Friday, May 26, 2006

The MoF as Radio Moscow

I have been an information junkie ever since I was a wee lad. I was the proud owner of a 100lb "Hallicrafters" shortwave radio set with more dials than a kid could imagine or ever want. I become so enthused with listening to the far and exotic edges of the earth (way before Hubble, Skylab, the Shuttle or the Internet) I graduated to a wonderfully sophisticated, Japanese-made Yaesu, and today still, I never travel anywhere without a small Sony to - at the very least - allow me to stay tuned to the BBC World Service.

It is important to point out (at the risk of showing my actual age) that this was during the height of the ideological cold war between the "west" and "communism". A time when people wrote and sent "letters" and still others actually answered them. "Aerogrammes" were the preferred mode of contact for boy pinching pennies. The Amerians, too, invested in radio propaganda (in the overly nasal and earnest "Voice of America"), but their efforts couldn't match the sheer weight of Soviet & Chinese efforts to persuade anyone in the english-speaking world of the inherent superiority of People's Socialism or Communism. Radio Habana Cuba, Radio Praha, Radio Moscow, Radio Kiev, Radio Bucharest, Radio Peking, and the most outrageous and hilarious of the lot, even to a twelve-year old, Radio Pyong-yang. They all were keen to share the heroic exploits of Tractor Combine Factory's #5 production triumphs, or wade into the peace-loving benefits of SS-17 Warheads vs. the evil Neutron weapons the US desired to point at the East flank of NATO. My powers bullshit detection were greatly heightened by the exercise of trying to triangulate "truth and objectivity" from the various sources of news all with differing views on the same event. Whether listening to Radio Pakistan vs. All India Radio's take on the Indo-Pakistani war, the Voice of Chile's pronouncements on the wondrous and benign regime of General Augusto Pinochet, or the Afrikaaner's hardened view on the dubious merits of Apartheid, there was rarely a dull moment when one's bullshit-o-meter could be turned off. And so I sarcastically adopted "Radio Moscow" as the metaphorical label for the obviously kitsch untruths & utter crap that one might encounter.

So what does this have to do with Japan, stock markets or the MoF? The NHK, Japan's National broadcaster, was, after all a relatively unbiased (if unprovocative) source of internatonal news and opinion. The connection is that Sadakazu Tanigaki, the Minister of Finance, is talking pure crap-ola about deflation and the impact of Yen appreciation and higher interest rates upon the Japanese economy, and he must be held accountable and internationally shamed for his persistent perversion (surely I mean sub-version??) of the truth. This has earned him my "Radio Moscow" award for this week.

For Bloomberg reported today that Chief MoFo Tanigaki (and other ministry officials) wentr on the offensive by saying that depsite six months of positive increases in prices, deflation stil, persists in Japan. "We still can't say that the economy has emerged from deflation", he said. Chief Cabinet Secretary Shinzo Abe, in pole-position for Koizumi's job, echoed this populist sentiment by saying: "Today's report [+0.6%) confirms deflation isn't over". What they are cynically, if not intentionally ignoring for Japan's marginal but parochial gain, is that international capital flows are more or less free and open. Sitcking to ZIRP when things are rather obviously booming in Japan is akin to leaving the tap open in the bath and letting the tub overflow. But because of the nature of relative interest rates, Tanigaki and the Japanese are metaphorically living on the third floor apartment, and all the liquidity is falling through a hole in the causing great damage to the flats below. And when we yell upstairs "HEY! W.T.F.??!!", we get Tanigaki, Abe and friends of MoF & LDP doing their Radio Moscow imitation "...leak? What leak....?"

Tuesday, May 23, 2006

The Forest & The Trees

All too often, one's sense of perspective can get lost. Occassionally this results simply from the passage of time, while in other cases it is the result of deeply held opinions that one cannot jettison or merely happenstance that has in some Darwinian way, survived. Whatever the cause, accurate perception of current reality may be the resulting casualty it occurs.

