No Thanksgiving or Christmas Cheer for Japan    

• Some strategists are talking about a "melt-up" in equities into the New Year. Despite growing caution that US and global stocks have de-linked from the budding economic recovery, the Goldman Sachs European equity strategy team is doing its best to spread Christmas cheer. They have looked at monthly data going back to 1974 and found that December has on average returned twice as much as the monthly average for the whole year,  which is the third best month based on average historical data.
• Not so Japan. According to the FT, "Japan's miserable performance comes just ahead of an unhappy anniversary: it is 20 years since the Nikkei peaked at 38,915.87 in December 1989, compared with Wednesday's 9,676.80 close." In other words, two, not one, lost decades.
• We believe Japanese equities have de-linked from the global rally because, (1) There is a strong conjecture among domestic economists that Japan's economy could double dip going into 2010, despite the preponderance of forecasts for modest 1~2% growth. (2) Foreign investors shorting are JGBs on the belief that Japan's debt problem could come to a head as early as 2010, pushing up yields and making their short positions profitable. (3) The major banks are expected to pull the trigger on massive new public offerings of equity that could reach trillions of yen, as they boost capital in preparation for new, more strict BIS core capital requirements. Other companies are also lining up to tap the equity market with new issues.
• On the surface, Q2 FY09 annualized real GDP (+4.8%) was apparently good news, but nominal GDP is still minus because of deflation from a still-substantial supply-demand gap of some JPY40 trillion.
• Further, foreign and domestic investors are not seeing any encouraging growth-stimulating initiatives from the DPJ, whose only accomplishment to date was to ram through a bill to reinstate zombie financing. While their growth stimulus math is still very fuzzy, the math that is very clear is that all roads lead to a re-acceleration of already economic recovery-threatening government debt. Thus the Nikkei 225 is now back below 9,500, is breaking down below its 13-week and 26-week moving averages.

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