May 25, 1998
Up and Down Wall Street
Jeepers Beepers!
By ALAN ABELSON
peter, read the neil martin piece and then read this one.....
Barron's man in Japan and our old buddy, Neil Martin, describes, deftly as always and with due skepticism, the outlook for the stock market in that beleaguered nation ("Monstrous Possibility1"). Neil has been right as rain on Japan in his recent pieces, and the last time we were bullish on the Tokyo market, the Nikkei was nearly 3000 points higher. So, with unwonted diffidence, we offer a counterpoint to his bearishness.
What emboldens us to do so is that one of the few truly great investors we know thinks the Japanese stock market is an upside explosion primed to happen. In other words, we have the courage of somebody else's conviction. But the somebody, as we say, is a spectacularly successful pro, with a venturesome flair, who, among his other triumphs, made a real killing on the short side in Japan when the air was just beginning to hiss out of the bubble.
Much as we're tempted to indulge the journalist's special talent for stating the obvious, we really don't see much point in reciting the familiar litany of woes that afflict Japan. We'll content ourselves with readily acknowledging that its economy's quintessentially lousy, and its financial system has taken on an oceanful of water. Further, apart from sporadic spurts, Japanese equities have, with depressing consistency, performed like wet noodles. But even on the other side of the world, night ends and it's often darkest before dawn.
Our savvy source -- who, incidentally, has a passion for anonymity, so let's call him something original like Mr. X -- is especially excited by the fact that all the smart money in the Western World has exited Japan. The U.S. and U.K. hedge funds, who not all that long ago were quite high on the country, have been so worn down by the recent soggy action of the market that they've thrown in the towel. "All my brethren," Mr. X says with evident satisfaction, "hate Japan."
The best gauge of foreign speculative sentiment, he contends, is the size of the long positions the brokerage houses maintain to hedge the index futures contracts they sell to the hedge funds and their ilk. When the level of that arbitrage position is high, it means there's a vast booty of speculative money lodged in Japan. Conversely, when it's low, such flighty capital is conspicuously absent from the country's investment scene, having left for what it views as greener pastures.
None of this is terribly inscrutable, Mr. X assured us (he's as shrewd at sizing up journalists as the equally crude commodities he habitually trades). Let's say one of those restless investment goliaths, Soros or Tiger, buys a stock-index-futures contract. The seller of the contract, Goldman or Salomon or Deutsche Bank, then proceeds to buy the stocks underlying the contract. In the aggregate, such arbitrage positions have ranged from zero in 1990, when the game started, to 4.2 billion shares a year and a half ago, when the Nikkei hit a recovery peak of 21,000.
At last check, the share total in the long arbitrage position stood at a measly 800 million. Not only is that number way below the peak four billion plus, but it's the lowest since 1992. And it doesn't even come close to the two billion shares held in the position in January as the Nikkei was sagging to 14,500.
Since that sorry nadir, the Nikkei staged a bit of rally that, a couple of months later, sent it comfortably above 17,000. Alas and alack, as the clouds gathered once more over the economy, the Asian flu revived in fresh virulence and investor spirits drooped, the Nikkei wilted.
"So here we are," comments Mr. X. "We made this grand retest of the lows in Japan. We look like we've turned up [the Nikkei closed last week at 15,801]. And yet the arbitrage position is down 60% from January." And all his fellow hedge-fund "punters," to use his term, "who were friendly and bullish on the Nikkei, every one of them has liquidated his longs and given up."
He reflects in mock bafflement: "Everybody is bearish on Japan. Bearish on the only country in the world where stocks yield more than bonds. Bearish on the only stock market in the world with a negative yield gap-which means you make almost twice the overnight call rate in dividends owning the Nikkei 225."
The U.S. hedge funds and big mutual funds and their British counterparts, Mr. X repeats, have been selling "night after night, they've sold the living dohickey out of Japan." And this massive foreign selling, he relates, has been "right into strong Japanese buying."
Unlike the top in 1989, he says, the investors he refers to as the "domestics" -- Japanese pension funds, investment trusts and the like -- "are unequivocally running the show in the Tokyo market." And he thinks that, in contrast to occasions in the past, the domestics are the leading indicators and the foreign investors the contrary indicators of the market's future direction.
Mr. X sees this surge of domestic big-money investment in the Japanese stock market as the equivalent of insider buying. He believes these heavyweight investors have a bullish take on their economy, in sharp contrast with the rest of the world's view of that economy. And, what's more, he's convinced they're right.
That 16-trillion-yen stimulus package, which has evoked such scorn among Western portfolio and economic wiseacres alike, will start to make itself felt on the economy, he predicts, in July, August and September. "You are going to have great year-over-year comparisons."
"The deflationary story in Japan," he states flatly -- and squarely and roundly -- "is at an end."
And Japanese stocks, he insists, are "as cheap as they have ever been. You have all the preconditions for a tremendous rally."
Japan, Mr. X sums up, "is a screaming buy."
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