Japan: Maximum Blood and Fear = Buy?    

• As for the turning point in the financial crisis, investors need only to focus on one indicator, i.e., credit spreads. While the stocks rallied sharply, the TED spread (3-month Libor-US treasuries spread) it is still over 400bps, although down some 30+bps from a recent historical high, versus a “normal” spread of more like 100bps.
• Market bottoms are usually signaled by just the sort of dramatic surge we saw last Monday (Tuesday in Japan) accompanied by trading volume surges that signal the bear market is exhausted and essentially all investors have capitulated.
• Whether this is the eventual bottom is still to be determined. One thing is certain, however, and that is that this crisis has caused maximum blood-letting and fear. As the famous contrarian Nathan Rothschild in 1815 said, “buy when there is blood in the streets, even if it is your own”.  Or, in the sage of Omaha’s words, “be greedy when others are fearful”. So it looks like it is time to take a deep breath, ignore the steady drumbeat of bad news, and focus solely on price versus core value, allowing for a margin of error.
• While the S&P 500 is still a long ways away from historical bear market lows, Japan’s Nikkei 225 has already crashed some 54% from mid-2007 highs, and is now selling at valuations not seen since the 1970s, or the first oil shock. The Nikkei 225 is only a couple of hundred points away from the post-war bear market low of 7,600 set in April 2003, while years of restructuring and deleveraging has left large Japanese companies with solid balance sheets and abundant cash on hand.
• Current valuations on about half of the Topix 100 index of Japan’s largest companies are selling below book value, and stock prices that already discounting not only earnings declines but earnings deficits as well.
• While the phrase “long term” is often abused by brokers trying to hawk stocks around market peaks, we would submit that this “once in a hundred years” financial crisis will also create a once-in-a-century long-term buying opportunity.

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