Thursday, December 29, 2005

My 10 New Year's Resolutions

Here's my list of New Year's resolutions upon which entropy will be working its wonders....

#10. Do NOT Choose a Hotel on the Internet, Sight Unseen.
I could give numerous reasons and countless examples precisely why, though I reckon that most with a modicum of taste and a wafer of expectation will know what I am talking about. Yet, when in need at the last moment, I still find myself lured and ensared by slick-looking but apparently ten-year old photos taken from "the perfect angle" obscuring the view of the railroad yards or motorway across adjacent. How about "room cams"? On second tought, maybe not....

#9. Disconnect My Cable.
No, not in lieu of a satellite dish but for peace and quiet and added industriousness. I am certain that seventy-five channels are merely seventy-four ways (excluding BBC World) to squander one's meager allotment of time on this planet with drivel, nonsense and mis-information. If you're reading my blog, then you apparently already made an important disassociative step from enslavement by the evil box. IF however you are a frequent FOX watcher, it may be too late to help.

#8. Avoid Indian food.
It tastes so so good. And the burn of a spicy curry releases a torrent of endorphins that overwhelms me with narcotic contentment. But I always always always regret it afterwards....

#7. Try Again to "Understand" Conservatives.
If the Dalai Lama doesn't hate the Chinese considering what they've done to his beloved Tibet, but rather feels true sorrow for them, then I reckon I can try yet again to understand and be sympathetic to arguments for why selfishness is inherently superior, and why being kind to people who are less fortunate than me will somehow f*ck everything up. I'll admit that I've been unsucessful so far at really getting my head around it, but I promise that I'll try....

#6. Respect the Market.
There is quite often a paradoxical wisdom in the herd. They know a good thing when they see it. But they typically don't know how to price it. That in itself instinctually "feels" like an opportunity to a natural contrarian like myself. Yet, the crowd typically doesn't care about the price of that thing. Not a bit. It just cares that it's good and that they want it. This means the price of such a thing can remain very divergent for a very long time. As such, its useful to remember that when it comes to trading growth counter-trendwise, time is NOT on your friend.

#5. Enjoy the Crowd.
I am naturally wary of crowds. Too much company or consensus in a position makes me feel decidely nervous. I can't help that - it's my nature. But the crowd CAN do a lot of heavy lifting in maret sense (of prices). And since it appears we are living in a brave new world dominated by feedback trading trend-followers, I will endeavor to relax more when I find myself long of momentum.

#4. Finish Writing the Novel.
It's rather frightening to consider how many resolution lists this one will find itself. MY novel continues to gestate. In fact, I feel like I am already finished it in my head. All I have to do is commit it to paper. Why am I hesitating? OK, besides the house full of kids? I feel as though I am in swimming trunks contemplating a dive into a rather cold swimming pool on rather cold day. A very cold swimming pool. Jump, damnit! I just have to jump....

#3. Do Not Try to Think 'Economically' About My Boat.
A boat defies all economic logic. It makes no economic sense. Like a poor elderly people or a squadron of Stealth bombers. I must stop trying to rationalize it. It simply is uneconomic. I must accept it, even though it makes much more sense to charter one whenever the fancy strikes. Such is the price for the convenience of leisure on-demnd. Oh crap, I wish I could just stop moaning about it.

#2. Stop Banging My Head Against the Wall and Embrace Inflation and Imbalances.
I must stop caring about inflation and deficits and imbalances. Why should I care about them anyway? No one else does. That makes me a fool. A really big fool and one who is rapidly getting relatively poorer because I care. I must face reality. The reality is: our economic leadership is morally bankrupt, the American people (at least half of them) are selfish and don't want to pay for what they and their country need or consume, the result of which is a long inexorable debasement of the unit of exchange, since anything that halts that debasement will have such grave political consequences that it is completely untenable. The economist in me says "what is unsustainable will NOT be sustainable", and the markets will enforce the discipline that our leaders, and we as citizens (at least half of us) are too weak, inept or selfish to undertake. But in 2006, I will just "let go", leverage up, buy a truckload of speculative stocks and real estate in hot markets and if the train wrecks, then I'll suffer with everyone else. But what really sucks is the classic behavioural FUBAR of watching everyone else amass wealth while I worry about the ultimate conequence of inflation....

#1. Don't Short on Price (read: valuation).
Like the schoolboy forced to write his penance on the chalkboard during detention, I WILL NOT SHORT ON PRICE. I WILL NOT SHORT ON PRICE. I WILL NOT SHORT ON PRICE. (And if I do, then I will do so only briefly).

