The empire of the rising Nikkei Dow index.
The new Japanese government will impose a 2% inflation and 3% nominal GDP target on the Bank of Japan, thus engineer a ECB/Fed scale shock and awe monetary easing at the same time as it passes a highly stimulative supplemental budget, bridges nowhere from Honshu to Hokkaido. The endgame? A 25% rise in Nikkei Dow corporate profits and a secular depreciation of the yen.
George Soros's theory of reflexivity now kicks in. The world's fund managers are still grossly underweight Japanese equity benchmarks, despite the 17% rise in TOPIX since October. So expect a tsunami of offshore hot money, as much as $70 billion, to hit Marounuchi in 2013. The Nikkei Dow/TOPIX was a heartbreak for my tribe of Asia investors since 2007, as the nominal GDP shrank by seven percent. But no more. Japan will be the best performing major developed market of 2013, as Germany was this year. Abe-san has changed the rules of the game of Japanese politics, monetary policy and public finance.
Japan is the only global stock market that trades near its 2008 bottom just below book value, though ROE is admittedly a mediocre 8%. A more relevant metric is that the TOPIX dividend yield at 2.6% is thrice the ten year JGB debt yield while the market still trades at 12 times forward earnings.
If FDR "packed" the Supreme Court in the 1930's New Deal, Abe-san will hand pick Masaki Shirakawa's successor at the Bank of Japan and his two vice-governors next April. The prospect of unlimited easing and reflation has ignited a bull market in Japanese brokers (Nomura), technology (Hitachi, Fanuc), construction/mining equipment (Komatsu), property (Mitsui Fudosan), banks (Mitsubishi UFG, Sumitomo Mitsui), autos (Nissan, Honda, Toyota etc) and electronics firms (Canon, Nintendo, Sony). This spectacular rally is for real though dollar/AED investors must be sure to hedge yen risk.
My favourite Japanese shares are global brands that dominate oligopolistic (an ugly word for an investor friendly concept) cyclical industries. So I am gaga over Komatsu (6301 T) though only below 1800 yen for a 3000 yen target. Komatsu has moved sharply higher since the election and is exposed to the China/Indonesia construction machinery market but still trades at 8 times earnings, 1.5 times book, 4 times enterprise value/EBITDA. The natural/winners among the autos are Nissan and Toyota Motors though China risk is an issue and Mazda/Daihatsu could be funding vehicles. In banking, the Japanese megabanks are clear beneficiaries of Abenomics as stock holdings are finally revalue higher. In insurance, Tokio Fire and Marine is the obvious winner as the shares are cheapened due to the hedged tail risk (via catastrophe bonds!) of the Fukushima, Thai floods, Hurricane Sandy triple whammy. Japan has reentered my trading radar. Tenno haika banzai!
Macro Ideas - The Mexican peso trade was a macro winner!
Of all my myriad macro market calls of 2012, I am most proudest of my recommendations in successive columns last summer to buy the Mexican peso at 14 - 14.50 for a potential 12 target against the dollar. The Mexican peso was the most undervalued currency in Latin America on the eve of a seminal election win by the PRI's Enrique Piena-Neto. As remittances from the 13 million Mexican migrants in El Norte surged even as the industrial mantequillas of Monterey and Nuevo Laredo leveraged off the Southwest's manufacturing renaissance (triggered by a rise in China wage costs and cheap shale oil energy), the peso was a winner. So it did not surprise me that Mexican GDP accelerated to 4.4 in 2Q 2012 and Governor Carstens of the Banco de Mexico went inflation hawkish, as befits a University of Chicago alumn who studied monetarism under Milton Friedman in Gringolandia. The Mexican PMI was 54.5 in June 2012, among the highest in the world. Statistical data series evoke as visceral an emotional chord in me as Andalusian poetry or Sophoclean tragedies. Hence the eureka moment on the Mexican peso.
Yet the easy money in the Mexican peso and the Bolsa in Mexico City has now been made. US economic softness as fiscal austerity bites will hit Mexican exports and remittances. The PRI's new structural labour, foreign investment in Pemex and judicial reforms will require a parliamentary finesse that neither presidents Vincente Fox and Felipe Calderon were able to manage. At 42,000, the Mexican IPC index is fully valued as earnings growth estimates of 16% could well disappoint.
