Friday, June 30, 2006

Tanigaki: "Elvis Lives!! - ZIRP Forever?"

Bloomberg reported today that Japanese core prices rose 0.6% YoY in May, their 8th consecutive monthly rise, while the unemployment rate fell to 4%, the lowest in eight years, and certainly the lowest amongst their largest OECD peers. Housing starts, too, increased robustly. That is EIGHT years and FOUR percent. But this should come as no surprise. For the government continue runnning a fiscal gap equivalent to nearly 7% of GDP, while the BOJ still has their discount interest rate at about ZERO. But "Why" do they persist with what is arguably a most reckless fiscal and monetary policy ?

Because they are cynically selfish and not "team players" in the international sense. Because they are intent on winning and holding market share in classic mercantilist tradition, through policies that overtly manipulate the exchange rate. They rightly (though selfishly) believe it is better to subsidise employment than unemployment, though any economist (most certainly Keynes & Triffin when they sculpted the Bretton Woods system from the ashes of WWII) would tell you that this is a classic example of a fallacy of composition whereby what is "good for a part" is not necessarily "good for the whole" [system]. They are are beggaring jobs, employment, and thus wealth over and above what they have rightfully earned from others.

So what will Tanigaki and Koizumi heir-to-be, Abe, do to spin this one? Well it seems PM Junichiro Koizumi is taking it very seriously indeed. So seriously that he's making a special trip to the USA. To see the Treasury Secretary & the President? No stupid! To commune with the spirit of Elvis at Graceland! This of course makes eminent sense for both Tanigaki and Elvis are shrouded in mystical denials and each harbour a "big lie". For Elvis, rumours abound that the "King Lives". But we all know that's horse-shit. Tanigaki's big lie is "Deflation still haunts Japan and so Japan can tolerate neither a stronger Yen, higher interest rates, nor lower government expenditure. This too is complete total utter rubbish. He knows. I know it. And most economists with an ounce of objective reality know it too. But in the eyes of the international community, especially voodoo soulmates in Washington, this can be defended, if implausibly, and so allow Japan to continue keeps rates absurdley low and fiscal gaps absurdly high, in comprison the reality on the ground, and thus ugli-fy the Yen, to maintain competitive parity with the Asian big-three of China, Korea & Taiwan.

So what happens now? The BoJ is worried. Or rather concerned. In a distinctly Japanese sort of way. Gov. Fukui remarks daily upon the future repurcussions of current policy blunders, but these are limited to Japan (fears of over-investment etc.), and not "the global commons". And the pressure to NOT go against the grain, and disturb the harmony of the nation by neutralizing Japan's self-serving parasitic policies is strong. But the pressure will continue to mount on Tanigaki, for HIS denial is looking more ridiculuous. So, he will marginally relent and "allow" the BoJ to raise rates, albeit too little, and too slowly to make any difference except quell criticism (whichh they detest). Such half-hearted moves will be yet another indication of their measured parochial cynicism at the expense of the rest of the world - something that has come to be expected from our Japanese allies. Indeed, with friends like this, who requires enemies?

Tuesday, June 20, 2006

Mr Fukui Ups the Ante

Poor Toshihiko Fukui. Fresh from losing the ZIRP tug-o'-war for the hearts and minds of Japanese people with Chief MoFo Tanigaki, he found himself under intense scrutiny for his investment in MAC, the investment fund of now-disgraced pseudo-activist and admitted insider-trader Yoshiaki Murakami. No doubt this was egged on by the MoF & Tanigaki, and while people like former intervention hot-hand Eisuke Sakikibara said there was no malice involved, he admitted it was rather careless and dumb of Mr Fukui. Clumsy indeed, but if Mr Fukui desired to enrich himself, just imagine how much he could peddle his material non-public information to someone like Mr Tudor, Mr Kovner or Mr Moore. No! He is an honest, loyal, if a bit naive, public servant.

And Mr Fukui has done Japan Inc. well. For he has steered a true course in comparison to that Mr Hayami, and achieved the objectives set out by the boffins. But now he has a problem. He has become distinctly uncomfortable with the policy and its longer-term impacts, both upon Japan and the US and he wants, shall we say, tack. Unfortuntely , Mr Tanigaki is minding the mainsheet, and in so doing is doing his best to prevent any change of direction.

And so today, Mr Fukui seems to have had enough and in upping the ante in teh BoJs battle with the MoF, has declared, according to Bloomberg news, that there should be no delay in implementing the change in policy. It doesn't get any more explicit than that. Now, I wonder if the MoF will produce some incriminating photos of Mr Fukui or send some tattooed types to loiter around the foyer of the BoJs fine edifice.

Monday, June 19, 2006

Central Banks Behind the Curve??!?

