Tuesday, December 27, 2005


It came as no surprise to most of us who perservered through the tediously long dark days of Tokyo's bear without becoming bitter, jaded, sullen (or unemployed) that Japan was cheap and that this would - sooner or later - come to be appreciated by other less observant (and it must be said less patient) investors. But before we start pinning medals upon our own breasts, let us remember that most of the same things that became cheap in the waning days of 1997, were STILL cheap (if not cheaper) nearly six years later in the thawing spring of 2003.

Today, in the twilight hours of 2005, the pickings of low-hanging fruit are decidely thinner, and the risks associated with joining the value-investor or activist greenmailer bandwagon have decidely increased. This is not to say they won;t be rewarded further. Or that there isn't any juice left to squeeze. It's just an observation that quite literally, a Tsunami of buying at higher and higher prices has roared through the TSE in Q3 & especially Q4 leaving many a share price inflated.

One might speculate as to the cause: petrodollars, a breakout fancied by CTA trend-followers, macro allocators, pension funds below benchmark weights, increasing speculation and day-trading by domestic Japanese, as well as a proliferation of Japanaese and Asian focused hedge funds. In many cases, the last real price-sensitive marginal seller was taken out mid-way through Q3 (probably sometime in a August) and anyone looking for stock has had to pay higher and higher prices for it. In a great many cases, we are talking doubles, triples, and more. Why is there so little stock seemingly available for sale?

Of course this situation doesn't concern those who already have large positions. In fact, many of them are resposnible not only for taking out the last discretionary marginal sellers in many issues, but for subequently and mercilessly squeezing any shorts unfortunate enough NOT to have puked and for continuing to purchase even more at even higher prices in a dramatic denoument that will insure performance fees are crystallized and relative performance rankings preserved.

But why is there such a dearth of stock for sale at such higher prices (and valuations!) on the main bourse in what remains the world's second largest economy? Daiwa Securities has shed some light on the subject recently by highlighting the sheer quantities of stock that are NOT for sale. Take the Deposit Insurance Corporation of Japan (the DICJ to acronym buffs) for example who bought YEN 2,400,000,000,000 worth of stocks at book value from failed financial institutions. Then of course, there is the Banks' Shareholdings Purchase Corporation (BSPC) which bought YEN 1,600,000,000,000 worth of shares from major banks to assist them in meeting their capital requirements and reducing the volatility of their earnings tied to the equity market. And finally, there is the Bank Of Japan (BOJ) itself which in the course of nationalizing some of the major City banks acquired nearly YEN 2,000,000,000,000 worth of shares. Undoubtedly, given the moves over the past two years, and especially in Q4 2005, these values are conservative. That's a lot of zeros. And a lot of zeros - even in Japan - means a lot of stock. How much? Probably close to more than USD$50,000,000,000 at cost, which is probably more like USD$70billion given the dramatic rise in stockvalues in 2005.
So in considering more precisely why the TOPIX MID, TOPIX 2nd Section, and JASDAQ Indices are all at all-time historic highs, it's worth contemplating one of the more important reasons: no stock!, and that beginning perhaps as easrly as Q2 2006, these securities will begin to be liquidated, or as Daiwa terms it - re-liquidated. We may then see how much room investors have for that so-called "Wafer Thin Mint" so-immortalized by John Cleese.

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