Saturday, June 30, 2007

The Bank of Japan's Inflation Threat Scale

Given events in the UK this weekend, we not only have to contend with Red Alerts from the Dept of Homeland Security, but market practitioners must contend with a new system introduced today in Japan. Taking a cue from the United Kingdom's Home Office, the Bank of Japan has initiated an "Inflation Threat Scale" in an attempt to forewarn the nation, and especially foreign policy-makers and market participants of threats that might require changes in official BoJ interest rate policy.

Threat levels are designed to give a broad indication of the likelihood of an inlation attack. They are based on the assessment of a range of factors including what PBoC and other exporting competitors are doing, where the YEN is trading at, recent events and what is known about our export markets, trading partner intentions and competitor capabilities. This information may well be incomplete and decisions about the appropriate interest rate policy response are made with this in mind. Together with the detailed assessments behind them, this analysis informs practitioners in key sectors and the Ministry of Finance of the potential threat of an inflation attack. Threat assessments are also produced as necessary for corporations, individuals and specific events. There are five threat levels which inform decisions about the levels of Interest Rates needed to protect our Critical Mercantile Advanatge (CMA).

* LOW : an attack is possible, but rather unlikely
* MODERATELY LOW: an attack is possible, but not likely, at all.
* SUBSTANTIALLY LOW: an attack is strongly impossible
* SEVERELY LOW: an attack is highly impossible
* CRITICALLY LOW: an attack is incredibly impossible, not to mention rather unlikely

In reaching a judgement on the appropriate threat level in any given circumstance several factors need to be taken into account, these include:

Available Intelligence: It is rare that specific threat information is available and can be relied upon. More often, judgements about the threat will be based on a wide range of information, which is often fragmentary, including the level and nature of current economic activity, comparison with events in other countries and previous inflation attacks. Intelligence is only ever likely to reveal part of the picture, and therefore is typically used only as an excuse to keep threat levels unchanged.

Inflationary Capability: An examination of what is known about the capabilities of the inflation in question and the method they it may arise based on previous attacks or from available intelligence. This would also analyse the potential scale of the potential inflationary attack.

Inflationary Type: Using intelligence and publicly available price informaton to examine the type of the inflation and the ways it may arise including what sort of targets it would consider attacking (wages, consumer goods prices, services, assets etc.).

Inflationary Timescale: The threat level expresses the likelihood of an outbreak or attack in the near term. We know from past incidents that some attacks take years to plan, while others arise more quickly. In the absence of specific intelligence, a judgement will need to be made about how close an attack might be to fruition. Threat levels do not have any set expiry date, but are regularly subject to review in order to ensure that they remain current.

WHO DECIDES THREAT LEVELS? The Joint Action Committee (JAC), a panel derived from Finance Ministry adn Central Bank policymakers, in combination with the Office of Financial Fairness (OFF) was created for the analysis and assessment of international inflation. JAC is responsible for setting inflation threat levels and Ministers are informed of its decision. It also issues warnings of inflation threats and other infaltion -related subjects for customers from a wide range of government departments and agencies, as well as producing more in-depth reports on trends, inflationary networks and capabilities. The Ministry Internal Security Service (MISS) is responsible for assessing the level and nature of the threat arising from domestic inflation, principally the Leveraged FX Day-Trader and related carry-trade oriented threat.

WHERE CAN ONE FIND OUT WHAT THE CURRENT NATIONAL THREAT LEVEL IS? National threat levels are continually monitored and are altered as required for our own protection for the purpose of demonstrating to foreign authorities that Japan is doing something. We cannot anticipate how frequently they may be amended as this is dependent on available intelligence at any one time. From the 1st August, information about the national threat level will be available on the BoJ's Website and Ministry of Finance's Website.

WHAT ARE "RESPONSE LEVELS" AND HOW DO THEY RELATE TO THREAT LEVELS? Response levels provide a broad indication of the protective measures that should be applied at any particular moment. They are set by financial policy practitioners in Government and in some Critical National Mercatile sectors. They are informed by the threat level but also take into account specific assessments of vulnerability and risk. Response levels tend to relate to market moves in a direction against desired market moves, whereas threat levels usually relate to broad areas of activity. Within response levels, there is a variety of measures that can be applied as appropriate – the response level will not produce the same measures at every location. Many of the measures will not be obvious or visible to the public, but will be evident to market participants and practitioners, or members of the press that report counter anti-inflationary policy-spin .

There are three levels of response which broadly equate to threat levels as shown below:

* NORMAL - Routine protective policy. Low and Moderate measures appropriate to the business concerned. This typically is represented by ZIRP and near ZIRP.

* HEIGHTENED - Additional and sustainable policy measures, for example the increase in fiscal deficits, or MoF claim that tax receipts may fall short.

* SUBSTANTIAL - Sever and protective policy measures reflecting the broad nature of the threat combined with specific business and geographical vulnerabilities and judgements on acceptable risk. This may include changing of domestic regulations to encourage greater flow of funds abroad, and other measures like insulting the PBoC officers in order to deter Chinese accumulation of YEN reserves.

* EXCEPTIONAL - Maximum policy measures including broad and concerted media compaign to counter a potentially Strong YEN, and all of the other polciy measures mentioned above.

* CRITICAL - Critical measures to meet specific threats and to minimise vulnerability and risk. For example in response to the YEN strength in mid 1990s. Dr Sakakibara engineered a massive intervention that changed the course of currency market history. Similarly weakness in 2004 was met with huge intervention and reserve accumulation. Any and all policy measures and actions are on the table when this threat level is reached. The policy measures taken to protect people and Critical Mercantile Advantage will not be announced publicly, to avoid informing foreign political authorities about our true intentions. Because response levels are the result of detailed assessments of risk to specific elements of the Critical Mercantile Advantage, changes in the national threat level will not necessarily produce changes to the sector-specific response levels.

TeamJapan 1 - Activists 0

It was a week in which things did not go as planned - one that has seen activists in Japan licking their wounds. Steel Partners [perhaps happily] lost their bid on the legality of Bulldog's takeover defense. TCI was impolitely rebuffed by BOTH management and other shareholders and watched the value of their 10% J-Power stake fall yet further, whilst DaVinci was foorced to up their bid for TOC perhaps to a level that pays away most of the juice in the deal.

Steel perhaps came out best, winning a partial victory by goosing the price to YEN 1650 (+30% on their existing position) for the June 30th quarter-end without having to buy a single share additional. Whether this was cleverness or dumb luck pprobably depends upon whether one believes Warren Lichtenstein really wants to own 100% of Tonkatsu-central. I believe, somewhat cynically, he knew full-well that management would resist, and they wouldn't need to put any more cash up to increase the market value, and hence SPJs accrued performance fees. Slimey, but clever from the point of view of the IM. Moreover since most of his investors are agents of faceless institutional investors, and not principals, they too are more-than-happy to ride the coattails of a juicey mark-to-market gain. Given the revolving door in the FoF business anyways, they probably won;t be around when SPJ must sadly dispose of their large holding into an illiquid market with buyers until the Yen800 to 1000 level or so.

