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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Chasing yield, it’s not just Japan anymore

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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

Simplistic Japan trade, best wishes in 2013

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Quite a rally in Japan over the past six weeks. I’m happy there’s some excitement about Japanese stocks but at the same time I’m worried the hot money and sentiment will prove truly ephemeral. Institutional investors in the U.S. are mostly one-trick ponies when it comes to Japan. I discuss this in my book. Retail investors often get burned going long iShares Japan (EWJ), not exactly their fault though with the sudden swarm of Japan pundits pitching long-Japan/short-yen, all paying obligatory homage to EWJ. For the record, EWJ is not the Nikkei (N225) and though it is a convenient proxy in conversation, it is a poor one in practice.

With that being said, Japan could remain the hot trade into 2013 but it’s worth knowing what’s going on, notably with the impact of the yen. Expectations seem to be quite high (too high!?) that inflation can be created and this will somehow right Japan’s ‘doomed’ economy. I’m doubtful of manufacturing real growth with money schemes. I also don’t believe Japan’s economy is doomed. In fact my favorite stocks are mostly domestic-demand companies. Grab a copy of my book if you haven’t already. Meantime, hope you enjoy my exclusive article at Seeking Alpha: “Real numbers and thoughts behind a weak yen and Japan’s exporters.” Best wishes in 2013!

Barron’s on the Nikkei’s 2012 reversal

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Barron’s Kopin Tan writes about the Nikkei’s reversal this year in the International Trader – Asia section (first half discusses Prada’s valuation) of this week’s edition. After being the best-performing market in Q1, the Nikkei has slid 16% since its peak in late March. The vicissitudes of the market should not weigh on value investors. In a phone conversation I told Tan that the rallying and retreating is a recurring theme for Japan.  I am thankful for the cheaper stocks and see excellent opportunity in domestic demand stocks, yes, the debt-ridden, deflation defatigued, and demographically doomed domestic economy. I’m being facetious of course. But as I watched fiscal year-end March earnings and the next fiscal year forecasts come in, there were more and more companies reporting and/or forecasting record earnings. The persistently strong yen is far from ideal, but take a moment and think about the fact that the majority of Japanese companies have remained profitable despite the horrible aftermath of 3/11, the severe flooding in Thailand only a few months later (manufacturing facilities impacted), and of course the ongoing uncertainty in the EU and elsewhere.

To learn all about investing in Japan (comprehensive A-Z overview of the nuts and bolts of the market and its players, as well as key idiosyncrasies and enigmas explained) including why the debt, deflation, and demographic fears are overblown, see my book, Investing in Japan. If you are currently investing in Japan by way of the iShares Japan ETF (EWJ) or another Japan-focused ETF or a mutual fund, you’ll definitely want to see how your money is actually being managed. Japan’s broadly undervalued market (0.9-times reported book value among large caps and significantly cheaper for smaller caps) and abundance of deeply undervalued  (net-nets) and very attractively valued (“GARP”) stocks  means there are multiple viable investment approaches. Don’t be misled by tunnel-visioned macro opinion jockeying at one extreme and pedantic fault-finding on the other. Shares of Unicharm (Tokyo: 8113), a leading Japanese diaper and hygiene product maker, rose four-fold last decade.

The ongoing JGB battle

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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.

Japanese individual investors saying no thank you to JGBs

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The Mainichi Shimbun (original in Japanese) reported early Thursday that Japanese Government Bonds’ (JGBs) popularity is rapidly falling among individual investors. Beginning in 2003, the Ministry of Finance (MoF) has sold two types of JGBs (a fixed-rate 5-year and a variable-rate 10-year) four times a year to individual investors. However, as interest rates have been held at zero (remember ZIRP) to near-zero levels for years, Japanese individual investors may finally be voting with their purses. The October 5-year issue had a coupon of 0.6%, the lowest since the program began in ’03, and less than half the peak coupon rate of 1.5% in July ’07.

The MoF now only expects to raise Y1.3 trillion (US$14.3B) this year from individual investors, down from a prior estimate of Y2.4 trillion, and considerably lower than the record Y7.2 trillion raised in ’05. Through the end of this September, individual investors held Y27.7 trillion or 4.6% of JGBs outstanding. The MoF argues that recent individual investor reluctance for JGBs is not an issue because their weighting is so low. However, it goes without saying, as the article accurately points out, that it is an issue, as the government is poised to take on even more debt in the face of declining tax revenues.

In fact, the MoF is reportedly planning to introduce a fixed three-year JGB for individual investors next July. At this time, it’s hard to imagine a warm welcome, let alone a return to previous years’ embracing of JGBs. The MoF may be right in not being very worried, since it can just pressure domestic institutional investors to pick up the slack. So whether individual investors like it or not, it’s probably the case that they will remain proxy buyers of JGBs.

Japan watchers and investors will readily recognize and perhaps even sympathize with the plight of domestic savers. The golden days of the yen carry trade seem so distant with US$1/Y90-level support so sticky. It’s a real shame that Japanese companies don’t pay quarterly dividends as is common practice in the U.S., for instance, since household, quality Japanese companies are in some cases paying dividends at multiples of what JGBs offer. The desperate search for yield could be called off. Instead of chasing the latest overseas investment fad or making risky leveraged forex trades, maybe something more productive could be achieved.

Disclosure: The author has no direct exposure to JGBs, and does not believe a crisis is looming for Japan despite David Einhorn’s position, and in spite of the serious problems the country faces but continues to bundle into a bumbling status-quo.