Thursday, April 26, 2007

Psalm 25-and-one-half

This little prayer recently discovered in that most obscure of scrolls: "The Book of Financial Psalms"

Psalm 25-and-One-Half

 1[a] To you, O LIQUIDITY, I open up my blotter and go long;

 2 for in you I trust, O Liquidity.
       Do not let me be put to shame,
       nor let The Bears or creditors triumph over me.

 3 No one whose hope (and position) is by you
       will ever be put to shame,
       but the holders of cash, and the unlevered will be put to shame
       for they ignore opportunity without excuse.

 4 Show me your ways, O LQUIDITY,
       teach me your many paths to profit: precious metals, commodities, equities, art, real estate, antiques

 5 guide me in your bounty and teach me gearing, and to love low cap rates and to not fear inflation
       for you are Liquidity my Savior,
       and my hope is in you all day long.

 6 Remember, O Liquidity, your power and will,
       for they make me bold.

 7 Remember not the sins of my youth
       and my rebellious ways;
       when I was bearish and full of doubt,
       for you are good, O LIQUIDITY.

 8 Good and upright is LIQUIDITY;
       for IT instructs pessimists to follow ITS ways.

 9 IT guides the humble in what is right
       and teaches them to borrow and never go short of stock.

 10 All the ways of the LIQUIDITY are giving and keep giving
       for those who keep to the demands of his covenant and don't go short, hold cash, or buy bonds.

 11 For the sake of your name, O LIQUIDITY,
       forgive my past cautiousness, for it was unwise.

 12 Who, then, is the man that fears the LIQUIDITY ?
       IT will instruct him in the way chosen for him.

 13 He will spend his days in prosperity,
       and his descendants will inherit the land, Shares, and Gulfstream-V.

 14 LIQUIDITY spanks those who fear him;
       he insures the levered's debt covenants are not violated, and that CDOs remain nominally solvent

 15 My eyes are ever on LIQUIDITY,
       for only IT will release my house from creditors.

 16 Turn to me and be gracious to me,
       for I am worthy and leveraged.

 17 The troubles of my loans have multiplied;
       free me from my margin calls.

 18 Look upon my affliction and my distress
       and lift-up all my underwater positions.

 19 See how Central Bank reserves have increased
       and how their coffers fill. Help them too!

 20 Guard my portfolio and rescue my positions;
       let me not be put to shame, and see my investors redeem
       for I take refuge in you.

 21 May leverage and beta protect me,
       because my hope is in you.

 22 Redeem NOT, dear investors, have faith in LIQUIDITY,
       IT will save us from all our troubles!


  1. Psalm 25:and-one-half This psalm is a translated acrostic poem, the verses of which begin with the successive letters of the Hebrew alphabet.

Farewell Kato

I have been waiting a year-and-a-half to find some way of working Peter Seller's sidekick, Kato, into this blog, who apart from being very amusing is consistent with my predisposition towards always being on the lookout for something that might blindside me. Now, with the clarification of just how cooked the books Katokichi Company's (TSE Code #2873) books actually were, founding family member and now-former President Yoshikazu Kato has decided to fall on his sword (metaphorically speaking, that is) and stepp down.

The total amount of faked sales were estimated at USD$1bn over the previous 6 years, reasonably in excess of initial estimates and amounting to somewhere between 5 and 10% of annual company sales. While I believe there will be phoenix-like value emerging from the ashes, I do believe that the eventual restatement of prior years' accounts will keep on a lid on things and cause further price distribution from liquidation and so would take any meager short-term profits, and as the old saw goes, get out of Dodge...

Wednesday, April 25, 2007

Thrice Lucky?

Thrice lucky. That must be the motto of Osamu Kaneko hard-nosed ebullient founder and President of real estate advisory and management firm Da Vinci Advisors KK (TSE Code 4314), now with a market cap of YEN 175bn, and Mr Kaneko still holding 25%. Not bad for a company with no sales in 2004. Such is the power of using leveraged finance in the acquisition of real assets.

