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John Thomas graduated with a bachelor’s degree in biochemistry with honors and a minor in mathematics from the University of California at Los Angeles (U.C.L.A.) in 1974. He moved to Tokyo, Japan where he was employed by a medium-sized Japanese securities house. Thomas became fluent in Japanese... More
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  • The Bull Case For Japanese Stocks

    If you live long enough, you see everything.

    After a 25-year hiatus, here I am finally back making money in the Japanese stock market once again.

    Any sentient being couldn't help but notice the spectacular results the Japanese stock market has produced so far in 2015.

    The Nikkei Average is up a robust 11.7%, while the Wisdom Tree Japan Hedged Equity Fund (NYSEARCA:DXJ), which eliminates all of the underlying yen currency risk, has tacked on an impressive 13.2%. This compares to a US Dow average return for the same period of essentially zero.

    So, is it too late to get in? Are we joining the tag ends of a party that is winding down? Or is the bull market just getting started?

    To answer that question, you have to go to a 30 year chart for the Nikkei average which chronicles all of the violence, heartbreak and drama of the great Japanese stock market crash, and the budding recovery that has since ensued.

    The bulls see a crucial triple bottom at ¥7,500 that has spread out over ten years, from 2003 to 2013. The initial resistance for the bull market was at ¥18,000. That level was decisively broken last week.

    And as any long in the tooth technical analyst will tell you, the longer the base building, the longer the recovery.

    It is no accident that this sea changing technical action is happening now. Last year rumors abounded that the Japanese government would mandate higher equity weighting by Japanese pension fund managers.

    That is exactly what happened at the end of February. The government required pension fund managers to increase equity weightings from 8% to 25%, at the expense of their Japanese government bond holdings. I guess the 0.33% yield on the ten-year wasn't exactly tickling their fancy.

    To meet the new guidelines, managers have to buy $120 billion worth of stocks over the next two years.

    That is a lot of stock.

    Japanese pension fund managers are the world's most conservative. Since they can no longer buy all the domestic bonds they want, they are investing in stocks that are essentially bond equivalents.

    These include relatively high dividend yielding domestic defensive sectors, like pharmaceuticals, railroads, services, chemicals and foods. With the program only just starting, the Nikkei will be underpinned by local Japanese institutional buying, possibly for years. That eliminates your downside.

    Enter the foreign investor. Gaijin mutual fund and hedge fund managers alike were net sellers of Japanese stock for all of 2014. They turned to net buyers only three weeks ago.

    Guess what kind of stocks foreigners like to buy? The same kind they buy at home: technology stocks. Take a look at the charts below for Sony (NYSE:SNE) and Canon (NYSE:CAJ) and the breakouts there exactly match up with the timeline I described above.

    Sony, in particular deserves special mention. Sony was the Apple of Japan during the 1980's, and should have been the Apple of today. But the company lost its way after 1990, when the founder, my friend Akio Morita, passed away.

    Succeeding management was dull, sluggish, and unimaginative. The world quit buying its top of the line stereo systems. As a result, its market capitalization plunged from $150 billion to only $10 billion.

    The final indignity came when North Korean hackers almost wiped out the company last year when it released The Interview, a spoof on dictator Kim Jong-un.

    These days, Sony is leading the resurgence of the Japanese stock market. Management modernized and westernized. It launched a range of new high tech products. It is selling at a dirt cheap 12X multiple. I also think it is safe to say that their hacking defenses are now state of the art.

    It doesn't hurt that when foreign investors think of buying Japan, picking up Sony is the first thing that comes to mind.

    So the technicals and the supply/demand picture lines up, how about the fundamentals?

    Go into Japan now, and you are betting that Prime Minister Shinzo Abe (I knew his dad), will succeed in his "three arrows" plan for economic and financial reform. Insiders believe he can pull this off.

    The December election gave him a continued mandate from the Japanese people. The Bank of Japan is also in his corner, implementing a monetary policy that is so aggressive that it was once thought unimaginable. Doubling the money supply in two years?

