INTERVIEW-Brooke sees Nikkei going over the falls
(Adds Nikkei closing level)
By Andrew Morse
TOKYO, Oct 27 (Reuters) - Anyone hoping the worst has passed for Japan's beleaguered Nikkei average had best avoid Robert Brooke.
The long-time observer of Japan's equity markets -- he followed the Nikkei for Swiss Banking Corp and Barclays de Zoete Wedd before establishing his own research boutique, Brooke Research -- believes the country's intractable banking problem will push the market to 10,000, a level most traders would have scoffed at a decade ago.
Today, with the Nikkei bobbing near 13-year lows at around 13,800 and more than 64 percent below its 1989 peak, many observers say the market is on the verge of finding its floor.
But Brooke says the much-publicised reliance of Japanese banks on equity portfolios to boost their capital will push the market lower. With all but a few banks posting unrealised losses on their equity holdings, the institutions have to cut back on lending to bring assets in line on their balance sheets. That means many companies could get caught in a credit crunch that will squash their prices.
Brooke says the problem can't come to a painless solution.
''The bear market can't end until the banking crisis ends and the reverse is true because of banking exposure to stock prices,'' he told Reuters on a recent trip to Tokyo to advise clients. ''At the end of the day, a lot of Japanese companies are going to be thrown to the winds.''
Brooke doesn't recommend placing too much faith in the government's 60 trillion yen ($504 billion) package to protect the banking system, much ballyhooed by observers around the world, either.
''I think the whole recapitalisation business is bad news for a variety of reasons,'' he says. ''Who is going to determine what the good borrowers are?'' he asks, referring to part of the legislation that calls for protection of sound customers of failed institutions.
He is also worried about the apparent readiness of authorities to let bank managements, responsible for the current mess, off the hook in order to entice banks to accept public funds.
Brooke's methodology, a combination of fundamental analysis of the market and trend analysis of charts, shows many of Japan's most well-recognised names either crashing or about to crash. Brooke calls the pattern ''Niagara'' because of its resemblance to the famous North American waterfall.
Most obvious to have gone over the falls: the now-nationalised Long Term Credit Bank of Japan , which traded at two yen -- down from a year high of 373 -- even as it became obvious the government would administer its operations.
''This is the first Japanese company whose stock price has discounted its demise,'' Brooke said.
Why is that significant? Because amid concerns that bank lending is on the verge of drying up and with bankruptcies racking up at a record rate, investors should be discounting failure in hundreds of stocks, especially banks, he says.
''We've been told by Japanese officials that there are going to be more more bankruptcies. So we should be able to find some stocks that are discounting bankruptcy, but we can't. It's absolute madness,'' Brooke says.
Unlike other analysts, who forecast the Nikkei will slide lower until it finds a floor, Brooke says the fall to 10,000 will be fast, painful and scary. And it will probably start in the banking sector, where the stocks of some smaller, regional banks are faring better than those of their big brothers.
''Japanese investors either don't believe or don't understand the severity of the threat to the sector,'' he said. ''It means that there's one moment of realisation that the market has to go through.''
On Tuesday the Nikkei edged down 0.16 percent to end at 13,820.68.
($1=119 yen)
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