New Highs for the S&P 500
The S&P 500 continues to climb a wall of worry, despite temporary setbacks on concerns about the Fed's announced tapering exercise, and then the Federal government shutdown and debt ceiling bruhaha. The Congressional mud-wrestling match about the budget and debt ceiling helped to cancel out immediate concerns about tapering, which the Fed put on hold in lieu of the Congressional budget and debt ceiling fight. Once Janet Yellen takes over as Fed chair early in 2014, we could very well hear more about tapering, but for now, investors are playing performance catch-up as we near the end of 2013, as the market cassandras wait in vain for "the" correction/selloff.
By S&P sector, consumer discretionary, health care, financials and the industrials have essentially been leading the market throughout 2013, and also led the latest upleg to new market highs. An improving housing market and balance sheet restructuring are supporting the financials and the consumer discretionaries, while the regulatory market is a tailwind for health care, and companies are widely expected to begin utilizing significant cash balances on the fifth anniversary of the global financial crisis.
The U.S. stock market is not the only game in town, as the Japan market even in USD is still well in front of other developed markets in 2013 despite consolidating since May, and more recently, investor money is returning to Euroland, with France and Germany outperforming the US.
On the other hand, the biggest casualty has been the emerging markets, where an inevitable tapering by the Fed could begin sucking up the excess liquidity that had been driving these markets.
Bonds and Commodities, As Well As Emerging Markets, Are the Losers
The biggest loser in terms of global fund flows and asset allocations is US treasuries, which of course had been the biggest beneficiaries of "haven" fund flows during the worst of the 2008 financial crisis, and the decades-long ultra loose monetary policy. It is now fairly obvious to all that the secular peak in bonds is past. The only issue is how far and how fast will long-term bond yields back up to levels that discount positive inflation plus a degree of sustainable economic growth. On the other hand, the USD index is largely flat over the past 52 weeks and basically a neutral factor for non-US investors.
The implications of the above are that investors should continue to go with the flow, which means to overweight developed market equities versus emerging markets, bonds and commodities.
Japan Has Been Consolidating, But Continues to Maintain an Upward Bias
As Shinzo Abe and a revived LDP burst back into the forefront of Japanese politics, Japanese equities surged as, a) hedge funds piled into the short yen, long Nikkei 225 trade, and long-only managers scrambled to restore Japanese equity positions back to neutral weightings, i.e., about 8% in global portfolios and 20% in international portfolios.
The Nikkei 225 however peaked in May along with a peak in speculative short JPY positions and the weakest retracement point in JPY/USD exchange rates. While speculators continue to bet heavily against JPY as indicated by the elevated level of shor JPY commitments of traders, JPY has yet to convincingly breach 100 JPY/USD for a second time as yet, and thus the currency has over the past several months been a drag on Japan's stock market performance.
The immediate upside bogey for the Nikkei 225 continues to be the 15, 627.26 high set in may, and while trading volumes have trailed off noticeably since this high, the market is trading toward a break-out of a clear apex that points to an upside, not a downside, move that could well take out the May high, clearing the way for a challenge of the 18,000+ highs hit during the Koizumi years.
Considering the close link to JPY/USD during this rally, however, a convincing move to weaker than JPY/USD 100 is probably a pre-requisite for this move.
In terms of big ticket good news, Japan's winning of the 2020 Olympics had no appreciable favorable impact on stocks prices as a whole, despite noticeable speculative activity in perceived beneficiaries. For one, the speculation in real estate stocks was dampened by concern that the VAT hike will cool real estate demand.
However, there is another possible big ticket good news item, which is the impending approval for
casino operations in Japan. Since Tokyo won the right to host the 2020 Olympics, campaigns pushing for the creation of casinos in Tokyo and elsewhere in Japan have been gaining momentum. Investors are also very interested in whether the government will legalize casinos as part of its Abenomics economic policies.
The IR (Integrated Resorts) caucus, a special-interest group made up of lawmakers from the Liberal Democratic Party, New Komeito, the Democratic Party of Japan, the Japan Restoration Party and others, envision the creation of integrated resorts comprising casinos, hotels and convention halls. The current impediments are a criminal law banning gambling and concerns that casinos would contribute to the deterioration of public order. Current Gov. Naoki Inose is a fervent supporter of the idea. But Tokyo assemblymen and local politicians say there is notable criticism from constituents who complain that the government should not be promoting gambling. Japan would also need to establish a strong, independent regulatory authority modeled on Nevada and Singapore's gaming commissions, and that is what has been included in the government's policy outline for legalizing, regulating and licensing gambling.
Legislators have submitted to current session of parliament, which runs through December, a bill that would allow authorized companies to operate "resort complexes" consisting of casinos, hotels and other facilities in government-designated areas.Casino development is also included in the ministerial council's draft action program. One of the top candidate sites for the country's first casino, is the Rinkai Fukutoshin (the Odaiba,Aomi and Ariake areas) waterfront in Tokyo, the area expected to provide the venues for the tennis and volleyball competitions during the 2020 Games.
Foreign interests like Macau's casino king Stanley Ho have been lobbying multiple cabinet members in Japan for the legalization of casinos, promising investment of $5 billion if Melco Crown Entertainment gets permission to build. Wynn Resorts’ investment in a Japan casino would be over $4 billion, say sources, and MGM Resorts International,Las Vegas Sands Corp would be there with checks in hand as well, for locations in Tokyo and Osaka. The investment in integrated entertainment resorts alone could rival current estimates of the benefit of the 2020 Olympics. Analysts estimate a market consisting of two resort-scale casinos, one each in Tokyo and Osaka, could generate US$10 billion – US$15 billion (JPY1 to JPY1.5 trillion) in gaming revenue out of the gate, which likely would catapult the market to the second-largest in the world after Macau.
The trading by investor type data show that foreign investors remain the only consistent net buyers of Japanese equities, albeit at a more subdued pace. Over the past month, there has been some profit-taking in the banking sector (where the most foreign buying has been seen during the rally), trading companies and airlines. Conversely, money has been flowing into Japan's manufacturing sector and services, relative late-comers versus the sharp early gains seen in, for example, real estate.
By Nikkei 225 constituent, the emerging winners are second-tier and late-coming manufacturers. The major electronics firms continue to noticeably lag, due to the structural nature of their problems that have not gone away just because of a modest weakening in JPY/USD.
Nikkei 225 Winners & Losers
Keep an Eye On Foreign Investor Disillusionment With Abe's Third (and fourth?) Arrows
Last year, piling into Japanese stocks when the Nikkei was below 9,000 was a no-brainer. Now, there is increasing evidence of more selectivity. For example, Coutts & Co., the wealth management unit of Royal Bank of Scotland, is cutting holdings of Japanese shares on concern Prime Minister Shinzo Abe won’t pass the structural reforms needed to boost the economy. They fear Abe will squander the early decisiveness of the Bank of Japan. With a sales tax increase looming in April and another in the pipeline, they fear Abe is failing to deliver on reform measures that would ease the burden of the levy.
So far, such shifts are but a trickle and in general a minority view. But as previously shown, given the still high outstanding short yen speculative positions, it wouldn't take much to spool the JPY shorts, which as was seen in May could be the catalyst for a significant short-term selloff in Japanese equities.
For now, however, we seen the Nikkei 225 as basing for a break-out to the upside rather than the downside.