Thursday, February 22, 2007

Factor Failure

Hello Houston....We've got a problem!

And so it is with "growth factor" measures in Japan. Not that this has much historical return attribution in any event, but even so, February 07 has been horrid to growth! In big round "top v. bottom decile" numbers, irrespective of the inanity or robustness of the measure, they are down ~5% in the MTD. This is even more interesting because this is not on the heels of some extended outperformance in prior intervals. It is, for whatever reason, monumental factor failure in the grossest sense. Yet despite this failure, somple naive price-momentum continues to motor away, with long-window portfolios accounting for much of this. But growth often correlates with "quality", and here we see similar potholes for "quality" concious, be it Margin, ROE, CFROI, EVA, volatility of earnings, forecast dispersion, etc.

So what is responsible? Non-price earnings revision, somewhat idiosyncratic longer-dated momentum, sector-effects and the global liquidity-sensitive names, all skewed towards larger-cap resulting in a rather strange and narrow mixture that does not explain well systematically-speaking, nor bode-well for all but the most trend-hugging reactionaries. It is very Darwinian, as the survivors continue to see more money ploughed into them, while those that pause or miss - irrespective of attributes,get mercilessly torpedoed.

Explaining what's worked (the brokers' term) is always more useful with other practitioners' input, so anything that any other observers might wish to add would be interesting to ruminate upon.

Wednesday, February 21, 2007

BoJ's Pennies in a Fountain

Everyone will offer you something today regarding the BoJs latest rate decision. Some will be dripping with sycophancy about BoJ independence, while others puerilely describe why zeropointtwo-fivepercent is a bold and decisive action by the obviously concerned public servants at one of the world's most important central bank. I will simply express to you my opinion that it is a most pathetic insult to both right-minded central bankers and those concerned about the health of the international monetary system.

The analogy that immediately came to me was the carefree tossing of a penny into a fountain, after making a decidedly pleasant but juvenile wish. Call me unsentimental, but if one REALLY wants something badly and desperately, one should NOT rely upon a wish imbued upon a penny tossed into a fountain, or for that matter, the first star one saw last night. Rather, one should go and proactively try to make it happen. For a central banker in general, this means NOT sucking-up to the politicos, or whinging ninnies, irrespective of which side of the fence they are calling from. For the Bank of Japan more specifically, it means: if you really need near-zero rates of interest because the civilized world will disappear tomorrow and take the global financial system with it, then leave the bloody rate unchanged. IF, on the other hand, nearzeropercent rates of interest in a large somewhat open and important economy near the center of the international monetary system, are in fact long-run destabilizing and fostering asset-price bubbles and global imbalances that will be even more painful to wean-off of in the future (which this writer believes they are), then do not be zeropointtwofivebasispoint pansy, but be a man, and raise the rate.

Mr BoJ, you have done quite enough damage, thankyouverymuch, to the integrity of things monetary for the sake of your own parochial advantage. Now it is incumbent upon you to more seriously clean up the mess, and normalize your official lending rates, NOT over the course of the next four years, but soon.

Monday, February 19, 2007

Earnings Hooliganism

If you'd asked me, I 'd have thought that "hooligan" was certainly Dutch in its lexigraphical derivation. In actual fact, the OED tells me that it is derived from "Hooley's Gang", an apparently tough Irish group of thugs wreaking havoc at the turn of the century. It comes to mind because the latest interim earnings earnings season has yielded to a singular mob-like behaviour in dealing the short-term fortunes of stocks in Japan. Some academics have previously termed it the "MBE" phenomena where there is a decided post-announcement drift divergence effect in the performance of securities that "meet of beat" expectations, while the guillotine awaits those that don't. Mind you, if it were just the Japanese domestic investors, they might be forgiven for quarterly earnings announcements and all the pathetically panicked and outsized portfolio readjustment that results is new to the island, a bone to the foreign institutional demanders of transparency, despite the stupidly myopic short-termism it has has brought to American markets, poignanly discussed by Rappaport in his damning paper on the subject.

Of course we've seen this before. Certainly, in the US, where systematic earnings yob-ism is the norm, and to an increasing extent in Europe, and at least since 2004 when the Gaijin returned to Japan, without guns and uniforms. Historically, the effect was confined to the smaller cap names, at least according the numerous academics. But the perrformance-incentivized hooligans now so prevalent in Japan have driven a post announcement wedge between the perceived good & seemingly bad (at least as determined by the most recent 9mo interims) unlike anything we've seen to date. But interestingly, in Tokyo, the hooligans are unconcerned by size, or other attributes, perhaps ass a reuslt of the inferior expectational data and more limited liquidity. But it IS better if its got positive ex-ante momo and it MBE's. This may be the result of short covering, or mischievous elves trying to force them to cover, or mechanical bots trying to capture some post-revision drift. However, is history is gauge, except for the cheaper secs., they will likely be paying too much.

