Friday, December 22, 2006

How Do You Hide an Elephant

Being a fly on the wall means that sometimes one has to make conjectures, hypotheses, and suppositions in order to attempt to make sense of the world. For things are often not what they seem.

And, nowhere is this more germane than in the case of reporting large positions to stock exchange regulators around the world generally, and in Japan particularly. Japan seemingly has a love-hatre relationship with transparency. Reading who has bought what and when was a fascinating exercise. On one hand, ownership changes were only detailed twice a year, and even then, only the larger holders either through the YuHo or Toyo Keizaei. So it was long after the fact that one realized who had bought the slugs of stock that vaulted the price an issue by triple digit percent. Yet, at the same time, turnover identification was available on each stock at the end of each day. This was a dead give-away as to whether purchasers were foreign or domestic, sporadic or persistent. The strange mix of obfuscation and transparaency juxtaposed each other.

A few years ago, the authorities decided, for unexplained reasons, not to "fix" this, but to turn it own its head, by eliminating the revelation of who was responsible for what percentage of turnover in a security on a particular day, while instituting a requirement to report ownership positions in a security greater than 5% (and thereafter) within some timely interval that is apparently indecipherable when reviewing the very wide variety in reported actions and compliance. Now, one couldn't see the day-to-day colour (rumours were that it was Fidelity and foreign brokers who successfully lobbied for this at a time when transaction volumes were very low, an intimations of an increase in turnover following a decrease in transparency).

The position reporting game reveals information that can be beneficial or detrimental depending upon ones objectives and motives. For example, if you are trying to buy 10% of a company at the best prices, reporting after 5% is not in one's interests. On the other hand, if one intends to buy 10%, having bought 5% at lower prices, disclosing the position might attract copy-cat buying that is beneficial from the point of you of having "the market" do some of the subsequent heavy lifting that raises the price, making the initial 5% rather more profitable and validating the purchase decision. However, if one desires to acquire 10% before encouraging the copy-cats to pile in, then reporting requirements clearly creates adverse issues.

When reporting was first enacted in I believe 2003 (and foregive my imprecision as my memory is fraying), Japan was not popular with international investors. In fact, most were underweight from a GDP adn a market cap weighting for all manner of reasons. But for the few who were operating, it revealed valuable information about who was ramping what. It mathced the proverbial name to the face. For when Fidelity was buying a truckload-sized position, a potential short-seller would be wise to recall the words of Jim Croce: "You don't tug on Superman's cape, you don't spit into the wind, you don't pull the mask off that ol' Lone Ranger, and you don;t mess around with Jim!".

Some [foreign] organizations have taken the view that they'll report quarterly, some time after the end of the quarter. And it seems that despite the apprent flaunting of the letter of the regulations, no action has been taken in customary Japanese fashion. Others such as Steel Partners, have complied for obvious reasons that publicizing their now-greater-than-5%-position attracts other buyers hoping for a quick buck. But now, it appears even the "big boys" are fed up with the annoyances of reporting. For beginning last quarter or so, it seemed that rather than institutional investors accumulating positions and reporting them as they accumulated them, brokers were accujmulating them, and anecdotally, shortly thereafter, the broker would report a drop in the position and a "real investor" (Fidelity, Cap Research etc.) would assume ownership. Now, IF I am correct and they are using these methods to obfuscate ownership acumulation until they've achieved their desired quantities, they must in order to do this, be using some option or derivative structure that technically complies with the regulation, but is contrary to the spirit of the regulation. This is of course, the raison d'etre of much of the derivatives market, but nonetheless is disturbing for those that are cannily trying to unmask price manipulations of all variety for fun, public interest, and profit.

The technology exists of course to ascribe meaningful ownership changes - and thereby the potential misuse of material non-public information - with precision and regularity. Bearer shares exist no more, and info is there for public consumption. When will Japanese authorities codify and enforce such regulations with the efficiency we've come to know and admire from this nation? Hmmmm. One would have thought that the Horie affair would have provided sufficient mpetus for change. But shenanigans certainly continue amongst powerful domestic interests, and in such an event, one must wonder for the like of Softbank and others, what unsavoury deeds might be revealed or disrobed in the process.


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