More gloom and doom on Japan? I can’t wait (Well, actually I can but November seems a good time to buy)
On August 30, the Bank of Japan, the country’s central bank, announced a major new program of monetary stimulus. The governor of the bank even flew back from the Federal Reserve’s Jackson Hole conclave for the world’s central bankers. The Japanese government announced what it billed as significant new economic stimulus package.
And the financial markets blew a giant raspberry. The moves had been designed to slow the relentless appreciation of the yen, which has killed Japanese exports by making them so expensive and which threatens Japan’s economic recovery. But the yen actually climbed to finish the day at 84.5 to a U.S. dollar. That’s not far off the 15-year high for Japan’s currency set lat week.
The yen seems doomed to keep on climbing. Japanese exporters seem doomed to keep on sinking. The country’s economy seems doomed to sink back into recession. And the central bank and the Japanese government seem powerless to stop it.
And that’s not the end of the gloom in Japan. The country recently slipped from No. 2 to No. 3 in the listing of the world’s largest economies. The government is bogged down in endless infighting. The country is one of the fastest aging in the developed world. And some of the country’s great corporate icons—Toyota Motor (TM), for example—are better, these days, at producing recalls than cars.
Interested yet?
I am.
Japan is still the world’s No. 3 economy, and home to some of the great export companies with some of the most recognized brands in the world economy. It’s corporate resources in robotics, biotechnology, and industrial materials research and development are among the world’s leaders. It’s stunning government debt is supported by one of the globe’s deepest pools of consumer and corporate savings.
So bring on the doom. Write off Japan. Sell Sony (SNE), and Toyota, and Honda Motor (HMC), and Canon (CAJ). The yen will turn one day—in spite of all the dysfunction of Japan’s politicians. And the tide that has drowned even the best of Japan’s companies will recede to leave that best still standing. And when that tide turns, I’d like to be able to say that I picked up some of those great companies at doom and gloom prices.
Let’s start off by understanding why investors are so gloomy about Japan right now.
Iron ore prices retreat by 12% and iron ore mining stocks say, So what?, and move higher
It’s hard to imagine this happening with any other “product.”
The price of the product drops 12% for the next quarter.
And the stock market essentially shrugs it off. On a bad day for the market, August 30, when the Standard & Poor’s 500 stock index drops by 1.47%, the shares of the world’s biggest producer of this product fall by 1.29%. Shares of the second largest producer fall by 2.49%, it’s true, but that’s not unexpected since the beta of that stock (the measure of the stock’s volatility in comparison to the entire stock market) says that these shares are on average two-thirds more volatile that the stock market as a whole. (The drop in the shares is almost exactly what beta projects.)
And on a good day for the market, September 1, when the S&P 500 jumps by 3%, shares of the largest producer rocket upward by 5.5% and shares of No. 2 go up 6.1%
Guess when it comes to iron ore—and that’s the “product” in question—investors just don’t expect any price drop to last for very long.
Even after the drop iron ore prices would be120% higher than they were a year ago. So this disappointment would leave these miners still incredibly profitable.
Nestle’s got a pile of cash, good growth prospects, and a stock price that’s a tad too high
Nestle (NSRGY), the largest food company in the world, continues to slice and dice, in an effort to shed underperforming or low margin businesses and pick up higher growth, higher margin opportunities.
Nestle has finished selling its last piece of Alcon, its eye-care business, to drug-maker Novartis (NVS). The sale of the 52% of the company that Nestle sold brought in $28.3 billion.
Nestle will use a substantial part of that to reduce the company’s debt, which stood at $29 billion at the end of June. That should maintain the company’s AA debt rating. (Some will also go to fund a plan to buy back about $10 billion in the company’s shares through 2011.)
Paying down debt doesn’t seem very exciting but it’s essential to the company’s strategy of buying growth opportunities in the nutrition, health, and wellness sectors of the food and beverage market. (A company has to clear room on its balance sheet to finance acquisitions either with cash or new debt) This year Nestle bought a frozen pizza business from Kraft, a United Kingdom nutrition company Vitaflo, and Mivina, a maker of instant noodles in the Ukraine. Expect more deals now that the Alcon sale is done.
Nestle is likely to face a tougher second half in 2010 thanks to rising prices of commodities such as cocoa and palm oil.
Cosan and Shell move, slowly, closer to creating the third largest ethanol (and from sugar cane not corn) producer in the world
It’s taking quite a while to get this one done. But the joint venture announced in February between Royal Dutch Shell (RDS) and Brazilian sugar and ethanol giant Cosan (CZZ) has finally moved to the signing of binding agreements.
The deal, when completed, would create the third largest ethanol producer in the world with annual production of 440 million gallons and a sales network of 4,500 stations. Estimated annual sales revenue would come to $21 billion.
The deal seems a natural: Combine Brazil’s largest processor of sugar cane (Cosan will contribute its 23 sugar cane mills, all of its co-generation plants, 1,730 retail outlets, and other ethanol assets to the deal) with 2,740 retail stations operated by Europe’s largest oil company. Throw in Shell’s 50% stake in Canadian cellulosic ethanol producer Iogen Energy and its 15% stake in U.S biocatalyst developer Codexis (CDXS) so that the joint venture can stay on top of the next generation in biofuels and you’ve got quite a package.
So why is this taking so long? Money. (What else is new?)
Cosan is transferring $2.8 billion in debt to the joint venture. That’s about $300 million more than in the initial draft agreement announced in the winter. In exchange Cosan has added its cogeneration energy business to the joint venture.
The advantages for Shell are pretty clear. The company gets a huge presence in biofuels at one stroke. Even better that biofuels business uses sugar cane rather than corn so it’s more efficient at producing fuel and doesn’t face any of the obstacles that come with diverting a food crop such as corn to fuel production.
Can anyone stop the appreciation in the yen? Not the Bank of Japan or the country’s government it appears
Talk about a no-win situation: Japan’s central bank is damned if it doesn’t intervene to weaken the yen and quite possibly double-damned if it does.
The Japanese yen climbed yesterday, August 31, to 83.92 to the U.S. dollar. That’s near the 15-year high for the Japanese currency. At recent prices Japan’s exporters are getting killed. Growth in Japanese exports slowed in July for a fifth straight month. As you’d expect shares of Japanese exporters led the Nikkei 225 down again. Toyota Motor (TM), for example, fell 2.4% for the day. Canon (CAJ) dropped by 4.5%. The Nikkei declined to 8824, a 16-month low.
The Bank of Japan and the Ministry of Finance have tried talking the yen down to no avail. They’ve announced a new stimulus package and extended a cheap-loan program. And the political pressure for the bank to do more has intensified.
It’s clear what the bank could do. It could sell yen into the market. In theory that extra supply of yen would drive down the price of the Japanese currency.
