Horiemon Arrested, But "Livedoor Shock" Not To Blame for Today's Nikkei Drop (EWJ, ITF, VPL, JEQ, JOF)

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Includes: ATE, EWJ, JEQ, JOF, JPXN, MC-OLD, NIPNF, NMR, PNCOF, TMICY, VPL
by: Steven Towns

Holders of iShares MSCI Japan Index (EWJ) and other Japan related investments will want to watch closely what happens in Tokyo as there may be some good opportunities to pick up cheaper shares again this week. The story early last week was the mass selling induced by livedoor Co. and president Takafumi Horie's (Horiemon) investigation of alleged securities violations. On Friday the Japanese had already started their weekend by the time U.S. stocks finished trading down heavily. On Sunday night as Americans were sleeping Japanese stocks also fell heavily amid concerns of higher oil costs, a stronger yen, and worries over the strength of the U.S. economy. Of course there was also the big news of Horiemon and three livedoor executives being arrested but this mostly affects livedoor shareholders which have seen the stock drop by over 60% since last Monday. Taking into consideration all of the above I still see Japanese stocks outperforming U.S. stocks this year largely because the Japanese economic recovery is "for real."

So far the best coverage of Horiemon's arrest can be found here by Bloomberg. I don't have anything to add except my condolences to livedoor shareholders. However, I will hold my condolences for the time being for its biggest shareholder, Horiemon, who holds 17.3% according to Bloomberg. Regardless of what happens to him and livedoor, my biggest concern is with the overall economy and its openness to competition and M&As.

Livedoor was an aggressive but relatively small time player in M&As based on its market cap. Japan still has the likes of Hiroshi Mikitani at Rakuten, Masahiro Inoue at Yahoo! Japan, and Yoshiaki Murakami of Murakami Fund. These are names that if you haven't heard before will certainly be hearing as Japan's economy continues to recover. They are the Masayoshi Son (CEO of Softbank) of the M&A age. By the way, there is news just out of Japan that livedoor might be bought out by a foreign investment fund.

Here's a brief summary of the market data for Monday in Tokyo and a look at the biggest decliners among shares that have ADRs.

Nikkei 225 lost 2.14% and the TOPIX Index lost 2.25%. The yen strengthened to Y114.28/US$1.

    • Trend Micro (TMIC) -4.57%
    • NEC (NIPNY) -4.20%
    • Pioneer (PIO) -3.86%
    • Advantest (ATE) -3.80%
    • Matsushita Electric Industrial (MC) -3.67%
    • Nomura Holdings (NMR) -3.05%