Debate is raging: how bad is inflation? Is the the Fed "behind the curve"? Are inflationary expectations picking up? Perhaps, some ask, inflation is only a problem amongst Aspen ski homes, tins of Beluga caviar, and Harvard tuition??!?

Another fracture in arguments supported by inflation apologists (IMHO akin to Creationists and evidence tallied by Darwin and, for that matter, all science) was hammered by a private auctioneer in the form of Gustav Klimt's portrait of Adele Bloch-Bauer, that sold to a museum affiliated with the Lauder family for a staggering sum of USD$135,000,000 dollars.

The apologists may argue that this was a "special picture", and was "unique". But aren't they all? The point is that each new record is an important tell-tale that says: Money is increasing in quantity faster (and accujmulating in more concentrated fashion) than the general increase in GDP. Today it's a Klimt. Tomorrow it will be your haircut, and your bag of crisps, and the quart of milk.

Wednesday, June 14, 2006

Tokyo Momentum Update

While the Average stock in Japan is down about 16.5% CYTD, and the indices have shed nearer to 20%, little has changed insofar as investor preferences, at least as they relate to momentum. One-month, three-month, six-month twelve-month, and all flavours of formation period in-between, have maintined their "spread" out-performance between the best-performing and worst-performing deciles of stocks.

This is curious if only because there has not only been enormous liquidation and margin-puking going on, but mperhaps more importantly, other major world bourses, most notably the USA have seen their 3,6,12 & 36 mo momentum spreads get absolutely crucified by a magnitude of 25% - numbers not seen November 2002 and January 2001. As a result Calamos ( doyens of uber-momentum), and heirs apparent to Navellier (TOP20 Fund -25.4% peak to trough)has seen his formerly $20bn long-only fund pummeled 20% since mid May.

Why has the relative performance of winners and losers been so dramatically altered in the USA, but not in Japan? My guess is that inflation and its associated interest rate rises that people fear, are structurally perceived as posing greater earnings threat to the US market. This is exemplified by heightened conditional co-variances of "risky" stocks (i.e. stocks whose earnings have higher r-squared to changes in aggregate demand and aggreagte US earnings), that will (presumably) manifest itself from continued hikes in US rates. Most sensitive to this are primarily effect sectors most buoyed by the "liquidity trade" (materials, mining, cyclicals, housing, etc.) coupled with secondary effects of general deleveraging by hedge funds, which means, "selling what they own". This has caused BOTH accelerated sector rotation coincidental to intra-sector convergence - both which are anti-momentum effects.

Japan, by contrast, has been caught in the jetwash. This has seemingly caused marginal exposures across the board to be reduced, which has not caused excess sector rotation nor the intra-sector convergence that so defines anti-momentum (excepting the shortest of reversion horizons). Where does it go from here? The momentum effects in Japan appear to result from the attention certain stocks receive from large foreign admirers, be they hedge funds, activists, or large long-only shops. And I believe that these allocations are somewhat stickier than the marginal flows driving some fo the US style shifts, and so I see no immediate reversal. Until, of course, if and when, Japanese stocks return to ignominimy. As for the immediate direction, the selling has been overdone and today the 14th of June with many fine securities having shed 30% to 40% from values seen just a few months before, I strongly suspect a significant and profitable near bounce is on the cards.

Friday, June 09, 2006

June 9th Market Musings

There is much that fascinates me today. Newsflow on Murakami continues strong, with most writers wielding late, but probably deserved, tar & feathers. The market bounced in sympathy with an "outside reversal" afternoon bounce in the US markets, and an oversold technical condition after a classic "margin puke" in Japan. And finally, the largest-ever MBO in Japan was announced with Nomura Principal Finance teaming with management to take the Skylark Co. (TSE Code#8180) private at a price of YEV2500/shr.

Today's news on Murakami alledges that in addition to being a child-raper, a North-Korean spy, being responsible for global warming, and being covert operative for Al-Zarqawi, he back-stabbed, two-timed Livedoor's Horie but dumping shares in NBS, after he urged [and convinced, we are supposed to believe] Horie to buy them at higher and higher prices. We are meant feel sorry for Horie, and despise Murakami's lack of honor. But I feel like I am watching the Japanese equivalent of Jerry Spinger, and really feel no sympathy for either of them.

