Field Reporter: Are they slow-moving, chief?

Sheriff McClelland: Yeah, they're dead. They're all messed up.

In many ways, the U.S. recession of 2008-2009 resembles Japan’s own economic debacle in the 90s and beyond. An overly confident national mood, appreciating asset prices, coupled with a ballooning real estate market and a heavily indebted corporate sector were the triggers of the long slump and the decades long bear market in Japan in the 90s. A look at the long-term chart of the Nikkei is a good indication of how bad it could get for the world and the US in the coming years. Rallies that lasted for years, declarations of bull markets did not manage to color the pale picture of the underlying bear market which has been ongoing for about two decades.

Is Japan in any better shape in this crisis? Yes and no. Japan’s corporate culture, and its sense of invincibility had a severe beating and a reality check once the bubble of the 80s burst. But as usual in a capitalist system, this has also allowed Japanese firms to adopt some aspects of the ruthless Western style of management, ensuring a more dynamic environment where the principle of survival of the fittest is applied with greater vigor.

Quantitative easing is certainly all the rage at the moment after this week saw the Bank of England move interest rates down 50 basis points to the level of 0.5% and effectively into QE.

Over at Morgan Stanley, Manoj Pradhan talks about a new global QE scheme even if we are not quite there yet. David K. Miles and Melanie Baker talk about the UK version. In the Eurozone, it appears that something fundamental has happened at the ECB with this week's decision to lower interest rates from 2% to 1.5%. At least, our good governor Trichet now seems to concur that the risks of inflation have receded (for now) and that a subsequent risk of deflation is present.

Recently, I published an ETF performance map on a year to date basis. Numbers were hovering around -50% for European ETFs and -60% for Asian ETFs, except Japan. I think it will be interesting to see which markets benefit from last week's rally the most.

click to enlarge

A major laggard is South Korea (EWY) with -69% followed by China (FXI), (PGJ), (GXC) India (INP) and Asia Pacific (PUA) with more than 60% down. As you can see, the picture here is even worse than in Europe and it is broad based.

Among "leaders" mostly Japanese exchange traded funds are listed. Japan High Yield Equity (DNL) -25%, Japan small cap dividend ETF (DFJ) -33%, Japan small cap index ETF (SCJ) -35%. Here we can see an offsetting equity downturn with the Japanese Yen strengthening.

Has there been a more demoralizing and disappointing major stock market, over the course of the past 20 years, than Japan's? It reached its nominal all-time high of 38,957 in December 1989; it closed today at 8,693, just 800 points or so north of its 2003 low.

The plight of Japanese shareholders is germane to anybody thinking of buying stocks today. Japan's companies are well-run, and its financial institutions, as we saw with the MUFG deal, are today more part of the solution than they are part of the problem. And yet, as Tim Price notes,

Just for kicks, I set up an ETF screen that used the following criteria for the current one and three month time frames. Of all the ETFs, seven made this list.

• Above average market return.
• Top 20% of net asset value within its category.
• Highest discount to net asset value
• Performance vs. benchmark (whatever it is) >10%

Here they are - with surprises:

Indeed, like the BOJ during Japan’s Heisei Malaise, the Feds “pushing on a string” by providing successive amounts of liquidity at ever lower interest rates will not immediately solve the credit crunch, but will push increasing numbers of exporters and institutional investors out of the US dollar--to the point that the US dollar could become the next major carry trade funding currency.

But a small group of LDP politicians do continue to push hard for timely and resolute action to stimulate Japan’s economy, including the introduction of a Japanese sovereign wealth fund. The debate has ratcheted up the next level with the establishment of a special team within the government’s National Strategy Headquarters to investigate more active management of Japan’s $996 billion in foreign exchange reserves and public pension funds to generate investment returns that can be used to restructure Japan’s public finances.

The following is an excerpt from James Grant's column in Forbes:

How am I investing my own untold wealth? In a confection of long-short equity hedge funds (no bonds), in gold and in Japanese stocks, chronically cheap but cheaper than ever in 2008. In fact, Japan has produced a previously unknown class of investment bargain, the globally competitive cigar butt.

Japan could find itself facing a recession, hand-in-hand with the U.S.economy, wrote Takehiro Sato in Morgan Stanley's Global Economic Forum.

Noting that recent debate over the coupling/decoupling of the leading and emerging market economies has led to widespread acceptance of the "recoupling" view, Sato believes that "the argument that Japan’s economic performance is still decoupling from the U.S. is unconvincing." The following is an excerpt from the Global Economic Forum:

Has Japan become a museum piece? Is the Japanese economic experience to serve only as an historical lesson to others, as it slips off the international investors' agenda? These were some of the questions asked at Macro Vision, Morgan Stanley’s annual conference in New York on the global macroeconomic outlook, as reported by Robert Alan Feldman in Morgan Stanley's Global Economic Forum.

At the conference, a similarity was drawn between Japan's financial meltdown and the current U.S. subprime debacle: "imprudent borrowers, imprudent lenders, [inadequate disclosure] and unprepared regulators." In contrast, though, the strengths in the U.S. - the rapid response of institutions, the deeper markets, and regulator scrutiny - have led many investors to conclude that the U.S. will not repeat the lost decade of recovery that Japan has experienced.

Japan's reluctance to shake off its sluggish economic performance is becoming an increasing concern for international funds, Dale Jackson reported in the Canadian Globe and Mail, only one week after China unseated Japan as the world's second-largest equity market. Even the Bank of Japan's decision to hold its benchmark interest rate at 0.5 percent until the fourth quarter has failed to elicit any enthusiasm:

"The Bank of Japan's monetary policy does not seem to have much impact on the economy" says J.P. Morgan chief economist and former Bank of Japan official Masaaki Kanno.

Some (rare) macro investment thinking I've been doing lately has lead me to Japan. In a post earlier this week I highlighted how Japan is certainly below average when looking at the world markets from a profitability perspective. I will be the first to concede that low profitability may be a non-intuitive place to unearth investment ideas, but in the case of Japan, there may be something interesting lurking underneath the ugly numbers.

Japan has a couple of issues which I believe have really compressed corporate profitability:

Excerpt from John Makin's latest commentary:

Almost unnoticed amidst the credit-market turmoil in the housing-driven Anglo-Saxon economies was Japan's quiet slippage into ominous negative growth. Sharp downward revisions to second-quarter capital spending that appeared early in September resulted in a negative 1.2 percent annual growth rate for Japan's overall economy--somewhat shocking in view of the fact that the initial reports on the quarter had put the growth rate at above 2 percent.

Hickey and Walters (Bespoke) submit: With the recent cut in the Discount Rate, there has been a lot of focus on dividend paying stocks that could move higher as investors search for yield that has been lost in the fixed income markets. For investors that want to spread risk by investing in a basket of stocks instead of specific companies, dividend ETFs might be attractive.

Below we highlight a list of dividend ETFs across a variety of styles and regions. We have sorted the ETFs by their percentage change since the 7/19 market top.

The Nikkei 225 lost 1.1% to 17,963 Monday (7/23), closing below 18,000 for the first time in six sessions and reaching below 17,900 intra-day for the first time in three weeks.

The Tokyo Stock Exchange was closed Monday (7/16) in observation of Marine Day, also known as Ocean or Beach Day.

According to data from the Nikkei Shimbun, as of Friday's close, the N225 components have a price-to-book ratio of 2.07, ttm p/e of 20.78, f/p/e of 19.55 and a dividend yield of 1.07% (expected) and 1.0% ttm.

Barclays iShares ETFs
iShares Dow Jones EPAC Select Dividend Index Fund (IDV)