One such example is the 10-Year Japanese Government Bond ( the "JGB"), seen here depicted in yield terms (courtesy of Bloomberg Professional) in the chart below. The JGB's yield (if one can really call it yield at all) has been SO low, for SO long, that people have stopped questioning whether or not it should be yielding thus. They have been ground down, and rather are worn out. In this respect, the MoF has won. But the cruel irony of financial markets is that the game is NEVER over. They have won but a round, an inning, a frame (maybe even several), but not the game.

Some of you may then ask: "where it is going from here?" I would suggest the answer is rather obvious, jumping off the page. So obvious (when one looks at it from afar) irrespective that people have stopped asking the question of it's proper yield; ignoring that hedge funds have stopped shorting it; and despite the sight of the BoJ AND the MoF patting each other on their backs in salute of their "victory" over trade surplus-related YEN appreciation, one's conclusion can only be that JGB yields are going higher. And they are going higher, make no mistake, because of six-years of ZIRP and 7%-of-GDP fiscal gaps. Just look at it for a moment and ponder the possible alternate realities of the future. 4% (at least!) by the end of 07' is my variant vision of the future.

Monday, May 15, 2006

Greenspan's Shame?

I was snowed-in, high in the Arlberg so I missed this gossip in Mark Thoma's Blog "Economist Voice" that Alan Greenspan, not more than two weeks retired as Chair of the FRB, was giving a private briefing for a few of Lehamn Bros privileged few. Fortunately, this subject was raised to my attention last night and I must admit to being rather astonished. More worryingly, I must admit to agreeing with Bloomberg's feisty conservative, columnist, Caroline Baum. Yes, I think that there is something wrong with the former Chairman of the Federal Reserve Board giving a private chat to the 10 or so largest gun-slinging hedge fund managers, including Moore Capital's Louis Bacon and Tudor's enigmatic namesake, Paul Tudor Jones.

First let me say, I have nothing against hedge fund managers, per se, since I AM one myself. And I must quickly dismiss the notion that I might be jealous, since I neither trade nor speculate in bonds or currencies. So what is it that Mr Greenspan has done by trying to earn a few honest quid that so gets my proverbial goat? After all, supporters of Mr Greenspan (as well as the priviliged few attending the private speaking engagement) will quickly point that no laws were broken (to which I argue not). And unlike other critics of his private briefing with the kings of hedgefundland, I do not think it is even against the spirit of the regulations and directives governing what he may or may not do.

But yet, a horrid taste remains in my mouth, for reasons not mentioned by Ms. Baum or by Dr Thoma & friends in the "Economists Voice" post. Dr. Greenspan should NOT have given a private briefing simply because he should not allow it to appear that markets are "rigged", "unfair", or "undemocratic", by holding private court with the wealthiest and most powerful investors in America, and possibly the world. This is a very unhealthy thing for a market economy predicated as it is by attempts to insure fair and uniform public disclosure of information. This directly relates to confidence of the people in the integrity of markets and money itself, and former government officials should have an obligation not to jeopardize THIS spirit in any way shape or form. They must be beyond reproach.

It is even more offending that Dr Greenspan has - whether intentionally or unintentionally - raised the spectre of unfairness in financial markets for the paltry sum of $250,000. I appreciate that this amount is greater than Dr Greenspan's ANNUAL salary as Chair of the FRB, but in relation to the worth and value of even insigfnificant mutterings in private, this amount is laughably small. This amount, split between the wealthy and powerful hedge-titans is a rounding error on a morning's interest. This is not meant to imply Dr Greenspan should sell private potentially valuable information to the highest bidder, but it is meant to put into perspective that *IF* he were to do it, the price should be much much higher.

I have no problem with Dr Greenspan speaking to capitalize upon his hard-earned notoriety after years of public service at an admittedly lower-than-market-value wage. But this should be honorary keynote stuff; graduation-day speeches, motivational lectures; academic philosophical discussion groups; or in the least televised, media-fed, OPEN lectures with open and transparent Q&A's for everyone's consumption. We don;t own Dr Greenspan, or his still lucid and keen mind, but he (and other public servants) with information that could remotely be construed as priviliged have a public repsonsibility to insure that the decorum of fairness and equal access to market information is upheld. This private "briefing" for a privileged few movers and shakers miserably failed THAT smell-test.