But it wasn;t always so, as the title of this post - "thrice lucky" - suggests. For Mr Kaneko spent the 1970s and bubble years with Bubble-King themselves, Haseko Construction (TSE Code #1808), as head of their US ops. From first-hand experience, I can recall Haseko's presence in the Japanese enclave of Fort Lee, NJ cynically known as "Fort Ree", to the working class lads of Edgewater (pronounced "Ej-wooda" to purists ), during the height of the last US real estate bubble in late 80's. They had constructed several monstrous towers majestically atop the hills overlooking the Hudson. Unfortunately, it was at a time when many others had done precisely the same, only sooner, while others were still in the process of doing the same, many of whom would never finish. Whether this project was their undoing, or the acquisition of Japanese land at never-to-be-seen-again prices, Haseko, as it was, is, no more. Strike-one!

Next, in the 1990s, came "Sunterra", the self-proclaimed King of time-shares, arising out of the ashes of Signature Resorts, whereupon Osamu (affectionately known as "Sammy") was Chairman. Maybe its cultural, maybe its my occasional unabashed snobbishness, but there is something about "time-shares" that creeps me out. Maybe its because I like my own space. Maybe its because I my economic sensibilities are offended when someone parcels up something as pedestrian as an apartment, and peddles for 300 to 500% of face. I thought hotels exist for this purpose, and to this day fail to see the allure of the timeshare. But Sammy was the timeshare King, with all the Radio Pyongyang prognostications about growth, value, ideas, blah blah, until in 1999 things went horribly pear-shaped, leading to eventual Chapter-11, and shareholder lawsuits. Strike Two.

In 1998, perhaps because Sammy knew more than he told to the unfortunate Sunterra shareholders of the time, he extricated himself from day-to-day management oversight, and founded Da Vinci KK, eventually IPO-ing in Dec 2001. While he needed to wait a couple of years before property values bottomed following the collapse of the bubble, cleaning up and recap of the banks, and the return of foreign carpet-baggers to Japan, the phrase "being in the right place at the right time" was rarely more apt. Inheritance law changes, asset sales and de-leveraging by all manner of corporations, securitisation and emergence of REITs, all happened in a relatively short period of time culminating in the launch of large managed fund that would secure steady management fees for years to come once the funds were deployed. Coincidental to this was one of THE most spectacular post-bubble ramps seen in Japan with DavVinci's share price vaulting ten-fold from YEN20,000 to YEN 200,000 during CY 2005, including a 4th quarter leap from YEN 60,000 to 200,000!! This assault was led by JP Morgan who, in the market, had amassed more than 20% of the outstanding shares that represented perhaps one-half of the float. Such is the power of the largest marginal investor, they it must be said that by mid December one retail mania had gotten hold of the theme, they presciently sold more than half of their monstrous position very near the top.

But this is history, left for the reader to make his or her own judgments. What has my attention today is that an apparent DaVinci subsidiary has been active in the secondary markets, acquiring a 10% position in the Ohtani's TOC (through presumed Davinci sub Algrave YK), and vocally opposing the ostensible YEN 800/share "take-under" from the family (see yesterday's poetical epitaph). Today, DaVinci offered YEN 1100/share for the same. Note that the Ohtani's have the effective control of TOC, though their take-under offer was apparently so insulting, and left so much juice, they will likely be required to pay-up in order to take it private, and there remains the possibility of other bidders emerging.

But perhaps for non-merger arbs, looking forward, it is more interesting to note that the same DaVinci vehicle, Algarve YK, that is spoiling the Ohtani's party, has also emerged as the holder of 9%+ stake of asset-rich Toei Corp (TSE Code# 9605) which in addition to its large holdings of TV Asahi and Toei Animation (equal to 40% of current market cap), owns a very large and reasonably valuable film library of Japanese animation and a massive amount of under-valued and under utilized real estate through out Tokyo in the form of offices and movie theatres. Presumably, Sammy sees what asset-investors have seen for the better part of a decade: the break-up value inherent in a number of venerable asset-rich companies. Whether an iconolastic outsider from Indiana State University with a chequered past will be more successful than those before are IMHO even-odds at best, but those are much better than one would have gotten from the bookies at any time in the past.