Happy New Year to all and may you have success with your own resolutions!! (except for the misogynous bastards that think its clever or fun to steal from their investors by ramping stocks in the end of the year in order to collect a bonus or incentive fee).

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.

Be careful what you wish for....

Japanese capitalism is of a distinctly different flavour than the American variety. This was initially drilled into me years ago by my Industrial Relations tutor at the LSE, and has stayed with me to this present day. But one need not be a Japan-o-phile, or a student in comparative finance or economics to appreciate the differences. Yet with the TOPIX MidCap, the TSE 2nd Section and JASDAQ indicies all at historic highs, a pertinent question arises as to whether "We are systemically converging upon them", or whether "They are systemically converging upon us"? Whatever the true answer, ,it is worth pondering the implications of such events.

If one closes one's eyes, one can conjure up images of Japanese-style Capitalism: keiretsu groupings and other business or legacy cross-shareholding relationships; long-range planning and even longer-term investment horizons; lifetime employment possibilities; promotion and pay based upon seniority; close banking relationships often cemented by part-ownership or primary creditor status; paternal responsibilities of corporations to employees during recessions and resulting good industrial relations; single-payor national healthcare; diversified constituencies of reponsibility exemplified by stockholders, workers, management, customers, government and community (not necessarily in that order of priority); negligible stock-ownership by professional managers; management by consensus; low ratio of average executive compensation in comparison to average worker salary; high priority on shop-floor capital expenditure vs. low priority on executive suite profligacy; self-deprecating and conservative managerial style; government assistance in defining the public interest for the benefit and detriment of corporations. There are of course other attributes that I've missed, but suffice to say, these are the primary ones that come to mind.

Now lets repeat the exercise with the American brand of capitalism: a rugged individualism of corporations (no cross-shareholdings); short-termism is the rule rather than the exception in both planning and investment considerations; little lifetime employment and "first-in-first out" firing policy to reduce costs by firing more senior, better paid people; purely competitive, sometimes predatory banking relationships; no paternal responsibilities (e.g. Wal-Mart not providing health insurance); bi-polar teated constituency: the shareholder and the executives: all others are deemed expendable or irrelevant; authoritarian style of management; worlds HIGHEST ratio of average executive compensation to average worker compensation; high management ownership ratio resulting from riskless incentive compensation awards at shareholder expense; low priority on shop-floor capex & high priority of boardroom & HQ expenditure; high prevalence of overconfidence and self-attribution biases.

These are dramatic differences, often at the opposite end of the spectrum. And so since foreign investors have been pouring billions of dollars into Japan, it is worth speculating whether these are "pure price momentum investment flows" or whether they are directing these billions because they admire these cultural differences. Or on the other hand, perhaps because they expect these differences to narrow? Some in fact, like the carpetbagger-cum-greenmailer, Steel Partners, are vociferously demanding change to more mono-constituency (i.e. "shareholder focused) regimes". Is this reasonable and/or rational? Will they kill the proverbial golden goose in the process?

Investors should be careful what they wish for. One would be forgiven for questioning whether it is realistic for investors to expect management to selectively reward shareholders without discarding many of the other conventions and attributes that are cornerstones to the success of the Japanese enterprise and society. For instance, IF Japanese corporations go to FIFO, management and workers would rightly expect greater compensation of shouldering the adjustment risks inherent in the employment relationship. And with these risks come large annual riskless stock option grants, "gross-ups" (expensive in high-tax Japan) and other such awards that diminish cash profits dilute shareholder earnings. Higher employee turnover and less paternalism in a Japan with impending demographic implosion and 4%-unemployment means higher and more competitive wages, lower employee productivity and loyalty - all which come at a price to shareholders. And Capex, long the cornerstone of Japan's edge, would also be a victim. It would also be unreasonable Japanese managers not to emulate their American peers and not spruce up their corporate offices, putting in gymnasiums, kitchens, games rooms, not to mention the odd helicopter and Gulfstream corporate jet. But don't forget golden parachutes. All this raiding, uncertainty, and greenmailing will have repercussions upon the stress-levels of Japanese executives that can only be ameliorated with sufficiently large separation packages.

