Cassandra's 20/20 Foresight on the Yen

A reader recently asked my opinion of the Yen. I was flattered inasmuch anyone would care a toss what I might think about such things following my admittedly long-shot crash-prediction. Undeterred, I climb back on upon my soapbox and reveal to you that, like my feelings about Japan (and all it encompasses) I have a decided love-hate relationship with the Yen.

For in the absence of official intervention - both overt (their >$800bn++ horde) and offical policy (read: ZIRP, nearZIRP and all unnaturally low rates of discount that entice both leveraged speculative carry traders and domestic capital flight), the Yen would be amongst the world's strongest units of exchange, with all that this entails (before the winner's-curse rot of mild deflation, loss of export competitiveness, hollowing industrial economy, and increased imports, etc.) would set in.

Despite the potential allure of the yen of the Yen in an unfettered market coincidental to a normal interest rate regime, we live (and trade) in the world - not as we wish it to be - but as it exists. In this reality, TeamJapan (MoF, BoJ, etc.) has engineered a [globally anti-social IMHO) preemptive policy mix to nix the Yen's unfettered allure by "uglifying" the it in order to preserve parochial mercantile advantage. This, has been, everyone must admit, very effective indeed as USD/Yen, Euro/Yen, KRW/Yen, even RMB/Yen clearly demonstrates.

As I do not see any meaningful change in this policy mix, or the underlying mercantile intention, this means to me: a continued skew of small-size returns in the direction of yen weakness, punctuated with infrequent but nonetheless periodically large fat-tailed returns in the direction of yen strength.

I say this with 20/20 foresight, and am not "talking my book". For when I recognized the reality of this cynical policy intransigence , I threw in the towel and cut the last vestiges of my long yen position last fall at the precise level of 120.20 - not because I didn't think I'd get better at some point (as we did in Feb) but because I am simply couldn't handle the daily angst of a counter-trend position amidst a firmly ensconced, trend.

So the Score on that fixture was an undeniable:
MoF/BoJ -One ; Cassandra Academical - Nil


7:21 PM

MoF/BoJ - Tag-Team Duo Extraordinaire

In clasic WWF tag-team fashion BoJs Kiyohiko "The Shredder" Nishimura and Chief FX MoFFin Hiroshi "Mighty Hawk" Watanabe pounded on potential oppostion to the status quo of nearZIRP (tm), capital flight, high Japanese fiscal deficits, and a weak yen today with a barrage of assuagement and hyperbole that telegraphed a very important message to the Community of Highly Leveraged Financial Speculators: "Go For It! Do More! Don't Worry Be Happy!! The Force is With You!"

Hmmmm. Wonder what that will do to Yen vol...

Kyushu-Shinwa - We Hardly Knew Ye

Here is a very short little ditty saying "Sayanora!" to Kyushu-Shiniwa Holdings (TSE#8340), whose decision to jettison the Shinwa Bank portion thereby salvaging what they could, and liquidate the balance, resulted in a rather unwelcome spank for its erstwhile largest Gaijin holders, BGI & Fido. The song goes something like:

This is your farewell song.
It is isn't very long...

Note To Self: Buy Japan!

The TOPIX is up 11.6% since Cassandra took "the other side" of the esteemed KBC Strategist Jonathon Allum's late November directional reticence with regards to Japanese stocks. Admittedly, it's only 4% in Euro terms, but there are ways around that, and I'll leave it to one's imagination as to whether I would or wouldn't have hedged the currency.

But today, against the odds of the summer doldrums, and near-parabolic returns across the sea in Shanghai, I remain optimistic on Japanese shares in aggregate, and positively enthusiastic about certain pockets where value and the lack of pessimism coincide. Many skeptics remain. But the frank reality is until Global Liquidity (and I use capitals for good reason) is throttled or fully-choked, the bias of the index will remain positive, even in dollar and Euro terms. As such, I can envisage a 50-stock portfolio that is, in market parlance, "a double" over the next 12-months, which is a bold prediction (in light of Cassandra's unrequited US correction call).

Mr Market Replies.....