Tuesday, April 24, 2007

Farewell TOC

So farewell
then TOC
TSE# 8841,
and would-be
lord of

As a listed
you always
traded cheap,
the respect you

With a TOB price
equal to a 5.5% cap rate,
you'll be remembered
as having been
by the Otani's
rather than

(with apologies to EJ Thribb, aged 5-1/2)

Friday, April 20, 2007

Katokichi: Cooking the Books?

In most other developed markets (and many emerging ones) major league fraud would spawn hundreds of news articles and much hand-wringing searching for culpability from janitors to auditors. Katokichi Co Ltd. (TSE Code# 2873) food manufacturer and distributor of frozen convenience foods, and owners/operators of variously-themed restaurants and pubs admitted recently ((see Yomiuri article here to (no pun intended) cooking the books. Katokichi has long stood out as a steady and profitable grower in an otherwise moribund sector, that, for the most part, has rather limited international growth and appeal. For despite the international popularity of sushi, none of Japan’s “ceremonial rice cake” makers, or “natto” (peculiarly foul-tasting fermented bean paste adjacently pictured) have succeeded in landing that contract with Whole Foods, WalMart, of WuMart, thus transforming themselves into the much sought-after secular growth company that, it would seem, so enamors foreign hedge fund investors.

In respect of the book-diddling at hand, Katokichi apparently fabricated sales transactions and related invoices between affiliated companies in a carousel fraud over a period of three years, to the tune of up to YEN20 billion gross sales per year, presumably in a bid to window-dress firm sales and profits (although it remains possible, pending investigation, that it was a scheme for parochial enrichment). At the top-line, this is a drop in the bucket for a co with YEN350 billion of sales, though it is potentially very meaningful at approx 3x the company’s reported net profits which were in the vicinity of YEN6.5 billion, hence the reaction of the firm’s share price (see chart left relative to the TOPIX). The company said: “it’s investigating and can’t comment”. Un-named sources, according to the Yomiuri daily suggested the amounts of false profit or fabricated indebtedness were negligible relative to aggregate turnover and recent firm net profit levels, though such intimations were apparently insufficient to prevent almost half the float from changing hands in the ensuing three weeks to date.

So while disclosure is far from sufficient, fear of roaches is now, an international phenomenon. Dump first, ask questions later. Such fear however, has, despite the potential for more ugliness, created an interesting opportunity to acquire interests in one of the few growing, successful, diversified food manufacturing and distribution business at a nice discount to peers, absolute historical valuation, peer-relative valuation, and probably a 30% discount to prevailing fair value, with a now-diminished foreign ownership ratio.

Feeling brave?

Tuesday, April 17, 2007

Thinner than Gruel

Attention all Japanese Equity Fund Managers: If you are outperforming the index, then you are incredibly lucky; have a narrow, cap-weighted portfolio; or are incredibly lucky AND have a cap-weighted narrow portfolio. There is almost nothing credible in between. This is highlighted by the implausibly low percentage (less than 25% as of 2nd week of April) of stocks outperforming either the Nikkei or TOPIX First Section on a rolling 12 month basis.

While good news for disciples of the MSCI Japan Index, and even better news for those prescient enough to make the TOPIX Large 70 their index of choice, this is decidedly BAD news for broader indexers, slaves to more inclusive benchmarks, as well as those with purely small and mid-cap mandates. Now, my data is reasonably good and extensive, going back to the early 1980s, and such widespread under-performance is historically unprecedented. Unprecedented BOTH in absolute percentage terms (less 25%) and for the duration of time (> 2-1/4 years) that the percentage has been deteriorating enroute to its current depths.

Now this may be as it should. Many of Japan's largest enterprises happen also have global, rather than purely domestic, markets, and benefit from the labour supply shocks boosting transnational enterprise profitability. Sales growth on one side coupled with cost relief on the other is, it must be said, virtuous for investors, in comparison to the obverse.

