Active Investing in Japan

No doubt David Einhorn (Greenlight Capital) is an astute investor. Recently he declared his bearish view on JGBs, which subsequently has generated heavy interest among financial and political circles. Hats off to Gwen Robinson of FT Alphaville for solid ongoing coverage of the latest JGB tale (see JGBs and the ‘end’ of the short-squeeze fest). My take is as follows:

Regardless of whether Einhorn still has his short trade on or not, the chips are stacked against him and any copycats. It’s a fat chance for opportunistic hedge funds, since JGBs, even with their paltry yields (and circumstantial concerns), have both sizable and perpetual domestic demand. As I said in my last post on this topic, in spite of subdued individual investor demand, there is always an obliged patron of JGBs (the domestic institutional investor), which in the collective can fend off any offensive.

On the surface, Japanese investors sure seem confounded, largely (and in the author’s opinion, mistakenly) shunning their own depressed equities, while settling for skeletal JGBs and feeling compelled to chase overseas trends.  I used to think they were unpatriotic, in a sense, for not being buyers of domestic stocks. However, it turns out they are exceedingly patriotic given that even if they’ve lost their appetite for JGBs (in the case of individual investors), they’ll be silent holders one way or another via proxy, thanks to institutional money managers.

The Einhorn-JGB story is a reminder to Japan bears that no matter how shaky the shoji rice paper sliding doors and tatami floors appear, the pillars are quite strong and have reinforcements. As I discovered last October (‘08) when the Nikkei tumbled to 1982-levels, the seemingly disastrous cross-shareholding system in Japan actually turned out to be one solid floor for equities. With the addition of timely pension fund-buying, the two effectively stopped the hemorrhaging.

So it is, Japan remains an enigma to outsiders. JGB shorts with a prerequisite nine lives. And value investors stuck in, or already having pried themselves out of, the most elusive value trap.

The author’s intent is not to be misleading, but rather to be as frank as possible, regarding the longstanding debate of whether or not Japanese stocks are truly undervalued. In short, the answer is  no. I no longer believe Japanese stocks are undervalued, not to the extent that I once did, and not to the lengths that some pundits and money managers try to make a case for. In fact, I would argue that Japanese stocks may best be described as being closer to fair value instead of being deeply undervalued. I mean Japanese stocks, for the foreseeable future, may be destined to be “undervalued” by traditional metrics, but fairly valued by the market and in relation to the economy. continue reading…

Down more than 11% in early trading, the Nikkei shed 9.6% to plunge to the 8,000-level (closing at 8,276). N225 futures barely managed to preserve that level, dropping 1,180 points to 8,020.

Yet again, the JP financial press, citing a Nikko/Citi strategist, points to (preemptive) selling by hedgies. Combined de-leveraging and de-risking by HFs is delivering a crushing blow. The Nikkei is now down over 50% since its peak last year, falling 27% in just this month of October.

A marginal life insurer, Yamato and the REIT New City Residence both filed for bankruptcy. This spooked today’s market further, exacerbating uncertainty and eroding confidence even more. All eyes on America and the G7 talks.

clipped from charge.biz.yahoo.co.jp 「株崩落」の見方＝日本の金融システムも悪化 従来、日本の金融システムは米国ほど悪化していないとの認識だったが、その認識も崩壊した。この点は痛い。 これを見越し、ヘッジファンドはキャッシュ化の動きを強めている。１１月決算のヘッジファンドは３０日・４５日ルールの期限が近く、顧客の換金を見越して売却を続けているようだ。今週の動きは、彼らにとって売りをためらう局面ではない。売れるだけ売ろうとしている。

First, no wonder there are no domestic buyers of stocks — not only is there widespread fear and distrust of capital markets, but also, after years of experiencing deflation, there’s unfortunately no urgency to buy something that may only become cheaper. That said, someone needs to set a floor on prices. The spread between the 10yr JGB at 1.4% and Topix-1 issues at 2.6% is compelling enough for institutional investors. No doubt hedgies have to sell amidst the great unwind, but that’s no reason for national masochism.

After Monday’s close in Tokyo, Morningstar Japan published a piece with comments from a Nikko/Citi strategist who said the price-to-book ratio of the Nikkei 225 is now lower than it was when the market bottomed at 7,603 in late April 2003 (as of Wednesday’s N225 close of 9,203 (-9.4%) the P/B stood at 1.07).

On Tuesday, Morgan Stanley’s chief Japan economist Takehiro Sato warned of a forecast for five consecutive quarters of zero or negative growth. Meantime, yen appreciation is exacerbating the deteriorating conditions for exporters. And in the background looms musical chair politics in the Cabinet Office, which further erodes confidence.

clipped from www.marketwatch.com Asian markets crumble, Nikkei 225 dives 9.4% “It’s not just the hedge-funds, everybody is selling … And there are no buyers,” said Dale Tsang, managing director at Imperial Dragon Asset Management Co. in Hong Kong. “There is a state of panic, for cash. Everybody needs cash.” “No, I haven’t seen anything like this, and I don’t think anybody has seen anything like this before, except those who are over 75 years old and have seen the Great Depression,” Tsang added.