As for TCI and their foray into 9513, I don't know what thhey could have been thinking. Maybe this is their training ground for green activists to cut their teeth without doing too much harm. Perhaps their end-of-year 2006 and Mar 31st ramps were sufficient reward from an incentive-fee accrual point of view to offset present mark-to-market pain. Perhaps thhey are sucking the shorts (it is literally impossible now to borrow the stock) before they do a "Torquemada" (fear & surprise!!) raid and increase their holdings to 15 or 20 coinciding with their next incentive fee mark. In any event for June 30 they are stomaching a 30% markdown, AND sitting on 10% of a company and management (and shareholder-base) that has told them to "piss off!" It will cost them another 20% (at least) to dispose of their present holding in the current market, even if they work stealthily.

And then we have the hostile DaVincis making life miserable for the Ohtani's, not only spoiling their "take-under" of TOC, but now, unwilling to take "No!" for an answer. The Ohtani's hilariously wanted it at 800 for themselves, but since they can't have it, now say 1100 is not in shareholders best interests. So DaVinci has raised their bid for TOC to YEN 1300. I know not what its worth, though reckon that it is fast approaching fair-value. What I do know is that relatively speaking, it's almost certainly overvalued in comparison to other static lowly-leveraged Tokyo portfolios be it Toho Real Estate (8833), Toei's,(9605), or Osaka's Keihanshin (8818).

But the gaijin continue to pile in to "cheap stocks", with nearly everyday revealing more reporting a greater-than 5% wodge of this-or-that. Make no mistake: I DO think there is absolute value out there. I just think the investors are underestimating the amount of social resistance, and the willingness of all segments of Japanese society to circle the wagons in defense against the greedy foreign carpetbaggers.They will tolerate them as passive investors, but they will not shower them with gifts, unless TeamJapan judges it is in their interests to do so, and Warren Lichtenstein is not a role model they are, as yet, desirious of.

In the meantime, it will be a race, for as resistance remains firm, global liquidity ebbs, and asset values compress, so too will the appetite for a lengthy hard fight to extract value from chheap but pedestrian assets. Of course, "friendlies" may still get done, as will the flotsam & jetsam that needs to be divested to real trade buyers or PE/LBO/MBO funds who want to take whack at rehabilitating something. But with Japanese buyers less-than-willing to go hostile, and TeamJapan less-than-willing to concede any sectors whatsoever to foreign domination or competition, it seemingly leaves but a few middle-market and small-cap deals in play. Maybe I am reading this wrong, but I think that this is round-one, and since most of the gaijin capital is NOT sticky, and since like with most things that require patience and a long-view, the gaijin are less likely to emerge triumphant.

Friday, June 29, 2007

What's Hot & What's Not (v.2007)

Nearly a decade after LTCM some reflection is in order, and so Cassandra presents the “What’s Hot & What’s Not” of International Finance (and the people and tastes of those who live it and make it what it is) Compiled and commentary by guest correspondent Ima Pratt.

Hot Trade? - Short Yen v. Long BRL ("Singing Polly Wolly Doodle all-the-day.....". Have you any idea how completely totally and utterly humiliating and soul-destroying it is to wake up each morning and NOT be short yen? No matter how much you think you can, you cannot..))
Not! – Long GKOs (GKOs? GKOs!??! We don't need no stinking GKOs ....[we are now strong Russia!])

Hot Stock Ramp! – CROCs (CROX) - (Make mine matching day-glo pink please, for the whole family)
Not – JDS-Uniphase (JDSU) - WHAT!!?? (You still own it? Ha ha ha ha......)

Hot EM - Any BRIC (sans the ‘R’) (Remember Slim Pickens on the nuke at the end of Dr Stranglove?? Yeeeehaw...Ride 'em cowboy!)
Not –Japan's MOTHERs market (Yak-pooh is seemingly more attractive. At least THAT burns.)

Hot Blowhard! – Dan Loeb (if you're into that sort of thing)
Not – Sandy Weill (Did anyone actually read his book?

Hot Hedgefund! – Amaranth (quickly "gunned", and rapidly incinerated)
Not – Long Term Capital Mgmt (nefariously "gunned", tortured, made to suffer inexorably before being piled on by the scrum)

Hot Operator! - Carl Icahn (Apparently he's a better negotiator than Hafez al-Assad)
Not - Nelson Peltz (You know the party's really going downhill when he's making the front pages of the business section and moving prices)

Hot Psycho! - Jim Cramer (Some have remarked it's Tourette's, but that's insulting to actual sufferers of the syndrome)
Not - Jim Cramer (You KNOW you haven't gotta life when you're reduced to watching Kudlow&Cramer)

Hot Hottie! – WallStrip's Lindsay Campbell (She's smart, and sarcastic. She must be Canadian....)
Not – Maria Bartiromo (Latest and most famous member of Citigroup's "Mile High Club")

Hot Icarus! - Nick Maounis (C'mon, double or nothing...what you say....?)
Not: John Merriweather (LTCM was "Water off a duck's back")

Hot Wings1! – Flying Private (Whatever one's shortcomings, never feel sorry for a guy with his own plane)
Not – “Gold” Frequent Flyer Card(Membership in that club spells: "Works too hard [for someone else] - Ain't gotta life")

Really Hot Wings! – Anything Boeing with room to drive-on, drive-off your Aston or Bentley (motto: If it ain't Boeing - I ain't going!)
Not – Gulf-IV, Citation (too small for the entire entourage and pets)

Hot Willy-Extender! – Bespoke built Swan 125’ with a “Wally” Tender (Exclusivity has no upper boundary on price)
Not – Ferrari (yuck!) or worse, a Porsche (Still a wide-boy's dream)

Hot Skiing! – Private Members-Only Ski Mountain (urbane skiers dream: No boarders!)
Not – Aspen, Verbier or Courchavel (Time-shares, condos, Russians...which is worse for the neighborhood?!?)

Hot Digs! – SW3 US $20mm for a freehold (before knockdown) to make way for a new Palace in the Romanov style.)
Not – New York (With the SEC, IRS, AML, AIPAC, & Department of Homeland Security endoscopically inspecting your ummm, well you know what I mean...)

Hot Job! – Private Equity (Damn!! How f-ing stupid could I have been to concentrate on arbitrage?!!?)
Not – Venture Capital (How f-ing stupid to pour money down a sinkhole, holding the hands of kids that make my daughter looked middle-aged for the hope and prayer of floatation, when one can buy it (with a wink & nod from mgmt), loot it, book fees, gear it up, book more fees, and then toss it back with negative EV to the retail and index-fund sods)

Hot School for Jr! – Le Rosey ("Hey guys! Dad left me the keys to the Gulf IV, we're off to Marrakech to p-a-r-t-a-y!!)
Not – Any US “prep” school (Sadly, even for the privileged, post 9-11 US immigration regulations means one actually has to attend classes to maintain an educational Visa)

Hot Deal! – Being a Seller of a LARGE HFM to an IB, Commercial Bank or SAFE for Billions (Indeed, there is nothing left to do after such a coup de grace except hire a private army, or, like Chuck Feeney, just give it all away before it poisons the very essence of your being and turns your kids into grateful role models such as Paris Hilton)
Not – Starting a Hedge Fund (over-educated, under-stress-tested, over-confident under 30s buying the equivalent of lottery tickets while spending entirely too much time surfin' MySpace or Facebook for a hook-up)

Hot Kleptocrat! – Vladimir Putin (A true man of the people, right?)
Not – Thaksin Shinawatra (A true man of the people, right? 'Eere we go, Blues!))