But before ye lucky ones start patting each other on the backs and spending one's accrued, but uncrystallized performance fees, I must be point out that this Golden Era Of The Large Cap, of the Most Deserved Enterprises In Japan, also happens to coincide with the period in which East Asian Surplus Capital - both Japanese and Chinese and others, has been flowing uphill to ostensibly finance the Americaland in its rather errrr unsustainable consumptive binge. And as a "Cassandra", I will give fair warning that the last time "The Deserving Few" shone so brightly, so too did they violently and terrorizingly under-perform for not less than a full Calendar year.

Despite however despicable some might find the YEN, (and make no mistake, there are no shortage of reasons) the Yen WILL become untethered from USD in spectacular fashion, and in the process crucify those with implied short yen bet buried within their "Market Cap Bet". I cannot say "when", but everyone has been warned and the prescient should - at the very least - take the opportunity to hedge hedge hedge.

Monday, April 16, 2007

That IMF Statement in Full

Regarding the recent IMF meeting, the member representatives wish to issue the following joint communique statement to the Press.

For Immediate Release.


Wednesday, April 11, 2007

So Long Reversion

In an April 10th research report, Daiwa's numerical gurus Yoshino and Sagawa wrote the epithet for naive price reversion strategies in the Japanese equity market. That price reversion has been the mainstay of many a naive arbitrageur in Japan from the bubble to the depths and back is noteworthy, though official pronouncements a brokerage firm of anything that reduces customers' trading turnover is rare to say the least. But Mssr's Yoshino and Sagawa have - up until now - been doing nice work, so their research, if nothing else, should be weighed carefully.

Their preamble summarizing the literature and history is coherent enough. And their gross numbers, while pathetically inadequate DO mirror the general condition of naive reversion, highlighting in particular the dearth of return since 2002. And while they arrive at a possible replacement in the form of a simple sector reversion model, it's paltry return is in all likelihood not robust to transactions costs and security borrowing limitations.

But in my mind, they fail to address the most nagging question of all: Why should reversion have persisted in Japan, contravening the normative behaviour of return persistence patterns highlighted by Jegadeesh in the US, and replicated by others for virtually all other global equity markets? For in even weakly efficient markets, BOTH naive reversion AND naive momentum shouldn't exist. Nonetheless, it [reversion] did, and rather than mourn and eulogize its passing, researchers with any sense of curiousity should set to work on why it was, historically speaking, so omnipresent.

Thursday, April 05, 2007

Sordid Business of Predicting A Crash (con't)

Kurtosis in the daily cross section of US equity returns is as elevated and extended as it has every been, YET the skewness remains highly positive, a truly anomalous circumstance. Historically, this has reliably foretold something ominous to come. Today, in answering the question I posed and whose answer I hinted at in my early March post of similar namesake, I will reveal why this happenstance exists. The answer is: "Private Equity".

Collectively, they [private equity], and the speculators who move security prices on the basis of rumours surrounding "who's next", are the ones responsible for the positively-signed, bountiful premiums, gapping certain stocks in the distribution higher in relation to the the rest of the distribution, which only inches forward. And as Stephen Ratner forthrightly said in his Bloomberg interview detailed below, they [his own private equity firm, Quadrangle] will continue to take things private so long as liquidity is abundant AND lenders are willing to buy debt at rates and on terms that, as Ratner says, make little economic sense from the perspective of the lender.

So in itself, the higher moments of the US equity market are whispering "bubble", though the bubble is seemingly located in the credit markets, with the equity market but a reflection thereof. This doesn't leave equity markets free and clear by any stretch of the imagination, for the chain of dependencies and linkages are many and complex, but it does explain the highly unusual circumstances of the higher moments. And by explaining away the fragile state of the higher moments, it perhaps takes the heat off of a collapse based upon unsustainable speculative internals, and pushes it towards the exogenous sustainability of the credit markets' extreme generosity and munificence.

Historically they have been related, and, as such such, the higher moments of the US equity market may themselves be the tell-tale of the bell-ringing ebullience of us dollar-based credit markets.