Japan has better pizza than Italy

by admin on November 17, 2013

Firstly, I was away in Europe, mainly focusing on eating in E.Europe and Italy. I wasn’t looking at the market since I sold down massively in May – near the top, even though my constant jibber-jabber about shorting did not materialize.

I came back to Japan, and sitting in the onsen regularly has got me thinking that ultimately I am managing defensively, which right now means that I need to get back almost fully long equities in Japan, even though the US market makes me sick.  Let me explain.

The biggest risk I can see to me here is a big decline in the yen. I was wrong about the yen since the summer.  My thinking has changed.

I still believe that a weak yen will most likely ultimately lead to a strong yen (with a few years, not decades, since on the decades scale there is the population issue). This is because a weakening yen is essentially a mercantilist policy to improve imports at the expense of purchasing power of regular folks, and it increases the current account, which … increases demand for the yen. Even if China and Korea do not retaliate, there are too many countries wanting to do the same thing as Japan. I still think that eventually, one day, when the US market has a down day of more than trivial magnitude, the reaction in the yen will be significant.

However, there is also the risk that we are in a kind of late-cycle ramp like we saw last time, whereby capital-goods exposed investments (like Japan) and those with high operating leverage (like Japan) get bid based on any sign of improving utilization.

Now, considering that the stocks I am buying in Japan are great deals any way you look at them, there is a serious chance of some of these really running away – unlike in the US, where nothing is attractive at current prices, and where I don’t care about sitting mainly in cash and buying occasional puts.

For instance, I am seriously bummed that Japan Materials has run away while my position in it was cut, Tasaki has being running away from me, and 日信電子サービス  has just been taken over (not much of a surprise) after I halved my stake in it, completely stupidly, earlier in the year. But, there are still many bargains out there.

That is what it boils down to, and if I had been writing regularly I would have discussed the way that Abenomics is ultimately doomed but is now looking like second-round effects will get a look in. I would have talked about the softness in addressing structural issues, tinkering with marginal laws, creating unnecessary jobs and regulation to supposedly make business easier. Or the tax issue.

But I have come to the conclusion that not being in my favorite long-term names right now is a big risk. To my favorite names that have not run up excessively (such as Mizuno, Treasure Factory, Techno Medica, medical gas companies), I have been added a few such as Nintendo, which in fact has been running away during my buying, and am now revisiting some “high risk” names which have solid balance sheets and/or the potential to fly, such as Techno Math and Risk Monster.  I sold Billing System too early (who would’ve guessed) and missed out big time.

What I am /am not scared of:
I continue to think that the prospect of the Japanese government defaulting on obligations to its citizens in the next few years is highly unlikely. I keep on reading about how terrible Japanese debt is, but given that the protagonist (the JCB) can control interest rates and print indefinite money, the arguments going around about imminent Japanese default are like saying that a man must shoot himself in the head if he has a gun in his drawer -no he doesn’t as long as he is in possession of his senses and control over his trigger finger. Yet again, I repeat that the whole situation will result in inflation, but the picture is complicated by the current account surplus and the measures designed to increase it.
What does scare me, is the fact that Japan, as well as all other surplus countries, is trying to increase its surplus when it should be doing structural reform to fix the demand and productivity issues domestically. This is an echo from the US’s decision to not impose a burden on surplus countries when establishing the Bretton Woods system – for if there were penalties on surplus countries built into the system there would be pressure to resolve imbalances internally rather than beggaring neighbors. And, the way things stand at present, this inflexibility is guaranteed to result in another crash in which Japan, China and Korea will suffer badly. Despite this fear, the balance of probabilities and weightings according to my thinking leads me to err on the upper end of equity allocation in Japan right now.

Performance over the summer was essentially flat and in-line with the index, but who cares?

In other news, I seriously considered setting up a small fund, and found out that the running cost can be made minimal in the Seychelles, but decided against it. After just reading Taleb’s Antifragile, it is plain that not being 100% invested is not a good position to be in when going out and raising investment. But of course, when the market crashes, and after I will be 100% in, then no one will want to invest with me or anyone else.

The translation business is growing, but only partly from finance. I have been having trouble recruiting new people because my standards are too high. I have to hold myself back from saying “sorry dude, you’re crap” and reach back to corporate days to find the right “HR” words to tell candidates the truth – such as “you would be better suited to…” or “you have demonstrated potential, but…”.  Honestly, I never fail to get surprised by how many cowboys there are in translation. One potential hire, when confronted with my appraisal of his strengths, told me flat out “I’m a good translator, and just because you don’t think so, that’ just your opinion” – what a loser! Where is Japan’s Yamato damashi (Japanese fighting spirit)?.

Once I get some new capacity through new hires who are not crap, I will get round to expanding in the area of finance.

In the UK, I made some money by betting that Albemarle and Bond, which i wrote up on this site, would be worth over 17m GBP, and that its rival, HAT, is worth more than net-net value.

Meanwhile, I have only been half-heartedly shorting the US after my initial positions were decimated. Nonetheless, as things stand, other than holding on reluctantly in Japan, it currently looks like the next big opportunity for me will be on the short side in the US.

