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.
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.
If the economy is so terrible, why are machinery stocks relatively strong?
Oddly enough on a day, August 31, when investors are again feeling nervous about growth, machinery stocks are showing relative strength. Among the standouts Caterpillar (CAT), Joy Global (JOYG), Bucyrus (BUCY), and Deere (DE).
This group has been through a day much like this not so long ago. On August 12 the same stocks were up—with the exception of Caterpillar, which was down slightly. Caterpillar (CAT) was the catalyst for the strong showing that day by the sector. On the morning of August 12 the company announced that it would triple the production capacity of its U.S. excavator lines and add 500 more employees with the opening of a few plant in Texas. Caterpillar said that plant will be operation in mid-2012.
Now, of course, Caterpillar’s optimism about its business may be completely misguided or wildly early, but it echoes news from other machinery companies: If your customers are other companies with long-lead times between breaking ground on a mine or an airport or a communications network and having them go into use, then you’re actually seeing an increase in business. That’s been the story at a company such as Cummins (CMI) and at Intel (INTC).
Today, August 31, the catalyst looks to be earnings from Joy Global due before the open tomorrow. The thinking among analysts is the company will beat modest expectations for the current quarter and then predict strength for the fourth quarter, which is typically the strongest of the year.
One stock that isn’t in today’s list of leaders but that will be a major beneficiary of this trend is Komatsu (KMTUY.PK), the world’s second largest construction-equipment maker.
Put more fiber in your portfolio
Last night’s bad economic news out of Japan means this one goes on our watch list. As a Japanese company, Toray Industries (TRYIY.PK), moves with Japan’s stock market. But much of its business and most of its growth are from outside Japan. (For more on the bad economic news out of Japan see my post http://jubakpicks.com/2010/07/30/for-surprises-this-a-m-forget-us-gdp-and-look-to-japan/ )
Toray Industries was founded in 1926 as Japan’s first maker of synthetic textiles. Today the company is still weaving and knitting exotic textiles—including for two of the global growth stories of the next decade,
First, reverse osmosis membranes for water desalination. Global installed desalination capacity will grow at a compound annual growth rate of better than 9%, according to projections from Pike Research. Total desalination sales will approach $90 billion n 2010 through 2016, Pike Research forecasts. Although the desalination industry as a whole remains strikingly unconcentrated with the top five suppliers together controlling only 25% of the market, the market for reverse osmosis membranes is strikingly concentrated. The companies, Dow Chemical (DOW), Nitto Denko (NDEKY.PK), and Toray Industries control 65% of the market.
For surprises this a.m. forget US GDP and look to Japan
All eyes will be on the market reaction to the U.S. GDP report this morning.
I think you’d be better rewarded by watching Japan.
I don’t think the U.S. GDP number for the quarter that ended way back on June 30 addresses any of the market’s real hopes or fears. The question investors’ are asking is “Will growth slow in the second half of the year?” A backward looking GDP number doesn’t answer that. And it’s all too easy to rationalize the number no matter what side of the growth debate you’re on. If it’s low, you say “Doesn’t prove anything about the second half.” If it’s high, you say, “Wait until we see second half numbers.”
By the way, the report released at 8:30 ET today, July 30, said the U.S. economy grew at a 2.4% annualized rate in the second quarter. That is almost exactly the 2.5% expected by economists. The government also announced that first quarter growth had been revised upward to 3.7% from 2.7%.
But Japan? Now that’s a different story. In overnight news the country delivered surprising—and this is surprising bad—economic news. And because it was unexpected the news roiled markets across Asia.
In Japan unemployment unexpectedly rose for a fourth straight month to a seven-month high of 5.3% in June. Industrial production fell by 1.5%, the most in a year. Economists had been expecting a 0.2% gain.
And perhaps most ominously for this deflation-shocked country, consumer prices, excluding food, fell by 1% from June 2009.
