Tuesday, February 06, 2007

How obvious is it? (The Tongue-in-Cheek Version)

That "investors" undertaking leveraged cross-border speculation, employing borrowed funds in a near-ZIRP country to purchase higher yielding assets somewhere else, willingly assume the tail risk of large fluctuations and the potential result of being rather literally "carried-out" under certain circumstances in exchange for the positively skewed coupon-clipping-like returns of purchasing anything with higher yield or harboring sure-thing capital gains appeal is, well, obvious to those who can spell l-o-g-n-o-r-m-a-l. For sometimes, unpredictably, "shit" just "happens". Like the Kobe earthquake. Or the tsunami. Or LTCM. Or the end of QE. Or the assasination of an Archduke. Or the the realization that, upon closer inspection, one of the nations most revered enterprises was, in fact, a fraud.

Obvious as that may, something even more obvious has, until recently eluded the macro investors renowned for carefull;y structured bets that presumably can be unwound at a hair-triggers' notice with nary a market impact (except in 1987, 1994, 1998, and errrr 2007?), which is that the thing that investors funding at ZIRP or nearZIRP most desire (yield spread) and the thing they are most afraid of and want to hedge (currency exchange wrong-way directional movement risk) hasb been right under their noses in good old Japan. For Zaitech nirvana is, and has been, here all along in the form of listed real estate companies thhat were trading south of book, and forward-looking earnings yields (net of tax) of 800bps over nearly free money, J-REITS that were easily 500bp of unlevered free-money spread, utilities at near-book yielding 200bps unlevered spreads, and a whole host of high-earnings yields, near-bookval enterprises with 2% yields also nicely leverable, and given their liquidity, a mark-to-market that is manipulable and protectable from the horrors of margin calls. Rather simply, borrow Japanese yen, and buy Japanese stocks! Why do the Japanese people and specs go to all the bother of swaps, forwards, foireign funds, currency & tail risk, dishonest & smelly gaijin, etc. when one can borrow YEN for nearZIRP and buy good Japanese assets for attractive unlevered spreads? No need to be too-clever-by-half! For as currency realignment risk grows with each down-pip on YEN, and as credit spreads have narrowed forcing thrill-seekers to assume more credit risk to goose returns overseas, some, over recent months have finally realized that Japanese equity yield spreads can be levered too!! Over course, given the drubbing that Mrs. Sato took during the last bubble, she remains suspicious of investing in stocks (the Golden Buddhist Toad of Mrs Inoue still missing). Her son of course, has eschewed work, but sports an on-line account jockeying in out-and-out of stocks faster than one say "Investors Business Daily Sucks", but that hardly qualifies as investment.

So is this Cassandra recommending this trade? Let no one forget Cassandra's imploring readers to buy Japanese stocks this past November. And Cassandra has maintained such a trade, for the better part of four years, via skewed portfolio toward precisely such undervalued domestic assets, and this has paid handsomely with low volatility, and low net equity exposure. The low asset values, reasonable yield spreads sans currency risk remain in some pockets for those willing to go down the cap scree a bit. But there also remains a host of quality large caps WITH not ignboble growth prospects, which possess after-tax earnings yields of 500 to 750bp over nearZIRP. And with Carlyle et. al. taking private anything and everything private with an ev/ebitda <10x while borrowing at junk rates (albeit diminished ones), these enterprises in Japan with ev/ebitda's in the 5 to 7x and money virtually free, are by comparison, extraordinarily anomalous. Thus my message to carry traders is: why make your life more difficult than it be? Why assume more risk for less, when you can assume less risk for more?


tmcgee said...

well said. which is why i'm long nikkei futures -- both in a purely internal competition with no money at stake. and some cute ETFs...

"Cassandra" said...

tmcgee...i cannot help but think that the Topix has some relative appeal over the Nikkei. The Nikkei has been rebalanced and included a greater weight of already-appreciated stock so is unlikely to revert to pre-rebalance levels.

Also note that BCA put out a small strategy piece today examing the headwinds that the YEN has provided in the past to Japanese stocks, and how that is more supportive this time around. The only scary thing was their statement "With the BoJ posied to keep interest rates at nearZero forever....." (or some such)