This level of undervaluation represents what we believe is a very rare opportunity—one we have never witnessed in more than 30 years of managing convertible portfolios.

That’s what Nick Calamos recently said about convertible bonds.

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

Ultimately, Orix shareholders will be rewarded (no details yet if cash/stock merger), but a portion of existing owners of Saison will take a hit (which begs the question of whether Mizuho (MFG) (9.20 +3.49%) (8411) will sell its stake). Orix is a great company, but there’s seemingly no rush to get in given broader market pressures.

There were some winners, with the top-5 performers all posting double-digit gains, led by Mitsui & Co.'s (MITSY) 42% return. Rounding out the top five were: Makita (MKTAY) +35%, Sony (SNE) +27%, Hitachi (HIT) +17% and Internet Initiative Japan (IIJI) +17%.

ORIX Corporation (IX)

Interim F2Q08 Earnings Call

The Bank of Japan voted 8-1, to hold the benchmark lending rate at 0.5%, as hawk Atsushi Mizuno was the only supporter of hiking for the third consecutive meeting. BoJ Governor Toshihiko Fukui warned of the risk of keeping rates "very low." He said the yen carry trade, like the U.S. subprime situation, is an example of how resources can be misallocated. Fukui referred to U.S. housing weakness and credit market turmoil as growing risks for Japanese exporters, but said he doesn't expect the U.S. to fall into a recession. On Tuesday the FOMC voted to cut 0.5% from both the federal-funds and discount rates, which sent stocks soaring. Japanese stocks also traded strongly higher, with both the Nikkei 225 and broader TOPIX gaining 3.7%. Among the biggest gainers on the Nikkei were ORIX +8.5% to ¥24,640, Nomura Holdings +7.7% to ¥1,881 and Mitsubishi UFJ FG +6.1% to ¥1.05M. The yen weakened about 0.8% against the U.S. dollar, last trading near the 115.9 level. The BoJ next meets Oct. 10-11. Its quarterly tankan (business sentiment survey) is due Oct. 1 and its semi-annual outlook on the economy is due Oct. 31.

Japan's second-quarter (ended June) GDP declined more-than-expected, -1.2% vs. economists' average estimate of -0.7%, in a revised data release Monday. The Nikkei 225 lost 2.2%, as stocks were already under selling pressure following Friday's stock market weakness in the U.S., which included a 1.8% fall in N225 Sept. futures in Chicago. GDP was negatively impacted by a revised 4.8% decline in capital spending, compared to a preliminary estimate of +4.9%. The government's initial Q2 GDP reading was +0.5%. This is the first contraction of economic growth since Q3 2006 when GDP fell 0.4% annualized. Bond yields are now at their lowest levels in over a year and a half, as expectations of a follow-on Bank of Japan [BOJ] rate-hike on Sept. 19 now stand at 0% and are increasingly doubtful for the rest of the year. Meanwhile, the yen rose about 1.5% against the U.S. dollar to the 113.4 level, keeping pressure on exporter stocks like Sony (-6.0% to ¥5,300). Other big decliners included ORIX -3.9% to ¥21,800, Canon -3.7% to ¥6,050, Nomura -3.3% to ¥1,827, Mizuho FG -3.1% to ¥657,000, Mitsubishi UFJ -2.8% to ¥1.03M and Toyota -2.4% to ¥6,440.

Japan has over 3,000 islands.

It has the second largest economy in the world by nominal GDP.

It has the third highest GDP by purchasing power parity.

It is the fourth largest exporter in the world.

It has the fifth largest defense budget in the world.

It is the sixth largest importer in the world.

The Tokyo Stock Exchange is the second largest stock exchange in the world.

Japan catches more fish than any other country in the world except China.

It has the third largest R&D budget in the world.

More than half of the industrial robots in the world are in Japan.

Japan's second-quarter (April - June) annualized GDP rose only 0.1% sequentially and 0.5% year-over-year, compared to economists' average estimate of 0.2% and 0.9%, respectively. The chance of a Bank of Japan [BOJ] follow-on rate hike at its Aug. 22 - 23 meeting now stands at 33%, after reaching 75% last Thursday, according to Credit Suisse. First-quarter revised GDP was 3.2% on an annualized basis. Economists don't seem particularly surprised by the Q2 reading, but say the data is not encouraging for the BOJ to raise rates again, after pausing since February. However, BOJ governor Toshihiko Fukui previously said the Bank expects slower growth in Q2 and that won't determine the decision of the August meeting. Further complicating matters is recent market turmoil stemming from the U.S. subprime induced liquidity crunch. The yen rose slightly against the U.S. dollar to around 117.85. The Nikkei 225 gained 0.2% to 16,800.

TRANSCRIPT SPONSOR

ORIX Corporation (IX)
F1Q08 Earnings Call
August 10, 2007, 8:30 AM ET

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

Trading volume remained light last week with the exception of a jump Friday from options expiration related activity. The Bank of Japan paused again at 0.5% on Thursday.

