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June 12, 2006
Increasing Positions in Japan
After raising cash and reducing risk exposure by selling positions in the Central Europe and Russia Fund (CEE), (down a stunning 20% since the sale last Monday morning), reducing some holdings of the Russell 2000 (IWM), and swapping from small and mid caps to large caps, I decided to put a little money back to work late last week.
My vehicle of choice was iShares MSCI Japan (EWJ)....
The Nikkei has been destroyed of late. EWJ had fallen 16% since May 10th and 9% in just the first four days of last week. Despite the thrashing, I believe the long-term fundamentals in Japan remain largely the same as they were when the market was rallying to multiyear highs – renewed economic growth, healthier bank balance sheets, renewed loan demand, and long-term benefits from growth in China and other smaller Asian market economies. I am moving toward making Japan a 4-5% across all client portfolios, up from prior positions closer to 3%.
The Nikkei has rebounded a little since the purchase including some gains today following the release of an updated 1Q06 GDP report for Japan. Several statistics noted in the Bloomberg article support my bull case on Japan. GDP grew by a healthy 3.1% in 1Q06, revised upward from 1.9%. Corporate spending rose at its second fastest rate since 1990. Machinery orders were up almost 11%. Inventory investment rose sharply. Bank lending has risen for four straight months. These datapoints all indicate that corporate confidence in continuing GDP growth is high. Modestly improving consumer spending shows that consumer confidence also supports future growth. Inflation is up in Japan, the GDP report showed prices rising 3.3%. In the US and Europe, inflation is big worry for investors. Japan is not immune to inflation risks but given that the country experienced deflation for the most of the last 15 years, the pickup in consumer prices is less of a problem.
If my timing was bad and the Nikkei continues to melt, I expect I'll average into the position further unless the current stock market crisis morphs into a global economic dislocation. I remain of the belief that this will not be the case. I think investor confidence has been fragile and once the market took a couple beatings, the shallowness of bullish conviction was quickly revealed. The stagflation (weak employment, falling GDP growth, and rising inflation) scare is just that -- a scare -- and a scared market is something different than a bear market.
Posted by Steve Birenberg at June 12, 2006 10:19 AM in Japan
IF A MARKED SLOW DOWN IN ECONOMY/MILD RECESSION OCCURS SECONDARY TO THE FED ETC,HOW WELL DO THINK THINK CETV AND NTLI WILL WEATHER THE STORM? WHAT DO YOU THINK THE NEXT RESISTANCE POINTS WILL BE FOR THE CETV AND NTLI STOCK?
I TAKE IT YOU THINK WE ARE IN A WICKED CORRECTION RATHER THAN A RE-EMERGENCE OF THE BEAR MARKER.
The only difference between what we have seen and a bear market is longevity. The best investments are down "only" 7%. Many others are down 10% and it is not at all unusual to find decliens of 20-30%. My feeling is that this is a financial crisis not a fundamental one. The risk is that if it gets deep enough it could turn a modest slowdown in global economic activity into a global recesssion.
CETV and NTLI will track the market with a beta greater than 1. This means that while if the market rises or falls 1%, CETV and NTLI will rise or fall more than 1%. This is especially true with CETV which is effectively traidng as an emerging markets proxy. A mild recession means stocks go lower so that won't be good for either stock.
If you think a recession is coming look for an exit point. But I wouldn't exit now as there is deep fundamental value in both stocks and the next bounce inthe market will trigger some good upside. Let's just hope the next bounce starts soon.
Posted by: Steve at June 13, 2006 01:25 PMI UNDERSTAND THAT THE DROP IN THE MARKET IS SECONDARY TO A DROP IN LIQUIDITY[ FROM THE CENTAL BANKS OF U.S,JAPAN,AND EUROPE] AND ITS FINANCIAL
CONSEQUENCES? I AM NOT SURE I UNDERSTAND JAPAN EXACT ROLL IN THE DROP OF THE EMERGING MARKETS AND GOLD.PERHAPS,YOU UNDERSTAND IT BETTER THAN I DO AND CAN EXPLAIN IT .MORE IMPORTANTLY,AS GOLD EMERGING MARKETS AND JAPAN SEEM TO MOVE IN CONCERT IN THE MARKET,DO YOU BELIEVE THIS PROBLEM IS EASILY CORRECTABLE AND THAT THE BULL MARKET IN JAPAN,GOLD AND EMERGING MARKETS WILL RESUME.
Many analysts feel that the Fed is acting in concert with other central banks around the world to drain liquidity from the financial system. The goal is to curb speculation in commodities and bring down prices of those commodities. It has worked. A byproduct has been huge declines in stocks. This is probably because many funds had the same trades on. Having taken huge losses in commodities they began to reduce risk expsoure elsewhere with emerging markets leading the way. Additionally, many emerging markets have commodity based economies so they dropped as the commodoties dropped.
I don't see Japan as having a unique role in this. Japan needs liquidity more than other industrial economies because it is coming off a long period of deflation. Because of this, Japan may have taken a larger hit than some other markets.
I don't expect a bull market to resume until late this year. That is consistent with what I have been saying all along in calling for a spring high followed by a late fall low. I did not expect a declien this severe. I do think we should stabilize soon and start to see some positive days.
To easily correct this problem means that investor psychology has to shift to expecting the centralbanks to back off. That can happen before they backoff. Investors look ahead.
Posted by: Steve at June 14, 2006 08:08 AM1.DOES THE LAWSUIT OF NOVA /CETV VERSUS THE CZECH GOVERNMENT HAVE MUCH SIGNIFICANCE FOR THE STOCK
2.HAD ANYTHING SUBSTANTIVE BEING GOING ON CONCERNING NTLI?
1. I do not believe this lawsuit will have any material effect on CETV. Then again, following onthe heels of the issues with regulators that altered the adverting sales practices I'd rather not see it. Czech is the company's largest market so no news is better.
2. I'll have a fresh post up on NTLI later this morning. No new news. The stock just acts horribly. There continues to be news flow in the UK about aggressive pricing for broadband services. Investors clearly do not beleive NTLI will be able to make thier numbers for revenues and subscriber growth. I disagree.
Posted by: Steve at June 23, 2006 08:33 AM