BoJ's Tankan Improves In-line, Stocks Climb Higher -- ADR Watch and News

by: Steven Towns

The Nikkei closed higher every day this week, and all major Asian indices made gains today as Asian stocks continue to have legs. Bulls just outnumbered bears in Japan, as an improved tankan was not enough to boost stocks above a 17,000 close, but did limit profit-taking.

The Nikkei 225 added 0.51% to close at 16,914.31, its highest level since May. There are mixed feelings among market participants on the Japanese stock rally. I am impressed by its strength, day after day, despite the looming threat of profit-taking, all in the face of big economic reports, and with a Bank of Japan rate decision meeting next Tuesday.

It has been interesting to watch the resiliency of exporter stocks as the yen initially was strengthening against the dollar. Now, instead of flirting with ¥114/$1, we are around ¥118, and exporter stocks are of course popular. What worries me is the inevitable, sustained strengthening of the yen, as the Bank of Japan hikes again probably sometime in Q1.

I continue to see the best value, growth and rewards from investing in mid and smaller caps, especially in domestic-oriented stocks. I also see better prospects for stock picking as opposed to blanket investing. The fact that Japan ETFs have a high proportion of exporter stocks is bothersome, although the impact of forex may end up being offset assuming stocks are sold on a stronger yen, which in turns limits the downside for American investors.

I definitely expect there to be heavy selling at some point as profit-takers overwhelm the market. However, I don't see the Nikkei closing below 16,500 at year's end. I expect Japanese stocks to have a better year in '07 and will position myself accordingly.

I have mixed feelings myself, on bank stocks like Mitsubishi UFJ (NYSE:MTU) and Mizuho (NYSE:MFG). The BoJ is highly unlikely to hike this time around. I'm not sure if banks are sold on a no-go by the BoJ. So establishing a position, or accumulating here might not be a bad idea, considering a hike is imminent in Q1, meaning gains in the yen, which would be a double plus for banks.

Consumer finance stocks are still pretty much hated. I have talked in the past of having established a position in NIS Group (NIS), which has less exposure to the government's clamp down on lending rates, but has been sold heavily nonetheless. It was making a very nice move up, but has succumbed to profit-taking, and I've noticed that Goldman published something on it, but I haven't been able to find out exactly what. NIS is popular among day-traders because of its dirt cheap share price at ¥60 ($5.08 ADR equiv. at ¥118/$1). I am holding on with plans to add, as opposed to trading it, although I might change my mind and start trading in/out.

Internet Initiative Japan (NASDAQ:IIJI) went nowhere fast (it actually went down today) after its transfer from the Tokyo MOTHERS market for startups to the more respected TOPIX 1st section. This doesn't really bother me to the point that I want to sell and capture gains now. I admit it is disturbing that IIJ has virtually no following in Japan (partially perhaps its own fault since its share price is ¥425,000 ($3,602) per share ($9.00 ADR equiv.)

IIJ's trading volume dropped significantly today. I don't think too many shareholders want to sell, especially with news of a dividend initiation next March, improving financials and M&A opportunities. The index fund related buying should play out over time. Its weighting is minor, but index buying should definitely provide support. I plan to add to my position on any dips. I'm also looking at call options of various expirations; I already own some calls.

The news Nintendo (OTCPK:NTDOY) is recalling wrist-straps for its Wii controller seems more noise than news as it applies to its stock. I'm not sure if Japanese investors knew of it during the trading day, as Nintendo hit new all-time highs gaining 2.96% to close at ¥29,250 ($30.99 ADR equiv). At this point I'm willing to say the risk/reward looks more favorable for Nintendo despite valuation concerns, than Sony (NYSE:SNE). I own shares of neither and doubt I'll be buying, but often consider shorting Sony (or buying puts).

CNBC is reporting Burger King (BKC-OLD) is headed back to Japan, after it left in '01 due to sales weakness amid a price war against McDonalds (NYSE:MCD). I am not excited at all about this. Expats might love it, but I think it will be uneventful. McDonald's is too dominant in terms of market share and having prime locations. Even it has struggled with profitability. Not too mention the super-competitive restaurant/fast-food industry. Unless BK has something up its sleeve, I wouldn't be compelled to buy based on a return to Japan.

Disclosure: The author owns long positions in NIS Group and Internet Initiative Japan.