    This is why the Japanese yen will continue to depreciate, which is also highly reflationary for the economy, and is the subject of my Trade Alert below to sell yen.

    If all of this lines up, then the next target for the Nikkei is for it to add another ¥10,000, up nearly 50% from here. Beyond that, the Japanese stock average is likely to take a run at its old 1989 high of ¥39,000.

    I remember the day it hit that level all too well.

    The rock group Chicago was leading the charts with Look Away. The office at Morgan Stanley was packed with women wearing these big shoulder pads that made them look like football players. Huge sunglasses, neon colors and big hair were everywhere.

    Like I said, if you live long enough, you see everything, even another Japanese bull market.

    Apr 09 10:31 AM | Link | Comment!
  • Fed Not To Raise Interest Rates In 2015

    Yes, that is the shocking truth that Fed chairman Janet Yellen told us today with the release of the central bank's minutes.

    Of course, she didn't exactly say that she would raise interest rates for the first time in a decade in so many words. To discern that, you had to be fluent in Janetspeak.

    Very few people have the slightest idea what comprises Janetspeak. It just so happens that I am quite knowledgeable in this arcane argot. In fact I can even negotiate a menu written entirely in Janetspeak and receive a meal reasonably close to what I thought I ordered.

    I learned this esoteric language through private tutoring from none other than Janet Yellen herself. These I obtained while having lunch with her at the San Francisco Fed every quarter for five years.

    It was a courtesy Janet extended not just to me, but to all San Francisco Bay area financial journalists. But fewer than a half dozen of us ever showed up, as monetary policy is so inherently boring, and government supplied food is never all that great. Ask any Marine.

    So let me parse the words for you, the uninitiated. The Fed removed the crucial word "patient" from its discussion. In the same breath, it says it is unlikely that rates will rise at the April meeting.

    She said that any future rate rise would be conditional on continued improvement in the labor market. As the US economy is now approaching full employment, there seems to be little room for improvement there.

    Now comes the vital part. Janet also said that an increase in interest rates would also be conditional on inflation returning to the Fed's 2% inflation target!

    Here's a news flash for sports fans. Inflation is not rising. It is falling. Look no further than the price of oil, which kissed the $42 a barrel handle only this morning.

    Inflation is at negative numbers in Europe and in Japan. Even the Fed's own inflation calculation has price rises limited to 1% in 2015. Their best-case scenario does not have inflation rising to 2% until 2017 at the earliest.

    Furthermore, things on the deflation front are going to get worse before they get better. Some one third of all the debt is Europe now carries negative interest rates.

    Tell me about inflation when oil hits $20, which it could do in coming months, and will have a massive deflationary impact on the entire US economy, especially in Texas.

    That's the key to understanding Janet. When she says that she won't raise rates until she sees the whites of inflations eyes, she means it.

    I love the way that Janet came to this indirect decision, worthy of King Salomon himself. By taking "patient" out of the Fed statement, she is throwing a bone to the growing number of hawks among the Fed governors.

    At the same time she shatters any impact this action might have. The end result is a monetary policy that is even more dovish than if "patient" has stayed in.

    That is so Janet. No wonder she did so well as a professor at UC Berkeley, the most political institution in the world. I feel like I'm back at college.

    You all might think I'm smoking something up here in the High Sierra, or that maybe a rock fell down and hit me on the head. But look at the market action. I'll go to the video tapes.

    Every asset class delivered a kneejerk reaction as if the Fed had just CUT interest rates. Stocks (NYSEARCA:IWM), bonds (NYSEARCA:TLT), the euro (NYSEARCA:FXE), the yen (NYSEARCA:FXY), OIL (NYSEARCA:USO), and gold (NYSEARCA:GLD) all rocketed. The dollar and yields dove.

    This is the exact opposite of what every market participant expected, which is why the moves were so big. It is also why I went into this with a 100% cash position in my model trading portfolio.

    We lost the word "patient" we got the "patient" result.