I think it would be an interesting exercise to "play dress-up" with the average Japanese company, by "Americanizing" or "Yankifying" their income statement to reflect Japan's presumed migration from multi-teated to shareholder capitalism. It may be that I exaggerate the implications. It may be that the benefits to shareholders to be had from cutting R&D expenditure, advertising expense, and capital expenditure (classic telltales of accounting conservatism) raping the workers' retirement fund and underfunding their legacy obligations (ones which haven't taken advantage of Daiko Henjo), putting the "asset pedal to the balance-sheet metal" and use every spare dollar of cash to squeeze the share float, and then use some not so spare dollars leverage it further but swapping debt for equity in order to approach a more Stern-Stewart-like capital that Mr Stern or Mr Stewart could be proud of.

Immortality, Fertility & Conscience

Nobel laureate economist Dr Milton Friedman was interviewed by Charlie Rose, the result which was aired late yesterday evening on America's PBS. This in itself is an amusing paradox worth considering since most of Dr. Friedman's close friends and disciples would eschew the very concept of a Public Broadcasting Corporation, thus depriving us of the still-lucid old man's oftentimes contentious views about the state of the world and the great economic debates of our times.

He commented upon many subjects: the Reagan years; his self-stated unequivocal victory over JK Galbraith and the Keynesians; the moral turpitude of communism and central banks (as well as most central bankers), Greenspan and Bernanke excepted. He also weighed in on Japan, the details of which I reveal shortly. While I respect Dr Friedman (as a Nobel Laureate), and what he has achieved in his life and career, I must say I find many of his opinions as disagreeable as those of Ayn Rand. While this is not the time for a long missive and though I am not qualified to find fault in his economic theory (my BSc being no match for his PhD and distinguished teaching career), my gripes with the famous laureate center upon the philosophical and social implications of his theory and rhetoric. In particular, while I don't doubt that in economic terms a nation where government occupies less than 15% of GDP may indeed be more efficient and create greater total output than a nation where government subsumes a 45% share, and while I would even admit that, distributionally-speaking, it MIGHT result in "more things for more people", I have grave concerns and reservations about what the social face of this society would resemble in the modernity in which we find ourselves.

For I am the first to admit that it would be wonderful indeed if the village (and her villagers) looked after its own. If children cared for their parents in old age. It would indeed be preferable (and novel) if a strong work ethic were universally distributed, as it would be if the same were true of education, wisdom, opportunity, and physical health and ability. That there were no indigent, malevolent, periodically sick or ill, nor wars; if greed, corruption, and dishonesty were rare as edelweiss in Florida, and people always did "the right thing" whether that was to pay taxes, or respect the common good or interest. In THAT world, on THAT planet (which is seemingly far from this terrestrial orb) a 15% slice for government might even be too much. But OUR world, THIS world, IS different....much much different. And as a result, I find it ironic that progressives and liberals are the actual pragmatists fostering and nurturing solutions that MIGHT help create better outcomes for people that those callously dealt by the market, and minimize the externalities resulting from the econonomic and social relations between men and women (where "better outcomes" is defined by, and includes words like "dignity", "need", "charity", "opportunity", "accident", "kindness", "respect" and yes, even "altruism". By contrast Friedman (and his disciples) appear quixotic in their objectives since the world required for Friedman-ite philosophy and economic theory to prosper - and more importantly - be superior to progressive social democracy, differs dramatically from the world as IT IS and as we know it.

With that off my chest, the reason for this post, was that Mr Friedman spoke about some things Nippon that I have promised to reveal. They are surprisingly close to my own thoughts. He said, Japan is in better shape than it has been for a long time, and their prospects are bright. BUT (and there always is a "but"), BUT, Japan is a nation with a severe dearth of births (my words, not his) which in combination with the wholesale lack of immigration, is both worrying and troublesome. He pointed out that the demographic contraction of the Japanese people over the coming decades will be dramatic and severe and unlike anything we've experienced in the modern age - something that is likely to have economic consequences.

Does this mean the TOPIX will fall? One cannot say. But it is interesting to observe that the impending demographic implosion has caught the prescient eye of Dr Friedman. This will likely mean, whether one agrees or disagrees with the good Professor's social conscience (or lack of one) that these concerns will at some not-too-distant point in the future, be front-page news, and capture the imagination of pundits and investors alike.

Wednesday, December 21, 2005

J-Comm, Mizuho & the TSE (part III)

Practical Market Philosophy Question #217: What's worse for an exchange : (a) admitting an error or mistake and taking steps to justly correct it, or (b) allowing the exchange become of farcical cariaciature of its intention and its members honor?

