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!

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 lost, but not dead, in deflation

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For Japan, the 1990s are commonly referred to as the “lost decade.” Those that know me are aware that I look beyond that and actually regard a quarter-century as the appropriate “lost” duration. However, if one really thinks about what has transpired and where we are today, it is rather impressive that Japan continues to function in much the same way. Similar to Jesper Koll, who is now head of Tantallon Research, I find promise in Japan’s sustained, and comparatively large, investment in capex.

The problem for equity investors is one of procyclicality. And unfortunately, the global recession has displayed all the things that could go wrong and did (among them, the velocity of capital fleeing; widespread asset correlation; and the lack of sovereign unity towards a concerted acknowledgment and solution). Meanwhile, interestingly, Japanese companies keep plugging away, while both domestic and overseas consumers, and investors, alike, keep shying away. Unsurprisingly, I see no change in the procyclical behavior of people, whether in government, the markets, or among consumers. It almost seems like a catch-22 to be publicly traded.

In closing, as we rapidly approach the extended Golden Week holiday, let’s remember that the economic situation could be far worse than what it is. A decent chunk of companies will report earnings prior to GW, while a majority will be reporting after. The mood seems to be one of deflated expectations that go hand-in-hand with deflated results and outlooks. Although deflated does not mean dead, it means for the time being a misguided cap on the promise of what could come out of all the capex. The reality is that the best way to play Japan is either to be a trader, or to look for dividend yield supported by stable cash flows. In all likelihood, the Nikkei remains range bound: 7,000 at the bottom and 9,000 to the upside.

Nikkei 9000, 8000, or 7000?

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About a year ago today, I published a weekly Nikkei outlook discussing whether the Nikkei was headed to 13,000 or back to 12,000. Suffice to say that much has happened since then. At the start of the new fiscal year today, the range in question is broader, 7,000 – 9,000, but obviously it is not any better (unless one has profited on the short side or had a timely exit). At any rate, investors might be excited since March was a particularly good month for equities.

The Nikkei 225 gave back 500+ points in the last two sessions of March, but the usual claims of year-end window-dressing were audible, since the N225 still managed to gain more than 11% for the month — the ascent was upwards of 18% through last Friday. The 11.4% return tied 1999 for the best March performance since at least 1991. That’s history. So what can we expect for April?

The last two Aprils have produced gains of 9.4% (2008) and 2.2% (2007) for the Nikkei 225. Both of those followed losses of approximately 1% in March. The last positive March in 2006 (7%) was followed by a 2.5% decline in April. Of bigger concern is the fact that the ensuing April to December periods for each of the past three years have been rather brutal: -31% (2008), -11.5% (2007), and +1% (2006). For those looking for a trade or a glimmer of hope, note that the N225 has closed higher two-thirds of the time in April over the past 18 years. However, the first day of trading is no indicator for the remainder of the month since up/down days are split 50:50. Lastly, know that the average monthly gain for April in the past 18 years is 1.3% and the median gain is 2.2%. By the way, the 11% March performance in 1999 was followed by a gain of more than 2% in April.

My assessment of Japanese equities in light of the domestic and global economy is still primarily negative. I continue to be of the opinion that the current trading level of the N225 reflects fair value. A simple way to play may be to consider the low-7,000 level as an area of support and a buying point, and the approach to 9,000 as an area of resistance and thus a selling point. Remember that the N225 closed the year in 2008 at 8,859. The 52-week low was back in late October at 6,994, but most recently on March 10, the Nikkei flirted with the 6,000 level again when it closed at 7,054. Keep in mind that the N225 is now down only 10% for the calendar year thanks to the March rally.

While it goes without saying that stocks are a “leading indicator” and will recover before the broader economy, the best thing to do is to be realistic. No need whatsoever to rush into equities. There are too many lingering uncertainties and the potential for even more doom and gloom. With all eyes seemingly on the U.S. (after all we got everyone into this mess), don’t put much faith in the longer-term efficacy of tweaking mark-to-market valuation or public-private investment schemes that rely on the “goodwill” of banks. Too many ifs would have to be realized before a meaningful amount of confidence could be restored and sustained.

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