These Three Iconic Japanese Brand Names Are On My "Short List"
[Kyoto, Japan] – Many investors have piled into Japan lately reasoning that somehow this will be "the year" Japan turns around and there will be lots of money to be made.
I don't disagree – only the big profits are on the short side, especially when it comes to these three iconic Japanese tech brands.
As I quipped earlier in the year, it's more likely that Godzilla will walk out of Tokyo Bay again than it is that Japan will suddenly rebound.
I am well aware that's not a popular thought and that it will likely earn me my share of wrath on the Internet. Save your breath and your keystrokes. Having spent more than 20 years in country, I am intimately familiar with the arguments.
For example, value-oriented investors consistently remind me that the Nikkei is "dramatically undervalued." I am also well aware of the "construction boom" that was supposed to follow the tsunami and nuclear crisis.
And I still continually hear from the statistically motivated that the Japanese economy just "has to turn around" because it's exceedingly rare that an economy remains in the doldrums after 20 years.
The Nikkei remains 75.5% off its December 29, 1989 peak for a reason. That means it's going to take a 308.19% gain just to get to break-even based on where it's trading as of this writing.
If you think that's a sure thing, I'm happy for you but wish to point out that business conditions now are hardly conducive to the kind of growth that got the Nikkei there in the first place. The entire society is deleveraging. Consumers are tapped out and the government is a wreck.
As for the construction boom, that's a misconception. As I noted in a flurry of interviews following the terrible events of March 11, 2011, only a few companies are going to enjoy any sort of revenue expansion whatsoever. Sure, there might be a short-term pop, but the majority would experience significant drops in revenue and exports resulting from production losses and a post-quake strengthening of the yen that will compound the efforts to regain lost ground.
And finally, as for the notion that markets simply don't stay down for this long…says who?
It was inconceivable in 1990 that Japan would lose a decade — let alone three. Nine failed stimulus programs and 22 years later, the Japanese economy has just lurched into another technical recession this week. The rules of the game have changed.
Clearly, the markets can, as the old saying goes, remain illogical far longer than investors can remain solvent.
Here's the Reader's Digest version of my thinking:
What I Wish Ben Bernanke Knew About Japan
I've called Japan my "other" home since 1989 and in that time I've seen it change in ways that ought to scare the pants off you.
I say that not to ruin your day, but because I fear we are headed down the same exact road as long as Ben Bernanke and his central banking buddies think it's easier to print money than actually stimulate real growth.
In doing so, they are re-creating Japan's "Lost Decades" here at home with years of smoldering, piss-poor growth as our destiny.
Yet it doesn't have to be that way. We can still choose a different path.
Here are 10 lessons from Japan I would share with Chairman Bernanke right now if I sat down with him:
1) All the cheap money in the world won't matter if banks hoard it and customers don't want it. You could lower interest rates to zero and it won't make a difference. Japan tried this to no avail. At this point, low rates are hardwired into the Japanese business system to the extent that any increase whatsoever is likely to cause a massive wave of corporate and personal bankruptcies. Don't let that happen here. You still have a chance to prevent this.
2) At some point somebody has to take the loss. You cannot pretend that the debt you've advanced is performing any more than the Japanese have. No matter how much money you inject into the system, the deleveraging process will continue until excess credit is bled out of the system one way or another. Defaults happened with alarming regularity before Central Banks tried to stave them off. There have been literally hundreds in Eastern Europe, Africa, Asia, and Latin America over the centuries. Spain and France failed six and eight times each in the 16th century alone.
3) Trying to manage any singular crisis will only result in a much bigger one down the road. The longer you prop things up, the worse they're going to get and the more consolidation you will see. Five of the 10 largest banks in the world were Japanese in 1990. Today the only bank to make the cut is 5th on the list (the Japan Post Bank Co. Ltd according to Bankers Accuity).
4) When politicians find it easier to borrow money than make hard policy decisions, they will because they prefer their short term re-election prospects over the long-term economic interests of the country. Japan has had 15 Prime Ministers in the last 12 years. Granted, their system works a little differently than ours, but continual reshuffling diminishes the effectiveness of any solution. Take advantage of the situation and act decisively before our elections risk a reset. You're supposedly apolitical. Prove it by acting with conviction instead of giving us more FedSpeak.
