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

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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.

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

Japan to be world’s 3rd largest economy is good news

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“China poised to pass Japan as world’s No. 2 economy,” reports CNN.com.  Q2 GDP figures from Japan and China show the latter exceeding the former, $1.34 trillion vs. $1.29 trillion. In 2009, it was Japan ahead for the full year, at $5.07 trillion compared to China at $4.91 trillion, according to the IMF. Given the two lost decades now in Japan, this was only a matter of time. Jesper Koll’s (veteran Japan economy expert now with JP Morgan in Tokyo) simple forecast (see quote below) represents a real and substantial opportunity for Japan. This is not a new idea or sudden realization by any means, but it is far more tangible now than ever before; it is becoming more palpable given recent developments such as the Japanese government actively courting Chinese tourists. Continue reading

What a run on the dollar could mean for Japan, the yen

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In 1996, in The Future of Capitalism, Lester Thurow observed the following:

When a run against the dollar starts, there are enormous amounts of money that can, and will, move into appreciating currencies. Sixty percent of official reserves and 50 percent of private reserves are currently held in dollars. Those funds will certainly move, but they will be a small fraction of the total funds avalanching down the slope. Financial speculators will pile on the downward trends in the dollar and the amounts moving will be  many times the world’s dollar holdings …. Those whose debts are denominated in the appreciating currencies (most likely yen and marks) will find the real value of their debts explode — evaluated in their own currency or dollars. Many will be unable to repay their yen- or mark-denominated loans. Financial institutions in Japan and Germany will take big losses as foreigners default on their loans.

Mr. Thurow’s observation suggests that the yen would appreciate — something it has done and sustained since Sept. ’08. However, the implications of an even more significant surge in the yen (with a corresponding plunge in the dollar), suggests that it would be detrimental to Japanese financial institutions — and we have witnessed the kind of mayhem that problems at banks can bring to the broader economy, let alone the effects of currency appreciation on exporters.

It seems then, that a lot of the presumed yen appreciation would be short-lived, since damages to the financial sector would likely result in downward pressure on the yen. What is not readily clear today, is how much exposure the financial system, excluding the BoJ/MoF, has to the dollar. In fact, given the significant foreign reserve holdings of the BoJ, it could be the case that a run on the dollar, while certainly resulting in chaos initially, would compel the government to finally look beyond the current account and do much more to encourage domestic-demand.

US$/JPY 2-year chart (source: Yahoo! Finance)

dollar - yen - 2 year chart

At the time of publishing, the author had no position in JPY/USD.

Nikkei Weekly Outlook: To 13,000 or Back to 12,000?

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What to watch: Monday, 3/31: February Industrial Production; Tuesday, 4/1: Tankan (watch capex spending outlook and yen/dollar predictions — the FY07 second-half ¥/$ prediction for the December survey was 113.79 compared to 114.23-33 in the Sept. and Mar. surveys and a most recent quote of about ¥99). Continue reading