The Bank of Japan voted 8-1 to hold its target interest rate at 0.5%, sending the yen lower against the dollar and euro, while late selling pushed the Nikkei down 0.4% to fall below 18,000 for the first time in ten sessions. The BoJ's pause was widely expected, especially ahead of parliamentary elections on July 29, but some were surprised by only one dissenting vote (Atsushi Mizuno). In January, Mizuno and two others voted unsuccessfully for a hike, but the following month the BoJ doubled its benchmark rate to the since unchanged target of 0.5%. BoJ Governor Toshihiko Fukui said policy makers are confident in their outlook of the economy, but want to examine more data, referring specifically to Q2 GDP, which will be released the week prior to its next meeting (Aug. 22 - 23). A majority of economists still expect an August rate hike. In its monthly report, the BoJ said the economy is expanding moderately and is expected to continue doing so.

Bank of Japan Policy Board member Kiyohiko Nishimura spoke Monday at The Brookings Institution. He urged more flexibility in monetary policy, while still embracing the Bank's "gradualist" strategy. Swap contracts on the BoJ's target rate show a 74% chance of a rate hike in August, with only a 12.5% chance of a hike at its meeting next Wed./Thurs. Instead of pre-scheduled or fixed rate hikes, Nishimura said rates "should be adjusted gradually to the trend of general economic conditions." He warned against holding rates for too long (currently 0.5%), since accelerated growth may require a large adjustment to rates in the future, causing unnecessary volatility. Regarding foreign currency trading, Nishimura said, "We do not know how far the contrarian strategies of Japanese retail investors can go. A sudden change in their behavior is likely to shift the direction and the magnitude of trading in many foreign-exchange markets." He also commented that "The gnomes of Zurich were accused in their day of destabilizing markets." However, "The housewives of Tokyo are apparently acting to stabilize them." The dollar/yen was last trading near 122.50.

The Nikkei was mostly flat in Monday trading, while the broader TOPIX rose 0.3%, on in-line results from the Bank of Japan's tankan (quarterly business confidence survey).

On average, the 27 Japanese ADRs gained a combined 0.6% last week and are now back in positive territory for the year, up 0.3%.

The BoJ's decision to hold at 0.5% bodes well for exporters, but keeps financial plays unattractive in the near-term.

In early trading Monday in Tokyo, the Nikkei was up nearly 1% to 18,130+, as the yen continues to trade around 123.50 against the US$.

As widely expected, the Bank of Japan held its benchmark interest rate target at 0.5%, unchanged since February. BoJ Governor Fukui reiterated the bank's gradualist approach to adjusting rates, saying it wants to review more data and be more confident about the outlook for the economy. The Nikkei rallied 0.7% to 17,971, reaching 18,000 intra-day, while the broader TOPIX rose 0.9% to 1,772.94. The US$ was last trading at nearly 123.50 against the yen, more than a 4.5 year high. Bloomberg reports 11 of 17 analysts it polled expect a rate hike in August after the upper house Diet election July 22 and following the release of Q2 GDP and the BoJ's quarterly tankan business confidence survey. In its monthly report, the BoJ commented the domestic economy is "expanding moderately" and it expects it continue doing so. The BoJ will release its latest meeting minutes next Wednesday before the market opens. Its next monetary policy meeting is July 11 - 12.

Media, Entertainment and Gaming

Japanese stocks rallied last Monday as the Nikkei closed near 17,670, its highest close in about a month; however it failed to hold the gains through the end of week.

We start this week off with another rally, as the Nikkei 225 gained 0.7% to 17,677. Exporters and some financial stocks were in favor, but overall, the market was balanced, hurt by domestic demand stocks, including smaller caps.

As expected, the Bank of Japan kept its key benchmark lending rate unchanged at 0.5%. Japanese stocks trader lower on profit-taking, after the Nikkei 225 hit a six-week high yesterday. The yen weakened slightly against the US$ to ¥119.15. Exporter stocks traded broadly lower, but selected financial stocks (including mega banks) which have lagged over the past year, posted gains. BoJ Governor Toshihiko Fukui said the bank is watching the effects of the Feb. hike. Regarding the yen carry trade, he commented, "... overall, we do not think the yen-carry trade will be resumed immediately." The BoJ also left its economic assessment unchanged, saying the nation's economy is "expanding moderately" and is expected to continue doing so. Most economists expect another BoJ rate hike after the July upper house election. As for the U.S. economy, Fukui said, "The U.S. slowdown is continuing, but we expect the economy's growth rate to return to potential after an adjustment, so a soft landing remains likely."

In parliamentary testimony, Bank of Japan Governor Toshihiko Fukui reiterated the bank's gradualist approach to raising interest rates. He also said land price gains "(do not yet) warrant concern of excessiveness." The BoJ voted unanimously last week to hold its benchmark rate at 0.5%. A closely watched land price report published last week shows some patches of double-digit gains in metropolitan commercial land in 2006, with an 8.9% increase overall for Tokyo, Osaka and Nagoya. Residential land prices rose 2.8%, for the first nationwide increase in 16 years. Fukui said, "Rising land prices won't automatically prompt a rate increase," but noted the BoJ is monitoring prices. Economists have mixed reactions whether rising land prices will force the BoJ to raise rates. Finance Minister Koji Omi stated last week the gains are not a signal of another bubble emerging. He commented yesterday that rate decisions are the BoJ's responsibility, but The Wall Street Journal says he "hinted that higher interest rates aren't welcome."