Investing in Japan: Is There Light at the End of the Tunnel?
Most people have given up on investing in Japan.
With an aging population and far too much government debt, the conventional wisdom is that Japan will never again see the vigorous economic growth it once enjoyed.
The earthquake and tsunami of March 2011 only reinforced this view. However, that tragic episode did have another side.
It showed the resilience and discipline of Japanese society.
There was almost no looting, for example — and recent economic data suggest that the Japanese economy is not as dead as it seemed.
First quarter Japanese gross domestic product (GDP) came in at an annual growth rate of 4.1% –far higher than the United States, Canada, Australia, or anywhere in the Eurozone.
Given that Japan has been in perpetual near-recession for 21 years, with no surges of productivity like the U.S. enjoyed in the late 1990s, it's really not a bad performance.
You can also see Japan's true strength from its exchange rate, which is currently 79 yen to the dollar, up from around 120 five years ago. That makes visiting Tokyo very expensive.
However, it's also sign of a highly competitive economy.
Investing in Japan: What You Need to Know
It's notable that observers in the United States, a country which perpetually runs payment deficits of $500 billion-$600 billion annually, sneer at the economies of Japan and Germany, which are almost always in surplus.
Before 1995, I lived in another economy that was similar. Britain ran deficits much like the U.S. does.
So believe me when I tell you, deficits are not exactly a sign of superior economic health.
Southeast Asia: Strong Growth, Humming Factories, No Debt Crisis
Gloom has enveloped most of the investment landscape these days, but there is still one region that offers strong growth and serious returns.
I'm talking about Southeast Asia.
There was a time when investors scoffed at the likes of Singapore, Thailand, Malaysia and Indonesia. But no one's laughing now. The naysayers currently are all too busy pulling their money out of the regions they always assumed were safe – the United States, Europe, and even the trendy BRICs (Brazil, Russia, India, and China).
Indeed, there are precious few flourishing economies in the world today, and none look as promising as the ones you'll find in Southeast Asia. We're talking about countries that have pro-market governments, thriving manufacturing sectors, ample natural resources, and – with the exception of Singapore – wage levels that can still grow a great deal before pricing themselves beyond their Western competitors.
That's quite a lot by today's standards.
Just take a quick look around the rest of the world and you'll see what I mean.
Searching for a Savior
U.S. growth has fallen off a cliff and no amount of "stimulus" seems likely to get it back on track. Economic growth in Europe is stalled as well, and the continent is further jeopardized by the potential collapse of Greece and the European Union (EU). Even Australia and Canada, both with strong mineral and energy sectors, seem to be slowing as demand wanes in the wealthy West.
Emerging markets seem like a better bet for our money at first glance, but they, too, have problems when examined more closely.
Brazil and China are battling inflation. Brazil has a government that seems unable to stop spending, while China has a thoroughly corrupt government and a banking system with an enormous hidden bad debt problem. Russia is a snake pit, from which a foreign investor is unlikely to escape alive. And India, while growing rapidly, has a serious inflation problem and a government as corrupt as it is economically inept.
Fortunately, one incandescent bright spot shines through the darkness: Southeast Asia. So let's take a look at some of the investment opportunities being illuminated.
Chinese Car Companies Racing to Produce a Global Champion
With Detroit a shadow of its former self and Japanese automakers sidelined by that country's recent disasters, Chinese car companies are racing to produce a global champion capable of competing with Western brands.
It's something that's long been talked about and something that Nissan Motor Co. (PINK: NSANY) Chief Executive Carlos Ghosn says could happen in just five short years.
"The Chinese government says this is a huge industry. We want to have a Chinese champion," Ghosn told Reuters. "It's logical. It's normal. We were expecting this."
Ghosn anticipates such an emergence will take about five years, but could happen even sooner if one of the major Chinese car companies acquires a mass-market auto brand from a foreign rival.
So who will this Chinese auto champion be?
A short-list of serious contenders includes:
- SAIC Motor Co. Ltd.