As a wannabe Herodotus of emerging markets, I look to historical valuation ranges as my lodestars of value in Mexico. Caramba, hombres! The Mexican IPCA now trades at 16.5 times forward earnings, the top of its valuation range. After all, Mexico traded at 13X forward earnings in 2010. I once traveled by train across Mexico, from the Yucatan to Nogales on the Arizona border and have retained an indelible memory of Mexico's vastness, its epic financial and consumer potential. The meteoric rise in the Mexican peso far beyond my short term targets makes me reluctant to commit new money to Mexico at current stratospheric valuation levels. After all, the Bolsa has risen 27% when expressed in greenbacks, making Mexico a money gusher south of the Rio Grande for global investors. Viva Mexico!
Like Asia, Latin American shares are growth warrants on global economic momentum though local factors move specific companies. Peru is all about silver and copper ever since Francissco Pizarro plungered the legendary mines of the Incas for the enrichment of Renaissance Spain. Brazil's Bovespa is dominated by black gold/mining colossi Petrobras and Vale, highly correlated to Chinese PMI and money supply growth. Chile's stellar sovereign ratings and pension fund flows make Santiago the low beta market in the region, though the Red Metal is its primary export Colombia, which is my youthful travels was notorious for the violent Medellin/Cali cocaine cartels and the ethereal beauty of Cartagena, has emerged as a major oil exporter after the peace settlement with FARC. Incredibly, Bogota is now the most highly valued exchange in the Americas, at 17 times forward and 3.2 times book. Colombia's financial resurrection is pure magic realism, a Garcia Marquez tale of a hundred years of solitude since the era of Don Pablo.
Stock Pick - Take profits on Morgan Stanley with 20% return!
I had recommended Morgan Stanley as a compelling buy at 16 in this column in mid November. A month later, Morgan surged more than 20% to as high as 19.45 as I write (December 19). This was a hugely profitable investment trade idea as Morgan Stanley rose 22% while the SPDR financial index fund XLF was up barely 2.5% in the past month. A ten times index return in a month on a Wall Street sector index is, of course, my definition of professional and intellectual nirvana. Notice that my broken record, table pounding, successive recommendations to buy Citigroup at 26 last summer have also proven extremely profitable, up 60% in the past six months. Research, stock selection, strategic thinking and real time market intelligence are mission critical in investing in global equities.
I had postulated that Morgan Stanley is the "new UBS" in the sense that it will have to reconfigure its business model, deleverage its balance sheet, slash its retail brokerage payroll, exit capital intensive fixed income trading business, scale down proprietary risk/market making (Dodd Frank, Volcker Rule and appeal regulators).
My Morgan Stanley trade ideas is now over as I doubt the shares rise beyond 20 - 21. Why? One, the easy money on Wall Street I-banks has now been made as the capital markets Black Death continues. Two, a 7% ROE business is fully priced. Three, wealth management margins have still not recovered despite three years of Mr. Gorman's ex-McKinsey alchemic abracadabra. Four, funding costs are still high due to the summer credit downgrade (remember the stellar short trade in MS back in 2011?).
Five, draconian regulations limit FICC upside. Six, the correlation between subpar ROE (below 8?) and valuation metrics will only grow higher now that Morgan Stanley has rerated on market froth and a mere request to repurchase its own shares. Six, the buy in of Smith Barney joint venture increases the wealth management revenues mix at entirely the wrong point in the investment cycle, as El Torro is now old, flaccid and complacent at a time when post fiscal cliff America enters not the Age of Aquarius but the Age of Austerity. Seven, Mr. Gorman has talked about a 15% ROE target for 2013. My take? Impossible to achieve as long as capital markets revenues continue to fall and cost structures worldwide are not realigned with the new realities of financial markets. Tried to change corp structure for 17,000 retail brokers. I would now once again short Morgan Stanley at 20 for a 17 three month target.
