The benchmark Nikkei 225 has gained 33% in the last six trading sessions since bottoming at a 26-year low at 7,162 on October 27. However, to put the surge in perspective: from the start of October to that bottom, the Nikkei shed an even more impressive 37%. So at a close yesterday of 9,521, the N225 is still nearly 2,000 points from its Oct. 1 close of 11,368, which as I’ve said many times before, is far, far from its 2007 peak levels exceeding 18,000.
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.
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.
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.”
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.
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.
After the market close on Friday, the Nikkei published a table showing various metrics of such things as where the Nikkei 225, TOPIX-1, yen, and JGBs are trading now versus 5 1/2 years ago (April 28, 2003) when the N225 hit a post-bubble trough (note we’re about 40 points away from that bottom and early futures trading doesn’t bode well). Following is a summary and additional detail to some of the metrics:
1. TOPIX-1 is actually 4% above where it was on 4/28/03. However, one key difference is the index trades at less than book value (0.97) versus 1.2x then. Another major difference: trading at 11.6x forward earnings now vs. 53.7x then! Forward dividend yield: 2.7% vs. 1.2%. Also, trading volume and turnover are both up more than 3.5x.
2. The yen, most recently at around 95 per US$, has appreciated some 20%. Against the euro, the upside is about half that amount.
3. Long-term JGB yield of 1.5% now vs. 0.6% then. (That’s right. That low and again with the dividend yield of TOPIX-1 far higher. We know what went on to happen by late ’05.)
4. The Nikkei threw in Sony (JP: 6758) [[SNE]], whose downward revised earnings forecast ignited a sell-off on Friday (see here). Sony’s ordinaries are down 27.5% compared to 5 1/2 years ago. No near or mid-term relief in sight. As I explained last Friday, concerning the sell-off of “exporters,” it wasn’t a secret that demand has soured and forex projections are way out of whack.
FD: No position in Sony.
Heavy selling on Friday in Tokyo almost pushed the benchmark Nikkei 225 to its lowest post-bubble close (-9.6% to 7,649 vs. 7,607 set on April 28, 2003). And that’s not all: extended trading of N225 futures in Osaka brought a record session low of 7,100, representing another 520 points to the downside. Sony (JP: 6758) [[SNE]] is said to have ignited the fire with its downward revised earnings forecast (no surprise really, since it’s no secret consumers are hurt and corporate forex projections are far out of whack). It was downhill from there, as deleveraging really took center stage, witnessed in a surge in the yen to a 13 year high and broad indiscriminate selling of equities.
The current levels for the Nikkei and other indices and the yen are unimaginable (the smart bet was for a N225 of 20K+ not <10K to be poised for new post-bubble lows). Worse yet (or better yet if you’ve got any cash left), valuations are far below what they were at the April 2003 trough. If memory serves me correctly, the former Merrill Japan strategist Jesper Koll had thrown out a target of 28K for the N225 by the time of the Beijing Olympics!
Japanese stocks “rallied” a spectacular 14% last Tuesday, but in spite of that (and being surrounded by massive days of selling), I lacked the broader market’s bullish conviction and explained why in “Trying not to rain on the Tokyo stock parade.” Overnight, the Nikkei sold-off about 6.8% to fall back below 9,000 again to 8,674, erasing the gains from a three-day rally. During that period there was a spooky appearance of bullish stories on Japan, particularly advocating banks. In fact, it is a recurring theme: whenever there’s page space to be filled, a couple days of higher closes in Tokyo, or the desire to sound smart and talk about valuations. Unfortunately, it is easy to be misinformed and fooled.