In other news, I have discovered some more great restaurants in Tokyo (steak lunch for c. $15, and the yen is supposed to be overvalued?), and got my first pair of custom-made shoes, in Poland. Now, I have an important appointment with a grilled chicken to attend to in Kamiyacho. Oh yeah, and Japan has better pizza on average than Italy.

{ 4 comments… read them below or add one }

Frank November 24, 2013 at 1:36 am

Welcome back Jan.

I figure you probably didn’t missed anything in the Japanese market these past few months as the market had been relatively quiet until recently… out of all the markets, I think the Japanese net-net sector as I like to call it is probably still the cheapest in the world in terms of absolute valuation. The recent Nisshin Electronics buyout is certainly another sign that perhaps opportunities in this sector will slowly disappear over the next few years as the market recovers and we will be left with the less compelling plays in this sector.

On a side note, did you get a chance to buy grab some Medikit on the dip or through the secondary offering? Have your opinion change on this stock? It seems from my research that there are at least two other companies (BD and Smith Medical) who have released similar patented IV catheters that do what Medikit’s patented IV catheter is supposed to do (i.e. having a stop valve or a different type of mechanism that completely eliminate the risk of accidental blood flashback leakage) – isn’t this special patent about the stop valve supposed to set Medikit apart from its competition? Also, do you know which patent and what claim is BD asserting against Medikit? I figure it probably won’t be a huge deal since the court judgment is only 1 million USD but just curious if you already know the specifics.

Reply

admin December 13, 2013 at 1:58 am

Hi Frank,

Sorry to be late in getting back to you. I think it is difficult to say if there is anything other than the impact of the company’s slightly weaker than expected recent quarters weighing on the share price, but the last q wasn’t that bad, so clearly there is something bothering it. The MRQ release says that sales in all categories are up, with safety values up the most. Sounds like they are missing on costs, and just quickly looking at their last inc stmt, it seems that they, not entirely surprisingly, had high SG&A in the last two q’s mainly due to salaries. Also, remember that safety valves are 27.8% of sales (in MRQ), and the market is growing. I don’t know the patent claims – I looked briefly at the patents when initially researching the stock, and I’m out of it. But I will tell you that it is very hard to get Japanese institutions to switch to new suppliers, especially foreign ones.
Also, just from memory, their factory in Vietnam must be ramping up soon, and that could give them some growth as well as lowering their costs. Another thing to consider is that they are fighting one patent infringement case in the supreme court now. That doesn’t look good for them since they’ve lost more than one suit on that case, and if they lose at the supreme they lose the patent and have to incur one-off costs.

However, if the stock falls a little bit more then it’s a net-net, which it shouldn’t be even if one third of its business goes sour.

If you have any specific info on the competing products, I would be interested to see it.

Jan

Reply

Frank December 19, 2013 at 4:12 pm

Hey Jan,
Thanks for the reply. I assume the Supreme Court case that you are referring to is the one that we knew about since the beginning of the year where Medikit is challenging the IP court’s decision.

Here is the court doc I found referring to that case: http://www.ip.courts.go.jp/search/jihp0030?hanreiid=82959

Upon a quick glance of the key patents mentioned in the doc though, it seems to me that the patent that Phase Medical relied on (US patent # 5,135,505) to sue Medikit has since expired. It was filed in April 1991 and the patent was granted in August 1992 so the expiration date is likely April 2011 or 20 years from filing. If the one million USD is all Medikit have to give to compensate BD over the infringement period, then wouldn’t it be safe to assume that even if Medikit lose their in-force patent (US Patent # 6,183,439 Device for winding and storing a used needle of an injector – filed Jul 1998, issued Feb 2001), they will be able to keep their needle business since BD’s patent expired and at the same time they won’t have to pay a royalty to BD. Certainly, we would assume that Medikit won’t be able to harvest any economic gains from the lost of their patent. That’s my take of the situation but would love to hear yours if there is anything else you think I might have missed.

On a side note, the competing products that seem to do what Medikit claims theirs could do are the following:
Smith Medical:
http://www.trustviavalve.com/
http://www.smiths-medical.com/catalog/peripheral-catheters/safety-catheters/acuvance-plus-safety-catheters/acuvance-plus-safety-v.html
BD:
http://www.bd.com/infusion/products/ivcatheters/autoguard/iag.asp

I agree with you on that it’s very hard to get the Japanese institutions to switch to foreign suppliers if the foreign ones do not offer anything that’s drastically better than the local competition. In general, the Japanese and the Chinese are very alike in the sense that they are extremely supportive of their domestic IPs. It’s certainly a matter of pride and national policy.

Frank

Reply

admin December 30, 2013 at 3:12 pm

Frank,

This is really great research, and thank you for getting back with this.

Yes, I agree that the impact to Medikit from the patent issue does not appear to be fatal on the evidence we can see.

The products in those links do look very similar to Medikit’s needle, but it does not have to be the death-nell for the company.

At the end it comes down to valuation – at present it just looks too cheap to justify known issues, and I am likely to be a buyer in FY14.

Have a great New Year.

Regards,

Jan

Reply

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