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Darrel Whiten
22 Comments
Reality Check for Japanese Commodity Price Estimates
1) While Inpex forecasts assume a Brent benchmark oil price, the actual benchmark for Japan is Dubai crude. Relative Brent, Dubai crude averaged $118.90/bbl, for a discount to Brent crude of over $4/bbl.
2) In FY08, of the JPY233 bln increase in sales for Inpex, unit prices accounted for JPY216.6 bln, volume increases JPY48.6 bln and exchange rates (stronger yen) minus JPY31.0 bln. Every $1/bbl annual appreciation in Brent crude oil gives a JPY2.2 bln boost to the company's net income, while every JPY1 appreciation slices JPY2.2 bln off of earnings, i.e., a JPY1 appreciation and a $1/bbl Brent crude appreciation would be a wash.
3) Nominal earnings are also significantly affected by inventory gains/losses. Inpex uses lower of cost or market average, with cost being calculated by the moving average method.
Japanese oil firms are notoriously conservative about oil price projections, believing that low balling earnings and beating street expectations is better than high balling earnings, missing street expectations, and then getting beaten up by investors. Unlike European and US oil execs, the top guys do not get megabucks in total comp. In Inpex's case, 13 inside directors (management) got an average of JPY46 million/director, of $460,000 per director (including bonuses). Compare this, for example, to Donald Humpreys, CFO of Exxon Mobile, with 2007 comp and bonus of $2.689 mln and total stock option and other calculated comp of $9.1 million
Escaping Japan's Potential Value Trap
The Japan Corporate Governance Research Institute (JCGR.org) releases annual JCG indices for individual Japanese companies that is available for free. Others like Governance Metrics International, Northern Trust and State Street sell their governance indices to institutions and even to the companies they rate.
Ironically, JCGR has found that Japanese firms with highly rated JCG are more likely to undergo corporate governance reforms after experiencing poor financial performance. However, they admit that the relationship between the JCG Index and performance may actually be negative--thereby indicating the tricky nature of using governance metrics to measure medium-term stock performance.
More ironically, the pitfalls of "cookie cutter" governance rankings are highlighted by the fact that Nomura Holdings topped the JCG Indices in 2006, only to be brought down by an insider trading and other scandals that will hurt their investment banking business. In addition, the JCG indices cover 312 of some 3,800 listed Japanese companies.
Thus a corporate governance "score" is only one, and a tricky one at that, to measure the quality of management and corporate governance--and an even trickier way of measuring potential stock price performance. A better measurement might be foreign ownership (and the corporate governance pressures that implies) and the lack of stable domestic shareholders, such as a parent company or Japanese banks/insurance companies.
At any rate, good corporate governance is only one (increasingly important) factor to consider when picking stocks, and I have my doubts about the effectiveness of a fund or index based soley on simple corporate governance scores.
Instead, we look for evidence that management "gets the joke" about the effects of globalization on their business, and of providing competitive returns to their shareholders, and shows this with visible action, as going from "poor" to "good" corporate governance can be as powerful a stock price driver as a text-book corporate governance structure--coupled of course with a corresponding improvement in shareholder returns.
Bureaucrats, Parochialism, and the Japan Discount
More Downside for Nikkei 225 as Yen Appreciates Further
Since the yen is only strong against the falling US dollar, profits of companies with high export exposure to the US would be hit the worst--both from falling US demand and a strong yen. That includes automobiles and consumer as well as industrial electronic companies. In terms of general sectors, that means automobiles and electronics. However, since both are major drivers of total Japanese profits, aggregate Japanese profits will also be hit.
Japanese Yen Poised to Renew 1995 High
Its a perfect storm in the currency markets too.
1) The yen carry has unwound as hedge funds blow up,
2) Sovereign Wealth Funds like Qatar which were 99% in USD two years ago are now down to 40% USD exposure,
3) "Bad boy" oil exporters like Iran and Venequela are now asking Japan to pay them in JPY instead of USD
4) US pension funds like CalPERs are reducing USD equities and shifting funds to international bonds, equities away from USD assets.
Ironically, individual Japanese investors are again loading up on USD and other foreign exchange investments on the assumption that the current blow-out in the Yen in will not last long.
Pricing Japanese Banks for Bankruptcy is Overdoing It
I don't know what your source of data is, but the source of the data for my comments was the Kabushiki Shimbun website
(www.kabushiki.co.jp/ma...), which carries daily TSE 1 sector quotes as well as forward PER and historical PBR and Dvd Yield for 33 sectors. They calculate PBR using the latest full fiscal year consolidated shareholders' equity per share, and the bank sector Arithmatic Stock Price Average.
The Tokyo Stock Exchange also publishes monthly PER and PBR data based on the TSE 1 Arithmatic Stock Price Indices. At the end of December, the book value per share for the TSE 1 Bank sector as calculated by the exchange (on a consolidated basis) was JPY650.80 per share, while the Arithmatic Stock Price Index for the Banks was JPY539.04, resulting in a PBR of 0.83 at the end of December 2007.
The Arithmatic Stock Price Index for the Banks recently fell to the JPY240 level, which works out to a PBR of 0.37X, implying that the Kabushiki Shimbun data is not in error.
Thus I fail to see how my comments could be construed as "sloppy" based on this data. Rather than going into a long explanation about whether the arithmatic stock price averages are better or worse than Topix indices or the Nikkei 225 indices, I believe my point is still valid, i.e., Japanese bank stocks are in aggregate at extremely oversold levels.