Hot Strategy! – “Doing what works” (Damn! Why didn't I think of THAT ?!?!)
Not – “Doing what used to work” (Errr...have YOU ever tried to drive forward while looking through the rear-view mirror??)

Hot Investment Property! – East European Real Estate (Thank goodness the Russians were so intent on beating the others to Berlin, most of the fine imperial towns were NOT directly in their path were spared)
Not – Spanish Real Estate (Japanese and Germans have been cursing the 1980s for more than a decade-and-a-half. So too will the Spaniards, and silly foreigners who bought it from them. Sorry Charles...)

Hot Tips! – Financial Blogging for Free (Ayn Rand makes me puke. Altruism lives)
Not – Financial Blogging for “Adsense” revenue (It is not so much a Faustian bargain as it is a huge scree-field through which gravity exerts its force in one direction only)

Hot Money! – Trading on Inside Information (Good research is Sooooo hard to come by these days)
Not – Catching the Falling Knife (If you don't know who the sucker is, it's probably you)

Hot Water! – “Paying” for Broker Recommendations BEFORE they are released (Hot Damn MW! Can you believe THIS is LEGAL??)
Not – Using Buy-side Fundamental Analysts (Might as well use darts or a Ouiija Board)

Hot Factor! – Break-up or Private-Equity value ("I know what boys like, I know what girls want, I know what boys like, boys like...)
Not – Stern-Stewart EVA (Positive feedback loops do eventually kill the goose or the dodo)

Hot Dog! – Merrill Lynch (See! Nice guys don't always finish last)
Not – Bear Stearns (Someone has to get caught with the Old Maid)

Hot Commodity! – ED&F Man (Apparently people DO buy guaranteed notes. The trick is not to try to sell them to the same person TWICE....!)
Not – REFCO (There was a crooked man, who walked a crooked mile....)

Hot Encore! – High-level Political Appointment (....for the love of country, civic duty, and sense of responsibility [to my former Limited Partners])
Not – Public Service (you mean, like, volunteering or giving money to some place WITHOUT having it named after me?!?)

Hot Potato! – Cash-for-honours (Surely that doesn't happen in England....does it?)
Not – Cash for a Good Lawyer (at 50 quid-a-fax, it adds up quick)

Hot Bottle! – “Le Pin” for Investment (Can you imagine what The Oligarchs will pay for that which you've judiciously tucked away once they've made some high-end sangria with theirs??)
Not – “Haut Brion” for Drinking (Merlot? What could be more naff...)

Hot Inflation Hedge! – Owning Physical Infrastructure (Will it throw off cash in a depression? Can it be nationalised? Will MacQuarie buy it from me for "a double"?? )
Not – “Asset Backed” (All assets are not, pray-tell, created equally. Just go ask The Bear..)

Hot Liquidity! – Dark pools (John Thain's worst nightmare)
Not – Being a specialist (Vinny don't work here no more. Him & Sal went an' opened a pizza joint in Rockaway...)

Hot Asset Class! – Agricultural Commodities (Pardon me, but asides from US subsidies for manufacture of Corn Ethanol, can you think of anything more absurd for something as fundamental ""Food", than letting hordes of narcissistic hedge fund managers loose with a trillion dollars to speculate upon foodstuffs, and, for the most part, not be taxed upon profits derived therefrom? I am certainly not proposing collectivization, but is this really in everyone's best interest??!?
Not – Municipal Bonds (It's a bond. It's demoinated in USD. And the constituents, whose good faith stands behind them, have negative savings, and negative equity)

Hot Cards! – Texas Hold ‘em (Bring 'em on Sparky...the only thing bigger than my pockets are my balls and my ego!)
Not - Bridge (A four-hour card game with a bunch of value investors and arbs....oh jeeez, shoot me now)

Thursday, June 28, 2007

Dear Mr Market...

Dear Mr Market

I was just wondering:

Like....ummmm..... W.T.F ??

Yours truly,


Dearest Casandra,

Let not your petty tyrants get the best of you.

As you know my job is to [metaphorically speaking] bugger the greatest number of people I can, as often as possible. However, I will intimate to you that I rarely undertake to it so boorishly and blatant such as what we are seeing at the end of this calendar quarter.

Chalk whatever is getting your proverbial goat to short-term requirements driven by the need and/or greed of those that can or must. And don't fret, something awful is sure to happen at some point to so vindicate your overly liquid always does, doesn't it?

And please do drop by for a glass of Port so we can discuss your seeming obsession with the Yen. It is really isn't healthy you know.

Until then,


Mr Market

Monday, June 25, 2007

The Hunter as Hunted

So the United States Senate has nearly completed its peek into Amaranth's errr ... ummm ....accident. And though I made it a point NOT to flog this one into the ground, I did post one rather lengthy comment entitled Amaranth: Was it the Market?. I stand by everything that I wrote, including the philosophical questions. Some of these, however, were answered toay as the scrutiny shed some fascinating light, not just into the traded market for natural gas, but more importantly, the nature of the notion of market democracy, generally speaking. I highlight this because I think it is central to understanding financial markets in a world of PBoC, the BoJ, collusive hedge fund groups and activities, and "traders" who buy and sell interests in companies the size of which approach or regularly exceed 15% of the shares outstanding.

Back to Amaranth. In a nutshell: Hunter at Amaranth smashed Bo's position at Motherock, causing an irreparable chasm between Motherock's equity and the required margin. Hunter apparently stretched and flouted most exchange and federal rules against such activity, including the contravention of exchange position limits, outright market manipulation. Lawyers may quibble on this point, but "gunning someone" i.e. the intentional accumulation or disposition of interests for the express purpose of impacting price leaves little doubt over one's intentions and motivations. Markets, in this regard, are a game only to an extent.

But the Hunter was hunted, and apparently in the process of slaying Motherock, Hunter (and Amaranth) exposed themselves to the same, something, and so their direct competitors, their financing sources, and finally the market, in turn, disposed of Amaranth. This was not about value, supply or demand. It was about market power, its abuse, the limits of that abuse, and finally retribution in the form of application of market power in reverse, through collusion. Heady stuff.