Yes, I've created a straw man of the the view that I think absurd. But what good does the latter serve with respect to the primary objective and function of the largest stock exchange in the world's second largest economy? How can this possibly represent the interests of the companies that are listed on the exchange without which the stock exchange would be nothing short of a pari-mutuel off-track betting office for the ponies? How can allowing the trade to stand possibly further the conception of a fair and orderly market? One look at the daily price and volume recap of a company with 15,000 Shares outstanding reveals the patent absurdity of anything less than "BUST THE TRADES!".
(Remember there are 15,000 shares outstanding, the float of which is only 3,660!!

12/08/2005 772,000 708,000 (~500,000 lollipops taken from the baby at 572000)
12/09/2005 Not Traded
12/12/2005 Not Traded
12/13/2005 Not Traded
12/14/2005 1,020,000 215 (Bid-only, Limit Up Allocation)
12/15/2005 1,220,000 342 (Bid-only, Limit Up Allocation)
12/16/2005 1,420,000 6,472 (Limit Up - Allocation on close)
12/19/2005 1,620,000 1,622 (Limit Up - Allocation in close)
12/20/2005 1,920,000 1,826 (Limit Up - Allocation in close)
12/21/2005 1,900,000 1,367

It was less than 10 mintues, between the huge, ridiculuous and obviously mistaken offer of non-existant shares and the time when the clever-cats knowingly lifted more than 500 times the shares sold at the IPO. By way of precedent, if your bank makes a mistake and puts money on your account that is NOT yours, you are not permitted to keep it. If you spend it, you are liable. If you are shopping in teh supermarket, and a bag of candy has broken open, that is NOT free booty for you as a shopper to loot. If bags of money fall out of a Brinks truck, it is NOT finders-keepers, irrespective of how irresistible it may seem. Yet, the news media continues to treat this as though "the lucky ones" won the lottery, or "pulled triple-sixes on the one-eyed bandit's grand jackpot" in a fair game of chance. I admit it makes for a wonderful spectacle, and interesting reading as to how a twenty-four year unemployed programmer will spend his windfall, but won't someone, BOJ Gov Hayami, PM Koizumi, Kofi Annan, Billy Graham, SOMEONE, ANYONE please please please just take a stand and admit it is just plain wrong??!!

Friday, December 16, 2005

J-Com ...Ayn's Shame?

Two days after UBS publicly stated it won't keep the gains from the errant Mizuho trade in J-Comm (Code #2462), an eerie silence hangs from the others: Nikko, Lehman Bros, CSFB, and Morgan Stanley. Susquehanna, Evolution Master Fund LP, and Tiedeman by contrast have bot, flipped and gone.

Which got me thinking about whether these people and organizations (ex-UBS) are devotees of Ayn Rand. This, to me, seems the most plausible of explantions for their collective actions: They are devotees of the Cult of Selfishness, which in Ms Rand's eyes is not only wholly justified when pursued in rational self-interest, but benefits everyone and makes them better off. I can hear Ms. Rand's voice with her sour unpleasant dosposition exclaiming her thoughts on the Mizuho fiasco:

"Vot kind of vimpy altruists these Swiss (UBS) have become! Can't they [UBS] see that such actions stem from ze pressure of vot other people think??! Where is their mettle? Where is their resolve? Do you think they become one of the biggest banks in the vorld being NICE to people? Bah!" They are nothing but sissies! Take that firm Morgan Stanley - the one with lots of men who possess chiseled chins, strong capitalist handshakes, an unwavering confidence and resolvein the correctness of their actions. Now that's a firm that KNOWS it's destiny. THAT's a firm which is not held back by insignificant concerns about "intention", "meaning", or "spirit". Nyet! THEY know that THEY are destined for greatness. THEY understand the difference between themselves and the weaker men who suffer from their brain-voshed bonds of altruism and vorry. THEY ALONE VILL RULE THE WORLD BY WINNING AND WINNING AND ACCUMULATING ALL THE CHIPS! VE MUST WIN! WIN ALL THE CHIPS! ACCUMULATE MORE CHIPS! IT IS GOOD FOR THE PEOPLE. DON'T BE A CHUMP AND OFFER YOUR HAND TO THE WEAK. IT WILL POLLUTE YOUR RESOLVE. ....MUST HAVE MORE CHIPS THAN THERE ARE CHIPS! MORE SHARES!! ...MUST GET MORE SHARES THAN THERE ARE SHARES! AAAARRGH DESTINY! POWER! GLORY! AAARGH!!! LET THE SOFT VIMPS VALLOW IN THEIR OWN PITY. MONEY IS POWER IS FREEDOM IS DESTINY IS LOVE IS POWER...."

