The shogun and the market

by admin on March 23, 2013

I just spent a pleasant while walking around the resting place of Tsunayoshi Tokugawa, a 17th-18th century strongman, in central Tokyo. The sakura are out, and it is indeed the best time to be anywhere on earth.

Tsunayoshi Tokugawa and the stock market Tsunayoshi Tokugawa and the stock market

Although Tsunayoshi Tokugawa had an appearance similar to that of a fat chav, he was anything but. He ruled over an era of art, and was mad about animals, even banning people from hurting dogs (at risk of death).

Soon after coming to power in 1681, he tried to raise the living standards of his people through legislation. This led to the depletion of government reserves and a decline in the economy.

However, in the present day, not all is as it seems in the market for equities of chemical manufacturers, either. (Didn’t see that one coming did you? You thought I would take the easy path and talk about fiscal issues, didn’t you? Stop foisting your assumptions on other people! However, I will say that it is interesting that limits on fiscal profligacy in the late 17th/early 18th century had the effect of forcing increased efficiency upon a feudal system.*)

Now, I have been struggling with chemical manufacturers for a while.

The reason is because cheaper currency will not help chemical manufacturers. This is obviously because imported feed-stocks become more expensive. But, chemical stocks are up, which would indicate expectations of increased demand net of the yen-depreciation effect.

And, obviously this applies to metal-bashers too, like カネソウ (5979).

My view: this is likely an artifact of the way stocks are being bought (namely, indiscriminately as long as it is has the words “exporter” somehow associated).

You see, if the yen continues to weaken, then rising material costs will really get out of hand for these guys.

Why? Because once they hit full or near-full utilization, or hit a short-term bottleneck, every point drop in the yen will do nothing to profits – sales will be flat in other currencies and rising in yen, whereas costs will be rising by the same amount (sure, technically, they can squeeze a bit more out of the toothpaste tube, but… just stay focused on the big picture, ok?). On the other hand, if the yen rises, then the shares will fall anyway. I think we are in a period now where metal-bashers and chemical manufacturers can rely on already bought inventory to get a boost in short-term earnings and the yen-weakening story is still hot, but this window of happiness will not be around for a long time.

You might say “So what? Earnings will still get a boost.” To that I say “So what to you – the boost is already in expectations, and once the ceiling is in sight on utilization, then it is likely that the only way for expectations, and share prices, to go is, unfortunately, down.”

Therefore, if you are participating in the chemical or metal-bashing space, I suggest that on the long side you need to have a clear view of how capacity utilization will increase; or, if you want to short something in Japan, this would be a good place to start looking (hint: look at exposure to chemicals for semiconductors – then you can get double-whammy on any downward estimate revisions to growth). I have only found one stock that I am keen on in the chemical space (on the long side), and it is only because the market is not recognizing a short-term improvement. I will reveal it after I have the chance to buy some more – sorry.

Separately, are those getting frothy-mouthed over housing starts factoring in the demand brought forward from 2014 accompanying the tax increases?


*These reforms were effectively to increase the shogun’s capacity to hire men of ability over men of social standing, and arguably were significant in contributing to the long length of the Tokugawa rule, even though there was a reaction to this trend several generations later.


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