Friday, May 12, 2006

Dumb, Dumber, Dumbest

In the interests of economy I will sacrifice eloquence for speed today in my attempt to highlight one of the more interesting characteristics of recent Japanese price action: From the point of view of return relative to the average security, the only thing worse than being a high-momentum stock is being a low momentum stock.

This is say that "High-momentum" stocks - that pool of securities outperforming all others in terms of price return during the prior formation periods - has done very badly indeed since the beginning of the calendar year. This is true across all formation periods - short and long alike. With negative returns running from between 12 and 20 relative percent.

there are few fundamental factors or pockets that have done worse than that and many of your favorite Japanese long-only and hedge funds will be reflecting this fact, since the only way pedestrian stocks get to graduate to the elite high-momentum gentleman's club is by your not-so-selfless agent/portfolio manager buying them, and buying them and buying- most likely at higher and yet-higher prices. Now before you excoriate (or excommunicate) them, let it be said that the adept may have gotten out, and their gains on the way in may exceed their losses on the way out. Jeff Vinik is a fine an example of such an adept player.

But what is fascinating is that perhaps the only thing that has done worse than extremely buying extremely high momentum (in any formation period), is buying extremely low momentum, again in any every time frame where negative returns have ranged from -20 to -30 relative percent since the beginning of the calendar year. This is even true for short-term horizons which have historically been fertile places to look for "a bounce", "bottom fish", or "catch the falling knife" with some moderate success.

So what is one to make of it since, every financial advisor is jolly-well smitten with Japan? Well "momentum" is conceptually vacant. Today's high or low momentum is different than last month's high or low momentum and they may reflect highly contrasting phenomena. Some may be "justifiably high or low, and some may not. At the moment, I would suggest that the immediate future will remain difficult for BOTH high and low momentum. BOTH are expensive, with the current Class of 2006 high momentum as highly valued as the ignominious class of 2000 (and we know what happened to them!). But low momentum, while often a nice place to scour for tomorrows' undervalued darling has a decidedly pasty fundamental pallour. And while there may be some hidden gems, buying underperformance or low momentum as a matter of course is likely to remain unrewarding. Finally, for the ever-popular players of the "good-stock/bad-stock" game, the risk is likely to be elevated relative to the pedestrian expected returns and so one is likely to see their favorite Japanese quality-biased long-short manager underperform the more adept and forward-thinking one. We are likely to be entering a phase where avoiding the wrong stocks (proverbial potholes and torpedoes) yields far more relative return than selecting the right stocks.

Monday, May 08, 2006

The Best Little Stock Trader in Japan

Nomura securities reported yesterday that the BSPC (Banks' Shareholdings Purchasing Corporation) suspended new purchases as of the end of April 2006, though it may continue to puchase securities for it's general account up until the end of the window permitted by its articles of association. This follows nine rounds of purchases of shares from Banks that commenced in Feb 2002 up through the present - most of which were cross-held shares that financial institutions desired to get off their books to minimize the variability of their core capital due to the vagaries of share price movements.

To date, the BSPC bought an aggregate amount of YEN 1,586.6 billion (at cost) worth of shares (USD$14.3 billion at today's exchange rates). This is only a smaller part of the total shares bought by the various Japanese authorities and agencies (including the Daiko henjo pension givebacks; the Bank of Japan's purchases (The DIC - Deposit Insurance Corporation) from failed financial institutions, as well as those whose ownership was assumed when other failed institutions were nationalized. But if you think this was a charitable undertaking - think again. Impressively. the BSPC is believed to sitting upon
YEN 1,000 billion of unrealized capital gains, making them one of the wildest financial gunslingers in the world surprassing the HKMA's feat of buying copious amounts of stock to support the market during the Asian Crisis of 1998. Yes, that's right, YEN 1 Trilion (USD$9 billion in market-to-market gains at this morning's exchange rate.

So will this stock find its way onto the market anytime soon, and rain on the bullish party sweepiong Japan? Legally, the Corporation must be dissolved by 2017, and they claim to have no immediate plans to sell stock. But if you're looking for a large line stock, perhaps you should give them a call...