Ahem. Well as I was saying, perhaps they are devotees Ayn Rand. Or maybe, it's that their lawyers are simply discussing the implications and technicalities of how to bust the trades without setting a bad precedent. Time will tell....

Wednesday, December 14, 2005

Financial Omerta

Where I grew up, several families lived at the end of the street who were reputed to be "mafiosi". They were said to launder money through the local pizzeria they were rumored to own. We would drive by and see them playing bocce on their front lawn - damning evidence for a naive eight year old. And so my innocent mind started thinking about "Fat Tony", "Big Nicky", the Godfather, honor, and their renowned code of silence, "omerta". I took comfort in the fact that while their code of Omerta made them virtually impenetrable, their honor made it a crime to harm innocent women and children.

In a related subject, most have read and commented upon Mizuho's "J-Comm error" where, upon initial listing of the shares, a now-shamed execution trader entered an incorrect order that offered to electronically sell several times more shares than were in issue, whereafter the more astute brokers/traders, with the deepest pockets scooped up the shares. In another situation, this would have been termed "a perfect corner" - the trading equivalent of "checkmate". Subsequently, Mizuho's shares themselves were violently sold off until because of the potential fear of an open-ended (or at least half billion dollar) liablity. Then they rallied as it was said to be the Exchaange's problem, and then Fujitsu's problem (who responsnible for the stock exchange's computers & software). Either way, particpants saw it in terms of black and white, winners and losers while ignoring the spirit of the rules and the intention of the game itself.

People forgot that "a corner" is against the spirit of the exchange, and illegal. And they forgot that an obvious and genuine mistake of this magnitude is...well... an obvious and genuine mistake. This was pit against honor, word and reputation, that are (or used to be) nearly everything in banking and financial markets. Commentators offered their amazement that it could happen and gawked over the potential profits of the successful bidders (more than 3 years worth of ordinary trading profits for UBS, it was reported!!) but were wholly silent upon the ethics.

But today the "omerta" was broken (at least by one), ironically by UBS the firm who got nailed by an identical error following the IPO of Japan's largest advertising agency, Dent-su. They announced that they had no intention of keep "the profits" from the transaction. Others profiting wildly, Nikko-Citigroup (the underwriter, no less!!) Morgan Stanley, Lehman Bros. and CSFB have, as of this moment, "no comment".

Why it was UBS iis uncertain. Perhaps because they profited most. Perhaps because there is residual guilt from WWII, and their illustrious record highlighted by the Volcker report. Why it took so long, I do not know. One would suspect greed or avarice, driven the same drunken euphoria that one might encounter if "a few hundred million dollars" fell at one's feet off the back of the Brinksmat truck. It might take a short while to come to one's senses that it is WRONG TO KEEP THE MONEY. That it's SOMEONE ELSE'S MONEY. That money doesn't, so to speak, grow on trees (though it seems that way following the great American debasement of the dollar over the last two decades).

A similar error (and subsequent trabsactions) in the shares of Corinthian Colleges (ticker COCO) in later 2003, that resulted in a far smaller loss, and that was far less obvious of "an error" was "busted" by the exchange in but a few hours. Is this because the US exchange has less "honor"? Or less "integrity"? In my Nov05 posting "Responsibility 101", I highlight some of the cultural aspects that suggest things are indeed different between the US and Japan, with the US distinctly erring on the side of utilitarianism and self-interest. While no one is suggesting that exchange authorities too-frequently exercise role-playing of "the Almighty", there is clearly a time and place to wield and exercise such over-riding power. And in a modernity where participants cannot apparently distinguish between right and wrong by their own volition, it is ever-more incumbent upon the authorities to take decisive action.

Tuesday, December 06, 2005

United Arrows' Xmas Present to Investors

United Arrows (TSE Code 7606) is a well-run, rapidly growing, Tokyo-based clothing specialty retailer thought highly of by investors, analysts and customers alike. By way of full disclosure, I am not conflicted by having a long or short position one way or the other. With that out of the way, I would bring to your attention that their Board has done something quite unusual, and it might even be said, magnanimous for their more performance-conscious shareholders: they have announced a more-than 1.5 million share buy-back (almost 7% of share outstanding) to be completed between today and December 27th.

