The equity markets have taken a beating recently and the major stock market indexes are tumbling. The MSCI Pacific Asia index is off by 25% this year, of which 6% came in the last week alone, while the S&P has fallen 16% year to date.

Analysts and economists are starting to think the credit squeeze and the global slowdown will have a deeper effect on the real economy than previously expected. When the sub-prime crisis came to light, the fist estimates were that growth will pick up in the third quarter in the U.S., while the rest of the world would be unaffected (the de-coupling theory). Now, ahead of the third quarter, all the major developed economies have been affected, and some may even face a recession in the coming quarters. The U.S. situation is not too rosy either, since exports – what actually saved the economy from the brink of recession up until now – are going to fall with the global slowdown. Furthermore, some are even starting to suggest the slowdown will continue beyond 2009, as inflation will erode the economic growth.

Shionogi & Co. (SGIOF.PK), a major Japanese drug manufacturer and US-based specialty pharmaceutical company Sciele Pharma, Inc. (SCRX), announced on Monday a definitive agreement under which Shionogi will acquire Atlanta-based Sciele Pharma Inc. shares, in an all-cash deal valued at $1.42 billion.

The acquisition on the part of Shionogi will be made through a wholly-owned US subsidiary for all the outstanding shares of Sciele’s common stock at a price of $31 per share. Shionogi will spend $1.1 billion and $325 million of capital required for the redemption of senior convertible notes.

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There is an interesting article in the Time Online (London). Apparently, Japan's powerful yakuza organized crime syndicates are moving away from old-fashion crimes of drugs and prostitution and are increasingly launching an assault on Japan's financial markets. Studies estimate that there are already hundreds of listed companies that may have some mob connections. Using "front companies," organization have become active traders in listed Japanese shares and in some cases own large positions.

Of interest in the article is the feeling that "the new activities of the nation's largest crime syndicates have effectively turned the mob into the biggest private equity firm in Japan." Things have gotten so bad that some observers believe that the problem may have gotten to the point where it is now beyond control. The problem continues to grow exponentially as the groups hire newly unemployed traders who have been laid-off as a result of the credit crunch. In fact, the current mixture between legitimate and illegal activities is making it nearly impossible to discern the difference between the funds that flow through the Japanese markets. Some organizations even operate their own stock trading floors.

Trading below book value
FUJI FILM (4901) (FUJI) — 0.89x book; 1.04% dividend yield; at the bottom of its 52-wk trading range
Nissan (7201) (NSANY) — 0.95x; 4.9%; at bottom of 52wk range
Wacoal (3591) (WACLY) — 0.97x; 2.0%; near bottom of 52wk range
NTT (9432) (NTT) — 0.95x; 1.7%; near top of 52wk range
ORIX (8591) (IX) — 0.92x; 2.0%; at bottom of 52wk range

As reported at MarketWatch, Japan is considering lowering capital gains and dividend taxes as a way to encourage savers to move funds from lower yielding investments back into the stock market. The plan would cut dividend and capital gains taxes, potentially for up to 10 years. The proposal would temporarily exempt dividend payments of up to 1 million yen ($9,100) from taxes.

An earlier plan that was passed in 2003 and cut capital gains by 50% and dividends to 10% is scheduled to expire early next year. It is hoped that the move will help spur the stock market, which has languished for over a decade. Given the level of fear in the U.S. markets, cutting capital gains by 50% and reducing dividend taxes to 10% would certainly give the U.S. markets a nice jolt. Hopefully it will not take over 10 years of poor market returns to see the need and potential benefits of such a cut.

For FY March ‘09, GS now forecasts profits to fall 12.0%, compared to 10.2% previously. For FY ‘10, GS sees profits up 6.0%, but that’s less than the 12.5% it previously estimated.

European Trade: European stock markets declined amid more bad news this morning. Concerns about the credit crisis, inflation, rigid consumers and a weak business outlook hit the market today, all at the same time. During the European session, economic releases showed business expectations and current business conditions sank to a five-year low, due to an imminent slowdown in developed economies. Both the Asian and U.S. markets closed in the red, with financial institutions having the biggest losses.

In Europe, the major stock market indexes are losing ground. The German Dax has declined 31.36 points (0.50%) to 6,265.59 reaching a 5-week low. The U.K. FTSE declined 113.80 points (2.07%) to 5,391.80, falling the most in the last month. European equities have traded lower for almost two weeks, as credit crunch concerns erode investors’ confidence.

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As expected, Japan's financial press cited investor concerns over the U.S. economy as the reason a lot of money remains on the sidelines, as investors are waiting to see how the latest economic data reads.

UnionBanCal's (UB) Special Committee is very opportunistic and knows what it is doing. It has effectively taken its minority stake hostage vis a vis its board representation and a long-standing one at that for the Chief of the Committee. At the end of the day, there is absolutely no “reputation risk” as MUFG (MTU) fears. Why? Nobody on Wall Street cares!

For more background see both the Financial Times exerpt below and last week’s “Mitsubishi UFJ Overpaying for UnionBanCal.” As stated then, this is a “safe” acquisition but one that is even more dubitable in terms of shareholder value. Shikataganai (MUFJ shareholders just sigh and shrug their shoulders).

Japan's economy contracted in the second quarter of 2008, bringing the country to the threshold of its first recession in six years, as exports fell and consumers spent less. Gross domestic product was up by 1% over the second quarter of 2007, but down by 0.6% over Q1 2008.

So the recession many observers were anticipating in the last quarter of 2007 may now have arrived in the second quarter of 2008. If this is the case the reason is pretty clear, flows of funds (following the sub-prime related credit bust in the OECD world) into some key emerging markets mainained Japanese exports at a much higher level than could have been anticipated. Now - on the back of rising inflation and central bank tightening those economies themselves are actually slowing. Click to enlarge:

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Last week one of the more bigger stories coming out of Detroit were the discussions between Chrysler and Nissan around Chrysler potentially reselling rebadged versions of mid-sized cars designed and manufactured by Nissan.

From the WSJ:

Now, as for MUFG shareholders, you have to scratch your head and wonder if the remaining stake really could not have been acquired at a cheaper price — UB traded as low as $35 a month ago! Furthermore, MUFG seems to have implied it is willing to pay even higher to complete the deal, thus the >$63 trading.

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In my last note on Japan, I asked how much longer Japan could continue to fight off the incoming recession faced with a continuing shaky outlook on exports as well as a domestic economy steadily slowing down. Well, it seems as if the answer to this question can now be provided. With the recent news that industrial production continues its slowdown as well as the news that exports actually fell in June, I am thus confident to stick with my call that Japan will enter a recession at some point in 2008-09. The exact timing will be suggested below.

In fact, a recession seems to be almost a foregone conclusion at this point since if we look at the recent messages emanating from official Japanese authorities, they are indeed bracing themselves for something ugly. Perhaps someone from the statistics department sent a primer of the Q2 GDP figures (due 13.08.2008) to parliament?

The Japanese government conceded yesterday that Japan's longest running postwar period of economic expansion might now be over as it reported a drop in its key measure of underlying economic conditions for June. The June coincident indicators index fell a preliminary 1.6 per cent and the government downgraded its assessment of the economy to "deteriorating." This effectively constituted an admission that the economy had probably entered a recession.

The coincident index, a composite of statistics including production and the ratio of jobs to applicants, fell to 101.7 in June from 103.3 a month earlier. A three-month moving-average of the index fell for a fourth month in June to 102.2 from 102.5.