I just received this reply from Mr Market regarding my queries on the recent behaviour of the major commerical real estate indices (e.g. S15REAL Index GPC W)

Dearest Cassandra,

So lovely to hear from you! You really should pick up that pen paper, sit yourself down and write the traditional letter more often! I can tell you from experience, it's very cathartic.

As to your question. I know what you'd like is a simple answer, but reality is perhaps more complex. You see my commercial real estate friends are caught in the tug-o-war between abundant liquidity and a slowing economy. And I've yet to write the middle chapters, let alone the final oness. But, I CAN tell you that I've made the price action choppy and trending lower, and because it's my job, I've engineered a large bounce on light volume today as a counter-trend move in order to confuse and shake-out potentially weak shorts.

I do this this helps, and do not hesitate to write me again if I can be of any further service to you.

Yours faithfully,

Mr Market

P.S. - Being omniscient, I will tell you that you really must do something about that frightful cash-position in your personal account. Being under-invested is terribly costly when asset prices are soaring.

The Cloud in Every Silver Lining

One would be challenged in the current epoch to find an asset or asset class outside of Zimbabwean bonds (do they even exist?)and the US Dollar, that has not left the fixed-orbit of earthly price action towards some higher interstellar plane. Even troubled Lebanon and its equity market is appreciating nearly 1% per month.

Only in Venezuela where a populist elected leader is nationalizing assets at a prodigious clip driving the nation's equity index down well into double digits are investors seemingly cautious in their enthusiam. The other oddity in this unprecedented bull-run for assets is the Japanese flotsam and jetsam represented by the MOTHERS (-24% ytd), Osaka Hercules (-19.7% ytd), and to a lesser but no means happy extent, the JASDAQ (-8.4% ytd). , from the perspective of the USD investor, which is the financial benchmark equivalent of the No Child Left Behind Act.

And just as the asset bull has been dramatically accelerating its rampage since 2005, so too has the carnage here been inversely accelerating! The pictures speak for themselves. Now running the risk of being immodest, I was rather vocal to my warnings to investors to insure they scrutinize their allocations accordingly, for the peak of the TSE Mothers and Osaka Hercules coincided with the trough in large cap relative performance, and the denoument of Daiko Henjo, and was based on the flimsiest of growth stories, and all manner of "weight of money" market shenannigans. Now, at a trailing prc/sls of 0.81x and less than 8x trailing p/ebitda and p/cf, and 22x nominal earnings, the excesses are gone. And there are a number of interesting, growing enterprises that Monhanram could ferret out, and some value situations that Piotroski too would find interesting.

So while no bottom has been printed, the time has come to begin to search through the rubble more closely, for when general interest (and money, for which at present there is no shortage) returns, the first 50% will disappear in the blink of an eye.

Katy Lied

Sting popularized it as "synchronicity" defined more precisely as a coincidence of events that are [seemingly] meaningfully related. Such was my feeling this morning listening to (at the risk of revealing my age and musical taste) Steely Dan's "Katy Lied".

First as my coffee brewing device came to finish, came:

BLACK FRIDAY

When Black Friday comes
I'll stand down by the door
And catch the grey men when they
Dive from the fourteenth floor
When Black Friday comes
I'll collect everything I'm owed
And before my friends find out
I'll be on the road
When Black Friday falls you know it's got to be
Don't let it fall on me

OK, so this is not so strange, Friday's come one-in-seven and today just happens to be the day before the weekend.

Next came "Bad Sneakers" conjuring up images of enrequited profit from my short position in Asics (TSE Code 7936). Then while I am thinking about how I've covered my Toyota shorts, track 4, starting haranguing:

DADDY DON'T LIVE IN THAT NEW YORK CITY NO MORE

Daddy don't live in that New York City
No more
He don't celebrate Sunday on a Saturday night
No more
Daddy don't need no lock and key
For the piece he stowed
Out on Avenue D
Daddy don't live in that New York City
No more

Daddy don't drive in that Eldorado
No more
He don't travel on down to the neighborhood
Liquor store
Lucy still loves her coke and rum
But she sits alone
'Cause her daddy can't come
Daddy don't drive in that Eldorado
No more

Now, not only is Daddy not driving an El Dorado, but fewer and fewer are driving GM, F, or Chrysler for that matter.

