Lance

Big Mac Index Supports Japanese Bullishness

I keep hearing this drumbeat ... Japan has underperformed ... Japan has underperformed.

On June 1, 2005, the Nikkei 225 closed at about 11,350. On June 1 two years later it closed at 17,958. In case anyone is math challenged, that's a gain of about FIFTY-EIGHT PERCENT in two years. Mean reversion, you say???

Sure, most of the gain came in late 2005. So what? That kind of performance cannot continue forever. This is a market that has more than doubled since the spring of 2003. Yes, it was a depressed low, yada, yada, yada.

Moreover, Japan is now trading at better than 20x earnings by most estimates. Can it go higher? Sure. Can stocks in a mature economy with a potential growth rate of around 2 percent and a declining, aging population also go lower from here? You better believe it. Japanese stocks are presently priced for a continuation of good news. Anyone getting real greedy here may manage 10 percent before the end of the year, or may get a 10 percent haircut.

In case anyone hasn't noticed, this place is not exactly shareholder heaven. The cash yield is barely 1 percent, and managers will use equity warrants like artillery to keep it there.

A POSSIBLE currency play exists with EWJ and dollars, but there is absolutely no guarantee that the yen must rise appreciably from here against the dollar, an no guarantee that it won't be 130 by next year either.

I converted my first US dollars to Japanese yen in the winter of 1992-1993. I still remember getting 121 yen to the buck. Sure, the exchange rate has seen some wild gyrations since then, but look where we are today. Machinery orders were an upside surprise today; the market was up about six-tenths; virtually everyone is pricing in a BoJ rate hike next month. The yen sank nonetheless.

Whenever there is a severe economic disruption, or merely the threat of one, what currency does everyone flock to? The yen?

The BoJ is also likely to be VERY gradual in raising rates, particularly once the sales tax issue re-surfaces after the election. (It's a political IED that nobody wants to get anywhere close to until the election is over.) If commodities keep going higher, the Fed is likely to maintain the rate differential anyway. Then it gets real ugly anyway, as it is bound to get sooner or later.

Like I said, this place (Tokyo) is priced for only good outcomes, with few or no bumps in the road. I'm happy to entertain less risk here at the moment than I was willing to entertain a few years ago.

Japanese Value Stocks: Excess Liquidity and Extreme Volatility

Nice call on Nomura. It has bounced nearly 10 percent since you said to avoid it.

Morningstar: "Think Twice Before Betting On Japan Funds"

Re: Japan's volatility ...

Remember (or if anyone doesn't already know) that there is NO UPTICK RULE in Japan. Short on demand at the bid, baby.

Now ... yes ... and no laughing here, please ... they *did* institute, a few years ago, a provision that you can only short on demand 50 times the minimum trading unit in one order. So, if you want to swamp the system with shorts, you need to enter multiple orders. Real tough, that provision. Slightly mitigating, trading units have tended to drift toward 100s, from the 1000 shares that has been traditional for a long time, but there is still no uptick rule, and no rule against using computer technology to launch an avalanche of shorts.

This (lack of an uptick rule), and daily movement limits (you can find yourself up-limit or down-limit, trapped either way) make the TSE, in essence, exactly like a US futures market. These are precisely the attributes that make futures markets more volatile than equity markets -- in addition to greater leverage, which Tokyo also provides. (Margin is 33 percent, and you can borrow 80 percent against cash positions, so leverage is pretty darn good for equities.) Tokyo, or the people who run Tokyo, *love(s)* volatility. Of course they like it mainly on the upside, because that creates, rather than destroys, wealth.

But please understand, this is an insider's market run by "The Generals".

Volatility? I know Steven wants us to buy Internet Initiative Japan, and he may be right. But those of us who do have to stick our toes into a market that does a mere US$ 2 million a day on average. If somebody wants to unload a "real" position, you don't want to be long. It's simply impossible to manage risk in that small a puddle. What? I'm going to put US$ half a million in IIJ? My timing had better be *perfect*.

Finally, MUFG is said to be stronly considering a 10-for-1 stock split this fall. What this does, of course, is put TEN TIMES the amount of shares out there that can be borrowed for shorting. Recently, there has been scandal after scandal over enormous stock splits. If MUFG should run up before the split date, I would exercise *extreme* caution.

I know that MUFG wants to increase their individual shareholders ... but take care, they may not exactly care (guaranteed, actually, that they don't) if *you* get blown out in the long term process of that transformation.

What Happened to the Bull Market in Japan?

Five days after this post, you wish you'd never posted, right? ^_-