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Darrel Whitten

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  • Using The OECD's Leading Indicators To Avoid Both Bull And Bear Traps [View article]
    Dear JCH57;

    I'm the wrong person to be asking about the Russian economy, but some believe that Russia will be one of the world's top 5 economies by 2020. According to the Center for Economics and Business Research (CEBR), Russia would rise to fourth spot from its current position of ninth. With India and Brazil also forecast to climb the ratings, the BRIC economies will take four out of the six top positions in the list. The USA, China and Japan are expected to hold their respective first, second and third places.
    Link to CEBR article

    This bullish view however hasn't helped Russia's stock market, which was down some 30% (Market Vectors TR Russia ETF) in 2011, worse than other emerging markets like China and Brazil, and even worse than Italy's approximate 25% decline.
    Dec 30 11:14 PM | Likes Like |Link to Comment
  • Using The OECD's Leading Indicators To Avoid Both Bull And Bear Traps [View article]
    ECRI calls tend to be very early. In September (2011) ECRI said a U.S. recession was "inevitable". According to a study of ECRI calls by John Helzner (, after both the 2001 and the 2008 ECRI recession calls, the S&P 500 rose for 2 months for an average of 8% before turning down rapidly. On September 30 the S&P 500 closed at 1131. On October 28 it closed at 1285 for a rise of 13.6% but dropping to 1215 on November 18 or 7.4% above where it was on the day ECRI made public their recession call.

    Of the 10 components of the Conference Board's LEI, the factor weight for money supply is 0.3580, by far the largest weighting (second is average weekly hours worked in manufacturing at 0.2549), meaning a heavy weighting is given to monetary policy. But what happens when the Fed is pushing on a string?
    Dec 28 03:15 AM | 1 Like Like |Link to Comment
  • Dispelling Myths About Rebuilding Japan [View article]
    Dear peterrabbit;

    If you look closely at the prefectural GDP breakdown table, you will see that the 23% includes the Tohoku prefectures (Iwate, Miyagi, Fukushima, Ibaraki, GDP share 5.6%) and Tokyo (17.7%). Why include Tokyo? because of rolling power blackouts that completely cut off power for literally all metropolitan Tokyo "bed towns" like Hachioji, Yokohama causing service industries and factories to close up shop during the outages, and interrupts train services throughout Tokyo, not to mention the bottled water, battery,etc. hoarding that is going on from the radiation scare.

    The government's estimate of $300 billion-plus in damages includes Hokkaido and Chiba prefectures, but not Tokyo, ostensibly because there was no physical destruction. But Nomura Holdings estimates the power supply shortage alone will lower industrial production 4% and corporate profits (their top 400) by some 5%.
    Mar 30 04:35 AM | Likes Like |Link to Comment
  • Memo to New Japan Bulls: Watch Your Currency Risk [View article]
    Dear tbonetmoney;

    Yes, I think its time to buy Japanese stocks, but with "eyes wide open" to a possible weakening in JPY and perhaps a "U"-shaped recovery instead of a "V"-shaped recovery from the disaster.

    In my Seeking Alpha article "A Closer Look at Japanese Small Caps", I found that the iShares MSCI Japan Small Cap (SCJ) was the best performer with less volatility for small cap exposure to Japan. So far, the recovery in the large caps has been lethargic because of power shortage issues, but small caps are moving well.

    Among the bigger cap names, you might want to look at Daiwa House Industrial (Tokyo code: 1925, DWAHY.PK) who already has an order book full of orders for housing in the Tohoku region, where the government wants to rebuild some 33,000 houses. P/E multiple is kind of pricey at 31X, but it sells below book value (0.94X) and has a dependable dividend yield of 1.65%.