Granted Hedge Funds are not Central Banks. And though both may break the rules either in fact or spirit, Central Banks and monetary authorities can (and frequently do) change the rules, whereas mere behemoths remain (in the end) not only beholden to them, but dependant upon them for the enforcement of their gaming tactics. Still, what comes across from the US Sentate investigation is how remotely this "market" actually resembles "the market" we learn about in rose-coloured theory and which capitalism holds on high - i.e. the perfect market of lots of small participants each with little to no ability to hold sway, and where price discovery is achieved only as the result of aggregate activity. This ugly hunchbacked stepchild of the market is deeply flawed insofar as this can, and does, occur with regularity, ir not pervasiveness. On the bright side,these games, however, often do end in tears, whether for the manager, the portfolio manager or the end investor, (not to mention the integrity of the market and the system). This was true of the Hunt Brothers, Sumitomo's Hamanaka, Barings' Leeson, LTCM, Amaranth, as it was true of Janus and Fidelity's abuse of market power evidenced by their largest funds' pathetic relative performance following high-market impact performance-game era's. And to be certain, there are casualties, reprehensible when they are innocents and orphans, and perhaps just desserts for those who do not understand the dangers inherent in agent vs. principal conflicts.

But the [literal] multi-trillion-dollar question is: will the PBoC/SAFE/BoJ - Central Bank or not - suffer the same ignominomous fate the befalls those that piss into the wind for too long, contrary to BOTH sustainable fundamentals and the perhaps inevitable attack of the electronic herd??

Friday, June 22, 2007

10 Cool Things to Do With That Short YEN

Have the summer doldrums got you down already? Borrowed all those YEN, but don't know where to put them just yet? Dont fret. I've got some stellar ideas for you under the heading of:

Ten "Hot but Cool" Things To Do With Those Yen Carry Proceeds
10. Score some "X", some East-European Supermodels, and fly-private to a "Rave In The Cave" in Ibiza. Be certain to leave the laptop at home....

9. Earn mondo kharmic-credits by donating it to the "Sea Shepherds" in order to finance their fight against the ludicrous Japanese whaling.(Note for US Leveraged specs: This is tax-deductible!)

8. Buy some Croatian waterfront or Belgrade Officeblocks - there is still value there even though the German specs have already bit it up. For the trulym, slavically-adventuresome, Tirana & Kishniev remain virtually untouched by property specs.

7. Splurge on a Damien Hirst "Sapphire & Ruby Encrusted Blackberry" insuring that whatever the market brings, you'll always have at least one-up on your mates (and two thumbs on the art-market!)

6. Be a hero and take a flyer on some those heavily discounted equity tranches of the yet-to-combust CDO of your choice. "Binary Punting" rarely had so much upside....

5. Be a contrarian and buy a stately townhome in Berlin, still for less than 25 cents of that prevailing price in Russkieville-on-Thames;

4. Use it to seed a "Distressed Spanish Property Vulture Fund". Lord knows the Spaniards are in deep shit, having built more new homes in the last decade than France and Germany combined! Surely there is dosh to be made by picking up the the almost-finished and half-finished pieces from the soon-to-be-liquidating Spanish banks jettisoning their "collateral".

3. Buy an Ambassadorship! Managing money in the trenches, it must be said, can be downright boring. Why not splurge on some large Democratic Campaign Contributions that will insure you are on the shortlist for a choice posting come 2008!

2. Lunch with Buffet. Could there be a better investment? Not to go yourself (can you think of anything more tedious than lunch with a VALUE investor"?!?!), but to "buy and flip". Surely somelike like Dan Loeb's ego will cause him to pay double before the lunch date arrives.

1. Try your hand at funding a Hollywood Blockbuster! Yes, THIS is what its all about: mingle with the glitterati; be on a first name basis with Tom Cruise (real name Thomas Mapother IV, Height= 147cm) and The Parties...oh yes, The Parties (just don't drive yourself home!!). A word of caution however: Hollywood is perhaps the only place where people are more cagey and dishonest than Wall Street. The last batch of eastern film financiers were buggered by the fine-print and left hollding the bag on a portfolio of shite of the likes of "The Postman" and "The Adventures of Pluto Nash".

Friday at the Dentist ?

Just another Friday? Ummm no. It is the last Friday before the end-of- -the-quarter, and no one with meaningful interests in Yen weakness is going to drop the ball here and now. Not after having positioned and driven, and yes, drilled (See chart above and photo below) the Yen (and any remaining longs) into the direction of painful oblivion. Performance league tables, sticky incentive fee marks, etc. are too valuable to be left to the vagaries chance.

And like the infamous ex-Nazi dentist depicted right, Vice-Minister Fujii has continued to campaign of rhetoric and hyperbole "warning" that tax receipts will likely fall short of official estimates, which perhaps can be seen as MoF anti-venom to Mr Yen's comments imploring the gov't to normalize rates.

But How does the Ministry of Finance manage this relentless compaign spinning every stat and information innovation such that it is seen as either deflationary outright negative for the Yen? I believe that I've found the answer. You see the Ministry of Finance has engaged a team of heroic experts such dark arts, a photo which I've managed to garner (see left). Famous 1960s Japanese hero, "Ultraman" (center) is seen here with his secret team.

Thursday, June 21, 2007

Mr Yen - "The Yen is Absurdly Cheap"

Some people choose to see the world as it is presently, and some choose to see it as it should be, whilst others choose to look at it as it will be [in the future]. As an idealist with a seriously pragmatic streak, and as a Cassandra, I acknowledge the former though draw mostly upon the intersection of the latter two for my inspiration and feeble insights. This is NOT always to one's benefit (as evidenced by the remnants of my long yen positions that I clung to far too tenaciously during the first quarters of 2006).

Jim Croce, too, recognized its perils, recommending that one never "tug on Superman's cape", "piss into the wind", "pull the mask off that ol' Lone Ranger", (and don't mess around with Jim). In markets, however, the rewards relative to the risks, increase dramatically as one approaches what in hindsight will the inflection point, plain as day for all see to inflection. Some times these happen from pure entropy, sometimes as the result of exogenous factors, while at other times price action is capped and turned as the result of some meaningful change, be it fundamental or perceptual, perhaps similar to the utterances of Dr Eisuke Sakakibara, who in was quoted yesterday in a Bloomberg interview as saying "the Yen is absurdly cheap", and the low rates, and the BoJ's failure to raise them, has sparked a bubble in speculative carry trades.

To say that "Mr.Yen" has been an influential figure at the MoF, and in FX markets, is understatement, unusual as that is for an inconoclast. And though one must take with a grain of salt whatever iconoclasts say in Japan that is contrary to the policy consensus, I must wonder whether this is yet another tell-tale that we are approaching a decisive turning point in the world of the leveraged free-lunch speculative carry trade. And though BWII bears are already writing the system's epitaph, a speculative wash-out in leveraged carry trades, might just add the years to the systems life that are required to transit to the modernity in which we now live, and to which the international monetary system must eventually adapt. I admit that it remains possible that Mr Sakakibara, like Paul Volcker, whose words in days gone by would momentously move markets, but today barely make newspaper copy, is but another talking head in his sunshine years. Yet, so few high-ranking TeamJapan members break ranks in such turncoat fashion against the policy consensus that one would be remiss to not sit up and take notice at its potential meaning to and impact upon, markets.