Following on this, the Asahi Shimbun reports on research by Kazunori Suzuki, professor at Chuo University's Graduate School of International Accounting, that suggests Murakami's activist style of investing actually destroys both companies and shareholder value. He's analysed the juicy and apparently undervalued companies in which Murakami's fund made investments and found that while their ensuing stock market performance was better than average, their ensuing business performance was pathetically worse than average on many important measures. The researchers suggest that this might be due to the distraction and low morale caused by the raiders' unwanted interest in the company, and therefore questions whether the activist has the company's long-term interests at heart. The skeptic (being me) would respond that the share price performance was aresult fo the raider/activists own buying upon the relatively illiquid markets of the smaller companies that caught his eye, and the true story will need to be seen only after MAC and other activists dispose of their holdings, or the researchers try to disentangle the subsequent share price performance due to "improved management and shareholder focus" from the insanely large market impact of incentivized fund managers jamming up the prices of these securities to collect ludicrously large performance fees. Furthermore, the skeptic might rightfully suggest that the companies in MACs portfolio suck. They are sh*t that sticks to your shoe, and they are cheap for a reason. OK, they were too cheap, but that is quickly resolved once one buys them up, and then what? You've gota large position in a sh*tty, illiquid company. It was no surprise that the companies that appeared "the cheapest" in the mid nineties all has "Martin Armstrong Repair Bonds" in the "marketable securities" line on their balance sheet, where REAL marketable securities should have been.

Finally, there is Skylark - Japan's largest MBO to-date. Rumour has it that the sale was the resulot of a typically Japanese family feud (similar to the Canadian McCain's), and the exit via a sale to Nomura and management was a mutually acceptable option. But THE PRICE for a pedestrian chain sushi-conveyors, buffets and dressed up noodle wagons?!?!? Granted, MBOs are "new" to Japan, and sometimes you have to learn by doing - even if the lessons are harsh. There is no lesson on the perils of "paying too much" than paying too much. And while I admire the engineering prowess, manufacturing organization, and long-term committment of Japanese corporations, I would also point out that Zaitech was invenyed in Japan, and there is good reason was THIS concept was never successfully exported!

Thursday, June 08, 2006

So, You Think You've Had a Bad Day

It is worth noting that when Impressionist paintings are "ringing the bell" at auction, and you overhear your nine year-old wanting to be a "hedge fund manager", that it may be time to consider that we are near to an intermediate-term top. Such was the case with Tokyo at year-end - something that's been alluded to in this forum in unwaveringly but none-too-subtle form.

Today, the 8th of June, Japanese fund managers might be forgiven feeling a little glum. After what was a bad start to the week, they saw yet another four percent hived off of their average portfolio values in what was the third biggest volume day of the calendar year. This was more notable since it was the largest volume day on the negative side of zero. This places the popular price-weighted benchmark, the Nikkei 225 at -9.17% YTD, and the the broader TOPIX first-section down 10.1% YTD. But if you bump into Tokyo bourse investors today, and they seem particularly [black and] blue, I will tell you why: The average investable stock, which is to say, the index of quarterly-rebalanced, equally-weighted security prices is down more than 17.4% since December 31, 2005, (and more -18% YTD for the annually-rebalanced variety!)!!

So while your American friends may be feeling poorly because the S&P500 has given up most of its gains (+0.45% YTD), and your European colleagues, too, are feeling regret at having shed their double-digit profits to less than a percent YTD, I would ask you to be especially kind to your Japan-centric acquaintences, and perhaps buy them a very, very, dry Martini and lend them an understanding ear to offset the very real financial, performance, and emotional distress they may be encountering.

Monday, June 05, 2006

Murakami: Legitimate Activist?

Forty-six year old former Ministry of Finance (known as "MoF") official Yoshiaki Murakami was arrested having admitted that he used material non-public information to profit from Livedoor's takeover of Nippon Broadcasting (TSE Code#4660). Bloomberg reported that Ken Siegel, Senior Partner at US lawfirm Morrison & Forrester (amusingly known as MoFo) commented that " would be a shame if this discourages legitimate shareholder activism."

Which begs the question: "What is legitimate shareholder activism?". It also begs the question: "What is legitimate management intransigence and what constitutes cynical self-serving behaviour?" Is this culturally determined, since there are many flavours of capitalism that have evolved in the world, distinct from the American version where the owner is "king" and all else, labour included, is meat for the grinder.

As is most often the case, reality probably lies somewhere in between Daniel Loeb's obnoxiously delicious missives, and Tokyo Style's (TSE COde# 8112) deliciously obnoxious disregard for their financial partners (i.e. capital). But it IS important to recognize that, in many places, the form of the limited liability corporation has many uses. In many instances, it is NOT to provide immediate rewards to shareholders, as the case may be in France or Belgium, where the "holding company" is effectively a legal tax dodge affording the owners to avoid various pecuniary wealth and generational estate taxes, while maintaining the benefit of effectively private control over one's business affairs. And indeed, the same may be said of many second-section listed subsidiaries in Japan.

Here I make no judgement of the relative merits such organization and [lack of] profit-maximizing business objective, for I believe that while profit-maximization affords certain disciplinary benefits, I believe that the large corporation legitimately serve multiple constituents - not least, shareholders, employees (including management), the community, and suppliers (probably in that order). And I also believe that many of these constituents are best served (shareholders included I might add) by longer-term vision and investment rather than shorter-term maximization strategies (meeting quarterly earnings forecasts, or the incipient year's profit growth), that might reward "activists", but impoverish the other constituents (including longer-term shareholders).

