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


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] (select potential factors at play: dollar rally; end to Fed cuts near; BoJ impotency; Samurai bond issues; Golden Week effect); GoJ selective protectionism (Japanese government despises hedge funds and private equity, characterizing them broadly as vultures — greedy capitalist barbarians (as opposed to pigs or locusts) — while ostensibly accepting of SWFs. Rant prompted by TCI (wanting to up its stake in J-Power) vs. GoJ stonewall.

Markets: For the second week in a row Japanese stocks are poised to gap up on Monday, following another week of gains and a 1.75% rise to 13,960 for Nikkei 225 futures trading in Chicago, compared to a close of 13,830 in Osaka. On Friday, the March N225 futures in Chicago opened at a daily (and multi-week) high of 14,025. Just over a month ago, the front-month N225 futures fell to a low of 11,635. Nevertheless, it is a holiday shortened week, with Showa Day on Tuesday, ahead of the extended Golden Week holiday.

Trading has already been on the light side and will likely stay that way. Beside earnings (which have been mixed thus far, with some firms such as Nintendo (JP: 7974) (ADR: NTDOY.PK) and KDDI (JP: 9433) forecasting record profits this fiscal year and others such as Honda (JP: 7267) [[HMC]] and Canon (JP: 7751) [[CAJ]] forecasting lower profits), it is a busy week with the BoJ and FOMC meetings, March industrial production, housing starts and employment in Japan and U.S. unemployment and nonfarm payrolls. Obviously there will be a muted reaction by domestic players to the key U.S. data releases on Friday, since Japanese markets are closed the following Monday and Tuesday.

Yes, 14,000 is in sight for the Nikkei 225, but it is not as critical to reach and hold this level this week, considering the subdued trading ahead of the extended holiday. Meantime, the 25 DMA of TOPIX-1 advancers/decliners sits at 115.5 as of week-end, up slightly from the 114 level in the week prior. This is an elevated level, especially since last summer, but may not precipitate massive profit-taking given the limited trading activity and intra-week weakness that has resulted in back-to-back bullish Friday sessions.

Among some of the bigger names reporting earnings this week: Monday, Apr. 28: Fuji Heavy (JP: 7270), FUJI FILM (JP: 4901) [[FUJI]], Fujitsu (JP: 6702), HOYA (JP: 7741), Matsushita (JP: 6752) [[MC]], Omron (JP: 6645), TDK (JP: 6762) [[TDK]], Toto (JP: 5332), Unicharm (JP: 8113); Wednesday, Apr. 30: Sapporo (JP: 2501), Kirin (JP: 2503), Sojitz (JP: 2768), Shiseido (JP: 4911), Lion (JP: 4912), Makita (JP: 6586) [[MKTAY]], Seiko-Epson (JP: 6724), Kawasaki Heavy (JP: 7012), Yamaha (JP: 7951), Itochu (JP: 8001), Marubeni (JP: 8002), Sumitomo (JP: 8053), Mitsubishi (JP: 8058), Mitsui Fudosan (JP: 8801), Mitsubishi Estate (JP: 8802), ANA (JP: 9202), Kadokawa Hldgs (JP: 9477), Tokyo Electric Power (JP: 9501), Benesse (JP: 9783); Thursday, May 1: Japan Tobacco (JP: 2914), Fancl (JP: 4921); Friday, May 2: Nomura Real Estate Hldgs (JP: 3231), Mitsui (JP: 8031) [[MITSY]]

Weekly recap: The Nikkei 225 gained 2.9% last week ending at 13,863.47, peaking at 13,886 on Friday and hitting a weekly low of 13,449 on Wednesday. (See chart below). TOPIX 1st Section ended the week just below 1,340.

As of Friday’s close the N225 is trading at 15.6x trailing and 15.8x forward earnings, 1.58x book, 1.4% trailing yield and 1.5% forward yield. By comparison, the broader TOPIX (1st Section) is trading at 17.5x trailing earnings, 16.5x forward earnings, 1.47x book, 1.7% trailing yield and 1.75% forward yield.

Nikkei 225 Chart April 25, 2008

JGB Yield Chart (courtesy of Bloomberg)
Japanese Government Bond Rates - April 25, 2008
* Green = current; Orange = previous