When Mega Cap Company's Stocks Go Parabolic

When mega market cap company's stock goes parabolic, the jig is usually up shortly thereafter, as when you are priced for perfection, there's no room for disappointment, not even a hiccup....There are many other examples in markets outside of the U.S., Nintendo's (NTDOY.PK) spectacular crash and burn being a case in point.

Apple compared to Microsoft and PetroChina at...
Market Anthropology

Cautious BOJ Moves Not Enough to Convincingly Turn the Strong Yen Tide

The yen temporarily fell to a three-month low of 78.54 versus USD after the BOJ surprised investors and traders with an announcement it would add JPY10 trillion to its asset purchase fund and set an inflation target of 1%. The asset fund was increased to ¥30 trillion while the credit lending program stayed at ¥35 trillion.This following stealth intervention in the currency markets of about JPY1.02 trillion in November, after selling a record JPY8.07 trillion yen on Oct. 31 when the yen climbed to a post-World War II high of 75.35 against USD.

The government has been hounding the BOJ to do more as the JPY/USD rate hit a three-month high of JPY76.03 on Feb 1 or whithin 1 yen of its prior postwar high as the Fed adopted a 2% inflation target and promised to keep U.S. rates at a record low of zero to 0.25% at least through 2014, and the ECB was preparing for the second tranche of its LTRO at the end of February, implying even more upward pressure on JPY/USD and JPY/EUR. LDP politicians were not impressed by the BOJ's move, saying the 1% inflation target was “too low” and not a substantial change from existing policy. This is because prices have not risen at least 1% in Japan for any year since 1997, and the economy now faces drags ranging from weakness in global demand to shutdowns of nuclear power plants.

The Japanese government has been frustrated by the super strong JPY and its heavy impact on  export firm profits, which opposite to street expectations 6 months ago, reported further deterioration in profitability in the second half of FY2011 to March, 2012. Q4 GDP was also much weaker than consensus estimates, raising the possibility that Japan's GDP would not recover the 2% GDP growth that was expected in 2012, ostensibly supported by a recovery in domestic demand from reconstruction efforts in the Tohoku region. Without some relief from a weaker yen, waning overseas demand could completely offset the recovery in domestic demand.

It thus appears that the BOJ's move to counter more aggressive easing by the ECB and the Fed in anticipation that another wave of buying that would push JPY even higher and exacerbate an already bad balance of trade situation is a case of too little, too late. Basically what we have is a continued "race to the bottom" for the three major currencies, i.e., USD, EUR and JPY, as central banks pump even more liquidity into the financial system and effectively monetize debt in a desperate effort to revive economic activity. While the BOJ moved three times last year to incrementally expand asset purchases by a total JPY15 trillion, the Bank stands accused of acting too cautiously while the Fed and the ECB are pulling out all the stops.

The best scenario for Japan is that continued good economic news from the U.S. begins to push up 10-year treasury yields and the Euro mess gets past the Greek circus without blowing out Spain and Italian bond yields, thereby allowing JPY to weaken well past JPY80/USD and JPY/EUR to visibly weaken. If the Fed however is forced to monetize more debt and the ECB continues to pump liquidity into the Euro banking system, the BOJ is back to square one with an even stronger JPY on its hands. 

The biggest wildcard for Japan's trade and economy is slowing China import demand as Chinese companies are forcebly weaned from the "loan bubble" that was the result of China's huge stimulus program following the 2008 financial crisis. The 28% YoY fall in bank loans in January implies that China continues to keep its foot on the brake, even as the new export index fell to 46.9 from 48.6 in the previous month. For Japan, weaker China exports mean waning China demand for imports from Japan, and China's imports index also dropped to 46.9 from 49.3 in December. Japan's exports to China have sharply fallen from two-digit year-on-year gains to minus growth, and since China is now Japan's biggest export market, Japan's exports get a double whammy from a) slower direct demand from Euroland, and b) a secondary impact from slowing demand from China, whose largest export market is Euroland. 

The Bank of Japan's Surprise Easing

The Bank of Japan surprised markets by implementing new easing policies and moving closer to an explicit price target, the latest sign of growing worries in Japan and around the world about the ripple effects of the European debt crisis on the global demand, after Japan's Q4 GDP was weaker than expected.

The bank expanded its asset purchases by JPY10 trillion, bringing the total facility to JPY65 trilion, bringing asset purchases under the program to JPY30 trillion (up JPY5 trillion), including JPY19 trillion of JGB purchases. The move was only good enough to nudge the Nikkei 225 up 52.9 points to 9,052. JPY on the other hand weakened to below JPY78/USD.


