But today, the Australian dollar has increased while the U.S. dollar has plummeted in value. Just $1.00 Australian is now worth $0.91 U.S. dollars. That $100 room in Australian dollars will now cost you $91 U.S. dollars — a 40% increase, even though the hotel’s rate didn’t change.

What does this have to do with increasing dividends? Well, what’s bad news for your vacation is great news for your international income investments.

Say you bought an Australian company five years ago that paid a dividend of $10 Australian dollars each year. Back then, you would have earned $6.50 in U.S. dollars after conversion.

But today, that same $10 Aussie dollar dividend would be worth $9.10 in the U.S. — or40% more.

The bottom line is if the U.S. dollar weakens against other major foreign currencies, then your dividends will increase over time… even if the company you invest in keeps its dividend payment the same.

The best news is that I see this trend continuing for at least the next two or three years. 

And I’m not the only one noticing this. In fact, the numbers are staggering…

“The dollar’s decline over the past 30 years has been far greater than most Americans realize. It has lost almost half its value against other major currencies since 1985 and is down 33% in the past 11 years alone.”
— Time.com, March 20, 2013 

But it’s not just dividends that benefit from a falling dollar when you invest abroad. Every dollar you invest sees the effects as well.

Recognizing this trend years ago — and investing alongside it — has already given international income investors a major boost.

You can see for yourself how the falling dollar has helped score some great returns in international markets for investors…

One major reason why the Loonie is losing flying altitude versus the U.S. dollar is because of the spread between Canadian and U.S. interest rates.

The chart above shows this spread relationship for 10-year government bonds for both countries.   As of this minute, US 10-year bonds are paying 2.89% whereas the Canadian 10-year bonds are only paying 2.58%.  Well, who the heck internationally is going to want to buy the lower-yielding Canadian bonds (and in the process covert their local currency into Canadian dollars in order to pay for them)?  Some foreign investors might have for reasons that are not immediately evident to us.  However, most would seek the higher yield offered by the U.S. bonds.

Also, a bit of a vicious circle ensues as investors witness the erosion of the value of the Loonie in addition to the lower yield offered on Loonie-demoninated investments.

In our 2014 outlook, published at the beginning of this year, we forecasted the Loonie to trade in a range of 87 to 93 cents while it was still trading at 94 cents.  It is now in the 91-cent range.  So far, so good … for our forecast that is, not the Loonie itself.

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Gold in yen has outperformed  gold in dollars, but it all comes down to foreign exchange rates.

Renowned investor Dennis Gartman recently said that his favorite commodity trade of 2014 is gold—but with a twist. As he has done a few times over the past year, Gartman made the case for owning gold in yen, arguing that the Bank of Japan’s monumental efforts to jump-start economic growth and inflation by doubling the size of its balance sheet was bullish for the yellow metal denominated in the Japanese currency.

Gartman’s argument certainly is compelling. Gold in yen has handily outperformed its dollar-denominated counterpart in recent months and years. In 2013, for example, gold in yen was down by only 12.5 percent, while gold in dollars fell by 29 percent.

Over the past five years, gold in yen has rallied nearly 80 percent, while gold in dollars rallied 55 percent.

That said, ultimately, if one makes the case for owning gold in yen (as a U.S. investor), one is making the case of continued devaluation of the Japanese yen against the U.S. dollar; because if there is no change in the exchange rate, gold in either currency will perform exactly the same.

Thus, Gartman’s favorite commodity trade of 2014 is as much a play on foreign exchange as it is a play on gold itself.

“In the 1500s, Motonori, a feudal lord of the era, sought to teach his sons the virtues of

cooperation. He gave each of his sons an arrow and invited them to break them, which they did

easily. He then gave each son three arrows and invited them to do the same. Try as they might,

they could not break three at once. This, he told them is the value of cooperation. One arrow is

easily broken, but three held together are stronger than the strongest warrior alone can break.”

Japanese folktale (from ClearBridge Investments, Oct 2013)

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Commentary & Analysis 

Is it time to buy the Japanese yen?

Though many are optimistic and there are positive signs, Mr. Market hasn’t yet issued its final verdict on Japan’s three-arrow strategy.

 Source: ClearBridge Investments, October 13, 2013 Institutional Perspectives 

So far the first arrow from the bow has proven a success; the yen has weakened and stock prices have soared. In fact, these two price series, seemingly impacted by aggressive monetary policy, are highly correlated as you can see in the chart below comparing the Nikkei 225 Stock Index and USD/JPY:

It’s not just liquidity that’s driving stocks, earnings have improved for Japanese companies and investors are betting this will continue as Japanese multi-nationals become increasingly powerful competitors thanks to the currency. 

But as Newton’s Third Law of physics says, “For every action, there is an equal and opposite reaction;” Japan’s current account deficit is climbing along with the falling value of the currency. 

From Bloomberg today: 

Japan’s current-account deficit widened to a record in November as imports climbed, underscoring challenges for Prime MinisterShinzo Abe as he tries to drive a sustained economic rebound. 

The 592.8 billion yen ($5.7 billion) shortfall in the widest measure of trade, reported by the Ministry of Finance in Tokyo today, was larger than the median forecast of 368.9 billion yen in a Bloomberg News survey of 24 economists. The deficit is the biggest in comparable data back to 1985. 

Is this a problem? Maybe! Why? The second arrow (flexible fiscal policy) is predicated on sustainable government debt. Local funding has been the bedrock for Japanese government bonds. If Japan has to go hat in hand to international investors for funding, because of the rising current account deficit, it will likely force up interest rates on Japanese paper, increasing the cost of government funding. This concern is real, when you consider the following factoid from the Bank of Japan:

The share of Japanese households with no financial assets rose to a record high of 31 percent. Falling incomes forced people to spend their savings. The major reason for this rise: declining regular income. 

Success of corporate Japan on the one hand adds to government revenue in terms of taxes. But it also takes away, as it reduces the pool of corporate savings for Japan to draw upon. Thus, the big bet is on improving the economy as the domestic pool of savigs is waning. 

And though we are seeing headline inflation pick up in Japan (another tool for fiscal flexibility), let’s put this into perspective. Below is a chart showing Japanese CPI going back to June 1967.

Governments tend to like inflation as it allows them to payoff outstanding government debt more easily. But one wonders if Japan can be successful here given the powerful global deflationary forces still in play, especially if demand from China is indeed waning as many analysts speculate. 

And of course the huge appreciation of the Chinese currency (yuan) compared to the Japanese yen probable doesn’t help Chinese growth, though it does make Japanese goods look very competitive to Chinese citizens. Overall, I would suspect the Chinese government isn’t too happy when it views the chart below:

The Nikkei was clobbered last night—down 3.08%. Will $-yen follow? At least near-term that is our bet. And the surprise for 2014 could be the yen strengthens at lot more than people expect if those arrows remain in the quiver. 

Currency Services Performance Update: 

Black Swan Currency Options Service… 5-Wins and No losses…so far… 

We have taken off four trades since the service began in October; all of them have been winners:

Black Swan Forex Service 

Black Swan Forex 2014 Closed Positions

www.blackswantrading.com

Regards, 

Jack Crooks 

Black Swan Capital 

www.blackswantrading.com 

info@blackswantrading.com 

Twitter: @bswancap

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