Wednesday, June 20, 2007

Runaway Bride

Take and Give Needs (Code # 4331) is a stupid stupid name for a company, full stop. But, in the case of this Japanese wedding services company ostensibly catering to Bridezilla and the Mother of Bridezilla, it is, with hindsight, rather appropos. For, as the chart (courtesy of Bloomberg) shows, what one giveth, one frequently also taketh [away].

Perhaps more interesting, this second picture - also of our favorite wedding host (see left) is a prime example of what happens to a Japanese stock when EVERYONE simultaneously sours and take the decision to sell at the same time, as they seemingly did so recently. In this case, it traded "allocation only" for SIX (yes, 6!!) consecutive days before opening on the seventh trading day at a price reflective of where demand and supply met. And in this case, when they finally met, more than the entire float exchanged hands, at price less than 50% of that before they were less-than-sweet on the stock!!
Wilhem von Mueffling's Cantillon, Bostom-behemoth Fido, and presumable Cap Research all bailed. Goldman too, probably jettisoned their position (though GS has yet to file if in fact they did). Certainly the research analysts all bailed (in their recommendations) with Goldman the most notable chump flipping to sell from their prior position the Wedding Planner's chief cheerleader. The nice thing about Japanese market structure is that the stock goes into what is called "suspension", and trade is halted until buyers and sellers clear at a single price. This fact often attracts additional speculative sellers, and the increase in total sellers often causes the original real sellers to up their indicative sale quantities to above what they might desire (or have) to sell, for at the end of the day the sellers are allocated pro-rata shares to the few buyers silly enough to stand in front of the train. Eventually, however, sometimes in minutes or hours, sometimes in a few days as was the case in 4331, the price falls to levels sufficient to attract buyers whose bids build in the book, and then the market clears at a new, state-changed, price. No market impact games by short-sellers, and plenty of time for BOTH buyers and sellers to contemplate whether they truly want to buy or sell given the new information and new indicative prices levels.

Are there any lessons here? Is this simply an ill-fated earnings torpedo, part of the so-called distribution within a portfolio? Or does this move herald something more ominous about pari-passu risk and market dynamics? Some may differ in their opinions, but I think it says that current prices should ALWAYS be taken with a grain of salt. They represent an equilibrium determined by both the prevailing public information, and the impacts of marginal buyers and sellers. Change one of those variables or BOTH ever so slightly and one's margin of error might, that is the depth and clearing price of a market in a proscribed position - as those former owners of Take and Give Needs Co. Ltd have recently found out - just might deviate by 50% or more.

TelePort Me Outta Here!

Rob Portman

Trade Rep
& 35th
OMB Director

You said
"I want
to spend
more time
with family"

But we
know that
like Christy Todd Whitman
You don't want
stuck to
your shoe.

Tuesday, June 19, 2007

Truth or Dare

If one were ambling along some pleasant promenade like the ramblas, and, glancing across the street, observed a Jew in a yarmulke, a Palestinian in a kaffiya sitting together at table in the cafe playing Go! and throwing back shots of JD, after which they would haka before resuming their game, all the while serenaded by Condi Rice belting out fado songs whilst playing the bazouki, one would be forgiven for pinching oneself to see if one were not dreaming, for the incongruence was, to say the least, overly-apparent.

Such was my feeling yesterday when, trolling the news-wires yesterday, I came across the Bloomberg report of Prince Alwaleed bin Talal's intended floatation of an $840mm portion of his closely-held conglomerate, Kingdom Holdings. Indeed, I did a double take. Why? Why would an immensely private investor, and alledgedly one of the world's wealthiest men (if reports are to be believed and there are no secret encumbrences upon the fortune), now decide he the public markets, limelight, and transparency are the best place for his business dealings? It is almost unimaginably (if one takes his fortune at face value) that he needs more capital than he has, or his current investment portfolio throws off. And if he did, why not simply take a private investment from the immense SAMA dollar hordes, or from from a private round amongst the now-overly flushed Princes? Perhaps he needs a public vehicle for acquisitions? However, the difference between a large wodge of illiquid Kingdom Holdings stock and cash is surely negligible, and most right-minded investors would, in any event, choose cash thank-you-very-much.

So what gives? Is Mr Alwaleed bin Talal AL Saud in some sort of financial trouble? Or perhaps he is simply making a grand statement that, like Sam Zell's sale of EOP, or Nils Taube's 1987 S&P call, will forever be written in the lore of financial markets. Whatever the explanation, in a savings glutted world of excess liquidity, and according to Bear Stearns' Chief Institutional Strategist Leo Tilman, one universally offering low returns, why is the Prince raising equity? The answer may yet be another tell-tale.

Monday, June 18, 2007


Last Friday was the quarterly expiration cycle known in the USA as "Triple Witching". Normally, the antics are contained to elevated intra-sector volatility, outsized last-hour moves (or pinning) into expiry. However this triple-witching cast a spell upon us, conjuring up a 5-digit P&L all composed of sixes. Hullo, Damien?

Friday, June 15, 2007

BoJ Employment Exam Exclusive!

Through secret channels and connections, Cassandra has managed to get hold of a highly confidential exemplary employment examination for entrance into the ranks of one of the world's most important financial institutions. Here it is revealed for the first time giving insight into the methods used to select some of the world's most influent bureaucrats!

** BoJ Employment Examination **

This test is intended to test your aptitude for independent thought. Please complete the entire examination

Question #1: - What, in your opinion, is the primary purpose of Central Bank Policy
(a) further the mercantile interests of Japanese businesses
(b) protect Japanese employment
(c) make sure the exchange rate doesn't rise
(d) shadow the RMB like a hawk
(e) do not upset anyone in MoF or Keidanren to insure good retirement job
(f) all of the above

Question #2 - Imagine your advising the BoJ Governor on interest rate policy. The economy is doing well. Real estate prices and the stock market are booming. Unemployment is near historically lows.
Deflation is past. Import prices are rising. What policy do you recommend to the honorable Governor?

(a) keep rates unchanged.
(b) do not raise rates
(c) urge him to make a statement saying rates will remain unchanged
(d) send SPAM mail to analysts saying rates will remain unchanged until the next ice age
(e) all the above
(f) other

(warning - if you selected "other", please refrain from completing the exam and exit immediately)

Question #3 - Complete the Following Sentence as best as possible
"The Bretton Woods International Monetary System" is...

(a) to be treated with the respect accorded to Korean comfort women,
(b) only to pay lip service to so long as it serves our interests
(c) dead, and if it's not, then let's put it out of its misery,
(d) an instrument of US economic hegemony, to be fought stealthily for the day that like a phoenix we will....
(e) wonderful for Japan, so long as we disregard its spirit and central tenets
(f) all of the above

Question #4 - In public a appearances a representative of the BoJ must never:

(a) admit there is a weak yen policy
(b) say anything that might be contrary to weak YEN policy,
(c) point out that US tax receipts are about 3% of GDP too low
(d) speak poorly of Dr Sakakibara-sama
(e) never overtly disagree with any from the US FRB or US Treasury.
(f) all of the above

Question #5 - What are the prime motivations of ZIRP and nearZIRP for BoJ?

