Active Investing in Japan

The Bank of Japan cut rates for the first time in seven years: 0.5% –> 0.3%, which is said to have disappointed the market and thus caused the sell-off in Tokyo (Nikkei 225: -5%; Topix-1: -3.6%). Not quite. The market had already opened lower and traded down throughout the entire session until the BoJ announcement. It’s hard to believe there was genuine disappointment with the BoJ, which in likely, largely trying to ease pressure on the yen, made a shortsighted decision, as the title above states, and caved into market pressures. Ironically, and perhaps linked to the so-called disappointment, the yen appreciated nearly 6 points against the euro and almost a full point against the US$. In summary, Japanese stocks were due for a retreat, after racing up some 26% in the three prior sessions. In addition, Monday is a national holiday (Cultural Day) and thus another reason to take profits. Economic data released earlier in the day showed an interesting dip in unemployment, but a multi-year low in the number of jobs-to-job applicants.

6.4%, 7.7% and now 10%. Those are the percentage gains for the Nikkei 225 over the past three sessions. Thursday’s gain was the 4th largest ever. Tokyo rallied along with the rest of Asia, including a record setting 12% surge in South Korea. Headlines emphasize Central Bank rate cuts, expectation of a BoJ cut tomorrow and more pension fund buying, as being the key drivers behind another day of strong upside. No doubt stocks had been severely oversold. Problem is, some equally heavy profit-taking likely looms and aside from pension fund buying, bullishness on rate cuts is a rather weak reason to dive back into equities. continue reading…

Stocks surged early and held up nicely in Tokyo, that is, until the start of the afternoon session and profit-taking. However, word on the street is that around 2pm pension fund buying helped recover the earlier highs — in fact, producing the seventh largest percentage gain ever for the N225 (7.7%).

*I had to remove the Clipmarks because it auto-updated the Nikkei 225 chart making it irrelevant to the day’s action. Anyway, here’s one of the day’s headlines: 日経平均は５８９円高と大幅続伸し高値引け、公的年金買い観測＝東京市場・２９日後場.

See the clip below (re. cross shareholding) from an article discussing Japanese stocks at a 26-year low (as of Monday’s close) in yesterday’s Wall Street Journal. Earlier this week I discussed cross shareholdings in Poisonous cross shareholdings may be helpful in reaching a quicker bottom.

clipped from online.wsj.com Japan’s banks, in particular, had seemed to be in good shape. Remaining cautious after their bad-loan problem, they largely avoided exposure to U.S. subprime mortgages. But the falling shares highlight one area of weakness. Japan’s banks are allowed to invest some of their capital base — the pool of funds against which they lend money — in stocks. The practice is a legacy of the traditional practice of “cross shareholding,” where banks and their borrowers held stakes in each other to cement ties. Such holdings by Japan’s banks now represent about 3% of the value of the Japanese stock market. Mitsubishi UFJ held a portfolio of Japanese stocks valued at 6.1 trillion yen, with unrealized gains of 1.8 trillion yen, as of June. With Japan’s stock market falling 40% since then, the portfolio is estimated to have shrunk to less than 3.7 trillion yen, representing a valuation loss of 630 billion yen, according to an estimate by Kristine Li, a banking analyst for KBC Securities in Tokyo.

After four days of massive hemorrhaging (over 2,100 points lost), the Nikkei 225 bounced back in an afternoon session rally that gained momentum into the close. The N225 gained 6.4% (459 points) to close at 7,621. In early trading it wasn’t clear a positive close would happen — the N225 fell through 7,000 at one point to 6,884.90 (a 26-year low). The broader Topix-1 rose 5% to 784, hurt by heavier exposure to banks, non-bank financials and real estate. Nevertheless, the rally had breadth, as 79% of 1st section issues posted gains and 29 of 33 sectors were positive. A weaker yen was also a big help in at least temporarily relieving concerns of recent yen strength although its last trade against the dollar at 95 is still problematic for the “exporters.”

UPDATE: (Osaka open). December Nikkei 225 futures (Singapore) point to another move to the downside, although the decline is a more modest one (-130 points) than we’ve seen recently. N225 futures in Chicago shed 440 points to settle at 7,110, also the low of the day. Osaka futures settled at 7,160 yesterday, but in extended trading fell as low as 6,900. Osaka futures have since opened down 180 points at 6,980.

Media reports and eventual confirmation (by Mitsubishi UFJ) of contemplation of raising capital among Japan’s mega banks warrants far more discussion. As stated earlier, the reasoning of MUFJ (JP: 8306) (MTU: 5.29 +1.93%) is understandable (growth at almost any cost), but unacceptable for existing shareholders. For Mizuho (JP: 8411) (MFG: 4.272 +1.47%) and Mitsui Sumitomo (JP: 8316), however, it raises some very important questions with implications for the entire market.

What I’m most interested in here, is how bad the broad market sell-off — stocks are now down nearly 50% since the start of the new fiscal year — is impacting balance sheets, which will see (more) writedowns of shareholders’ equity. As the painful reality of global deleveraging sets further in, equities continue to be “re-priced.” We knew earnings estimates had to come down. What we didn’t know was that forex would be so damaging. Is the next step to learn that the steep and broad market fall has induced a further shaving of shareholder equity? This is a vicious spiral and almost Bermuda Triangle-like. More corporate failures are inevitable. Likewise for even deeper discounted valuations. That said, the bright side to all of this is that there certainly is a floor and it is held up strongly by the cross shareholdings. Yes, the selling will have to end for obvious reasons. And companies can help themselves by acquiring subsidiaries and maybe even competitors. Talk about timing for a golden era of inward M&A! So, given the precipitous fall, it is a no-brainer that we’re closer to the bottom. However, as I’ve been saying repeatedly, patient capital is a must. Anybody have capital and want to talk?

By the end of the morning session’s dubious positive close, the Nikkei had already fallen through its post-bubble trough in early trading (compare valuations then and now), taking it to a level last reached 26-years ago (today’s close: 7,162.90). Media reports of mega banks needing to raise capital were finally taken seriously in the afternoon session, spreading selling broadly beyond banks and solidifying the 26-year low close. The N225 has now lost over 2,100 points in the past four days! And Nikkei futures broke the 7,000 level, trading as low as 6,900 in late trading before settling at 7,090 or about 70 points below the regular session. The broader TOPIX sold-off even harder than the N225 to fall to a near 25 year low (today’s close: 746.46). Get ready for bailouts.

clipped from markets.nikkei.co.jp 東証大引け・26年ぶり安値に沈む　日本の金融システムにも疑念高まる

It has been an interesting trading day thus far in Japan. Stocks have moved triple-digits up and down, including a 350 point surge from the day’s low, all to finish the morning session up a modest 30 points. During that time, the Nikkei 225 fell as low as 7,486, taking it to a 26-year low — forget about the post-bubble trough! Initial selling was obviously induced by futures trading, in addition to media reports about banks needing to raise capital. continue reading…

December Nikkei 225 futures trading in Singapore opened at 7,480, off a little more than 2%. That’s right about where the Osaka futures settled on Friday at 7,470. In Chicago, the close was a bit more optimistic at 7,550. At any rate, at these levels, if the benchmark N225 trades in-line, we’ll be at a new post-bubble low. Sad, but true. For a comparison of various market and other related metrics see: Nikkei and TOPIX, then and now.