But since they are aggressively shorting the ones that do NOT MBE, this is where the opportunity lay for the patient. Make no mistake, I have nothing against a punter making a calculated short-term bet. In fact I thrive on it because they are creating opportunity. History may tell them it's a good one, in the short term. They should just hope they are asking the correct question. And that they do not oversize their position. For, in Japan, when they begin drilling reasonably hig-quality names to the tail of the dsitribution, despite contextual fundamentals, for a few bp's of hopeful short-term performance, potential buyers should take note, and use the mechanical myopia to wisely and patiently acquire positions, for they will be returning shortly to reverse their positions.

Thursday, February 15, 2007

Japanese Stock Market Poetry v2.1

So farewell
Sunstar Osaka,
TSE Number four
nine one

Maker of things
dental, health
cosmetic and
cycle brakes??!?

We hardly knew
thee for you
were but
a guppy
amidst coi.

Though "cheap"
as you might
have been,
you always

now for you,
has flossed ye
away from
public view.

(with apologies to EJ THribb and all real poets)

Wednesday, February 14, 2007

Market Internals Update: Big Remains Beautiful

It is bad enough for overseas Japanese equity investors that for eight months Japanese equity funds have done nothing in dollar terms, while the US market has seen dollar returns of 20% and the European market approaching 30% in dollar terms. But in Japan, even with its indices up 15% since its mid-year lows, the currency is, sadly, down nearly a like amount, such that the resulting chart looks like my EKG while watching the evening news.

But the even bigger insult to active managers in Japan is that most Japanese stocks have continued to underperform the major indices. So much and so thin their ranks, that merely 26% of the approximately 2300 investable stocks have - on a 12-month rolling basis - beaten the Larger-cap dominated TOPIX or Nikkei. Market Cap, it must be said, has been a nice contributor to performance, and for the Gaijin fund manager, this as much saved him for foreign portfolios are heavily skewed towards the both the megacap, and the merely large.

But what does it mean??!? To some extent it is reversing the large-cap underperformance that was the result of Daiko Henjo, and the opportunity that Cassandra highlighted in the waning hours of 2005. To another, it is that the wall of GCC money is ploughing into cap-weighted indices, and prime market leader assets. But it also reflects that domestic no-growth assets have few buyers, and it is these, by number predominate the Topix, and the equally-weighted ranks of "the average stock" universe. This leads to a fascinating potential struggle. The "good-stock/bad-stock quants will love to hate these stocks as they have little immediate appeal outside of under-catalysed under-valuation. But in a world where leverage is most plentiful, and trade buyers increasingly emboldened, and private equity on the prowl all over Kabuto-cho (and Roponggi), it will continue to be dangerous to be short of increasingly under-valued assets, however pathetic their cash-generating ability, and irrespective of how opposed entrenched management & their extended constituencies are to any change in the status quo. Steel Partners was the first ungainly shoots across the bow leading to a second round of more determined struggled BY JAPANESE inconoclasts for undervalued Japanese assets. 'Twill be entertaining to watch the ensuing scrum for the Japanese are not known for their Rugby prowess...

Monday, February 12, 2007

The Secret Bank of Japan Lexicon

Verbal accuracy is a virtue in analysing and ultimately understanding international economic phenomena. The following lexicon should be of great value to earnest investors worldwide, especially those who take Media-speak, and bureaucratic Ministry-speak at face value.

ZIRP (c) - The policy of giving away free money in unlimited quantities to any and all comers, for the stated purpose of avoiding deflation, but actually for the purpose of insuring that the YEN remains weak for selfish, mercantilist purpose.

nearZIRP(sm)(c) - same as the above only a few basis points higher; ostenisbly meant to relieve pressure on the BoJ for the world's most FUBAR policy by creating the anticipation for a policy change that will always be "just around the corner".

ZIRPtastic - The feeling of joy and bliss that overcomes the borrower of "free money" upon swapping YEN paper for something with yield.