Track 5 is the humdinger, for as I begin chomping on my croissant wishing I was a fly on the wall in the Paulson's strategic talks with the Chinese Vice-Premier arrives...

DR WU

Katy tried
I was halfway crucified
I was on the other side
Of no tomorrow
You walked in
And my life began again
Just when I'd spent the last piaster
I could borrow
All night long
We would sing that stupid song
And every word we sang
I knew was true

Are you with me Doctor Wu
Are you really just a shadow
Of the man that I once knew
Are you crazy are you high
Or just an ordinary guy
Have you done all you can do
Are you with me Doctor

Don't seem right
I've been strung out here all night
I've been waiting for the taste
You said you'd bring to me
Biscayne Bay
Where the Cuban gentlemen sleep all day
I went searching for the song
You used to sing to me
Katy lies
You could see it in her eyes
But imagine my surprise
When I saw you

Are you with me Doctor Wu
Are you really just a shadow
Of the man that I once knew
She is lovely yes she's sly
And you're an ordinary guy
Has she finally got to you
Can you hear me Doctor

Yea, I know Fagan was talking about a different Doctor Wu but the lyrics are not far off and seemingly have some relevance to the Madame Wu now in DC.

Still in disbelief about the seeming coincidences, I open my paper and wish I was in Cannes as I read about the Glitterati attending the festival when Track 6, "Everyone's Gone To The Movies" begins blaring from my speakers.

But now, I am wondering whether today is going to be as bizarre as they come. So I dropped everything I was meant to do, lazed on the sofa, closed my eyes, and drank in the last four songs which are some of the most masterful compositions written...

YOUR GOLD TEETH II

Who are these children
Who scheme and run wild
Who speak with their wings
And the way that they smile
What are the secrets
They trace in the sky
And why do you tremble
Each time they ride by

CHORUS:
Throw out your gold teeth
And see how they roll
The answer they reveal
Life is unreal

Who are these strangers
Who pass through the door
Who cover your action
And go you one more
If you're feeling lucky
You best not refuse
It's your game the rules
Are your own win or lose


CHAIN LIGHTNING

Some turnout, a hundred grand
Get with it we'll shake his hand
Don't bother to understand
Don't question the little man
Be part of the brotherhood
Yes it's chain lightning
It feels so good

Hush brother, we cross the square
Act natural like you don't care
Turn slowly and comb your hair
Don't trouble the midnight air
We're standing just where he stood
It was chain lightning
It feels so good

ANY WORLD (THAT I'M WELCOME TO)

If I had my way
I would move to another lifetime
I'd quit my job
Ride the train through the misty nighttime
I'll be ready when my feet touch ground
Wherever I come down
And if the folks will have me
Then they'll have me

CHORUS:
Any world that I'm welcome to
Is better than the one I come from

I can hear your words
When you speak of what you are and have seen
I can see your hand
Reaching out through a shining daydream
Where the days and nights are not the same
Captured happy in a picture frame
Honey I will be there
Yes I'll be there

CHORUS

I got this thing inside me
That's got to find a place to hide me
I only know I must obey
This feeling I can't explain away

I think I'll go to the park
Watch the children playing
Perhaps I'll find in my head
What my heart is saying
A vision of a child returning
A kingdom where the sky is burning
Honey I will be there
Yes I'll be there


THROW BACK THE LITTLE ONES

Lost in the Barrio I walk like an Injun
So Carlo won't suspect something's wrong here
I dance in place
And paint my face
And act like I belong here

CHORUS:
Throw back the little ones
And pan-fry the big ones
Use tact, poise and reason
And gently squeeze them

Hot licks and rhetoric
Don't count much for nothing
Be glad if you can use what you borrow
So I pawn my crown
For a ride uptown
And buy it back tomorrow

CHORUS

Done like a matador I pray for the weekend
And hope the little girls still throw roses
Else I'll change my bait
And move upstate
Before the season closes

Warning: Retail Japan Short Hundred Trillion Yen

Bloomberg reports here today that recent data suggests that there is nearly YEN 100 trillion in leveraged FX trading originating from Japanese retail, presumably in one form of short YEN or another. OK so some of it is an extremely short-term speculative alternative to pachislo .