Zero Hedge

China Loan Growth Declines Sharply: This Can't Be Good

Economists are observing a sharp slowdown in China bank loans. Chinese bank lending fell 28% YoY in January, suggesting Beijing is reluctant to open the credit valves too quickly for fear of reigniting inflation. Chinese banks typically ramp up lending at the beginning of the year to avoid losing quotas issued by regulators and the effects of changes in monetary policy, but the December-January change was the lowest increase since 2007.

To us, this is more evidence that China's economy, now the world's second largest, is slowing as turmoil in Euro zone countries and weakness in the United States hurts demand for Chinese exports, while China is itself a key driver of the Asian and Japan economies.

The weak January numbers came despite reports by the FT that the government is telling the banks to rollover their loans to local governments to give them more time to repay massive debts from stimulus spending after the 2008 financial crisis. Last year, China's National Audit Office put the debt held by local governments at 10.7 trillion yuan ($1.7 trillion) at the end of 2010 -- or about 27% of China's 2010 gross domestic product (GDP). The huge amount of money involved this time is unsettling investors. The government belatedly gave permission to four of its most developed cities and provinces to directly issue bonds after a long ban, to give cash-strapped local governments an alternative funding channel to real estate development through property subsidiaries.

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Google News

Guru Calls: You Show Me Yours, I'll Show You Mine

The following chart without commentary via FT Alphaville seems to indicate that calls from famous gurus like David Rosenberg of Canadian firm Gluskin Sheff, economic gloom and doomer Noriel Roubini as getting the weekly squiggles in the S&P 500 exactly wrong, the implication being that investors should use their calls as contrarian indicators. In the interest of full disclosure, we would like to see how right Nomura has been on their calls.

Hat Tip: FT Alphaville

Japan's Q4 Real GDP Down 2.3% Annualized, Nominal Down 3.1%

The Cabinet Office released Japan's Q4 GDP numbers (preliminary), which shows Japan's GDP in the October-December 2011 quarter falling 2.3% annualized (0.6% Q-Q) in real terms and 3.1% in nominal terms, which is weaker than the consensus for a 1.4% decline. The weakness in Q4 GDP resulted in Japan's real GDP in calendar 2011 declining 0.9% YoY to JPY506.83 trillion, and nominal GDP falling 2.8% to JPY468.74 trillion, the second annual decline in two years. At the end of 2011, Japan's GDP was still about 9% lower than the peak hit in 2007 (JPY512.97 trillion).

For the quarter, personal consumption was up 0.3% Q-Q on a bounce-back in auto sales and stronger clothing sales because of the cold weather. Housing investment slipped 0.8%, while private sector capital expenditures were 1.9% higher. Given the more uncertain outlook, the contribution from business inventories was minus 0.3%, and public works expenditures were also down 2.5% as the government's third supplementary budget did not get passed until later in November.

Exports fell 3.1% on weaker overseas demand and supply chain interruptions due to the Thai flooding. On the other hand, imports rose 1.0% on increased energy imports of LNG for electricity production. Deflation continued as the GDP deflator fell 1.6% YoY for the 9th quarter of declines.


Japan's GDP had just come off two quarters of recovery from the March 11 Tohoku disaster, but the strong yen, failing overseas demand and long delays in the government support measures for Tohoku reconstruction are again dragging GDP lower. The Cabinet Office's January economy watcher survey was pointing to weakness in domestic demand as the index fell 2.9 points for the first time in 2 months as the strong yen is hurting foreign tourism into the country and a cold wave from January weighed on personal consumption. 

By Mid-March, Greece’s Next Lifeline or Default Will be Largely Irrelevant

According to Greece’s finance minister, Greeks have withdrawn €65 billion from their bank accounts since 2009, of which €16 billion was legally taken abroad. This is capital flight of massive proportions, or a whopping 20% of GDP!
 
That Greeks are trying to protect their wealth is not surprising, as the country is in a de facto depression that looks to get worse before it gets better. Greece’s manufacturing output is 15.5%, unemployment has reached 20.9%, rising to 48% for youth unemployment, as 60,000 Greek small businesses have gone bankrupt since last summer. No surprise that tax receipts are falling 7% YoY, making promises of further austerity measures even mor unrealistic. Suicides have jumped by 22.5% and pharmacies are having difficulties obtaining medications.
 
The Greek public and now the government itself are rebelling against the German “boot”. The deputy foreign minister and three colleagues resigned from the government in protest at the austerity plan, the right-of-centre Laos party withdrew its support from the coalition and there was a 48-hour general strike. For Troika (EU, IMF, ECB) offering loans for further austerity, Greece has become a black hole. Bailout number one for €110 billion wasn’t enough. Number two for €130 billion, whose details haven’t been decided yet, has already been declared insufficient, and another €15 billion is needed.