From my perspective, I might make one observation that I have learned in my years of experience that separates the "mouse that roared" from the "real men" of financial substance. And that is: possession in nine-tenths of the law. This is to say, if you are not prepared "to own it" (bid for majority control) and run it (take it private), or are not able to do either due to majority stake-holders, you've got nothing to say.

Friday, June 02, 2006

The Nail That Sticks Up Gets....

I remember that fateful day when Hank Greenberg Former Chairman of the colossal AIG Insurance Company started attacking US Attorney Eliot Spitzer implying he was something akin to a "fascist". Well I was far away as the crow flies, but I KNEW what was coming and next thing you see, Mr Greenberg was being investigated for fraud, and subsequently was bounced out of his job amidst great personal embarassment and shame. Despite the fact that, in he end, he was cleared of any wrongdoing, one could see he messed with someone more powerful, and he lost, full-stop. Of course, we shouldn't shed any tears for him as he is, after all, sitting in control of the CV Starr Foundation that owns an ungodly amount ($21 billion??!?) of AIG stock, in addition to the billions he has accumulated of his own.

But this is not about AIG or Mr Greeneberg, but about former MoF official, Yoshiaki Murakami: value investor, corporate cage-rattler, stock-greenmailer, petty thief, and now corporate scafflaw & greedy trader, whose portfolio took a severe hammering today as a result of an investigation into MAC Asset's potential wrongdoing. Many people seem to have issue with Mr Murakami: self-serving managers, squeezed short-sellers, his fund investors, as well as his competitors. But the one he has really offended is Japan Inc., and like the disgraced Livedoor upstart Takefumi Horie found out, there are limits to how much they'll take. For he has challenged entrenched interests and caused (in all truth) some positive changes in the respect (or at least lip service and dividends) that Jap[anese companies heed shareholders, but in this process has disturbed the "wah" of the house of Nippon. But he has wrought these changes in an apparently ill-tempered and undiplomatic manner that has been seen as vulgar (in Japan) to most of the powers that be, in addition to those transgressed.

The markets severe reaction today was perhaps predictable since he has, for parochial interest, NOT been gentle upon "price" in accumulating his positions. I have two observations that I can humbly offer Mr Murakami about today's events. The first is: "Don't break the law when you're breaking the law" (even if this "Law" is the unwritten law of the land know as "custom"). For if you do, they will surely bury you, with what the Miller Brewing Co. used to called "gusto". The second piece of advice is: IF you are going to accumulate very large positions in rather pedstrian and illiquid lines of stock, you had best not be: (1) leveraged (2) be subject to investor calls on capital for an amount of time less than that measured in "years", and (3) Never, never, never, let the market know your positions. If you get caught violating all three at any time, I must say, one might deserve whatever "Mr Market" might deliver...

Thursday, June 01, 2006

Baby Blues

The BBC announced today Link that fertility rates in Japan have dropped to their lowest levels since record-keeping began more than 60 years ago, weighing in at 1.25 per couple in 2005, vs. 1.29 in 2004. This is versus a steady-state replacement fertility rate of 2.1. While a number of western European nations (most notably Italy, Spain and Eastern Europe) face similar issues, Japan's issue is particularly acute since, by my calcualtions, in but a mere 40 generations, the Japanese will follow the path of the Dodo, and be no more.

So why is this advanced mature nation, with far less sexual hang-ups than Western Europe and that are so adept at producing consumer electronics and automobiles having such a difficult time producing babies? Cost? Environmental stress & degradation? Health? Male impotence? Competition? Urbanization? Nintendo? Manga? Ego-centric hedonism? Pathological disorders? Maybe none. Or maybe a bit of all of the above.

My own guess is that following the industrial revolution and the technological revolution of the 20th century, mortality rates fell dramatically, as hygiene improved, diseases were treated, food security and wealth increased with global trade and the division of labour. But there was a several generation lag in the off-setting fall in fertility rates that exponentially mushroomed the human pestilence across the planet, to levels that, one might speculate, are beyond the stress-free carrying capacity of the land. Urbanization and modernity followed, but perhaps this has been not without consequence. Perhaps we are witnessing an unconcious natural reaction in humanity to the stress and pressure of excess population, driven by living costs, health, etc. that will ultimately see human population numbers move away from forecast Malthusian heights returning towards more sustainable numbers. That is, of course, if we can convince the various religions, particularly evangelical christians, and muslims that "going forth and multiplying" is, while historically useful when mortality was high, is rather passe, unhelpful and terribly uincivic-minded for the planet when mortality rates are low.