My first thought was "Hallelujah & Merry Xmas!". My second thought once the emotion had subsided was: "How Generous!" and what a coincidence of timing to announce the fixed-period repurchase of 6.3% of your stock at the most illiquid time of year. Then I noticed the caveat: they'll only buy shares at YEN 5208, and not a YEN more. Which is fine except that momentum and growth investors have pushed the stock towards the more lofty level of YEN 7000. Bah Humbug!!

But what does this really mean? Yes, the company has put a 25% stop-loss under the current share price. Is is it simply public relations? Or are they trying to buy it on the cheap by suckering in a large and unwitting shareholder into selling at a discount? Is it a statement about the current value of the company? Is it a statement about the Owner's / Manager's / Board of Director's (yes they happen to be one and the same) view of prevailing fair valuation? It would indeed be novel for them (as owners of stores selling clothes fit for an emperor) to come out and say that "the emperor has no clothes" so to speak, or in this case that he is "over-dressed". After all, the stock is trading at quite lofty multiples (36x FY06 and 31x FY07 consensus EPS) for a company with forecast growth of 15%. It must be considered, however, that the Board are simply sophisticated and experienced stock market operators, and that YEN 5,208 is simply the result of hard, cold and objective analysis. It may be the modeled liquidity discount that a small-float, highly accumulated and probably-over-valued momentum stock would command in the open-market if such a cmparably-sized shareholding were to be sold in the open market and predatory traders were able to sniff it out. Nothing pejorative intended, nor insulting towards the foreign growth aficionados who see diamonds where others see quartz.

Perhaps I'll put in a call to the founder/owner/manager Shigematsu-San and ask for the real skinny....

Friday, December 02, 2005

Educating Riso

I have an interesting story about Riso Kyoiku (TSE Code# 4714), a humble family-run private education company running ju-ku, or cram schools, not dissimilar from America's SAT review courses. It is a story that Elliot Spitzer should be interested in for it exemplifies just how far the investment management business has travelled. But more, It is a tale that reveals the sordid impact of what this reality has wrought. But to fully appreciate it, one needs race through my short course in Financial History from 1979 to the present.

[fade in to an Appalachian-looking cottage with Hay-seed (yours truly) playing banjo on the porch with a mongrel dog buzzed by flied at his feet, and a 1955 Buick upon on blocks in the yard] A long time ago, when I was a boy, in the good old days, when Republicans were socially conservative, AND fiscally conservative (but no less un-hip), a healthy tension existed between those who might have thought it wise to short a stock, and those of a more bullish persuasion who were inclined to buy it from them. They were innocent times. No channel checkers. No one rummaging through your rubbish or supbeoning your e-mails. No hedge fund analysts running around trying to interview disgruntled employees, count cars in teh factory parking lot or bribing doctors affiliated with clinical trials in order to obtain material non-public information. Investors, even large ones it must be said, generally bought stocks because they thought (for better or worse) they were good investments and that their prices would go up in the future because others would recognize the same. And while some even made money in this good old-fashioned kind of way, few bought stocks with the intention that they would make them go up come proverbial hell or high water.

I don't believe there is a clear line of demarcation when money management moved from the discreet rooms and plush carpets of the Trust companies and boutique patrician firms to the big-time, but it probably began in earnest once the horrors of Volcker's bloody massacre of inflation began to dissipate and Reagan's great democratisation of credit providing 24-7 leverage to the masses really took off. These were good years. Vietnam and oil shocks faded, as did "day-glo" and bell bottoms (thank god!). Pony-tails were cropped. House prices rose. Ordinary middle-class Americans began to save, but had very little knowledge or savvy about what to do with it. Not that the rich had any better clue, they simply had enough of the stuff (money) that substantial amounts were left over once the Trust Co had helped themselves such that it didn't matter. And besides, it was bad form to haggle over price as folks at the club might get wind of it and think that one was having "problems".

Recall that CD's were considered bold financial innovations, brokerage commissions were only recently deregulated and the mutual fund was still a novelty. Those who invested directly in stocks typically suffered from bad halitosis. With double-digit interest rates and single digit PE's (that had been double-digit themselves not long before), equity mutual funds were clearly NOT the au fait topic at cocktail parties. Not in 1981. The boom may seem obvious in hindsight (as it always does). The first movers who seized the opportunity grew to inconceivable size - something few could have dreamed of only a few years earlier watching President Carter deliver his "Malaise Speech" in that dark cardigan. If they had been able to conceive of it, maybe a Johnson from Boston, rather than a Kennedy from Chappaquidick would have resided in the large white house atop Pennsylvannia avenue.

