Wednesday, January 16, 2008


Oh dear. Someone has been hurt. Perhaps mortally so. I don't know "who" or "why", but what I do know is that someone is puking or being forcibly puked in Japan, and they are selling assets with little respect to price. It is likely that it is a large long vs. short portfolio since the volume pick-ups - which have been significant on both the likely longs (value biased under-performers) and outperformance of likely shorts (poorer value out-performers with tinges of higher short interest) in a replay of late summer action. It could be a hedge fund for such sub-strategies have been pedestrian performers at best, or, with the capital calls going round the IBs, and universal banks, the marginal utility of balance sheet usage and warm highly-paid bodies may have been given over to cost-cutting endeavors that in turn may have led one or some to shutter an operation with a reasonably sizable position. More interesting is - like August - is not so much the marginal increase in volume, but rather the evaporation of liquidity on the other side (talking mostly bids here), which leads me to believe that this someone was a significant liquidity provider, or reversion-oriented pseudo-market-maker, which - as we saw in August - turns into a rout when such a participant turns and retreats from the undertaking in favor of demanding liquidity to exit.

This is NOT to be confused with the puking of stock-specific consumer-discretionary and earnings disappointments in the USA (TIF, WSM, CPKI, DKS). These are event-driven moves, that are exacerbated by the number of traders and quantitative strategies pursuing similar return. While these (call them divergent strategies) have been small rays of hope in otherwise lame quantitatively-based pursuits, they, too, face the same problem [as August] of overcrowding trades at a time when valuation dispersion is rather elevated on the tails.

As for what it means for Japan, I will note there are an increasing number of investable and real companies (albeit of lesser size that are being caught in the global small-cap slaughter) with real businesses which are victims of recent moves and trading at depression -implied levels of large discounts to book, very low (less than 5x) ev/ebitda, and a reasonable chance of continued earnings stability. At least for those on the vanguard of share-price destruction, they are probably nearer to their intermediate term bottoms than not.


Anonymous said...

Margin interest is historically high in US, and banks are providers through brokers. Margin calls? Like calling loans on sub-prime, not a bad idea, where sub-prime includes non-performing assets in Japan.

"Cassandra" said...

anon - lots of stuff is getting hammered, but the relative price movements within the puke, while subtle, are sufficiently visible to suggest (in addition to Yen-strength & recession-selling fears) an unwind of a large book with systematic characteristics. I see the ripples in attribution tools and factor returns that mimic many of these strategies and their precursors.

Anonymous said...

Yesterday I increased my holding in a small cap. which I originally bought at the nadirs of 2002/3. Stripping the net cash position out of the share price gives a business valued at ¥200~300 per share. Earnings are around ¥30 with an implied yield on the business of 10~15%, a much better deal than 2002/3. Most of my holdings, large and small cap., are showing similar valuations, an indicator of how bombed out the general market is. Of course, the market could go lower still, but for value investors this is a once in a blue moon buying opportunity.

Private investor

"Cassandra" said...

Anon PI - Earnings and sales have risen dramatically since the nadir, with 08 & 09 estimates barely deprecated, but prices absolutely slaughtered in sections of the market. This hasmade price to prospective earns hugely attractive both absolutely and in an historical context.

BUT....before one gets too excited, the market is more often than not ahead of the sparse estimate information, meaning forecasts inevitably will be coming down further. And managements are like deer frozen in the headlights, for visibility has deteriorated dramatically, and a storm heretofore unseen is heading their way with implications that are almost impossible to gauge in the form of crashing US demand, a 15% yen appreciation with more perhaps to come, rollicking commodity input-price inflation, and a likely sharp drop in capex exports to China. Add to this teetering Europe, and some over-extended EMs, and there is a possibility of the first synchronized recession in two decades, something that would have untold effects upon Japan. Throw in to the soup that Japan is in the worst fiscal position of any OECD nation (and that includes Italy!!), and while households are underleveraged, and corporate balance sheets are in good shape, houshold savings rates are hovering at zero. And the demographics continue to worsen. Doesn't do much to make one bulish.

Global asset values are set to continue to contract. The positive thing about Japan is that they've already contracted in many cases nearly as much as they will. Dispersion however is HIGH between the cratered (due to earnings or cap-related downdraft) and the not-yet cratered. Take the first chart - 7732 Topcon, a Toshiba affiliate mfging GPS and surveying gear, or Sato (6287). Both got tagged with negative revisions, but both have secular growth markets, potential global markets, and have very attractive valuations that have already more-than-discounted alll but the most extreme of tempests.
I personally still value a market oriented hedge, since the coming storm looks set to be doozy and it would be a shame to squander good alpha, for the sake of being piggy, only to get wiped out by the unhedged beta. Good luck all the same....

Anonymous said...


Perhaps I should've used the moniker "Value Investor", and as such am prepared to tolerate short-term pain for long-term gain, as well as having the liquidity to weather a market Katrina.

I agree with you on most points, just take a less apocalyptic view. Don't kill yourself laughing on this, but my outlook for some time has been that the next upward movement in J stocks will be driven by M&A, Topcon being a case in point. The demographics and stagnant nominal GDP almost make it an imperative.

Happy Investing

Value (erstwhile Private) Investor

Anonymous said...

Now things are getting hairy ... the eyn is rallying towards its all time high despite a emergency 75bp cut by the US Fed. Are we going to see more yen repatriation that will continue to feed the buying of yen from the shorts?

We should soon be hearing BOJ talk their books (ie., yen too strong) soon at this rate we keep going.