    As for a less-traveled road, there is West Holdings (Tokyo code: 1407, no ADR) that sells Chinese-made Canadian Solar (CSIQ) 230watt solar cells in Japan for 10% cheaper than the domestic competition. Profit momentum is good, P/E multiple is low (8.4X) and dividend yield is good (2.87%), but market cap is tiny at a mere JPY8.9 bln, so you need to watch your step because of thin liquidity (float is only 9.1%). Small cap and thin liquidity mean this is not for everybody.
    Mar 30 04:05 AM | Likes Like |Link to Comment
  • Memo to New Japan Bulls: Watch Your Currency Risk [View article]
    Dear Ananthan;

    You are right--all other factors being equal (unchanged)--a weak yen does boost GDP growth and Japanese corporate profits. But capital gains in the Nikkei 225 even with the tailwind of a 40% depreciation in JPY/USD and reconstruction stimulus were not enough to offset the loss of value in USD returns after the Kobe earthquake between 1995 and 1998.

    This time, "other factors" are not equal (unchanged).

    1) Immediate Negative. GDP flow losses from the disaster.
    2) Medium-Term Positive. Reconstruction expenditures to restore GDP flow and destroyed productive assets.
    2) Medium-Term Negative. Higher corporate and individual taxes as the government seeks sources of revenues fund reconstruction expenditures.
    3) Medium-Term Negative. Possible permanent shifts in global supply chains, as businesses seek alternative supply sources in Asia.
    5) Medium-Term Negative. Weak yen will exacerbate already soaring input prices of crude oil, coal, LNG, raising the cost of doing business for factories in Japan.
    6) Medium-Term Negative. Higher electricity costs for businesses and households from generating more expensive LNG, coal-fired electricity.
    7) Medium-Term Negative. An up-tick in unemployment, not only in the Tohoku region, but at factories throughout Japan where output has been affected by supply shortages.

    Morgan Stanley MUFG Securities estimates that the disaster will lower Japan's GDP in 2011 from 2% growth to -3%~-1%, followed by -1%~+3% growth in 2012. Consensus Economics had Japan corporate profits slowing from a 42% rebound in 2010 to 9.1% growth in 2011 before the disaster and 6.2% in 2012, while Nomura Holdings estimates the expected shortfall in electric power alone could squeeze ordinary profits at the top 400 firms by about 5%, as a 10% percent shortfall in power would pare Japan's factory output by as much as 4%.

    While we believe that the two-day sell-off in Japanese equities did discount most of the immediate negatives, investors are still trying to come to terms with the medium-term negatives.

    Looking beyond the medium-term negatives and to FY2012 earnings, export companies in the automobile and electronic sectors will probably see the best earnings momentum, coming off a lower disaster-stricken profit base in FY2011 and ostensibly given a good tailwind of a weaker JPY. But the metric for corporate profits is real effective exchange rates, not nominal JPY/USD exchange rates.
    Mar 30 03:00 AM | Likes Like |Link to Comment
  • Memo to New Japan Bulls: Watch Your Currency Risk [View article]
    Dear Ohrama;

    In the article text, I did stop at 1998, to show the next secular (multi-year) movement of JPY/USD aside from the knee-jerk, short-term yen carry reversal.

    Yes, I could have shown the entire movement of JPY/USD since JPY was allowed to float in the early 1970s, but I doubt you or most investors were fully invested between 1970 and March 2011 in JPY-denominated investments.

    Most "long-term" institutional investor positions in Japanese equities have a cycle of 2~3 years, and I wanted to show what could happen after JPY hits a major secular high (which I believe the JPY/USD 76 could be).
    Mar 28 07:38 PM | 1 Like Like |Link to Comment
  • Tokyo Electric Power: In the Eye of a Nuclear Storm [View article]
    Dear Global Reflex;

    First, a back-of-the-envelope stab and the scale of TEPCO's losses..

    TEPCO’s Kashiwa Kariwa nuclear plant in Niigata has output capacity of 8.2 gigawatts, or 13% of TEPCO’s total stated capacity. On July 2007, a 6.8 magnitude earthquake forced TEPCO to shut down the seven nuclear reactors at the plant indefinitely for safety checks and safety upgrades.

