Simplistic Japan trade, best wishes in 2013


Quite a rally in Japan over the past six weeks. I’m happy there’s some excitement about Japanese stocks but at the same time I’m worried the hot money and sentiment will prove truly ephemeral. Institutional investors in the U.S. are mostly one-trick ponies when it comes to Japan. I discuss this in my book. Retail investors often get burned going long iShares Japan (EWJ), not exactly their fault though with the sudden swarm of Japan pundits pitching long-Japan/short-yen, all paying obligatory homage to EWJ. For the record, EWJ is not the Nikkei (N225) and though it is a convenient proxy in conversation, it is a poor one in practice.

With that being said, Japan could remain the hot trade into 2013 but it’s worth knowing what’s going on, notably with the impact of the yen. Expectations seem to be quite high (too high!?) that inflation can be created and this will somehow right Japan’s ‘doomed’ economy. I’m doubtful of manufacturing real growth with money schemes. I also don’t believe Japan’s economy is doomed. In fact my favorite stocks are mostly domestic-demand companies. Grab a copy of my book if you haven’t already. Meantime, hope you enjoy my exclusive article at Seeking Alpha: “Real numbers and thoughts behind a weak yen and Japan’s exporters.” Best wishes in 2013!

Barron’s on the Nikkei’s 2012 reversal


Barron’s Kopin Tan writes about the Nikkei’s reversal this year in the International Trader – Asia section (first half discusses Prada’s valuation) of this week’s edition. After being the best-performing market in Q1, the Nikkei has slid 16% since its peak in late March. The vicissitudes of the market should not weigh on value investors. In a phone conversation I told Tan that the rallying and retreating is a recurring theme for Japan.  I am thankful for the cheaper stocks and see excellent opportunity in domestic demand stocks, yes, the debt-ridden, deflation defatigued, and demographically doomed domestic economy. I’m being facetious of course. But as I watched fiscal year-end March earnings and the next fiscal year forecasts come in, there were more and more companies reporting and/or forecasting record earnings. The persistently strong yen is far from ideal, but take a moment and think about the fact that the majority of Japanese companies have remained profitable despite the horrible aftermath of 3/11, the severe flooding in Thailand only a few months later (manufacturing facilities impacted), and of course the ongoing uncertainty in the EU and elsewhere.

To learn all about investing in Japan (comprehensive A-Z overview of the nuts and bolts of the market and its players, as well as key idiosyncrasies and enigmas explained) including why the debt, deflation, and demographic fears are overblown, see my book, Investing in Japan. If you are currently investing in Japan by way of the iShares Japan ETF (EWJ) or another Japan-focused ETF or a mutual fund, you’ll definitely want to see how your money is actually being managed. Japan’s broadly undervalued market (0.9-times reported book value among large caps and significantly cheaper for smaller caps) and abundance of deeply undervalued  (net-nets) and very attractively valued (“GARP”) stocks  means there are multiple viable investment approaches. Don’t be misled by tunnel-visioned macro opinion jockeying at one extreme and pedantic fault-finding on the other. Shares of Unicharm (Tokyo: 8113), a leading Japanese diaper and hygiene product maker, rose four-fold last decade.

Shareowners learning the importance of corporate governance, the hard way


The topic of corporate governance excites few, far fewer than it should, and of course much fewer than say a big (but ultimately boring) story like Facebook’s (FB) pending IPO; though even Facebook and also Google (GOOG) have some newsworthy corporate governance issues. Corporate governance is only hot when there is an Aubrey McClendon type figure making the news — Chesapeake Energy (CHK) shareowners deserve to be outraged — or when a shareowner proxy vote overcomes all odds and leaves corporate directors and management in an awkward position, think Citigroup (C) getting a “no” on its say-on-pay. Continue reading

No Stock Market as Undervalued and as Misunderstood as Japan


Japanese stocks have done very well in 2012 and of course the weakening yen has increasingly more to do with the rally; deservedly so for the people of Japan. Otherwise, and unless Japanese stocks continue to do well, they could become neglected once again. Not necessarily a bad thing for value investors, and regardless of the rally to-date, valuations in Japan remain extremely compelling. Allow me to introduce my book, Investing in Japan: No stock market is as undervalued and as misunderstood as Japan, just released this month. Continue reading

The ongoing JGB battle


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.

Japanese stocks ‘fairly’ undervalued


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

Panic selling in Japan brings casualties


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.

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Perfect storm slams Japanese equities


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.

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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.

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A Tale of Two Banking Systems


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.

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 [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。

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Milking Mitsubishi UFJ


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]] 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]] 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).