Katrina & Koizumi

These are momentous times. The big news in America, of course, is the devastation of Hurricane Katrina in New Orleans. Americans, true to form, are exceeding the call of duty in their donations and help. Even when the government drops the ball, the people don’t. I love that about my country.

Meanwhile, halfway around the world in Japan, where I currently live, it’s election day. And not just any election day, mind you. This is The Big One. Without a doubt the biggest in 50 years. It will determine the fate of Prime Minister Koizumi and could dramatically alter the political landscape and give electro-shock treatment to the world’s second biggest economy.

In both cases, Katrina and Koizumi, we find ourselves staring at two wonderful investment ideas.

With Katrina, investing is a touchy subject. Even after donating toward relief and doing all that we can to help, is it ever in good taste to hunt for an investment idea? Is there an uneasy feeling in the stomach if we make money off an event that rained such misery on so many people? There certainly can be, which is why I’m particularly thrilled to have found a company that has good upside potential and yet will be instrumental in getting The Big Easy back on its feet. Interestingly, it’s not a construction company.

It’s an insurance company. How, you ask, can an insurance company be a good bet after a disaster for which they need to pay claims? It’s an interesting situation.

As longtime readers know, I watch and admire Warren Buffett and his company, Berkshire Hathaway. In so doing, I also monitor Berkshire’s competitors in the insurance business. Now, mind you, no company is in better financial condition than Berkshire. However, others are pretty darned good and can sometimes be had far, far cheaper than their famous peer.

Now is just such a time. An event like Katrina is a megacatastrophe in the insurance business. Rare, thank goodness, but not so rare that we don’t have some history. Katrina’s infamous cousins on the megacatastrophe list include Hurricane Andrew and 9/11. In each case, insurance companies took a hit in the stock market because of the impending claims they’d have to pay. The claims were so big in the past that many companies went bankrupt. That’s where your skepticism appears justified.

So far, pretty ominous. But think a little farther out. What happens to the companies strong enough to literally weather the storm? They are left with fewer competitors and the ability to charge higher premiums on the next renewal cycle. It turns out that the best place to find that situation is not the frontline insurance companies visiting homes and assessing damage, it’s in the reinsurance companies that provide insurance to those frontline insurance companies.

Estimates for the financial damage from Katrina are still rolling in and are still wildly different from one another. The range is between $20 and $60 billion. No matter the final figure, it will be massive. But, and this is key so please don’t miss it, it will not be as big as expected.

In every past megacatastrophe, the estimates have come in vastly inflated. That’s good from the standpoint of getting the money in place that’s needed. In the stock market, though, it unduly scares investors away from certain insurance companies that are seen as being dangerously exposed. Maybe even fatally exposed.

So, the prices drop. And drop. And drop. What the clear-eyed investor does is sort through the wreckage for the most deeply underpriced strong company. If it is indeed strong, it will survive, rebound, and flourish.

Guess what? There’s just such a company at just such a deeply discounted price right now. And I do mean right now, because the price fell like a rock early last week, but already staged the first leg of a dramatic recovery last Friday. It’s Investments are shown only to KELLY LETTER subscribers. Click to try it for free., and it closed last Friday at $18.87. It was fluctuating around $25 all summer then crumpled to less than $18 last Thursday. Hurry to buy under $19. Even if the stock simply gets back to its pre-Katrina $25, that will be a 31.6% gain. However, the stock has a year-over-year revenue growth of 20%, low debt, and a solid profit margin of 7%. It should go higher, perhaps above $30.

Investments are shown only to KELLY LETTER subscribers. Click to try it for free. has survived every major catastrophe since its founding in 1982. I’m confident that it will survive Katrina, too, and be one of many helpful hands putting New Orleans back together again.

My Advice: Buy Investments are shown only to KELLY LETTER subscribers. Click to try it for free. under $19.

Now, back to Mr. Koizumi and the reforming of Japan.

The Japanese market as measured by the Nikkei appears poised for a breakout. It’s already above 12,000 and touching 4-year highs. It has done this before, though, and always disappointed to retreat back down to 10,000. That’s why it’s important to wait for a decisive breakout and compelling circumstances to believe that we may finally be at the trigger-pulling moment.

From Businessweek:

In S&P;’s view, the quantitative evidence seems to support that the economic recovery in Japan is well under way. In mid-August, the Nikkei-225 stock index and the Topix index both reached roughly four-year highs. Moreover, Japanese GDP grew for a third consecutive quarter and is expected to rise 2.5% for fiscal 2006. Employment is also better. In June, the
jobless rate dropped to 4.2%, a seven-year low. And consumer confidence, though still sluggish, may improve as more people have money to spend.

Mark Headley, lead manager of the $185 million Matthews Japan fund, believes Japan’s recovery has legs. He thinks the country’s central bank is intensely focused on ending deflation, which has been “extremely brutal on consumer-spending habits, on corporate balance sheets, and has brought their entire banking system to the brink of bankruptcy.”

Part of Japan’s renewed vigor has more to do with
politics than it does with banking.

Here’s where we get our fireworks and why the world is suddenly unable to stop watching what is normally the most boring political arena on Earth. Prime Minister Junichiro Koizumi dissolved parliament last month and called for a snap election when members of his own party rejected his proposal to privatize the government postal service, called Yubin Kyoku. Japan Post holds 350 trillion yen in deposits and insurance assets. That’s $3.3 trillion, making it the largest financial organization in the world. Mr. Koizumi’s idea, if realized, would inject all of that capital into the economy. The resulting growth would really light a fire under the stock market.

I live in Sano, Japan and I’m typing this to you at 6:00 a.m. on September 11th. The snap election is today. It’s a big deal, undoubtedly the most important election in the past 50 years here. Mr. Koizumi has appointed specific candidates of special appeal to take out opposing members of his party. These appointed candidates are called shikaku in Japanese, assassins. Many are women, several are TV personalities, one is a famous cookbook author, and one is Takafumi Horie, the internet entrepreneur.

When, as is expected, Mr. Koizumi and his assassins dethrone the fossils of the Liberal Democratic Party, the way will be clearer for reform. It won’t be entirely clear, naturally, but much more open than it was in August.

Thus, it’s a big deal. Trucks are driving around Sano blari
ng the names of candidates. Women are handing out fliers at the supermarket. Everybody’s talking about it. The expected turnout is over 70%.

Clearly, something is happening in Japan. Can Mr. Koizumi and his band of reformers unlock the trillions needed to get this economy going again? I’m betting that they can, and my bet is on Investments are shown only to KELLY LETTER subscribers. Click to try it for free.. Like other funds from the Investments are shown only to KELLY LETTER subscribers. Click to try it for free. family, this one magnifies its returns, in this case twofold. When the Nikkei 225 rises 5%, this fund will rise 10%. It works the other way, too, but things look set to rise.

My Advice: Buy Investments are shown only to KELLY LETTER subscribers. Click to try it for free. below $40.

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