With this growth came lower fees. Explicit ones, at least. Granted they wer not much lower, but they were lower. Mostly, however, the heady growth just meant pots of money for the investment management company. But there was competition. Someone was always doing better, and when they did, money flowed to them and THEY grew at a faster pace. Don't shed a tear for the others though. There was plenty to go around. At the same time came Wall Street's resurgence. Greed was Good!, Gordon Gecko told us. MBA's, CFA's, VC's, CEO's, PhD's, all setting their sights on the pots of gold were followed by LBO's, MBS's CMO's IPO's, QQQ's and ECN's. Of course there were some minor setbacks (1987 & portfolio insurance, Gulf War I, LTCM, 9-11), but for the most part, money and credit were easy, easier, and easiest and more or less has remained that way to this very day. Wealth was created and had to be invested. Firms grew, and either ate or were eaten to become ever-larger and more powerful, controlling larger percentages of assets. And this is the opportune moment to point out that the combination of ambition, power, and buckets of other people's money is a certain a recipe for folly and possible financial calamity.

Fast-forward to the miliennium. Jerry Garcia is dead. Johhny Cash is playing a cameo with a grunge band. Netscape, THE Bubble, Enron, WorldCom, Adelphia, Janus "20" Fund, all were tell-tales of "something" in people and America that many obserrvers still seem not to have fully grasped. Games (big games!) were played. Sometimes well (by Jeff Vinik and Cap Research), some less well, like Janus, who let (and encouraged!) investors to pour so much money into the Janus-20 Fund ($30 billion?+) ostensibly focused on "their twenty best ideas" that the annointed stocks therein powered to unimaginable heights. And like Gerry Tsai before her, Helen Hayes was presumed a genius (as was Ameriindo Vilar & First Hand Landis)! Yet there wasn't a one article in Fortune, Forbes or the Wall Street Journal that questioned the wisdom (or queried the market price impact impact) of focusing multiple billions of dollars of liquidity upon non-megacap stocks through open market purchases. Nope. Performance was self-attributed to "amazingly perceptive research analysts" ("one step ahead", we were fallaciously told) and prescient portfolio managers. Kahneman & Tversky have words for these people, and they are technical and not pejorative in nature. But I too have words for them....less techincal... and more plebian descriptors: fraud and stupidity. Not because in 2002 it all went horribly wrong leading to the [deserved?] near-destruction of Janus, but because it was ill-conceived and cynically dishonest from early on creating a redistribution of wealth from those whose need for it in the future will be more, to those whose immediate need for it wasless. And if it wasn't premeditated and cynically dishonest then lord please have mercy upon their very stupid souls!

But what does this have to with the saga of Riso Kyoiku, the humble operator of 50 or so juku schools in and around Tokyo? In the post-bubble meltdown that also hit Japanese stocks hard, Riso was minding it's own business, and fairly well one might add. It had grown it's business beyond many peers and as ambitious people do, garnered a TSE listing. This is not unusual as most juku operators in Japan are for-profit, and numerous are publicly listed - some more time-honored, some more aggressive. Sometime in 2001, the "for-profit" education theme captured the imagination of US investors and the few available stocks had their growth (much by acquisition and in hindsight less-than-scrupulous enrollment methods) were rewarded with doubles, triples, and more. UOPX, APOL, CECO & COCO were present in almost every growth, momentum, and thematic portfolio. By the end of 2003 the private education theme was, as they say "white hot". And so in early 2004, it spilled over to Japan.

It's is hard to know whether such the decision to select and ramp Riso is the result of a mechanical formula for choosing a few active-weight companies which will be annointed "The Ones" (like Neo in teh Matric), chosen above those of its brethren. Perhaps they throw darts. Maybe they write the co names on slips of paper and stuff them inside a paper mache donkey and have a pinata party (the Senior Portfolio Manager getting to swing the bat first?). Maybe it's the sector analysts' call and they, in fact, choose meritocratically on fundamentals. It's only of passing interest and once the stock passes the two-bagger level, matters little to the outcome. As it happens Riso does have growth (both historical and forecasted). And this growth is forecasted to be higher than peers. But this is independent of the cynical disregard for all decorum (and probable legality) in what happened next.