(a) keeps our currency weak for mercantile advantage
(b) insure no difficult political decisions on fiscal policy are required
(c) allow the families of BoJ Governors and employees to marry well
(d) postpone the day when the slackers day-trading FX might have to go out and find useful employment;
(e) assist the global dominance of Japanese MNCs

Question #6 - When asked about the BoJ's Accumulation of USD Reserves the correct response is

(a) "reserves?!?! what reserves?!?"
(b) "the US is the best place on earth to invest (and the women are so pretty!)"
(c) "What's with the racist Japan-bashing? PBoC, and GCCs own way more than us....."
(d) "You should direct your questions to Prof MacKinnon"
(e) "We are saving up for a retirement holiday"
(f) "We keep our friends close, and our enemies closer"

Question #7 - In advising the Governor on responses to leveraged speculators borrowing yen to fund carry trades, what advice would you give him?
(a) Encourage Japanese pension funds to invest in hedge funds to insure new equity for more leveraged carry trades
(b) The market's estimates of the carry trade are ALWAYS overestimated
(c) Advise Japanese banks and insurance companies to Sell Yen Puts. We can always rescue them with unsterilized intervention whenever we like.
(d) Start a Macro Hedge Fund themselves
(e) All of the above

Question #8 - The inflation rate is beginning to rise. What policy responses are available to the BoJ?

(a) distribute wheel-barrow vouchers to all households
(b) keep rates unchanged.
(c) do not raise rates
(d) jawbone saying rates will remain unchanged
(e) denial denial denial that inflation is incipient

Question #9 - Your trading partners are getting seriously pissed off at you. Ten YEN is dropping like a stone, even against the pathetic USD, and your bilateral surplusses with other OECD nations are soaring. What should you do?
(a) keep rates unchanged at nearZIRP
(b) conjure up the deflation boogie-man to justify current policy
(c) tell the market that "the BoJ is considering studying the possible change of policy once the preliminary implications of policy changes are evaluated"
(d) tell the market "we believe in free markets and do not wish to distort them by enacting polcies that might distort them [further]". And point out that deflation is not yet whipped.
(e) Highlight the coming demographic challenges facing Japan, and the need for lots of savings to insure their well-being, and policies that might do otherwise would be unecessarily harsh upon kind defenceless elderly people.

Question #10 - What is your opinion on Overt Official Intervention in the FX markets
(a) Highly recommended in a crisis, or nearCrisis
(b) OK, but only on Mon, Tue, Wed or Friday.
(c) Only if buying other ccy vs. YEN - never sell!
(d) Always a useful and important tool.
(e) to be used only when the market is heavily long YEN, or when the YEN is moving up, or to insure that the YEN is not moving up too fast, or to insure that the YEN doesn;t move up at all - especially during March or Sept book-closing time.

Congratulations! You are now prepared to enter the Japanese Civil Service! Please return your examinations and insure that your views NEVER deviate from those of The Team.

Loonie Flies North vs. Yen

A 20% straight-line move for a major currency cross in just 70 trading days is a BIG event. Such has been the stellar move of the Loonie versus the YEN. Fascinating to say the least. And seemingly the farthest thing from the typical stuff Brownian Motion type behaviour that's characterized recent action of the FX majors.

OK, so maybe the Loonie isn't a major. And at the risk of being immodest, I've gone on record as a big fan of the Loonie (See Dec post of "Cassandra's Xmas Presents to You). But there is something unreal, and seemingly non-random about such incremental, straight-line unidirectional moves depicted above. Detecting non-randomness is highly prized in my book, for once detected, one can set about to game it (provided it is of course truly non-random, and not mere coincidence masquerading as such).

And maybe this is less about the loonie, than it is about the YEN. For I still like the Loonie, know that it is coming from a prolonged period of market-mis- and under-valuation, and do think it will eventually break on through to the other side of parity vs. USD. That notwithstanding, there IS a mega-divergence at-hand between the direction of this particular cross and its rate of change (see chart right), and it should be noted that we are rapidly approaching the end of the quarter, which coincidentally coincides with quarterly accrual and crystallization of incentive fees, and thus may serve as an intermediate term endpoint for this less-than-likely move. In any case, the days of derogatory remarks about the "Northern Peso" are long gone, and soon US dollar-holders south of the Canadian border may wish they were paid in, and holders of, BOTH northern, and southern pesos. But there is still time before THAT chapter will be written...

Thursday, June 14, 2007

US REITs - Canary In The Coalmine?

( muffled electronic voice crackling from the p.a. system....)

"Attention risky asset holders. This is your Captain speaking. In case you haven't noticed, we are experiencing a bit of turbulence. You might think that things have smoothed out at the moment, but I ask you to please keep your seat-belts fastened, for if look out your window (on the upper left), you'll notice that Commercial Real Estate still looks very sick and is making new and lower lows. I am going to try to fly up and over it, however, if you see any other risky asset classes adrift, I kindly ask you to notify the nearest cabin hostess (or steward), and then make whatever preparations necessary for a hasty exit."

Mack-Cali (pictured above in a one-year daily candle chart courtesy of BBG) either represents a sober warning to risky-asset holders, or an exceptional opportunity to buy Warren Buffett's favorite post 2002-puke-out commercial real estate value. What do YOU think?

Farewell Poetry...

Farewell then

UN Secretary General

Fellow Austrians
that you
were just
"following orders".

But we'll
remember you
for what
you failed to

(apologies to EJ Thribb & PrivateEye)

Playing With Fire

All but the biggest of liars will tell you that there are things that they have done of which they are not proud. In my case, I recall aged 10 or so deciding, against my better judgment, to go with my equally-young pyromaniac neighbors to make a "potato & weenie" roast in the middle of dry farmland chockfull of dry brush on particularly hot and blustery day. I know the wisdom is dubious with the benefit of hindsight, but so it came to pass. Chalk it up to oxygen deprivation at birth, excessive television and lax parental supervision.

Off we went, cutting a path through the dry brush to the middle of the 100-acre field behind my home, camped ourselves down, and set about gathering straw and kindling for a fire. Once accomplished, we lit the fire, stoked it, and dropped-in the foil-encrusted potatoes to cook. As happens with 10-year olds, our attentions wandered, and so did our vigilance. The wind picked up and next thing you know we are stamping around trying to put out an increasingly large and out-of-control brush fire. Conjuring every ounce of wisdom between us, we set about to cut our losses (still a useful habit today!), and we ran outta there like Sebastian Coe, back to the safety of our garage to hide from potential consequences, laughing nervously about our antics, but still-shaking from fear. The firemen finally arrived, and put out the fire, but not after it scorched 50 or so of the 100-acre field. They never did find us, and we never did 'fess up.

