Good Japanese Stocks Being Thrown Out With the Bathwater   

• The stock and commodity Crash of 2008 continues. Stock markets are off between 75% (Russia and China) to 48% (US$-denominated Nikkei 225), commodities futures are off 57% (crude oil) to 31% (gold) and even 10-year US treasury futures are off 9% from March highs as investors worry that the US efforts to paper over the banking crisis with government debt will deep-six the US dollar with runaway inflation. This notwithstanding, currency carry trades continue to unravel, fueling rallies in the USD index (up 20%), and Yen cross trades like Yen/Euro and Yen/Aussie Dollar (up 21% and 24% respectively from 2008 lows). The TED spread, a main measure of stress in the financial system, fell from a high of nearly 500bps to 254bps (normal is more like 100bps), while spreads on European credit default swaps last Thursday hit new highs.
• Foreign selling continues to pound Japanese stocks. Last week, the Nikkei 225 broke through 8,000 for the first time since April 2003 as the yen surged to JPY90/US$. The peak-to-trough decline is now over 58%, versus a mere 37% in the 1973/1974 bear market.
• While a global recession and the strong yen will hit earnings of Japan's exporters hard, Japan's balance sheets are clean, there is plenty of cash on hand, and there is none of the ridiculous leverage like that seen on US and European balance sheets. In other words, these are realizable asset values, not "mark to myth" values.
• Currently, no less than 778 first section Japanese companies are selling at PBRs between 04X~0.6X book. A helluva lot of stocks of good Japanese companies with solid businesses are being thrown out with the bathwater.
• We can see no fundamental justification for these large book value discounts, and no reason why Japanese stocks should be sold off harder than their US or European counterparts other than foreign selling. Japanese stocks have already seen and survived JPY80/USD in 1995, and a 14-year bear market to April 2003 that erased over 80% from the Nikkei 225 as well as property prices.

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