In this instance, the very large American fund management company chose Riso. And they chose. And they chose. And they continued choosing. They chose it for their value funds, their growth funds, their global funds, their country funds. They chose it on Mondays, Tuesdays, and Wednesday, as well as Thursdays and Fridays. For Riso (and it's owners), this must have been like winning the lottery, for they sold some shares. And from when they began choosing to the end of the first quarter, they had taken Riso from YEN 2,500 to YEN12,500 (on a split-adjusted basis). A significant and eye-popping amount of this performance was the first of three following a large stock splits (see my previous post "10 Divided by 1 = 3", for an explanation of the split-ramping anomaly) which must have. This must have been welcome news to the American Co's various portfolio managers who held this previously unknown nano-cap juku operator, and even though their holding may be small, even a 25bp position that quadruples in value can contribute a potentially quartile-changing return.

But things were to get even more curious. By end of Q1 2004, humble Riso was sporting google-like valuations (and returns!). It was quite obviously was no longer a value stock, yet it remained a member in a myriad of style contradicted funds. The owners sold a reasonable number of shares which were apparently hoovered up by "interested parties" who by this time had filed with authorities of >5% ownership. The stock price came off to near it's pre-split ramp price (still 2.3x, it's price at the beginning of the ramp), but leapt to a new high just eclipsing its prior high on the back of rises every day in Jun4 2004 which coincided with this investor acquiring another 6% of the company. Following this quarterly pump, the price again dumped 25%. But a combination of another round of splitting, split ramping, insider sales, and accumulation by interested parties who raised their stake by another 5% to nearly 15% of shares outstanding or about a third of the free-float, took the stock up 27% in the last of Aug, and other 15% in Sept to conveniently set another new high for the end of Q3 2004. Maybe it was causual coincidence that they increased there stake so substantially at higher and higher prices which coincided with important fund valuation periods and random perhaps, but curious all the same. But as an observer of randomness, I have my doubts.

The price fell back 30% into Q4. Maybe this large shareholder was lightening up.
Maybe they were trying to send a message to management that while they have mutual interests in seeing a higher a share price, they will NOT buy any more stock from the owner & family at these high prices. Perhaps the message hit home. For in Q1 of 2005, the co. announced yet another split, vaulting the shares another 35% back to their prior highs. Since then, the American investment manager so enamoured prior, has cut its ownership by more than half to Q3 2005, and the price has nearly halved. One might wonder what would happen to the share price if they unloaded the rest of their position.

But what this is about is our tolerance of obviously manipulative behaviour, without investigation, or even a footnote in the financial, academic or regulatory press. Martha Stewart went to jail for far less (not that I approve of what she did). And the thing is that YOU can't do this at home. And it is a direct result of the size these firms have reached, the placing of their parochial interests as an investment manager in front of the interests of their shareholders and their role as a fiduciary. THIS is where financial history has taken us. THIS is the sad result of size and questonable ethics upon markets. And everyone is poorer - except Mitsugu Iwasa - Chairman and founder of Riso, who has indeed seemingly drawn four aces from his relationship with his institutional investor.

Topix 2nd Section Hits All-Time High

Pop the champagne corks everyone! In a little noted event the TOPIX Second Section index has surpassed YEN 4500 in latte November, and thus has clocked an all-time high! That's right, higher than in early 1990 when a a handerkerchief-sized piece of Tokyo was emminently more valuable than the entire Isle of Sheppey.

According to Bloomberg this equates to 121x trailing earnings, 26x forecast earnings, 1.6x book and 8.1x cashFlow. These remain undemanding by way of comparisons to the US market (S&P's "MID" Index stood at 20x forecast earnings, 2.6x book, and 11.4x cashflow). On the other hand, this is Japan, and the owner of many TSE2 securities also finds themselves essentially as a minority shareholder.

Should this command a discount? First thing to remember, despite all of the hyperbole surrounding change in Japan is that in Japan's version of Capitalism, the Shareholder is but one constituent alongside, but not necessarily superior to, workers, customers, suppliers, and government and the community at large. The SHareholder is becoming more important, but doesn't sit atop the pile by any stretch.

Second thing to remember is that as a minority shareholder, one is often "taken under" rather than taken over. This is to say that the minority shareholder seldom achieves fair value when consolidation, divestiture or acquisition is taking place, since these transactions are typically done in the interests of the controlling shareholder. This is far from the situation in America, and warrants some nebulous discount. How much? Who knows. Damodaran has some novel views on this and would be wise to consult his site on my links sidebar.

But my main point is to bring attention to the tardiness of the media's recognition of "Japan's Re-Emergence", and phenomena more than three years old, and as the chart above indicates, far far less cheap than it was but 24 months ago. Bargain hunting? It may be wiser to start in Korea, or at least be very discriminating when looking at the fruit that remains on tree on the TSE.