Now, in my investment life, I look at the BoJ and SnB (& PBoC), the respective monetary and interest-rate policies that are being run, and I cannot help but see parallels. Selfishness. Stupidity. Stubborness. Short-sightedness. Lack of Responsibility. The dangers of Playing with Fire. I do not think what I did was funny, and I certainly take no pride in the results. And I think the BoJ, SnB and PBoC (and the more sober-minded amongst their trading partners) should also more closely examine the wisdom of their policies, and their underlying motives, before it's too late, and that which we cherish and upon which we rely is scorched beyond immediate repair. Raise rates now, more boldly, before that absurd Damien Hirst is selling for $100mm. Laughing in his beard, indeed!

Tuesday, June 12, 2007

Earth to Hedge Funds: Reinsurers Own Lots- o'-Bonds

Virtuous circles sometimes unwind equally unvirtuously. Such was the case with rising asset prices, and the reinsurance companies that own them, and so it may be in reverse when the market gets around to tweaking their expectations for the group. Strong asset returns in Q1 from stable bonds yields, narrowing credit spreads and rising equities, and a smattering of alternatives, goosed upside surprises and a dribble of rising estimates. Now 60bp of bond yield, (more if one has credit exposure) equaling at least 6 big-figures on price will have the unpleasant result of reversing the bias of estimates in the very future. Yet share prices remain robust, while "S15REAL Index" (S&P Diversified REIT index) continues to get pummeled, as prescient investors run-away from rising yields, and elevating inflationary expectations.

So while hedge funds have been loading up on reinsurers for the [apparent] low valuations and uncorrelated return profiles, their reaction to fallout from imminent earnings revisions will be fascinating to witness.

Reprint of Bulldog Sauce Letter to Steel (in full)

Below is a copy of the text of the Bulldog Sauce Boards' reply to Warren Lichtenstein's Steel Partners Japan TOB for the infamous maker of Tonkatsu sauces:

Steel Partners Japan Strategic Fund
Cricket Square, Hutchins Drive
Georgetown, Grand Cayman
Cayman Islands, British Virgin Islands
Not their real address (-ed.)

Dear Scumbag(s),

Most people with manners in polite circles understand when their presence is unwanted. What is it you don't get?!?!

In response to your TOB, we would take this opportunity to inform you that everyone here, and their extended web relations would rather eat kimchee with butter for the rest of their living days than sell our beloved company to you.

(signed) The Board of Directors
Bull-Dog Sauce Company Ltd
11-5 Nihonbashi Kabuto-cho
Chuo-ku, Tokyo

P.S. - Fcuk you!

Hmmmm. It will be interesting to see shareholders and employees reaction. Balls' in your court SPJ...

Monday, June 11, 2007

A Large-Cap Relative Reversal Is Nigh

Back from a few days in the UK-countryside, and a day on the Chelskea-Prospekt (SW3 with a Thames-view), I will again express my opinion that both Sterling & London are impressively overvalued. I freely admit that Inland Revenue is far less intrusive than the Fisc in France, and London remains as pleasant as ever, but there is a price for everything, and London has indeed gone beyond the point of any reasonable ascribed premium.

But this is not my point. Today, I want to highlight the secular bottoming of the 12-month under-performance numbers of Tokyo stocks relative to the Nikkei and TOPIX indices. This figure reached all-time lows (as pointed out here) in terms of percent of stocks outperforming on a trailing 12mo basis, back at the end of CY2006. The touched the level again smack-at-the-end of the quarter (Mar07), and again smack at the end of May07. Theoretically, of course the market could narrow more, but the noisy pattern looks to me like a "classic bottom" at 25-year lows. Moreover, this coincides with extreme bearishness on the YEN, and a gaggle of pundits and observers forecasting continued underperformance of Japanese stocks.

I do not know how it will resolve itself, but resolve itself it will! Perhaps the largest caps stabilize or weaken amidst a strengthening YEN, while the balance of domestic, small and mid-cap issues rally; OR, perhaps large-caps shit-their-pants in sympathy with a global equity purge (led by futures selling/hedging) while domestics/small & mid issues give-back less or move sideways. OR perhaps everything rises, but domestics/small/mid issues simply lead the charge amidst a new round of liquidity-induced buying from oil-states-flush-with-cash, central banks, with Japanese retail mimetically caboosing. Who knows.

But my $1000/hr advice to one and all investors in Japan: accumulate domestic/small & cap value-ish, and sell those large-caps that have been so kind and munificent to you over the past two years, for the time has come.

Wednesday, June 06, 2007

And You Thought You Were Tight !

I ask you: If Axel Weber says that the ECB policy (following today's discount rate rise to 4%) is "...far, far, away from being restrictive..." according to an interview today with Bloomberg's Andreas Scholz, then what pray-tell does this make BoJ policy (in respect to restrictiveness??

My guess is that this makes the BoJ's nearZIRP "far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far far away from restrictiveness....

When You Wish Upon a Star....

In response to concerns by famous tonkatsu sauce manufacturer Bulldog Sauce management concerns regarding Steel Partner Japan("SPJ")'s tender-offer bid for the company, SPJ has issued a manifesto on their website about themselves, Warren Lichtenstein, and their intentions. The report includes details of how what nice people they [Nishi. Lichtenstein, & SPJ] actually are, how noble are their intentions, pointing how experienced they are in ramping the shares of Japanese Food Companies, and how they have no plans to stop Bulldog management from visiting their favorite hostess bars on the company's tab. They did include a photograph depicting SPJ's senior management (seen above), articulating their hoped-for kinder, gentler, neo-activist relationship as "that akin to Snow White and her Fairy God-mother".

(Ummm...I might be mistaken, but I think they got the wrong Fairy God-mother, for wasn't this one a right ball-busting bitch????!

8841 TOC - A Take-under Too Far....??!?

Que lastima!! What a shame indeed!! If only the Ohtani's had been bolder and decided to take TOC "under" sooner! They certainly had ample time to do it for the stock traded under 20x forecast earnings - a 5% NET earnings yield at at time coincidental to hard-and-fast ZIRP even in its less-than advatangeous corporate form - for a solid and UNLEVERAGED real estate portfolio. Yet, investors shunned it, either too scarred from the prior bubble-shakeout, or too scared AT ANY PRICE to take the plunge amidst still-severe operating and pricing conditions I should know, for it was a cornerstone in my portfolio(s) (and those of friends sufficiently whimsical to act upon my advisement), for a solid five years, until after the current bid (By way of disclosure, I have no position - long or short - at present).

But all that was a long time ago. TOC's value has been seen by the market (long before the bid), seeing a more or less continuous run-up from its nadir at YEN 200. The Ohtani's proposed to take-out TOC out at an UNLEVERED cap rate of 3.5%, which at the time was an insultingly small premium - which was the kind evidently offered by wealthy insurance journeyman John Charman to his wife that so-infuriated her, she made sure that she hired the best lawyers to insure (no pun intended) she (and He) got their due!