Nonetheless, if ever there was a reason for a large, counter-trend move, herds of Japanese retail finding themselves pari-passu in a hihgly leveraged trade would clearly be at or near the top of the list.

Breaking News! SAFE expands with new hires...

Beijing (AP). In breaking news today, China's State Administration for Foreign Exchange (SAFE) announced that it was beefing up its investment team with some new hires. This follows rapidly on the heels of its announcement that it will take a USD$3 billion stake in Stephen Schwarzman's private equity powerhouse, Blackstone Group.

The new hires, Mssrs Sherman & Peabody, are well-known faces to more experienced and wiser financial market professionals, having been in the spotlight and won numerous awards over the years, especially when most professional were cutting their teeth. Deputy Administrator Li Dongrong said that "Their vision, experience, adventursome spirits, and innovative tools (probably referring to Mr Peabody's "Time Machine" and "Magic Blackboard") will be invaluable to SAFE's ongoing investment efforts.

When interviewed about the career change, Mr Sherman was quoted tersely as saying "If anyone can fix it, Mr Peabody can!".

Dear Mr Market

Dear Mr Market,

I understand that you are busy and that you've a lot on your plate, but I was wondering what precisely you meant by the recent weakness in real estate (see above chart). Did you mean that the economy will will be softening and so future rent and capital value increases will necessarily be limited, OR did you mean growth and liquidity will continue unchecked and so inflation will be HIGHER and thus interest rates will rise hurting relative values, even for the bluest of bluechip portfolios such as BXP's(see below).

Your insights would be helpful for if real estate has stopped being an anti-dollar hedge, then surely some people should told.

(always) Respectfully Yours,

"Cassandra"

(P.S. - I do realize it's expiry friday and that it just might be fun & games for sport & profit, but confirmation would help)

The Spread Police (Comments now allowed)

If you've been lamenting the under-performance of your favorite Japanese equity market index (like MacroMan and other foreign punters), imagine the frustration of those who have NOT not hedged their currency exposure. As it stands, the Japanese equity returns in dollars (see above left chart of MSCI-Japan) has yielded little in nominal terms over the past 18 months. More interesting, is the inverse correlation over the past 18 months, which has been volatility-snuffingly high. And while the strength of the inverse correlation may be new, the lack of return to the Nikkei in USDs over the long term is not (as depicted right).

Returning back to my main point, the inverse correlation between the USD/YEN and the Japanese benchmark equity-index-of-choice is truly uncanny. It is as if some secret order maybe the The Spread Police have been contracted to watch over every tick in order to insure that none are errant, and so that said relationship is not jostled free by emboldened feedback-trading trendfollowers searching for sufficient change impulse.

Now, if they in fact, existed, who, or what, would these "spread police" actually resemble?? Would they have families? Would they acknowledge their profession? Who would pay them?

Might they look like this?:


or perhaps this?:


Or what about....:



....this???


My spouse suggested...


My 5yo son assures me that they are...



Those who think it is a more nefarious, 2nd-order effect might think this:



At first, I thought...


Though after much rumination, my best guess, was more umm ... errr .... mechanized....



But in all earnestness, what has caused the Topix vs. USD/JPY relationship to be caught in this financial "eddy" for the past 17 months? For it hasn't alway been so, as seen in the long-term chart of the Topix in USDs in the second graph from the top. Of course, there remains a measureably-large dollar sensitivity amongst the shares of the largest enterprises many of whom indeed depend upon US exports and world trade, historically overly-dependant upon the strength of the USD. But this reality has existed nearly since I cut my wisdom teeth, so why now??

And one would be forgiven for considering ZIRP & nearZIRP as the culprit, though it too is almost a decade old and has seen both currency moves and index moves that has swamped the relationship. So why so little vol? While William of Occam would no doubt attribute it to that which is most likely - the fact that not even gaijin equity investors, be they pension funds or central banks, want to hold YEN thanks to ZIRP - the lack of certainty is making me edgy. For low vol periods in high-vol instruments and the apparent relationships that causes them is making me feel decidedly unsettled.

