Active Investing in Japan

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: 5.21 0.00%) is understandable (growth at almost any cost), but unacceptable for existing shareholders. For Mizuho (JP: 8411) (MFG: 4.25 0.00%) 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