All in return for another set of German “must’s” that Greece won’t be able to fulfill, but gives German and Greek politicians an out, as no one wants to be blamed with having made the first step in breaking up the Eurozone. The idea is to keep investors/speculators from panicking, give governments time to prepare for the inevitable and give politicians a plausible pass for Greece’s exit from the monetary union.

 
Of the three Troika inspectors—the IMF, the EU, and the ECB—it appears that the IMF has had enough, after IMF MD Christine Lagarde warned German Chancellor Angela Merkel and French President Nicolas Sarkozy that the fiscal and economic situation in Greece had gotten even worse, and the Germans dug in their heels in pouring more German savings down a bottomless pit to the tune of tens of billions of Euros above the second €130 billion bailout package agreed upon on October 26.
 
Thus by mid March, Greece’s defaulting or receiving the next bailout tranche could be largely irrelevant, as it is already a walking dead—the economy is in shambles, its society in turmoil and its finances ruined. Any way out from here will be equally painful, while a withdrawal from the Euro and a crash and burn default for Greece would be the most swift and actually the shortest road to resolution.
 
Yes, it would be a shock to the already fragile Eurozone economy, but would withdrawal from the Euro be even worse for Greece? The Association of Greek Tourism Companies (SETE) had a record 2011, and expects another record in 2012. While the number of tourists from the EU declined, Russians increased by 88%, and the uptrend is expected to continue aided by easier visa requirements. In SETE’s view, the drachma would turn Greece into a tourist mecca for all budgets, and business would boom. In other words, the only major growth industry in Greece has declared it would be even better off if Greece left the Eurozone.
 
ECB LTRO Second Tranche Gets Lost in Greek and then a Portuguese Tragedy
 
Greece is clearly insolvent but this has never been just about Greece. Reports emerged that European banks were gearing up to ask the ECB's emergency funding scheme for up to twice as much in funds as the central bank supplied in its debut €489bn auction last month, i.e., something approaching €1 trillion. Banks of course are steeling for more contagion in Euroland. Yields on Portuguese 10-year bonds hit a fresh record of 17.38% even though the country is already shielded by a €78bn package from the EU, ECB and IMF troika and does not have to tap the markets this year.

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Euro Area Debt Crisis

Corporates and Individuals Shun Risk, Accumulate Cash

Both individuals and corporations continue to accumulate cash since the 2008 financial crisis as they refrain from investing in risk assets and making longter-term capital commitments even as the developed world's central banks continue pumping record amounts of liquidity into the global financial system.

According to central bank flow of fund statements, cash and bank deposit balances held by individuals and corporations in Japan is around $13 trillion, while US corporates and individuals have some $9.6 trillion and Euroland individuals and corporates have a similar amount of cash and bank deposits on hand.

Stock holdings in Europe among households are down 9% YoY, while they are down 7% YoY in Japan. As a result, the outstanding balance of investment trusts on a global basis are down 6% from the end of 2010 to USD23 trillion. As a percent of GDP, cash and bank deposits have grown from 1.9X GDP 2006 to 2.2X GDP as of last September, while bank loans are flat to slightly lower. Bank loan growth in Germany, for example, is also waning.

The quantity theory of money holds that MxV = P x Y, where M is the money supply, V is the velocity of money, P is the price level and Y is the quantity of output. In other words, high cash and bank deposit balances indicate that the turnover of money in the developed  economies is very low, and is negating much of the efforts of central banks to revive their economies with more than abundant amounts of liquidity, as households and corporates hoard cash balances and the banking system uses the excess cash to repair balance sheets riddled with impaired assets.

By the same token, the developed economies cannot be seen as "recovered" until the velocity of money recovers to normal levels and money is again circulating smoothly from the central banks through the banking system into the "real" economy.

Japanese Venture Companies Thrive While the Big Boys Suffer

Corporate profits for companies listed on the first and second sections of the Tokyo stock exchange are now expected to see a 28% decline in net income for the fiscal year ending March 2012.
On the other hand, the Nikkei is reporting that companies listed on the TSE Mothers and JASDAQ are thriving, with net income for 472 companies now expected to see a 48% YoY increase, the third year of profit growth following a drop-off in profits in the aftermath of the 2008 financial crisis.

Generally, the emerging companies doing the best are those whose businesses are domestic niches little affected by the megatrends buffeting Japan's global champions. For example,
Shidax (4837.T) and Daiichi Kosho (7458.T), two companies operating Karaoke establishments, are seeing brisk business since the Tohoku disaster as consumers are again using Karaoke to let off steam.
New e-retailers like Start Today (3092.T) that operate the popular Zozo Town online clothing retail mall are seeing growing users.

While news on such companies in English covered by foreign news wires is insufficient to say the least, they are evidence that Japan has not yet become a total basket case.