    While the Kashiwa Kariwa reactors were still usable, TEPCO estimated the quakes financial impact at JPY604 billion ($5.2 billion). Some JPY195 billion ($1.7 billion) was spent inspecting and repairing the plants, and shutting the plants cost TEPCO another JPY420 billion ($3.6 billion) for buying more oil and gas to increase thermal power plant output, and for purchasing wheeled power from other electric power companies.

    Since up to four reactors at the Fukushima Daiichi nuclear plant are probably damaged beyond repair, replacing these reactors would cost some $24 billion, for which TEPCO has catastrophic insurance. This time some 17% of TEPCO’s electricity output capacity will be offline indefinitely, implying a 30%+ greater revenue loss than in 2007, more than double inspection and repair costs, and 30%+ more oil, gas and wheeled power purchases, or more than JPY1 trillion/$12.1 billion of losses.
    Mar 20 07:39 PM | Likes Like |Link to Comment
  • Tokyo Electric Power: In the Eye of a Nuclear Storm [View article]
    Lloyd’s of London insurer Chaucer Holdings P.L.C. has a nuclear syndicate 1176 that is one of a panel of insurers that provides coverage to Tokyo Electric Power’s irreparably damaged nuclear reactors. Insurance cover however is not provided for property damage or business interruption coverage.
    Mar 18 07:12 PM | 1 Like Like |Link to Comment
  • The Economic Impact of Japan's Monster Quake [View article]
    Article errata;
    As pointed out by several commentators there are several errata in the article.

    1) The Prince William Sound Alaska quake was in 1964, not 1954.
    2) TEPCO's Fukushima plants produced over 9,000 MW, not KW.
    3) A new nuclear reactor will cost more like $6.6 billion, not $6.6 million.
    Mar 13 08:15 PM | 3 Likes Like |Link to Comment
  • How Will Japanese Companies Spend Their Cash Hoard? [View article]
    Dear Clemens;

    Mizuho Financial Group as you know is one of the three "megabanks" from a massive consolidation of Japan's banking sector, which before the Heisei Malaise had 17 "major" banks sectioned off into commercial banking, trust banks and foreign exchange banks.

    It was established in 2002 by the merger of Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan, and became a bank holding company in 2003, but remains very much a work in progress eight years later.

    When investors realized in 2003 that the big bank groups would be saved, Mizuho's stock price surged 7-fold as the stock was re-priced from being "priced for bankruptcy" to "priced as a going concern" with an ostensible plan. The stock price since 2006 however has imploded back essentially to where it was in 2003.

    Mizuho Financial Group in particular has been called to task for being slow to complete their integration, which cost the prior group chairman and his counterparts at Mizuho Bank and Mizuho Corporate Bank their jobs.

    Bad loans and a weak balance sheet continued to plague the new company and the re-organization was hobbled by several battling corporate cultures jostling for control of the new group.The computer systems for Japan’s banks and brokers were out-dated smoke-stack like islands with little integration. The Mizuho group spent two years integrating IT systems, which cost a fortune and was generally a disaster.

    Much of the firms merged under the holding company continued to exist under new names. Dai-Ichi Kangyo Bank’s (DKB’s) operations were renamed Mizuho Bank and concentrated on individuals, small businesses and local governments. Fuji Bank became Mizuho Corporate Bank and concentrated on institutional banking. Mizuho Financial Group, Mizuho Bank, Mizuho Corporate Bank and Mizuho Securities are all housed in separate buildings—resulting in a great deal of functional overlap and minimal economies of scale.

    Mizuho's broker operations are weaker than its megabank competitors as well as Nomura Holdings and the Daiwa Group. They are essentially a collection of second- and third-tier brokers affiliated with the merged banking groups, and could have been integrated a long, long time ago.

    The second generation of management is now in charge of picking up the pace of reform to boost profits and build up capital reserves for the Basel III capital rules in 2013. In a recent ranking of global financial institutions by corporate users, the Sumitomo Mitsui Group ranks 63, the Mitsubishi UFJ Group ranks 64, while Mizuho Bank and Mizuho Trust & Banking are ranked 1,011 and 1,012 respectively, i.e., there is still a significant quality gap.