    I had a batch of Trade Alerts cued up and ready to go expecting a dovish outcome. But it was delivered in such a left-handed fashion that I held back on the news flash. It was only when I heard the words from Janet herself that I understood exactly what was happening.

    Out went the Trade Alert to buy the Russell 2000 ! Out went the Trade Alert to pick up some Wisdom Tree Japan Hedged Equity ETF (NYSEARCA:DXJ)!

    Why the ? Because small caps are the American stocks least affected by a weak Euro.

    Why the ? Because the Fed action is an overwhelmingly "RISK ON", pro stock action. Unlike the rest if the world, the Japanese stock market has to double before it reaches new all time highs. It is just getting started.

    Won't today's strong yen hurt the ? Only momentarily. The Nikkei has yet to discount the breakdown from Y100 to Y120 that has already occurred, let alone the depreciation from Y120 to Y125 that is about to unfold.

    Banzai!

    Apr 02 10:03 AM | Link | Comment!
  • The Crash Coming To A Market Near You

    I'm sure that most of you are spending your free time devouring the utterly fascinating pages of Fifty Shades of Gray these days. I, however, am reading slightly different subject matter.

    As obscure, academic and abstruse the "Global Dollar Credit: Links to US Monetary Policy and Leverage" may sound, published by the Bank for International Settlements, it has been an absolute blockbuster among strategists at the major hedge funds.

    And given the apocalyptic conclusions of the report, it might well rank as one of the best horror stories of the year, worthy of the bloodiest zombie flic.

    I'll give it to you it a nutshell.

    Corporate borrowers outside the US have ramped up their borrowing astronomically over the past 15 years, from $2 trillion to $9 trillion. This makes them extraordinarily sensitive to any rise in US interest rates and the dollar. Emerging market debt alone has doubled to $4.5 trillion.

    Easy money has encouraged mal investment and overinvestment in projects that would have never seen the light of day if financing were not available at 1%. In other words, it is all a giant house of cards ready to collapse.

    That could happen as soon as Wednesday, if the Federal Reserve removes the word "patient" from its forward guidance.

    I know a lot of you thrive on folk based economic theories you picked on the Internet based on monetarism, Austrian economics and the theories of Friedrich von Hayek, that all have the dollar collapsing under a mountain of debt.

    In fact, the complete opposite has come true. The global economy has become "dollarized," with companies and governments in almost all nations relying on the buck as their principal means of financing.

    The end result of all this has been to vastly expand the power of the Federal Reserve far beyond America's borders. Even the smallest rise in US interest rates, like the ¼% hike mooted for June, could trigger a cascade of corporate defaults around the world. Think of subprime, with a turbocharger.

    We are already starting to see some cracks. The complete collapse of a number of emerging market currencies, like the Brazilian Real, Turkish Lira, South African Rand, Malaysian Ringgit and the Russian Ruble, has been accelerated by local borrowers rushing to buy back dollar before it appreciates further.

    This is having a huge deflationary effect on the economies of many emerging nations.

    Malaysia's sovereign wealth fund has almost gone under after a series of bad bets against the dollar. There is thought to be another troubled dollar short coming out of Hong Kong worth $900 million.

    This is forcing countries to liquidate their US Treasury Bonds to cover local losses.

    Further exacerbating the situation has been the crash of the price of oil, which has turned producing countries from suppliers to takers of liquidity to the global credit markets. Russia alone sold $19 billion in the Treasury bond market in February, and is partially responsible for the sudden and dramatic rise in yields there.

    The net net of all of this is to increase the risk of surprise blowups overseas, both by banks and the private borrowers. This will increase the volatility of financial instruments everywhere.

    The Bank for International Settlements is an exclusive club of the world's central banks. It is based in Basel, Switzerland, with further offices in Hong Kong and Mexico City. Its goal is it to coordinate policies among different nations.

    The BIS was originally founded in 1930 to facilitate payment of German reparations following the Versailles Treaty ending WWI. As a regular groupie on the central banking scene, I have been reading the research publications for many decades.

    The BIS Has Some Scary Ideas

    Apr 02 9:59 AM | Link | Comment!
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