Bill Cara: Japan equities are over-heated, Tues., Dec. 20, 2005, 6:29 AM

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December 20, 2005

Japan equities are over-heated, Tues., Dec. 20, 2005, 6:29 AM

The Nikkei Dow index is up over +21 pct in 60 days, and Wall Street analysts are streaming into financial entertainment TV to encourage the audience to invest there. So, two things are apparent: (i) Japan is the fashion of the moment, and (ii) the analysts once again (to prove nothing changes on Wall Street) have it wrong; they are late to the party, merely telling outsiders that the room is full.

After hitting a five-year high last Wed. at 15,886, the Nikkei index had a significant pull-back that had technical analysts stating that the trendline was broken at 15,200. The low Friday was about 15,140, which was a 750-point (almost 5-pct) two-day drop, so there was a lot of concern.

A week ago Monday, the authorities doubled the margin requirements on the over-hot Tokyo Commodities Exchange. Precious metals prices dropped like a stone. Then the equity prices started into free-fall. Traders were asking, was Wed. the top?

This week, the Nikkei did a turn-about, shooting up to 15,641. Today the gain was 250 points (+1.62 pct). But, is everything ok here? I think not.

Comparing these percentage moves to say the Dow 30 would raise eyebrows. In equivalent points on the Dow, the Nikkei would have risen in 60 days from 10,200 to 12,500. You might even say that traders in NYC would be talking about more than today's transit strike.

I think the end is nearing.

Should global equity prices turn bearish in 2006, a long-term chart of the Nikkei shows support at 13,800 and then 12,000. The 13,800 level would represent a pull-back of about "12 pct, which would be relatively modest compared to the +21 pct rally in the past 60 days and the almost 2 pct move today.

Always at a market cycle top the stories from the sell-side abound. This is part of the distribution strategy. Today the stories seem to be zeroed in on property developers. Pun intended.

The property developers enjoyed a superlative day today " not unlike the house-builders in USA in recent months. Clearly foreign capital is chasing a red-hot Japanese property market. But the group has extreme moves up, then down, then up again. This is a sign that markets are now highly speculative, which is a sign of a high-risk topping phase.

The Japanese auto manufacturers are also in the news today. Sales are booming. Toyota Motor is poised to become the world's leading auto manufacturer by unit volume. Interesting that TM has a market cap ten times that of GM.

Over the past two months, as this rally in the Nikkei gained steam, I have become vocal that a distribution of stocks has started. So be cautious.

I cannot see the Nikkei surpassing 16,250 in this cycle, and that in itself would be a very speculative top.

Posted by Posted by Bill Cara on December 20, 2005 06:30:06 AM | Category: Japan

Discourse

A lot of private Japanese investors are throwing money like crazy after the equities market here at the moment.
I agree that the Nikkei 225 index is in for a needed correction like Softbank (up 50% in one month!).

But in general I don't think it is to late since the fundamentals is still undervalued.

Also US borrowed all their spanding money as bonds to Japan. These money come from private investors also over their pension savings. This gives a good picture of how much money there is here.

Regards
Lars
Tokyo, Japan

Posted by: lasse at December 20, 2005 7:40 AM [link]

I would have to agree and say any such moves cause a market to lose credibility to invest in. At least in my mind, that is how I look at it. I agree with Bill on Japan and believe Mexico is heading to the heated point as well. I don't think Bill is saying most equities will drop in those markets however, what he is saying is you're late to this party which cannot continue much longer. India, Mexico and Japan are three that have become pricey but may continue upward as the confidence in US markets diminishes.

Just read an article this morning which left me in the same position as prior to reading it - wanting more.

Nobody knows where Oil is headed. Some say $70 next year and some say $50 due to a slowdown and global pullbacks due to all the problems the US is facing. Either scenario could play out as stated in the Globe & Mail Article. One bank (names left out) predicts $50 a barrell and the other says $70. Both predict that should the housing market slow, the spending that we have in place will slow and any wealth we have now is not by job creation but by homes.

With the expectational return of the S&P being 8-9% in 2006 I would rather roll the dice in India, Japan, and Mexico taking a flight to quality approach (banking sector mainly and metals)

Posted by: dinov at December 20, 2005 10:31 AM [link]