    Thus the moves to consolidate are in the right direction, but domestic and particularly global banking competitors are zooming past Mizuho while it is poking around in the slow lane.
    Mar 1 01:20 AM | Likes Like |Link to Comment
  • How Will Japanese Companies Spend Their Cash Hoard? [View article]
    Dear Chancer;

    The Japanese government (MOF, Tax Agency) would certainly like to get more revenue from corporations (taxes), if they thought they could get away with it. As it stands now, however, there is legislation in progress to lower Japan's corporate tax rate by 5 percentage points to around 35%, ostensibly for Japanese companies to keep operations in Japan instead of moving them offshore and exporting jobs.
    Feb 28 06:06 PM | Likes Like |Link to Comment
  • A Closer Look at Japanese Small Caps [View article]
    Dear Hedged In;

    Regarding valuations of Japan small-cap ETFs versus US small caps, the NASDAQ is selling at a forward P/E of 16.3X with a dividend yield of 0.77%, while the Russell 2000 is selling at a forward P/E of 21.8X with a dividend yield of 1.26%.

    In comparison, the DFJ ETF is selling at a P/E of 14X and a dividend yield of 1.70%, while SCJ is selling at a similar P/E of 14X with a dividend yield of 1.9%--i.e., both offer lower valuations and better dividend yields. However, growth potential for Japanese small caps in general is much lower than for US small caps, which means you should be buying Japanese small caps for value, not earnings growth.
    Feb 22 07:14 PM | Likes Like |Link to Comment
  • A Closer Look at Japanese Small Caps [View article]
    Dear Hedged In;

    Comparing DXJ and DFJ to SCJ (MSCI Japan Small Cap, the second-best performing ETF to the MSCI Small Cap Value index for which there is no ETF?), the DFJ (Japan small cap dividend) has performed just as well as SCJ. DXJ however has visibly underperformed SCJ and moreover looks more volatile.

    Like the US, the best long-term performance in Japan comes from small-cap value, and DFJ has a value preference as it focuses on dividends.

    The higher volatility of small cap ETFs like DFJ, SCJ means they could well correct more than the S&P 500. But as the S&P 500 finally looks like its taking a reality check after three months of uninterrupted gains, confirmation of the downside in the S&P 500 would be a good time to get serious about DFJ or SCJ.
    Feb 22 06:42 PM | Likes Like |Link to Comment
  • Time to Short Japanese Government Bonds? Maybe Not [View article]
    Dear jungpa01;

    As far as I know, there is no easy way to short JGBs, for example, with an ETF. Ostensibly, you can short JPY with the ProShares Ultrashort Yen (YCS) and short JGB futures on the CME. Good luck with that, because it seems to me both have a lot of inherent risk involved versus potential (and tricky timing) gains.
    Jan 31 07:08 PM | Likes Like |Link to Comment
  • The New Japan Bulls [View article]
    Dear Peter Rabbit;

    Firstly, interest income on foreign debt is the major component of Japan's foreign income surplus. In calendar 2009, Japan reported income from overseas investments in its balance of payments of JPY12.329 trillion ($138.45 billion at end 2009 JPY/USD exchange rates), of which direct investment income accounted for only 28.1% (JPY3.46 trillion), while portfolio investment income as 67.7% of this surplus (JPY8.343 trillion). Further, interest income (included in total portfolio investment income) on foreign debt was JPY7.834 trillion, or 63.5% of total income from overseas. The interest income on foreign debt was down from a peak of JPY10.92 trillion in 2007, but remains the major component of the income account of Japan's balance of payments.

    Secondly, reserve assets are the currencies or other stores of value that are primarily used by nations for their foreign reserves. Given a persistent BOP surplus, such as in the case of China or Japan, these surpluses tend to manifest as hoards of the reserve asset being amassed by the surplus countries. Conversely, deficit countries tend to build debts denominated in the reserve asset or at least depleting their supply. Bottom line, large BOP surpluses tend to result in significant build-ups of forex reserves.
    Jan 6 07:30 PM | Likes Like |Link to Comment