Chasing yield, it’s not just Japan anymore


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

Japan: one-trick ponies, exporters, yen, QE, EWJ, real estate, domestic demand; some sound conclusions


Value investors will still find excellent valuations in Japan despite the market’s gains over the past several weeks. As I say again, in my latest exclusive at Seeking Alpha, “Investing in Japan Beyond the Platitudes,” the most interesting opportunities are in domestic-demand small/mid-cap companies. I’ve received a number of messages asking about WisdomTree’s hedged Japan Equity fund (DXJ). Yes, DXJ has done well, much better than iShares Japan (EWJ), in this rally. However, I’m not a big fan of DXJ for some of the same reasons I don’t like EWJ. Over 270 portfolio holdings for DXJ and 300 for EWJ mean outside of  the top-few positions no one stock is really going to move the needle; the top holdings are not dissimilar from the benchmark indexes nor the one-trick pony mutual fund managers. Exporters are already cyclical and the demand/supply (selling) of their shares only makes them more cyclical — this is even more a concern should positions get closed en masse in DXJ given its smaller asset base that has surged only recently.

Finally, I don’t see the yen “blowing up” — it’s not as simple as some may wish or have been led to believe to see a currency like the yen or a country like Japan “blow up” in a straight line. Beware macro pontification coattailing. The great 2005 Nikkei rally saw a roughly 10% weakening of the yen. Overnight, Economy Minister Akira Amari warned excessive yen appreciation may benefit exporters but would hurt people’s livelihoods. The business press is concluding Minister Amari as having suggested the yen has weakened enough. In fact, too weak of a yen begins to hurt exporters if materials costs don’t start to decrease. In this sense, the input environment is quite different than ’05; ditto the strength of the global economy now vs. then.

Long precious metals, hope others stay long Treasuries


Please see my exclusive article at Seeking Alpha, “Why I’m Long Precious Metals (And Hope Others Will Continue to Buy Treasuries).” I look at some of the perils of investing in Treasuries; the performance of select assets and money growth since 1971 when president Nixon closed the gold window; and discuss my investments in iShares Silver ETF (SLV) and Vanguard’s Precious Metals and Mining fund (VGPMX).

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.

Japan inadvertently intervenes to soften yen


The Japanese yen (JPY) is still “relatively” strong, but it has weakened by a pretty significant amount against the US$, nearly 10 points, in recent weeks. With much buzz of yen intervention leading up to the recent softness, one would have thought the MoF ran out of patience and intervened. Well, in fact, it kind of did in a sense, since the now disgraced former Finance Minister Nakagawa couldn’t handle his glass at the G20; and the latest Japanese political news scandal involves a case of potential campaign contribution fraud by the opposition party — maybe now is the JCP’s chance. So, with Japan so concerned about “reputation risk,” one would assume a national policy would call for carefully cultivating it. However, in addition to the above, the musical chairs of inept prime ministers post-Koizumi and the ceaseless political gaffes, have instead resulted in carelessly damaging Japan’s reputation. Should the yen find relative strength again — and it just might considering the basket case of currencies out there — unless there are more snafus within the GoJ, then I continue to believe there should be no deliberate intervention since it would still be premature at this point given deteriorating global economies.

Yen ETFs traded in the U.S.:

CurrencyShares Japanese Yen Trust [[FXY]]
Ultra Yen ProShares [[YCL]]
UltraShort Yen ProShares [[YCS]]

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

UPDATE: Borderless Conventional Banking Failure


No surprise that the BoJ kept rates unchanged at 0.1%. That a return to deflation is expected comes as no surprise either, since in reality, deflation never really ended, even when commodities surged last year. Meanwhile, the Japanese are left in the same predicament, with next-to-zero returns on deposits and no real need or desire to consume beyond necessities. Unenviable circumstances for both individuals and businesses, alike.

The “borderless conventional banking stupidity failure” refers to the clipped text below. With exports plunging and domestic demand continually depressed, it’s unnecessary to obsessively cater to the big players idling plants and curbing expansion. Rather it’s of utmost importance to ensure that lending not only continues, but does so without excessive stringency, at the SME and individual level, in order to have any hope of minimizing the effects of prolonged deterioration of the economy. This is a simplified argument, but the crux of the problem, especially in Japan (or I could say “even in Japan” despite all the cash held by companies and individuals — innate risk aversion exacerbates the problem). And again, a truly unenviable situation (regarding the lending climate), but in this case, one not so different than what we are witnessing, say for instance in the U.S.

clipped from

BoJ holds rates unchanged; sees deflation ahead

The BoJ’s quarterly survey of bank-lending practices, released on Thursday, showed large financial institutions lowered lending standards for large firms, kept them unchanged for medium-sized firms and tightened them for small firms and households.

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Japanese monetary policy: stealth liquidity


$225B in three weeks?!

clipped from
Shirakawa Downplays Speculation for Joint Rate Cut
The best way for central banks to counter the global
financial crisis is to provide liquidity, Shirakawa said. The
BOJ pumped 23 trillion yen ($225 billion) into the financial
system over the past three weeks, the most in at least six years,
as banks stored cash on concern other financial institutions may
follow Lehman Brothers Holdings Inc. into bankruptcy.
“It’s appropriate for each nation to make a judgment based
on its own economy and prices,” Shirakawa said at a press
conference in Tokyo after his board left the key interest rate
at 0.5 percent. Any coordinated action that doesn’t reflect this
would be “undesirable,” he said.

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