U.S. Markets in Early Recession Mode; Japan Already Discounting One
Japan's LDP: Let Them Eat Cake
Yes, demographics is having a major impact on Japan in many ways. Most prefectures (of which there are 47) are experiencing declining populations, a weakening economic base and related lackluster demand for banking services, shrinking property values, and structural local government deficits.
That said, the government actually exacerbated the situation by "stealth" tax hikes, trimmed public services (i.e., no buses for grandma) and a rush-job tightening of regulations on building codes that has essentially stopped the housing market in its tracks. And oh by the way, they would ram through a doubling of VAT hikes in a minute if they thought it would be politically feasible.
They are also clueless as to how to restore Japan's role as an international financial center, even though they desperately would like to. How about tax breaks, easier administrative proceedures, free economic zones, etc., etc.?
Yen Carry Trade: Dire Threat or Poltergeist?
The BOJ is the agent for the MOF in effecting forex intervention, using the Foreign Exchange Fund Special Account, which has two elements, the Foreign Exchange Fund and the narrowly defined Foreign Exchange Special Account. The former is a separate fund prepared for foreign exchange trading by the Government, and purchases/sales of foreign exchange by this fund are not recorded as the revenues/expenses of the Government. In the latter, results of trading such as (1) profits/losses arising from foreign exchange trading and (2) payment/receipt of interest arising from fund-raising/investmen... accompaning foreign exchange intervention are recorded as the revenues/expenses of the Government. In this case, the government issues finance bills to fund the intervention. So, Japan's total debt would technically be affected if it were a sizeable intervention.
As for the impact, in 2001, the BOJ spent $28 billion to prevent the yen from breaking JPY100/US$, and in 2002 had to spend another $33 billion to keep the yen from getting too weak. During this period, the yen swung from JPY105/US$ to JPY135/US$, so the interventions were apparently effective.
In addition, the government is now showing massive capital gains and interest on the forex held that run into the trillions of yen, and some of these profits are being funneled back into the general account to help stop the fiscal bleeding.
Would a US Recession Negatively Impact Japan?
Japanese Property: Fear Has Overcome Greed
Mitsubishi Estate and Daibiru were mentioned because of Seeking Alpha's requirement to mention stocks that are traded in the US, which these two are in ADR (OTC) form. Personally, I like Sumitomo Realty (TSE Code: 8830) better because of its higher Beta to bull runs in real estate-related stocks. Mitsubishi Estate is the Cadillac (or Mercedes S550) of the Japanese real estate companies, being landlord of the some of the best commercial properties in Japan, such as the Marunouchi central business district around Tokyo station.
Will Crashing Chinese Stocks Mean a Yen Rally?
If you are a US dollar-based investor investing in a stock that trades in another currency (like the Yen), there are four possible scenarios;
1. The currency and the stock (in yen) appreciates.
2. The stock appreciations but the currency depreciates.
3. The currency appreciates but the stock depreciates.
4. Both depreciate.
Japanese stock prices of major exporters (Toyota, etc.) tend to depreciate when the yen is strong, because it has a directly negative impact on their operating profit, i.e., JPY10 appreciation in the yen against the dollar on an annual basis can mean tens of billions of yen in lost profit.
So while the US dollar-denominated ADR price goes up when the yen appreciates (because of the exchange rate), the stock price in yen tends to depreciate, i.e., scenario (2) as described above.
More Japanese Polarization: Only the Truly Global Will Prosper
I would make a distinction between nationality of board members and "global mindset" as compared to the globally competitive nature of the business/products, i.e., is the company really globally competitive or not? I agree with Mitarai-san of Canon that "form over substantance" is not the solution to Japan's corporate governance issues, and for that matter, profitable investments in Japanese stocks.
Sure, Toyota has way too many board members by international "standards", yet they are one of the most respected (feared) automobile company in the world today. A relaively small company like Ushio Electric is also very respected for its niche products where they have global market shares in the 70%~80%. Japan's shipping companies operate in truly global markets and while not perhaps the most competitive firms out there, are nevertheless benefitting very nicely from global trends.
The point that I was trying to make is there is a big difference between firms who are able to leverage (benefit) from global trends as opposed to firms who are basically local clones of successful global business models, which in my mind includes may of the "new economy" Interntet companies listed on the Junior markets whose businesses are now struggling, but for which investors paid high premiums for when they were first listed.
Japan: Chasing Yield in a Low Interest Rate World
Your suggestion is a good one given that that our portfolio of "core" REIT stocks (i.e., those that were first listed) is showing the best YTD 2007 performance of any other Japanese equity group year-to-date (up 26%) and (up 73%) since the model portfolio was launched in November 2004.
The REITs first listed (some 14) are stronger because they were the earlier movers, i.e., they acquired commercial properties in central Tokyo locations (Tokyo's 23 wards) for very attractive prices, well before the "hot" money began arriving.
However, since Japan Investor is a subscription site, I'm afraid information on specific REITs is only available to subscribers.
Regards,
Darrel
Yen Carry Trade: How Much is Too Much?
According to the IMF's attempt to measure the yen carry trade, the bulk of this carry trade is not "speculation"... but individual Japanese investors buying offshore investments denominated in high yielding currencies. In Asia, for example, a Japanese investor can earn 6.8% on demand deposits while also enjoying an appreciating Auzzie dollar against the yen. Japanese fund management companies are creating mutual funds with monthly payouts that have various bells and whistles to be able to make the monthly payouts, which is also contributing.
I found this attempt to get a balanced view of the carry trade a bit refreshing.
tmcgee.wordpress.com/2.../