ZIRPflation - The internationally uncivic-minded side-effect of rising asset prices everywhere in the world caused - in reasonable part - by the unecessarily cynical & low discount rate in Japan and the unmitigated ability of foreigners to borrow as much as they want, in order to buy whatever higher-yielding, or greater capitally-appreciating assets they want. (See Private Equity, Hedge Funds).

disZIRPflation - The brave new world of very mild falling wage and goods prices in Japan (& Switz!) coincidental to ZIRP, nearZIRP, strongly rising asset prices, and massive demand for the currency to fund leveraged specualtive trades into higher-yielding currencies.

ZIRPulation - Leveraged specu-trage predicated upon borrowing YEN at nearZIRP for investment in anything and everything nonZIRP. Presumes continued weakness of the YEN and the dangerous belief that unwinding is possible somewhere near present levels as and when a paradigm short occuers (See "tail risk", and "lognormal")

ZIRP-sixed - Losing one's hedge fund by maintaining leveraged long YEN bets.

ZIRPcurve Risk - The aggregate embedded yield curve risk in a ZIRPified financial system where the paucity of short-end yield induces investors to "reach for yield" by going farther out on the curve, thereby squashing long-term rates towards ungodly low levels that circularly make it near-impossible to shift policy or paradigms without inducing massive mark-to-market capital losses throught the financial system.

ZIRPerrific - Peculiarly un-Japanese celebration of "High-fives all around" in the MoF & BoJ offices every time the YEN ticks new lows versus the dollar and especially the Euro.

ZIRPBento - The FreeLunch(c) Box served in the BoJ cafetaria, but available to any and alll comers.

ZIRPquake - Colassal dislocation in financial markets due to simultaneous attempted unwinding of ZIRP-related carry trades

neoZIRPantilism - Using all manner of monetary policy tools and jawboning about the same to insure that no one gets a competitive "leg-up" over TeamJapan. (See "Beggar-Thy-Neighbor";)

ZIRPing-on-a-String" - Economic state describing the ineffective outcome of employing ZIRP monetary strategies but to no avail, because the causes of Japan's disinflation has next-to-nothing to do with the price of money.

ZIRP-o-tility - The phenomena describing the compression of volatilty resulting from ZIRP and the flood of liquidity it spawns that have virtually eliminated risk premiums in global markets.

ZIRPocracy -Describes the paradoxical policy in capitallism where the market price is believed essential to the optimal, (or reeasonable approximation thereof) allocation of a scarce resource supporting privatisations, and market-pricing of utility services, but conveniently ignored when it comes to optimally allocating the quantity of YEN (or SFRs) in existence.

ZIRPlosion - - Eventual market explosion caused by any many manner of unwinding of speculative leveraged carry trades.

Thursday, February 08, 2007

Today's ECB Rate Announcment in Full

(Summary of Statement of Mssr Trichet)

Everything macroeconomic is bon bon bon so we will do nothing today. But we are worried about everything and we are afraid that anything and everything can come apart at the seams, at a moments notice. So, as a result we will watch anything and everything carefully - especially those things that our colleagues across the Atlantic go to great lengths to ignore. We suggest that you take two aspirin and call us in the morning.

P.S. - We are especially watching you carry-traders!!
P.S.S. - We are watching asset prices & liquidity too!!
P.S.S.S - We should make fiscal hay while it is still economic day....

Merci very much!

(End of statement)

Bried Q&A followed....

Q: Will you be raising rates?

TRICHET: I am not telling you.

Q: Do all comittee members agree with your Vigilance?

TRICHET: Qwerty sporkwork wiglkcxx ixmagntryee op noim te te qsxtry. Qaaafff?? Kloop re voop dut dut! (Mr Trichet apparently answered in Esperanto, but no translator was immediately available)

Q: Do you agree with American officials that rising asset prices are an indicator a nations sexual prowess?

TRICHET: Mais Non! Non! non! Ce n'est pas possible!

Q: Do you think Carry Trades are a problem?

TRICHET: Does a poulet have lips? If it walks like a duck, if it talks like a duck, it is probably a duck (but not a canard. Claro?

Q: What do you think of the YEN ?

TRICHET: That's for me to know, and you to find out, nah nah-nah nah-nah nah! But...I will tell you this much: certain loans to certain people are certainly growing at what in no uncertain terms is certainly a rate several times higher that it should.

Wednesday, February 07, 2007

Tokyo Stock Exchange NYSE TIE-Up - Interview with CEOs Thain & Nishimura

But a few days ago, TSE Chairman Taizo Nishimura & NYSE CEO John Thain granted an interview regarding their proposed capital tie-up and cooperation talks which had splashed the headlines of financial pages. Below are some highlights from that interview...

BOOMBERG: So what are some of the reasons for the tie-up?