- Geely Automotive Holdings Ltd. (PINK: GELYF)
- Dongfeng Motor Group Co. Ltd. (PINK: DNFGF)
- BYD Co. Ltd (PINK: BYDDY, BYDDF)
- Chang'an Automobile Co. Ltd.
SAIC, and Chang'an are state-owned, which makes them difficult to invest in. But Geely, Dongfeng, and BYD are open to U.S. investors, with the latter backed by Warren Buffett. At the very least, these Chinese car companies stand to profit handsomely as China takes its place as the automotive capital of the world.
The Japanese Economy: How Its Post-Earthquake Weakness and Scuffles With China Contribute to a Global-Market Reversal
In our ongoing search for possible "inflection-point" catalysts – financial stimulants that could help turn global markets upside down – the Japanese economy has to be a prime candidate.
In the last part of the 1980s, Japan was the world power – so much so that investors on the U.S. trading floors of New York each day watched the Tokyo markets with a mixture of awe and fear. An oft-cited investing aphorism of the day explained this very clearly by holding that "when Tokyo sneezes, Wall Street catches a cold."
Not long after, the Japanese miracle ended, the stock-and-real-estate markets crashed, and that Asian country fell into a funk known as the "Lost Decade" – a misnomer, since the economic malaise that's lasted virtually ever since is actually more than 20 years long.
China's Economy Continues to Ascend – But Watch Out for Speed Bumps
Everyone knows that China's economy is hot. The only question is whether it may be a little too hot.
China posted yet another quarter of stellar economic growth in the first quarter of 2011, with its gross domestic product (GDP) growing 9.7%. However, analysts are worried about some of the side effects that have accompanied that growth- namely soaring inflation and the emergence of speculative bubbles.
Inflation in China hit a 32-month high in March, and the country's real estate market is beyond scorching.
Policymakers in Beijing insist they have the situation under control, and they've been trying to rein in liquidity and curb speculation to prove it. That's why China's economy, accustomed to double-digit growth, is only expected to grow 8% to 9% this year.
Buy, Sell or Hold: Toyota Motor Corp. (NYSE: TM) Needs to Rebuild from Supply Chain Collapse
Toyota Motor Corp. (NYSE ADR: TM), one of the largest manufacturing companies in the world, has offered strong periods of growth from which investors have profited.
However, today it is a "Sell" – and is likely headed toward a long-term redevelopment of its core company structure (**).
Toyota was founded in 1933 and is headquartered in Toyota City, Japan. Toyota has more than 300,000 employees and a global network of production plants. The company has a market capitalization of $126 billion with an enterprise value of $238 billion, once net cash and debt are accounted for.
Disasters Driving Japan Auto Parts Makers to China
Disruptions caused by Japan's March 11 earthquake and tsunami could further encourage Japanese auto parts makers to relocate factories to China – an eventuality already being driven by explosive growth in the Chinese auto market.
Japan's Big Three automakers – Toyota Motor Corporation (NYSE ADR: TM), Honda Motor Co. Ltd. (NYSE ADR: HMC) and Nissan Motor Co. Ltd. (PINK ADR: NSANY) – all already operate assembly plants in China. And while 60% to 70% of the parts those plants need come from within China, the rest must be imported from Japan. So if the assembly plants run out of the parts from Japan, production will halt.
Although no plant in China has yet reached that point – Toyota, Nissan and Honda have all said their factories have enough parts to sustain production for at least two more weeks – the possibility has led some to contemplate a more localized supply chain.
Japan Disaster Update: Beware of Global Insurance Stocks
The catastrophe-modeling company AIR Worldwide Corp. has estimated that insurance company losses from the Japanese earthquake and tsunami could reach $35 billion.
That has insurance analysts feeling bullish about insurance stocks: In their view, losses are good because it enables the insurers to ratchet up their premiums.
Personally, I don't see it that way. While I like life-insurance and domestic-insurance companies as investments for ordinary investors, I think the big-ticket insurance market is too opaque, too insider dominated, and much too unlikely to deliver decent returns to its outside shareholders.
In short, here in the aftermath of the deadly Japan disaster, investors need to beware of global insurance stocks.