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We are a team of economics professors in the NY area with a passion for financial markets. In our blog "BubbleBustInvesting.com", we write about individual stocks as well as macroeconomics events. We believe that most of the returns in financial markets can be made during the blow and... More
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  • Don't Count on a FED Put to Save the Stock Market

    Complacency is dangerous, especially in a rapidly changing world. Back in 2007, when real estate began to crank, I did have an interesting discussion with a hedge fund manager. “I’m concerned about home prices falling and taking the economy and the stock market down, John,” I said. “You are worry too much,” he replied. The FED won’t let it happen. It will cut interest rates, and home prices and markets will resume their ascend,” John argued in an assuring voice. “Bank of Japan drove interest rates down to zero, and it didn’t work, the Japanese stock market is 80 percent below the 1989 high,” I explained. “Japan is different than the US,” John continued. The rest is history.  

    I am not sure whether John is still in business and has learned any lessons from history, but many investors seem to have missed it. Anytime, energy and material prices pull back, they do jump in to buy more shares. And when someone raises the question as to how energy and materials can continue climbing at these prices, the answer is clear and loud: “The economy will pick up; and if doesn’t pick up, the FED  will continue printing money.” The market goes up in either case! According to the AAII survey, in the first week of April, 43.6 percent of investors were bullish, while 28.8 were bearish—near the 2007 levels.

    I hate to spoil the party, but I must remind investors that we don’t live in paradise where economic resources are free and God takes care everyone’s need. We do live on planet earth where people are faced with scarcity, which determines the value of things. The FED may control the printing presses, may conveniently continue to focus on “core” inflation, but it cannot control the economy, and it cannot fool people who are affected by the overall inflation.

     

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No specific stock was mentioned. However, I am an investor on both the long and the short side of the market
    Apr 12 12:24 PM | Link | Comment!
  • Don't Bet on a Robust Japanese Recovery
     Rational or Irrational Exuberance over Japanese Stocks?

    As reflected by the precipitous slide in the Nikkei Index, Japanese stocks have been out of favor for more than two decades. Following the disastrous earthquake of March 11, this has changed, however.  In a cover story on March 19th issue, Barron’s prompted investors to buy Japanese stocks now, to take advantage of the country’s reconstruction boom, while a week later, mutual funds and ETFs investing in Japanese equities reported an $1.5 billion inflow.  Is this exuberance about Japanese stocks rational or irrational? 

    The answer to this question depends on the comparisons made between the March 11th earthquake and previous disasters. When comparisons are made with the earthquake of 1923 that leveled most of Tokyo, and the disaster of the Second World War that left most Japanese cities leveled this exuberance is rational, as the disasters changed economic fundaments, especially policy. Both disasters prompted policy makers to ease monetary and fiscal conditions that fueled an expansion in the aggregate demand, especially a construction boom that boosted equity prices, especially shares of companies involved directly or indirectly in reconstruction. 

    When comparisons are made with the disaster that followed the 1995 that hit the Kobe area, this exuberance is irrational, as the disaster didn’t change economic fundamentals. Monetary authorities did little to stimulate aggregate demand, because they were in a dire situation: they had driven short-term rates to near zero to fight deflation. Fiscal authorities weren’t in better shape either, as they were building bridges to everywhere and nowhere! Stock market gains, as a result were short-lived. After retracing its 25 percent decline in the next twelve months since the earthquake hit, the index continued its decent to new lows.  

    Policy makers are in even more-dire situation at the time the March 11th earthquake hit. Thanks to several rounds of quantitative easing both short-term and long-term rates have hovered near zero levels for a prolonged period of time. This means that investors who buy into Japanese stocks now shouldn’t expect a boost from lower rates, and a boost from fiscal policy should be minimal, as money is expected to shift from building bridges to nowhere to repairing bridges to somewhere. Government’s hand to spend freely on infrastructure is further constrained by the country’s heavy debt burden that approached 200 percent of the GDP before the disaster.

    Follow our blog on stocks and the macroeconomy at BubbleBustInvesting.com and www.twitter.com/bubblebustinv 
    Apr 09 6:06 PM | Link | Comment!
  • Kubota Corporation: A Good Play in Japan’s Reconstruction

    After steering away from the Japanese stock market for almost twenty years, foreign investors are buying Japanese stocks to take advantage of the country’s reconstruction boom that is expected to follow the March 11th earthquake.

    As I discussed in a posting on BubbleBustInvesting.com, investors shouldn’t bet on a robust Japanese recovery. As it was the case in the aftermath of the Kobe earthquake, this disaster isn’t going to change economic fundamentals. Monetary authorities can do very little to stimulate aggregate demand because they are in a dire situation. Thanks to several rounds of quantitative easing both short-term and long-term rates have hovered near zero levels for a prolonged period of time. This means that investors who buy into Japanese stocks now shouldn’t expect a boost from lower rates, and a boost from fiscal policy should be minimal, as money is expected to shift from building bridges to nowhere to repairing bridges to somewhere.

    There is one company, however, that may be benefited even from a minimal boost in infrastructure spending, Kubota Corporation. The company is a manufacturer of a broad array of construction equipment, agricultural, machinery, waste and environmental gear, including iron and plastic pipes and filters, water treatment systems, drainage systems, water supply systems, etc. The company is further expected to benefit from a weakening yen that makes its products more competitive in world markets. Trading at around $46, Kubota’s stock has almost tripled since 2002, while the Nikkei lost almost half of its value. And although its fundamental lag behind those of its US counterparts, reconstruction spending and a weaker yen can reverse fortunes.
     

    Stock Recent Price Forward PE QoQ Earnings Growth Oper. Margin
    KUB $46 15 58% 9.28%
    CAT 110 13 317 9.38
    DE 97 13 111 13.13

    Disclosure: Long KUB

    Tags: KUBTY, CAT, DE
    Apr 09 5:55 PM | Link | 1 Comment
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