Nikkei Weekly Outlook: Testing Dubious Highs

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Last week’s question of resiliency or reluctance at 14,000 for the Nikkei 225 Stock Average was answered, somewhat predictably, with another late-week rally. The Nikkei ended the week higher by 2.3% to 14,338.54 and the broader TOPIX, which rose by the same amount, recouped the 1,400-level (1,408.14) for the first time since January 10th.

This week, the N225 is poised to test its Jan. 10 high of 14,388 and perhaps it’s not a stretch to throw in the 14,691 close on the first day of trading this year (its calendar year high close). But don’t get too excited (just trying to keep things in perspective), considering the N225’s 15,155 open on the first day of trading in 2008, let alone the 18,000-plus levels it once traded at last year!

Nikkei 225 Chart May 30 2008

At any rate, there is growing momentum behind stocks now. Although the 25 DMA of Topix-1 advancers/decliners eased somewhat to a still elevated 117.4 by last Friday, compared to a 126.5 reading the prior Friday, there were 123 new highs versus only 6 new lows, supported by solid overseas investor buying. A Nikkei market report suggests investors have come to recognize the risk of not being invested in stocks. Steel Partners’ victory against Aderans (JP: 8170) proves there may be hope in Japan after all for foreign investors and retail shareholders alike. Dollar/yen at ¥105 is not bad either, but hurts at the pump (see gas prices below; also see Lex in “Carry trade silence“).

For a recap, intra-week the N225 traded as high as 14,366 on Friday and as low as 13,665 on Wednesday. As of Friday’s close the N225 is trading at 16.7x trailing and 17.1x forward earnings, 1.68x book, 1.44% trailing yield and 1.52% forward yield. By comparison, TOPIX (1st Section) is trading at 18.0x trailing and 17.2x forward earnings, 1.56x book and 1.64% trailing yield and 1.69% forward yield.

Now for some bearish news: following a report on costly cross-shareholding investments by Nomura last week, the Nikkei reports of a 47% drop in unrealized gains from corporate shareholdings in what was a disastrous FY-2007. The Nikkei also published news that there were ¥1.9 trillion ($18 billion) of subprime-related losses in FY-2007 for publicly traded Japanese financial instutions (keeping this in perspective however, the losses are rather insignificant compared to the red ink bloodbath in the U.S. and Europe).

Rounding out the bad news is something that could rain on the stock market’s recovery: the highest ever monthly wholesale price hike for gasoline was announced effective this month. Consumers are now paying more than ¥170/liter and nearly ¥180 in some places. So much for the temporary relief at ¥130 in April. (Note, ¥170/liter is the equivalent of about $6.10/gallon at ¥105/$1 — talk about pain at the pump).

How about some weird news: amidst an ongoing nationwide hunt for tansu kabu there is unrelated news that an unemployed man in Fukuoka discovered a woman living in an unused closet in his apartment. Police suspect the woman, whose appetite blew her cover, had been living there for several months.