Wednesday, January 18, 2006

 

After 50% Run Up, Sellers Panic In Japan

Market Watch looks at what happened last night in Japan. "U.S.-listed shares of Japanese companies tumbled Wednesday, caught in the downdraft created when the Tokyo Stock Exchange was forced to close early after a flood of orders threatened to overwhelm its systems. Officials were forced to close the exchange 20 minutes earlier than its regularly scheduled time, an unusual move that came after a day of heavy selling pressure."

"'The [Japanese] market has rallied a tremendous 50% in just eight months,' said Steve Kelsey in Hong Kong. 'The market looked extended as you could see turnover was dropping. The market repeatedly tried to break the 16,500 level; however, each rally was made on lower turnover, indicating that bulls were already fully positioned and there was no new buying coming in.'"

"At Merrill Lynch, analyst Masatoshi Kikuchi said he believes the current selling will be short-lived. 'We believe this should not lead to the start of a bear market or be considered as the bursting of the bubble,' said Kikuchi. Looking at the bursting of past bubbles such as the asset-inflated bubble in 1990 or the IT bubble in 2000, steep share-price declines presaged economic recession, he said."

"'We see no changes in Japan's strong economic fundamentals and corporate-earnings trend,' he said."

"The Tokyo market also came under pressure from disappointing earnings from chip giant Intel, Internet company Yahoo and blue chip IBM, all of which took their toll on the broader technology sector, according to Jonathan Allum. 'The Intel report is of particular concern in that the missed forecast is only six weeks old and this is a major tech bellwether,' he said."

"Among individual American Depositary Receipts, financial giant Nomura fell 4.5% to $17.79. Telecoms company NTT lost 4.6% to $23.24 and real estate company Orix Systems lost 4.6% to $116.50."

Comments:
I posted on here last night about the carnage in the Nikkei while it was happening. I was monitoring it pretty close as my biggest equity position is EWJ, an ishares EFT. Yes, the Nikkei was up 40% last year, but it declined or was flat the last 14 years. The fundementals are all there still and there is mucho pent-up demand and I see it rise another 15%-35% again this year, barring a war in Iran. Today was a fantastic entry point, and I doubled up on it myself, although after AAPL & EBAY stocks were hammered after hours Japan will likely fall again tonight.
 
I held EWJ until earlier this week (whew!) but sold because I'm having a hard time balancing my previously bullish stand on Japan with my (extremely) bearish stand on the US. Granted, the Nikkei plunge today happened on news of the scandal, but (long term) its hard to imagine a country who's economy is so tied to the US consumer, coasting smoothly through an American economic slowdown.

I think thejdog (above) is right to an extent, that the Nikkei will bounce back shortly -- but IMHO I wouldn't go long. The US economic slowdown isn't going to end at US borders. Also, while there has been some promising news coming out of Japan -- its mostly news about their economy stabilizing (as in: "not dropping anymore"). There's a lot of ground to cover between "not dropping anymore" and "booming". Sure, play the bounce on the EWJ. But IMHO the Nikkei will have an up & down year in 2006, and won't enjoy the same happy ride as oil and gold.
 
I think I read that the Japanese and US markets are not correlated much.
 
Japan's economy is very connected to the strength of the American consumer.
 
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