My friends in town have ribbed me about my recent bearishness on the Singapore dollar, since I was uber-bullish on the Lion City dollar since 2006 when I was singing in the rain (OMG LOL! Every afternoon) on Orchard Road looking for 8% dividend yield REITs with the Sing dollar at 1.65. The November electronics shipment data was horrible. The MAS has to abandon its anti-inflation vigilance. I now expect the Thai bhat and Philippine peso to outperform the Sing dollar. The Malaysian ringitt at 3.05 also seems a compelling short as the KL grapevine predicts that the opposition will win Selengor in the general election. Who is the next UBS in international banking? Credit Suisse, its archrival on the Paradeplatz. The mother of all I-banking restructuring, cost savings and One Bank synergies. My call? Credit Suisse shares could trade at 30 Swissie in Zurich. Is hope a strategy? Is it?
Wall Street - Debt crises and dollar debasement
In retrospect, debt crises were the defining theme of my professional life first as a Wall Street banker in New York in the 1990s and now as a global equities bond/FX fund manger here in Dubai. The Latin American sovereign debt crisis was my baptism of fire in global finance after my stints in Wharton, the Chicago futures pits and the Eurobond market in London. I was traumatized by the Mexican tesebonos crises of 1994, the collapse of Drexel Burnham's junk bond Masters of the Universe, the Treasury bond new issue scandal that killed Salomon Brothers, Asia's epic currency meltdown, the Fed's first rescue of a hedge fund LTCM that almost gutted the global financial system when John Merriwether's genius failed, the $138 billion sovereign default of Argentina and Boris Yeltsin's Russian GKO default.
After the cosmic triple whammy of US subprime and Lehman's Brother's Gotterdamerong in 2008 - 9, we witnessed the Greek crisis morph into a run on Spain and Italy, Nakheel's standstill into a property collapse in Dubai, Ireland's bankruptcy and debt rebirth. The triumph of Hayek/Friedman's monetarist ideas in the 1980's has now led to the intellectual morass of Bernanke Fed QE/Operation Twist/QEP and the Draghi ECB's LTRO/OMT. Alphabet soup euphemisms for currency debasement and the theft of wealth.
As an obsessive student of global money markets, I instinctively grasp that the endgame of every central banking money printing spree is a stealth devaluation, the debasement of the currency that Vladimir Lenin said was the surest road to Soviet serfdom. After all, the dollar has devalued by no less than 70% under Alan Greenspan and Ben Bernanke. Coincidence? Pas de tout! A monetary heist known as "seignorage" outlined in Lord Keynes's seminal 1936 tome when he also talked about the euthanasia of creditors. Seignorage enables the superpower whose legal tender denominates the global monetary system's reserve to run catastrophic, unlimited budget deficits, to cynically devalue the world's reserve currency.
The Federal Reserve has stiffed my generation of savers/investors with trillions of dollars in lost wealth/losses by the systemic devaluation of the dollar since the 1985 Plaza/Louvre Accords. The British Empire pulled exactly same monetary deceit on its colonies via sterling back in the centuries when the sun never set on the Union Jack (though now in sad eclipse, save over Gibraltar, Falklands!). The Roman Empire survived the debasement of the denari by successive Caesars to pay their murderous Praetorian Guards not to revolt. Paper money is an illusion, a claim to wealth that acts as a cancer to destroy actual wealth.
Just look back at the US Dollar Index since 2002, the year I wrote column after column begging my readers to save in Aussie dollars at 52 cents. The Aussie dollar has doubled in value in the past decade. But what happened to wealth invested in US dollars? Wiped out. It was wiped out by Bush, Greenspan and Bernanke. We were all the victims, since the dirham is pegged to the dollar.
The Weimar Republic fascinates me because it holds such salutary lessons for the future even as the US Treasury debt curve once again steepens. No, hyperinflation will not happen but the dollar will continue sinking as long as the Bernanke Fed monetizes Uncle Sam's trillion dollar Ponzi schemes. When debt/GDP ratios soar, societies explode, as happened in Iceland, Eire, UK, Greece, Spain. Default is a risk that cannot be averted in dozens of countries and I forsee bond market massacres that will make 1994 seem chicken feed, the destruction of vast swathes of wealth.
Karl Marx thought class struggle was the determining force in history. Not so, Herr Doktor. Debt crises are the ballast of history. As a bond trader, I should know. Bubbles, banksters and money alchemists create daisy chains of debt that haunt the markets. Debt is the ultimate monetary servitude for societies and human beings across time.
2012 CPI Financial. All rights reserved.
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|Date:||Dec 24, 2012|
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