(BTW - for those admiring the chinese-looking "soldiers", they are in fact North Korean border guards "walking the line" as Jack Nicholson said in "A ew Good Men", or in this case, sitting on the wall. I used it not to intentionally mislead, but just because I liked the pic! -C-.)

Man of Steel

A South Korean newspaper managed to snap & publish photographs of heretofore camera-shy, activist, buccaneer, and Steel Partners founder, Warren Lichtenstein while he was attending the KT&G AGM recently.

To a certain extent I admire Steel's activities in Japan, for they had shined a deserved spotlight upon the low-hanging deep-value fruit that was present in Japan. And indeed they've pointed out the under-leveraged, and sub-optimal capital structures of many Japanese enterprises.

At the moment, however, while I admire Mr Lichtenstein's efforts, I do not envy his investors, for while the investment manager has indeed collected meaningful performance fees AFTER the share prices of portfolio companies have been ramped-up, investors currently face a less pleasant situation of owning a portfolio of pedestrian, less-than-liquid and undervalued-no-more companies, the exit from which will more perhaps even problematical than it was for Mr Lichtenstein to slip away from the AGM without getting his photo snapped.

Bold Imagination

I like bold forecasts. Particularly predictions that employ large quantities of imagination, that look beyond the present to big figures far-departed from prevailing price levels. And yesterday, sober, often-prescient, Canadian stalwart, The BCA (The Bank Credit Analyst) did precisely thus, by predicting that Euro-Yen is enroute to YEN180 per solitary Euro.

They say that despite the impressive 80% apreciation since the bottoming of the Euro in 2000, more is in store. They say:

As we have previously highlighted, the ECB will continue to raise rates, which will underpin the euro heading forward. In sharp contrast, Japanese interest rates will not move higher as the country battles with deflation, and the economic data remains soft. Should the euro eventually break up through its previous high and head towards 1.4500, as expected by our Foreign Exchange Strategy service, and the yen holds relatively steady, the cross could get close to 180.00 and test previous highs set in the early 1990s.

Far be it from me to disagree on a lark. For I do understand that in the game of currency-market "rock-paper-scissors", relative interest rates and the bias of change thereto trumps the theoretically important aspects of trade account balance and current account balance. From this perspective, despite mighty mercantile Japan's persistent trade and current account surpluses over the past two decades, negligible unemployment, proximity to the greatest growth conjurer that the world has EVER seen, and the phenomenal accomplishments of Japanese multinational enterprises in terms of technological and market dominance, the MoF has accomplished "plenty much" through ZIRP and fiscal disabusement: They've deterred anyone and everyone from holding or bidding for YEN, including the vast majority of their own citizenry, who Bloomberg reported today now own more mutual funds with non-Japanese assets than mutual funds withn Japanese assets. This is, from the perspective of bureaucrats, a policy triumph equivalent to bringing down the Soviet Union.

Before one picks up the phone and shorts the YEN for EUR, I would point out two things. First, the demise of the Soviet Union was to some extent accidental, since the Reagan build that ostensibly bankrupted the evil empire was itself based upon flawed intelligence intercepted from the Russkies who were essentially fabricating Russia's own military-industrial infrastructure acquisition and troop-strength facts and figures to their own leadership, something American intelligence didn't consider when embarking upon their own 80s build. Secondly, Euro-Yen has been the bane of large macro traders and carried out many in 1998, and after. Now, they are requited, but short YEN IS crowded both explicitly (by financing carry trades) and implicitly, by the Bloomberg figures of Japanese capital obviously (and copiously) flowing abroad.

BCA things nothing will upset the proverbial apple cart, send the cross to 180. They may be right, but many other things must also go right and smoothly for this bold prediction to come to fruition.

Not-so-Chinese Whispers

So the stock is rising for "no apparent reason". "It's noise", says the naive reversion trader or overconfident short-seller. Maybe someone knows something. Knows something indeed!!! Bloomberg reported today that a NY-based investment banker within the energy group at Credit Suisse (and friends) were taking advantage of precisely such Fat Chance to profit handsomely from their privileged information. Soon, however, he'll be surfing porn at the US Federal minimum security prison at Allenwood.

