Some legendary thoughts on Japan

By now it is readily apparent hopefully, that Japan has been running all out with the Nikkei up 67% in less than year.  Very impressive.  Abe(Prime Minister) and Kuroda(BoJ Head) have followed through on their commitment to flood the country with liquidity and even though they rang the loudest cowbell(“I gotta feeva.  And the only prescription…is more cowbell!” – Walken voice) about their intentions, many have missed out on the trade so far.   I read a very thorough analysis in January before 20% and 31% upward runs in the DFJ and DXJ, respectively.  Those are two of Wisdom Tree’s ETF’s that offer probably the most simple and best exposure to the move in Japan.  Even though the trade is due for a breather, according to some of the most informed and experienced money managers around, there is still a lot of room left to run.

Here’s a synopsis of Stanley Druckenmiller’s thoughts on Japan from the recent Ira Sohn conference, “Japan’s long term outlook is much more favorable as the country has experienced 15 years of deflation and central bank policy is supporting Japan’s stock market.  He sees the Nikkei gaining for 18 months and exports bolstered by a depreciating yen.  To play this trend, Druckenmiller favors Japanese domestic companies that benefit from reflation.  He feels this could be the beginning of a secular bull market in Japan.  Kuroda in Japan is doing QE x3 of the US relative to equity market capitalization.  He actually thinks the Japanese QE makes sense, because they’ve been in deflation, particularly their currency strengthening against everyone else in the world. He believes when the US economy improves and the Fed tightens, it will overwhelm the growth and cause the market to crash. He does not expect that in Japan, because it has been in a long-term deflation.”  If you don’t know who Druckenmiller is, step your game up.

Here’s some more thoughts on Japan from probably the first big time hedgie to nail the trade, Dan Loeb, before everyone else got in:  “It’s a huge game change, and there’s a lot more room to go,” Loeb said of the yen’s decline, “The structural reform, which should be announced before the election, is going to really be the big game changer over there…We have the potential to get this right, to have a similar kind of massive improvement in the performance of Japanese corporations with the backdrop of the support of government.  It’s a really critical time.”  Loeb did not make any specific recommendations on where to invest in Japan but compared the growth to the 1980s before the country began its “Lost Decade.”  Loeb is arguably the hottest macro guy out there right now next to Gundlach.  And what’s funny is they’re both fixed income guys who have been nailing macro trades in equities.

And some last thoughts on Japan from the living legend of Technical Analysis, Louise Yamada:  “…both the Yen and the Nikkei moves are the real deal.  Today’s leap over 100 is huge for the Yen.  “Yamada and others expected it to take longer for the currency to break through such time-tested resistance.  Now that it’s happened the Yen is in a spot that should be familiar to U.S. investors: the rally is “due for a rest” but the momentum just won’t stop. It’s looks like a legitimate breakout in the Nikkei and clearly a legitimate decline in the currency,”  What’s that mean?  As Yamada often says “the greater the damage the longer the time it will take to recover.”  The Nikkei and yen have spent 3 decades marking time and making doubters of the world.  Extended or not, rallies that tear through resistance so vigorously seldom reverse immediately.  Like Druckenmiller, if you don’t know Louise then step your game up.

If allocating a portion of your portfolio to the Japanese opportunity, then here’s a chart to consider as a matter of timing from the great site Kimble Charting Solutions:clip_image002Coming back to the ETF’s, both obviously specialize in Japanese equities.  The DXJ invests in Japanese equities but it hedges risk by trading the Yen versus the Dollar to “neutralize currency exposure.”  The DFJ(which I like better) invests specifically in Japanese small-cap dividend players.  Depending on where you stand on the reflation of Japan, both ETF’s offer compelling 12 – 24 month opportunities.

And touching on the thesis for gold, here’s an update with an interesting recent graph of small speculators from the Commitment of Traders reporting by the COMEX.  Small specs are your non-giant institutions i.e. banks, large hedge funds, and commercial producers.  Each of those types of entities have their own CoT classification.  The small specs tend to be wrong very often at the extremes and this graph, courtesy of the outstanding services of SentimenTrader, clearly paints a picture of extreme sentiment towards the precious metals as the small specs have a net short position for the first time in 23 years.clip_image004Even if one has enough exposure to PM’s, I think the graph is compelling and it’s worth noting some old words of wisdom here I read this morning, courtesy of LB at WSD:

o From Sir John Templeton we get this nugget of wisdom: “It is impossible to produce superior performance unless you do something that is different from the majority.”

o Warren Buffett advises, “Be fearful when others are greedy and greedy when others are fearful.”

o And Silicon Valley venture-capitalist extraordinaire, Bill Gurley, says, “You can only make money by being right about something that most people think is wrong.”

To conclude with a little monetary opinion, here’s a link to an article about monetary policy that is somewhat in opposition to some of the stances I have shared.  It’s always good to read a qualified opposing opinion.  Keep in mind, I do not completely disagree with the thoughts of the article but I’m not sure the author is framing up his argument correctly as he completely fails to mention or expound on potential sovereign insolvency or derivative exposure at the country and institutional level.  None the less, worth a look:  http://markdow.tumblr.com/day/2013/05/12.

Read, Read, and Read some more.  Good luck out there.

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