Here is another musing on Japan...it's to big to not try to watch it....I am sure they are making some progress at recapitalizing the banks with the .02% money being dispensed at the short-term window.
John
An Encouraging Picture in Japan
By Jim Griffin
Special to TheStreet.com
03/15/99 12:15 AM ET
Among the many advantages of working at a big investment management
company is that it is a valued client of all the major sell-side banks and
brokerages. As a result, we get the benefit of perspective on a broad range of
topics, from some of the best minds in the business. Many trees are felled in the
delivery of these perspectives, and because there are so many and they are so
diverse we have to tune our ears to hear the music that lurks in the cacophony.
But it beats talking to yourself, as this market periodically drives you to do.
Bob Barbera, the Hoenig & Company economist, came through our offices last
week. He and I see things so much alike that we may have been separated at
birth. Among his key points: T-bond yields have bounced back up into the high
fives because the global economy has recovered from the panic of the Russia and
LTCM meltdowns of last year's third quarter. Treasuries were the primary
beneficiary of the panic of '98, and U.S. corporate bonds were not, so spreads
gapped. Now the "safe haven" money is slipping back to where it came from, so
Treasuries are losing custom but corporates are not, so spreads are snugging.
The information would appear to be in the volatility of Treasuries and not in the
credit spread.
Bob's primary focus is, and has been, on Japanese developments. Like me, he
believes that Japan is a much more important explanatory factor for global and
U.S. conditions than many others seem to think. You've got to pay attention to
what's happening over there even if your portfolio or your business interest is
exclusively local.
And what is happening over there? One, the banks are being recapitalized. The
requisite laws were passed and money was appropriated last year. After some
reluctance on the part of bank managers to accept public capital because of the
sanctions that accompanied the salvation, the regulatory authorities have
managed to get through to them this year that they are being made an offer they
can't refuse. As Japanese banks have begun to clean up their balance sheets, the
Japan premium has evaporated in euro-currency markets. With access to credit
again becoming a reasonable prospect for business owners, small business
sentiment has turned sharply higher and business bankruptcies have fallen
precipitously. The domestically oriented stocks that make up the over-the-counter
market have begun to fly -- up 46% since the October low -- and the broader
market is showing signs of a pulse.
All in all, it is an encouraging picture. But as you know, "Japanese recovery"
translates into English as "false alarm." OK, so it doesn't -- but after the
performance of the 1990s, it should. Barbera admits that he can't yet support the
promise of these leading indicators with proof of performance in the growth of
Japan's output, employment, or profitability. At this stage, it is still a matter of
forecast, of prediction. But the basis for prediction now looks to be more on
substance and less on faith than has been the case.
With something like normalcy beginning to reassert itself in the global economy, a
more normal level and term structure of interest rates is likely to prevail. He
doesn't read the recent U.S. Treasury market setback as derived from concerns
about inflation or fear of Fed tightening, but merely as a return to normalcy. As
such, he is less concerned about its effect on stocks than I have been. Many of
the cyclicals and value plays that have underperfomed in the very weak global
economy of 1998 may be setting up to do better as global conditions improve in
1999. A better Japanese economy in particular, through its positive effects on
Asian and overall global demand, may enable our market to broaden out. It is too
simple to say that the last shall be first, that those industries or sectors that have
struggled will now soar, but a better Japan will be better for a lot of other folks,
too.
In contrast, Greg Smith of Prudential Securities has stuck to a position he
argued during his most recent visit, that Japan really doesn't have much hope of
generating a robust recovery, and it doesn't matter much in any case. Its
affluent-but-aging population can't be expected to be an effective engine of
demand, but it can be an important source of funds, as it has been throughout the
1990s. The future is now, and the United States, not Japan, is at the center of it.
Not much harmony between these two points of view. I'm far more sympathetic to
Barbera's analysis, but Smith's skepticism has stood him in good stead.
How about Byron Wien's recent change of tone? The Morgan Stanley strategist
took some money off the table, for many reasons. The higher level of bond rates is
causing strain in his valuation model, and no immediate relief is in sight. Breadth
is going from bad to worse. Sentiment seems a bit complacent. Inflows into equity
mutual funds are relatively subdued. He sees no risk of recession and so a bear
market is unlikely. But the case for a significant upward move from current levels
is just so much harder to make than the case for a meaningful correction that he
felt moved to raise his cash reserve.
Tom Galvin of Donaldson, Lufkin & Jenrette puts several of these themes
together. He expects the market to broaden out because earnings will do better at
more companies as the economy broadens out this year. Earnings breadth drives
market breadth. He shows more interest in foreign flows into our markets than in
mutual fund flows, and he sees those foreign purchases as an important
explanatory factor in the outperformance of the high-profile, large-cap names that
a foreign investor would recognize.
I'd tell you what I think in here, but I'm trying to forget. I suggested a month ago
that the market was "hearing footsteps," that a rising trend in Treasury yields
against a backdrop of extended valuation and terrible breadth meant that
discretion should take precedence over valor. So of course the market lurches up
toward a Dow 10,000 on better breadth and better volume. Among the reasons for
the better performance must be that the economy continues to amaze -- the J.P.
Morgan economists threw in the towel last week on their recession forecast --
and that earnings expectations are being marked up as a result.
Liquidity remains abundant, whether from foreign investors, mutual fund flows, or
corporate activity. The inflation numbers are so good that Greenspan won't soon
find the smoking gun required to tighten credit, so many investors apparently feel
it is safe to put money to work in the market until the risk of unfriendly monetary
policy looms more closely than it does now. Under these conditions, that feels to
me like playing in traffic. But this is not a market that deals kindly with being
dissed, however good the reasons may be.
As economists mark up their forecasts, whether for the U.S. or Japan, and as
market psychology recovers from last year's raw fear, the risks line up on the high
side: higher growth, higher earnings, and higher bond yields. I see that yield
uptrend as the most important factor to keep an eye on -- but the market has
enjoyed the uptick in earnings expectations instead. |
