I wrote the general update below on a train in Poland three weeks ago. Currently I am in Bratislava. Here is a koala san using my computer in my hotel:
Koala san in Bratislava
Basically, not much is going on other than me gradually turning more bearish. Lack of value outside of Japan has just led to a general stoppage of value research on my part. Since I wrote the update below I have gotten even more bearish, and a few days ago I significantly reduced my Japanese stock longs (again – seems hyperactive, but I am only responding to what the market is telling me to do).
I have read some excellent commentaries in the last few weeks, giving me even less reason to write about anything. The one I recommend my readers to look at is the Hussman Weekly Commentary (google it) – although Mr. Hussman has been wrong for a while in this bull market, his general valuation framework is solid over long periods of time, empirically robust, and disciplined. The reason why he has been wrong, in my view, is that the stock markets are way overstretched. He thinks we are in the latter stages of a significant top in the market, and I happen to agree. The reason why I have become this bearish of late (and not earlier) is due to the additional factors of credit deterioration, which are evident in junk bonds, Chinese credit, and elsewhere; as well as increasing signs of market participation by retail dumb money and exiting by less-dumb money. I am now building a short position on various indices, and going long JPYUSD.
General update:
Firstly, let me say “thank you” to the “thank you’s” I have gotten recently.
My lack of communication is both a function of what is happening in the market and my own traveling in Europe right now – you do not want to be in the Japanese heat.
On several occasions I wrote half-finished articles, but decided that, upon reflection, I had little to say that was either important, interesting, or potentially profitable. The market (outside Japan, mainly) has frustrated me with high valuations, and I feel as if I am living in a strange world where the stock market does not exist.
Of course, if I have not mentioned it before, this blog is for my own purposes, to expose my failures and successes to public view, and force some discipline on my investment processes. The fact that a number of people have made nice returns based on my articles is great, but not what drives me.
I now have enough translation work for my company for the moment, so I will only be accepting limited new requests through this site.
Japan stock performance:
In hindsight, performance was good. I managed to sell down from c. 85 to 25 pc long exposure directly after the initial big fall in May, and then go up to about 85-90 pc just after the first big rally in June. I do not see myself as a market timer at all – I was simply reacting to incentives the market was giving me. At the time I was killing myself for not shorting the Nikkei at the highs, despite my constant chit-chat about shorting soon. Nonetheless, I am now happy with the overall decisions taken in that period. (Aug 08 Update: exposure way down again on yen bullishness).
Current stance:
Japanese stocks: I currently expect that I will not do anything to my portfolio for the next couple of months.
General things:
The things I look at (valuations, sentiment, and general credit conditions) are all saying “sell”, if not yet screaming so. Selected Japanese names are the only island of reasonable valuation.
There appears to be a belief out there that QE makes stocks go up, but it may be that it is simply this belief itself that makes stocks go up … until, that is, there are no more greater fools available. Has anyone forgotten that bear markets tend to occur in easing environments?
I have started to short outside of Japan, still at levels that are not yet even heading my illiquid stocks, but I intend to increase short exposure, mainly in the US.
Gold: I was wrong. I now think that the price is likely to be higher in the next 12 to 24 months due to:
– the price of gold being close the cost of production (capex included)
– it seems that there is a connection between recent declines in the gold price with the reach for yield and/ or belief in ever-rising stock markets. I believe that this belief is self-fulfilling and reaching limits of its viability (primarily due to evidence of credit stress), and the above reach for yield is evidently getting stupid.
– there is abnormal behavior in the gold futures that indicates a lack of physical gold. This matches with premiums above US and European gold markets paid in Asia, as well as with anecdodal evidence of Asian demand.
– if the economy improves, inflation will go up – you already know this “bad is good” behavior
– if the economy deteriorates, earnings will have to go down
– US banks are now net long gold, and speculator short positions are at all-time highs
Of course, all of the above can continue for a while – longer than a rational person can remain solvent – but I think that the overvaluation in stocks, ridiculously low yields, apparent beginnings of credit stress, the age of the bull market in stocks, the high sentiment in stocks, the awful sentiment in gold, the low cost of gold when measured in terms of cost of production, and the inevitability of eventual inflation based on primary school maths and inputs on debt and output figures, make gold attractive here.
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Sent from my iPad
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