Recap: Debt, JGBs, Value Investing Simplicity, and Japanese Stocks

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I’m going to see how posting a daily summary of my tweets goes. I’ve always felt that tweets are too ephemeral and despite the excellent information and leads that do get shared,  there’s far too much action/noise/distraction on Twitter. There is at least a “favorite” button, but the weak search function and inability to bookmark and sort, is something I hope Twitter gets right, soon. I’m starting these summaries for my own benefit — a quick recap of what I tweeted, retweeted, and favorited — and I’m fine if it remains for an audience of one and would of course be thrilled if others benefit. Highlights:

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Chasing yield, it’s not just Japan anymore

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CNBC on Tuesday, July 8, 2014: “Watch out for asset bubbles developing: Sternlicht.” I read this with some interest considering Starwood Capital’s AUM ($36B) and focus on real estate. “[…]  watch out for tail risk,” warned Barry Sternlicht, company chairman and CEO, who also said there is complacency risk among investors because there is such a dearth of yield.

Since there’s no yield … in corporates or governments — everything whether it’s farmland, timber — everything is yield proxies.

“Yield proxy” is an interesting term. I know all about “chasing yield”  having watched and invested in Japan for so long (remember the yen carry trade) and seen the shitty products that banks sell their customers (10yr JGB yield: 0.53%, see Bloomberg bond tables). What really caught my eye in this CNBC piece (originally in video) is this admission by Sternlicht: Continue reading

Simplistic Japan trade, best wishes in 2013

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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!

No Stock Market as Undervalued and as Misunderstood as Japan

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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

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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 individual investors saying no thank you to JGBs

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The Mainichi Shimbun (original in Japanese) reported early Thursday that Japanese Government Bonds’ (JGBs) popularity is rapidly falling among individual investors. Beginning in 2003, the Ministry of Finance (MoF) has sold two types of JGBs (a fixed-rate 5-year and a variable-rate 10-year) four times a year to individual investors. However, as interest rates have been held at zero (remember ZIRP) to near-zero levels for years, Japanese individual investors may finally be voting with their purses. The October 5-year issue had a coupon of 0.6%, the lowest since the program began in ’03, and less than half the peak coupon rate of 1.5% in July ’07.

The MoF now only expects to raise Y1.3 trillion (US$14.3B) this year from individual investors, down from a prior estimate of Y2.4 trillion, and considerably lower than the record Y7.2 trillion raised in ’05. Through the end of this September, individual investors held Y27.7 trillion or 4.6% of JGBs outstanding. The MoF argues that recent individual investor reluctance for JGBs is not an issue because their weighting is so low. However, it goes without saying, as the article accurately points out, that it is an issue, as the government is poised to take on even more debt in the face of declining tax revenues.

In fact, the MoF is reportedly planning to introduce a fixed three-year JGB for individual investors next July. At this time, it’s hard to imagine a warm welcome, let alone a return to previous years’ embracing of JGBs. The MoF may be right in not being very worried, since it can just pressure domestic institutional investors to pick up the slack. So whether individual investors like it or not, it’s probably the case that they will remain proxy buyers of JGBs.

Japan watchers and investors will readily recognize and perhaps even sympathize with the plight of domestic savers. The golden days of the yen carry trade seem so distant with US$1/Y90-level support so sticky. It’s a real shame that Japanese companies don’t pay quarterly dividends as is common practice in the U.S., for instance, since household, quality Japanese companies are in some cases paying dividends at multiples of what JGBs offer. The desperate search for yield could be called off. Instead of chasing the latest overseas investment fad or making risky leveraged forex trades, maybe something more productive could be achieved.

Disclosure: The author has no direct exposure to JGBs, and does not believe a crisis is looming for Japan despite David Einhorn’s position, and in spite of the serious problems the country faces but continues to bundle into a bumbling status-quo. 

Japanese stocks ‘fairly’ undervalued

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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

Perfect storm slams Japanese equities

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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.

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Nikkei Weekly Outlook: 14,000 in Sight Pre-Golden Week

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What to watch: Earnings reporting continues; JGB activity (unprecedented サーキットブレーカー (circuit breaker) action last Friday; rising yields but equity yields still attractive to the 10-year); Tues./Wed., April 29 -30: FOMC rate decision meeting; Wed., April 30: Bank of Japan (BoJ) monetary policy meeting; March – Industrial production; March – New housing starts; March – Unemployment and Ratio of Job Offers to Applicants; March – Household income and expenditure survey; U.S. Q1 GDP; Thurs., May 1: April – New auto sales; Fri., May 2: U.S. April – Unemployment and U.S. nonfarm payrolls

Ongoing: External factors, particularly U.S. earnings and economic data (see above) to influence domestic stocks; record commodities vs. weakening yen [¥104.5/$1 on Friday] Continue reading