The list of deals that he and his friends are accused of capitalising upon is long, and the profits large indeed. He told friends and business partners, they told others, trades were placed, leaving a trail of landline and cell-phone records. But what was he thinking? After the effort that the SEC put into trying to get Martha Stewart make the pen more "homey", did he believe they were now too preoccupied with terrorism? Really! Consider the effort that Ashcroft put into screwing harmless pot-head Tommy Chong.

As result, Credit Suisse now has egg on their face for hiring and promoting such an idiot who got caught badly, without any form plausible deniability. And make no mistake: the real surprise here is how stupid he was for someone 37 years old and in the business for a long time, and that he got caught. OK, so he was not a WASP American, but still, "what was he thinking?!?!?" For everyday. CFOs, analysts, hedge-fund & portfolio managers, non-executive directors, syndicate desks, financial printers, lawyers, legal assistants, journalists, TV talking heads, SEC registration clerks, cleaners, and all their friends, relations, acquaintances and people they want to impress are acting mmaterial non-public information within the public markets, whether about secondary offerings, earnings torpedoes, takeovers, buybacks, mergers etc.

So that emerging price move, with emerging volume change, sans information might just be noise. But the odds are that someone has information that YOU don't and is acting upon it, either directly or indirectly in the market.

Fair & Balanced ?

Perhaps the only conceivable thing worse than the Wall Street Journal is a Wall Street Journal owned by Fair & Balanced parent, Newscorp. Such would be case if today's reported marriage were to be consummated.

I have always been partial to the pink sheets of Pearson's Financial Times. I took the habit as a student in US, at the height of the Eurodollar market boom, and continued as a student in the UK, despite the fact that the pink pages were deeply unfashionable amongst the crowd with which I was running and the professors with whom I was studying, most of had a Guardian or Workers Daily under their arm. Nonetheless, despite the unfashionable-ness, I thought it firmly "centrist", and not nearly as obnoxious as The Economist, at the time.

The Financial Times did, and still does, deliver the dry facts. They have no need to pepper the news or op-ed with ideological diatribes, for their readers knew their class and by extension their classes interests. There were few fence sitters in their audience. I appreciated this, for I was keenly independent in thought and found the Wall Street Journal's slant rather vile and insidious. I understood shy they thought it necessary for in America, "class" was primarily economic, far more amorphous, the associated politics more resembled the shifting sands of the Sahara. This meant that there many fence sitters, working-class by birth, middle-class by education, and perhaps upper-middle by profession. They were inherently conflicted and presumably could be swayed by persuasive ideological argument, and/or cynically bent reporting, or deeply ideological op-ed rants.

Today, I still read the Financial Times. And for the most part, they remain "centrist" in the political-economy of their editorial stance (though they've sold out to "the Suits", of late, caving in to vulgarity and the crassest of consumption with their "How To Spend It" and "Property" inserts). But the thought of a Wall Street Journal owned by Murdoch & Co. is, I must reveal, a rather depressing one. As if CNBC's bubblevision weren't sufficiently theatrical with talking heads Kudlow, Cramer, Perky Bartiromo, and their two-minute interviews with the "movers, shakers, and "hot-hands", we know must countenance "Fair & Balanced" in Finance. No more recession. No more pessimism. Your either with us or against us. Bullishness or broker. Bears, skeptics, cyncics, pessimists and maybe even just those this a valid and correct (by contrary) point of view, kind of like France and Germany during the Iraq war will now be ridiculed in print, and in the op-ed. As a result, if consummated, we will have to assign "contrarianism", like Communism before it, to the dustbin of history....ne c'est pas?

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!

Footnotes:

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...

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.

Farewell TOC

So farewell
then TOC
TSE# 8841,
land-lord,
linen-lord,
and would-be
lord of
health-tonics.

As a listed
company,
you always
traded cheap,
never
getting
the respect you
deserved.

Now,
With a TOB price
equal to a 5.5% cap rate,
you'll be remembered
as having been
"taken-under"
by the Otani's
rather than
"taken-over".

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

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?