I woke before dawn this morning and caught an early train to Tokyo. After continuing to read and watch news surrounding the Livedoor scandal, I decided to spend Monday among investors during market hours. I went to the Nomura Securities office in Shinjuku, where there is a large lobby with live news feeds. Anybody can enter and talk investing with other people gathered there, including the Nomura employees.
The market opened down and continued fluctuating in the red all day before closing another 2% lower. Individual investors appeared edgy, but not panicked. The prevailing theme in conversations was that Livedoor doesn’t matter to the economy and that its contagion is a real head-scratcher. Who cares if some tiny internet start-up with a CEO who goes on TV regularly is under investigation?
Nobody, actually, but the market needed an excuse to sell off. That’s the take of Sarah Whitley, a fund manager at Baillie Gifford & Co., a U.K.-based investment firm. The Livedoor situation brings nothing to bear on the economic recovery or Japan’s long-term uptrend. This down leg is merely a correction of last month’s impressive rally.
Hakan Hedstrom, a senior economist at Deka Investment GmbH of Germany, also thinks Livedoor’s troubles are its own and do not mean anything to the rest of Japan’s companies. He agrees with me: there are no changes in the upward momentum created by government reform, the end of deflation, and increasing land prices. He said that if Livedoor Shock sends short-term speculators to the exits, stability will return to the market.
Zenshiro Mizuno of Marusan Securities Co. said that “Individuals are starting to move on their long-awaited bargain hunting opportunity.”
Takanori Tanabe, head of Tanabe Economic Research Institute, feels that the Nikkei will bottom at 15,000. That’s 2.4% below today’s close.
Tsuyoshi Nomaguchi, strategist at Daiwa Securities Co., says the market will stay flat for a while until the scandal dissipates, and then the Nikkei will advance to 18,000 when Japanese companies report fiscal 2005 Q3 results (through December 2005). That would be a 20% recovery from 15,000.
Finally, I refer you to comments from Takehiro Sato of Morgan Stanley. He wrote:
. . .the underlying scandal does not reverse our scenario and we maintain our constructive stance toward Japan’s asset markets.
First, the scandal is unrelated to the basic economic fundamentals. Consumption and capital investment environments are unprecedentedly healthy, and we expect Oct-Dec GDP data released next month to considerably exceed our existing estimate (+2.5% annualized) with special factors such as a seasonal lift for the consumption of winter items from cold weather and a retracement of real imports. Now Japan’s F2005 real GDP growth is not only within reach of 3%, but also it is increasingly headed toward beating this level.
Second, we expect the lessons from this scandal to enhance the quality of the Japanese stock market gain. Recent rallies have included undisciplined run-ups for stocks with comparatively weak financial standing and profitability alongside of high-quality stocks amid fierce expansion of trading volume from rotating intra-day transactions by individual investors. However, we think this incident has altered investors to the importance of compliance and proper disclosure. Although the stock market’s upward pace might slow somewhat, we are even relieved by the correction to a more suitable level from the overshooting territory. Going ahead, we hope to see rallies that are aligned to improvements in corporate profits. As for this, we have an out of consensus view, looking for more than 20% growth in recurring profit for F2006.
Also the Japanese market has a surprising track record of rapid recovery from recent dips on the scale of a few hundred yen, setting new highs just a few days later. We think the market will remain firm with risk still on the upside.
Let’s stay put for now.
Jan. 28, 2006 Update:
This call was spot-on. By Friday, Jan. 27, the Nikkei had fully rebounded and closed at a 5-year high of 16,461. The Kelly Letter’s two Japan investments, a bank and a leveraged market mutual fund, ended the week up 10.6% and 20.1% respectively.