But aggressive thrice-lucky Da Vinci has offered a fairer price, more in tune with market valuations, buying up 10% in the market through their sub Algarve KK . I am not an M&A deal analyst, nor am I highly conversant in the subtleties of Japanese takeover law, but it seems that whatever happens, the Ohtani's (if they want it bad enough) will have a hard time not matching DaVinci's price. While possession is proverbially said to be 9/10ths of teh law, most civilized countries DO demand fair treatment of minority investors for listed companies, and it would seem that Directors - irrespective of the vote - would have a hard time recommending their own YEN800 bid with the competing YEN1100 bid on the table. Of course, if the were NOT bidding themselves to take it over, they could argue that it is in shareholders long-term interests NOT to sell, but this avenue of judgement is not available when comparing two cash offers - one objectively inferior (by 37.50%) and one superior by the same.

The market appears to be saying something similar as well. That could be the arbs taking a flyer. Or, it could be the Ohtani's buying more to insure their majority. In any event, the YEN 800 take-under appears remote if the current market price is any reasonable judge.

Monday, June 04, 2007

9513 to TCI: "......"%#&k &##" !

Every manager's worst nightmare (at least those without a meaningfully large golden parachute), Christopher Hohn's TCI, received a defiant slap-in-the-face from Electric Power Development's (TSE Code 9513) management answering TCI's first large foray into Japan. TCI seemingly copped the financial equivalent "unwelcome feel" (i.e. an inappropriate advance for non-teenage non-Americans) by asking for an unsustainably large dividend hike after TCI amassed a reasonably large position, ramping the share price in the process to achieve some nice month-end marks.

American HF-cum-carpetbagger, Jana Partners, also joined the fray, buying shares and tossing pebbles rocks at management from the sidelines.

Unlike the pathetic collection of no-growth, cash-rich co's attacked by Steel Partners and other greenmailers, J-Power actually has reasonably chunky long-term investment plans, and so while their new shareholders would like them to use more debt to finance these projects, management has seemingly said in rather unpolite terms that shareholders should leave the managing to us.

Best of luck to TCI and Jana in their new endeavor! I am sure you'll find it a rewarding experience.......NOT!! In the event you find it frustrating might I recommend trying to "buy low" and "sell high", rather than "buying low", "buying pedestrian", then "buying more high" and subsequently praying for a miracle.

The Unbearable Lightness of Being [YEN]

Milan Kundera struck a humanistic chord with his early novels though with all due respect to his early work that had an innovative edgeiness, I find his recent musings as redundant as Neil Young's croonings about missing his daughter who's grown up and gone away to college. I am not passing judgement on their recent works' artistic merit, only how it speaks to me, personally.

Since that epoch when both artists were in their prime, the Trade-weighted Foreign exchange value of the Japanese Yen has sympathetically followed suit, with a deterioration in value that mirrors the declining relevance of Mr Kundera and Mr Young's recent work.

Looking at the chart above, (provided through a keenly observant friend at UBS in London), our favorite currency unit of exchange, the whipping boy of the FX trade that we all love to hate, is now pushing on lower trade-weighted boundaries not seen since the Plaza Accord. By way of comparison, this is weaker than in the latter 80s when the US Administration encouraged Japan to undertake the most imprudent of expansionary monetary policies by aggressively cutting rates, causing the famous mother of all stock and real estate bubbles; weaker than the mid-90s post Rubin-dancing-on-Japan's-head collapse coincidental to their own banking implosion and the hieght of Rubinistic Strong Dollarism; and weaker than the late 90's downward spiral resulting from ZIRP (with a errr ummm not-so-small post-98 hiatus courtesy of LTCM).

All of this current weakness occurs amidst booming domestic real estate prices, robust rent and land-price increases; extremely low unemployment, fine Tankans, very respectable capex, still-buoyant stock prices, and a still-booming export trade. I know fiscal deficits remain large, and demographics are challenging, and I understand that these trends appear set to remain in the coming years. But in comparison to the mess in the USA, and the heavy-lifting being done by Europe (who faces many of teh same challenges as Japan), surely there is merit in arguments that Japan is NOT pulling its weight, or if one considers ZIRP and USD reserve accumulation to BE, in fact, pulling its weight, then would someone please ask them kindly just to "stop".

Friday, June 01, 2007

Integrity & Culpability

It goes without saying that the USA and Japan really are - culturally speaking - vastly different places. Many of my recent posts have been attempts to find humour in the arcane details of the dry financial world populated by ego, bombast and rhetoric. But the recent suicides of two Abe administration ministers brings a sober respite to this space.

For it has been frustrating to watch Ebbers, Scrushy, Nacchio, the Rigas', Skilling, Martha Stewart, etc. Mutual Fund Timing, Options Backdating, Insurance & Reinsurance Bid-Rigging scandals, in seemingly pervasive in the sphere of business, and then Scooter Libby, Tom Delay, Alberto Gonzalez, Rumsfeld, Jack Abramoff, and minor players like Perle, Roche, Deutsch in the realm of public service sullied by scandal and disgrace. But the defining element that binds all of these new-millenium scabs upon the ethical behaviour of America's erstwhile leaders is that none of them were willing to assume responsibility for theirs, or their subordinate's actions. No one, it seems, in this third millenium is culpable. Not OJ or Kobe, not business leaders, nor those in public service - at least not voluntarily culpable.

Japan is by no means free from scandal and wrongdoing. Oligopolistic cartels are unearthed seemingly every month. Corruption is far from rare. But in Japan, people still take responsibility, trust (and perhaps more importantly, the violation thereof) rather seriously. So much so, that, they often commit suicide when they are caught having acted to the contrary.

Take for example the note left by the former Agriculture minister in the Abe Administration (following the heels of a senior J-Green exec's self-annihilation)

"I apologize from the bottom of my heart for causing disturbance and trouble, for my ignorance, lack of virtue. With my death I would like to take the responsibility and apologize."

Now, contrast that to the total utter denial of the American President following Katrina:
"'re doin' a heckuva job..."

American apologies are now compared against Clinton's for sincerity, but this misses the point, for these are all looking for selfish parochial absolution. Japanese apologies, by contrast are intended to remove the cloud from the organization and colleagues, and offer some manner of redemption for those that were mere bystanders, such that the organization and society can get on with it. It is an attempt to noble and atone in larger way for one's mis-deeds. J-Green may wallow and whither, but the Environment Ministry and the diligent functionaries may soon carry-on, business as usual.

And to this day, no one in command has "owned-up" to what went on in Abu Ghraib. Even if someone (Rumsfeld, Cheney, Gen. Franks) just came out and said: "We made call. In hindsight, we regret it (or not, as the case may be) but did it in good faith to protect America and The West from a perceived threat". Unfortunately, no one's stepped up. And America, in the eyes of the world, and with respect to her own sense of comprehending the "right & wrong" of her actions, is the worse off for it, both diplomatically, and spiritually.

Most Ironic Quote-of-the-Day

In a Bloomberg news blurb about the toxic waste tranches of CDOs. Chris Street Treasurer of Orange County California commented on the riskiness and appropriateness of such highly leveraged derivative instruments in public portfolios:
``It's grossly inappropriate to take this level of risk.''
``Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig.''

Hmmmm. One must wonder whether or not an Orange County Treasurer is the best one to proffer advice on risky securities to others. Can anyone spell "h-y-p-o-c-r-i-t-e" ??