JOHN THAIN (Rubbing hands together doing imitation of Simpson's Mr Burns): Well, at the NYSE, we like to keep our friends close, and our enemies closer...

BOOMBERG: Errr yes, I see. You mean like Dick Grasso, Goldman Sachs, and the Specialists?

JOHN THAIN: No, they were all just our friends. In fact we send runners with snacks and gifts to go visit Joey, Sal, and Louie in the clink just so they know we're thinking about them. Dick did a lot of good things for his friends and for himself, so no, I wouldn't include him in that. And as for Goldman Sachs, well you know an anagram for Goldman Sachs is "Land Scam Hogs", which I think speaks volumes. And anyway, everyone who settled neither admitted nor denied guilt. And even those who found guilty denied guilt, or pleaded "extenuating circumstances", like the cost of living in Oyster Cove.

BOOMBERG: Are there others?

NISHIMURA: Technor-o-gy. You know, in Tokyo, we' have had probrems with our technorogy. You know, "Fat Fingers"??!

BOOMBERG: But given the insanely absurd "specialist system", the scandals surrounding front-running by virtually all the specialists (including Goldman's SpearLeeds sub), the high fees, restricted access to data, and well to be honest the virtually-non-existent market-supervision, isn't the NYSE the LAST place one would look for world class market structure and trading technology in a potential partner?

JOHN THAIN: Hey, that's not fair! We've made a lot of money for our members, and allowed them to make a lot of money! (errr should I be saying that??!?)

NISHIMURA: Understand, that at moment, we have agreed to agree to study ways in which we can agree to together study the different ways that might lead to joint ventures and new products. Nothing is concrete. We have, in stylized Japanese fashion, only agreed, (if you forgive my bluntness for the sake of the American audience), to agree on nothing, to evaluate ways that might lead to something in the future, to take some photos, and have lunch. Thank you very much....

BOOMBERG: Are you guys going to merge ?

JOHN THAIN(reverting to diplomatic tone): Nothing has been agreed and we are pleased with our little joint Indian pecadillo.

NISHIMURA: Perhaps we can discuss at a time that Japanese sovereignty is returned to the Kuriles....(translation note for American readers: "Perhaps when hell freezes over!!)

BOOMBERG: Thank you very much....

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?

Friday, February 02, 2007

Five Things Hoarding USD Reserves Is NOT Responsible For (And Twelve Things For Which It Is)

One trillion USD of YEN-financed carry trades of one sort or another, says PI Econs Tim Lee!! One might then take a bold at guess at all the manner of leveraged speculative trades financed by Swiss Franc carry. Add a trillion USDs on the books of the PBoC, the same for TeamJapan, and another one-half to one-trillion USDs across , Russia, GCC and the ROW. Then, close your eyes and take a deep breath when contemplating what that Ivy education will cost in 2014 for your MoonUnit or Dweezil when she/he reaches the age of consent.

The more sanguine say "Worry not!" for they are but the benign products of globalization. But I cannot help but feel that these rough pencil-on-the-back-of-envelope numbers represent many-a-distortion-in-the-making here on Planet Earth. Of course, not all absurdities of modernity in this brave new millennia result from the cavalierly selfish to the wantonly stupid policies and actions of both leveraged implementers and official enablers. For example:


(1) Scooter Libby's aboutface & newfound desire to take down Karl Rove.
(2) John Bolton's Stalin-wannabee moustache
(3) The fog and appalling food at Heathrow Airport
(4) Marc Faber's ponytail
(5) Absurd rules concerning "liquids & gels" in carry-on luggage


(1) Absurdly low USD interest rates relative to experienced inflation and asset price inflation leading to negative savings rates
(2) Unustainable US fiscal, trade and current account deficits
(3) The death of offical CB ability to modulate liquidity growth with free-flow of capital & hugely varying interest rates
(4) Rapid & persistent liquidity growth relative to GDP Growth;
(5) Greatly exaggerated and excessive USA PCE in relation to USA GDP
(6) Low to negative real interest rates & resultant US gross over-investment in oversized, shitbox housing
(7) Environmental destruction and/or global extinction of numerous fish & wildlife species
(8) De facto concession by USA of manufacturing & its web of dependancies to nations with policy horizons longer than a nano-second.
(9) Worse-Than-Non-Existant Energy Policy in the USA
(10) Continued mindless suburban sprawl in the USA
(11) Persistent and pervasive global asset-price inflation & destruction of risk premia encouraging all manner of leveraged overinvestment.
(12) Donald Trump