Wilbur Ross made an interesting comment at an Invesco seminar in Tokyo on Thursday, stating that Japan’s financial system has never been healthier — even (historically) compared to the U.S. No further details were provided by financial press coverage in Japanese, but it is fairly obvious that the Japanese were primarily (although marginal) customers of U.S. financial toxic waste products and not distributors or manufacturers of their own version of ABS and CDS gone wild.

Mr. Ross did mention the recent resurrection of pre-Glass-Steagall conditions in the U.S. He also reiterated that many more banks are poised to fail in the U.S. I believe he recently said up to 1,000 could fail and that he wouldn’t invest unless the conditions were right with government support. Can’t blame him.

So, are Japanese banks a screaming buy with so many of them trading less than book and seemingly having higher quality balance sheets … or do distressed U.S. banks represent the bigger prize? Maybe neither. Massive ongoing value trap in the former and massive ongoing value destruction in the latter.

clipped from jp.reuters.com 　［東京　１９日　ロイター］　破綻した企業への投資・買収で知られるＷＬロス・アンド・カンパニー会長兼ＣＥＯで、インベスコ・プライベート・エクイティ会長のウィルバー・ロス氏は、日本の金融システムについて「米国よりも、かつてないほど健全なものになっている」との見解を示した。

Below are some additional thoughts on the latest MUFG-UB offer (these comments were originally posted in response to an article published by Reuters; edited for style/formatting).

UB’s (UB: 0.00 N/A) Special Committee is very opportunistic and knows what it is doing. It has effectively taken its minority stake hostage vis a vis its board representation and a long-standing one at that for the Chief of the Committee. At the end of the day, there is absolutely no “reputation risk” as MUFG (MTU: 5.09 -1.17%) fears. Why? Nobody on Wall Street cares!

So, is MUFG overpaying? Of course it is. Is it a good deal — yes, great for UBOC in this market. Will MUFG pay up even further as some Tokyo analysts suggest? Probably not. If so, it is even more concerning why there is such urgency on the part of MUFG. Meantime MUFG shareholders suffer and shareholder value is sacrificed over the desire to expand overseas (note it’s great to seek overseas expansion, but it has to be done at the right cost).

Bottom line, this is a so-called “safe” deal for a Japanese mega-bank. Union Bank’s SC knows this and is milking it. The offer in no way signals a bottom for banks’ woes. It also does not necessarily signal a forthcoming buying spree by foreign banks of their overseas subsidiaries. However, it would make sense for opportunistic HFs and other traders to buy shares and hold-out for more! See: MUFG Now Really Overpaying for Union Bank, Oh Well (Shikataganai).

Mixed signals, as always, from Japan. Activist investors are making some ground, most notably in Steel Partners v. Aderans (8170). Still, the climate for M&A and shareholder value unlocking investors is not made any easier by more expansive cross-shareholdings. A more concerted effort is needed by METI, FSA, TSE and the business lobbies. (See Reuters 7/29: Activist investors face long haul in Japan).

clipped from customers.reuters.com

Last week was another down week for the Nikkei, albeit very limited, but the Friday close of 13,942 was over 3.5% off the weekly high and the second consecutive week of a sub-14,000 finish. So, while the Nikkei had been showing signs of promise and not simply selling-off on every piece of bad news, a move beyond 14,500 has proven elusive. The N225 is up over 19% from its year-to-date and multi-year low of 11,691, but there are just not enough positive catalysts to push stocks higher, at present, in the face of all the bad news that continues to hit the wires day in and day out. And this month, we have hedge fund redemptions that could be putting further downward pressure on equities. continue reading…

In “Hollowing Out, Tokyo Style,” FT Alphaville’s Gwen Robinson does a fine job of capturing an ongoing, and now accelerating human resources conundrum. While it seems like there’s no shortage lately of fake Japundits (not to be confused with the real Japundit, who is simply trying to keep it real on the cultural front) saying to go long Japanese stocks, boots-on-the-ground evidence provides further insight into the opaque. continue reading…

Last week’s question of resiliency or reluctance at 14,000 for the Nikkei 225 Stock Average was answered, somewhat predictably, with another late-week rally. The Nikkei ended the week higher by 2.3% to 14,338.54 and the broader TOPIX, which rose by the same amount, recouped the 1,400-level (1,408.14) for the first time since January 10th.

This week, the N225 is poised to test its Jan. 10 high of 14,388 and perhaps it’s not a stretch to throw in the 14,691 close on the first day of trading this year (its calendar year high close). But don’t get too excited (just trying to keep things in perspective), considering the N225’s 15,155 open on the first day of trading in 2008, let alone the 18,000-plus levels it once traded at last year! continue reading…