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Mad Hedge Fund Trader

Mad Hedge Fund Trader

John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.…

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Japanese Reconstruction Investment Opportunities

As destructive as the Japanese tsunami has been, it may have left some investment pearls in its wake. It has suddenly made available some of the country’s best of breed, world beating companies available at throw away prices. But this is going to be an investment for longer term money, not a trade, as some patience may be required for a payday.

Japanese Earthquake

There is no doubt that the economy has suffered a body blow. I believe that quarterly GDP growth has swung from a 2% to a -3% rate, a flip of 5%. Electricity shortages are the biggest problem, followed by the disruption of parts distribution web with global implications. A significant portion of the world’s DRAM, semiconductor package, and thin screen production has been taken out, and there are no easily available replacements for the higher end, customized parts.

To show you how daunting the electric power problem is, take a look at the satellite photo below from NASA. It is overlaid on an identical photo taken in 2010. Areas in yellow show where power generation is unchanged over last year. Areas in red have gone dark since the tsunami. While the largely rural Sendai area had 1% of the country’s population, it produced 10% of Japan’s electric power, making it a huge net supplier of power to the rest of the country. There is now a crash program to conserve power. The lights in the Ginza are off. Trains are shorter and without heat. LNG tankers are being diverted from European destinations to Japan. Japanese companies are scouring China for every large diesel generator they can get their hands on.

The down leg of a “V” economy is now upon us. What lies ahead for we traders and investors is how to best take advantage of the inevitable up leg that will follow. The last estimate of the earthquake and tsunami damage is $300 billion, or 6% of GDP. That means this amount has to be injected into the economy to make the country whole again. The largest part of this growth will be concentrated in the first two years, which means Japan may become one of the better performing developed countries in 2012 and 2013.

For a start, you can ignore much of the drivel that is being passed off as research by several American based institutions. Despite having a debt to GDP ratio of over 200%, one of the world’s highest, funding will present no impediment to Japan’s recovery whatsoever. The current level of interest rates, 0% at the short end and 1% at the long end, prove that there is too little borrowing going on in Japan, not too much.

Don’t expect Japan to dump any of its substantial holdings of US Treasury bonds, counted last month at $886 billion, to fund reconstruction. Both the government and private investors in this paper have indicated they have no intention of paring positions whatsoever.

The Bank of Japan has already stepped up to facilitate a national recovery, unleashing $186 billion in asset purchases on the first day financial markets reopened. That is the equivalent of an entire QE2 being dumped on the market in a single day, and we all know what that can mean for stock prices.

However, you are going to have to make your investment choices here carefully. This is not going to be an index play, so that knocks broad brush ETF’s out of the box like the (EWJ) or the (DXJ). There is still much that is wrong with Japan, including the world’s worst demographic outlook, a grotesquely overvalued currency, and two “lost decades” behind it.

Instead, the play here is to take a few precise rifle shots at the best opportunities. This task is made somewhat easy, given that Japanese stocks are already among the cheapest in the world on several valuation parameters, reflective of the recent low rate of economic growth.  The TOPIX sells at 1.0 times book value, putting it at a 56% discount to their American counterparts. Did I mention that the market has been going down for 21 years? I have included a list below of the best, which should be bought on substantial dips from here.

Toyota Motors (TM) – If a company has every suffered the perfect storm, it is Toyota. The stock has been falling for a year, thrown out of bed by an onslaught of safety concerns and forced recalls. Remember those sticky accelerator pedals? Now it has the earthquake and the tsunami to deal with. As a result, its shares have plunged by 17% in just three weeks. Centered on the central city of Nagoya, the company’s production facilities were farther from the affected areas than any others. In fact, the state of the domestic plants is of little worry. Toyota has been pursuing a globalization strategy for 30 years to combat a relentlessly appreciating yen, and less that 15% of the cars sold in the US are imported from Japan.

To me, this all adds up to a great screaming “BUY.” You can start with the recall, the largest in history, covering eight models, which promises to be speedy, lavish and generous. It prompted a production shut down, an unprecedented measure in auto history. The company is going all out to reinforce customer loyalty. Toyota still makes great cars. And let’s face it, many people would rather die than drive an American car, the Mad Hedge Fund Trader included.

It’s usually a great idea to buy when there is blood in the streets, and in the auto industry it doesn’t get any worse than this. Toyota has become the BP of the auto industry. I know the Toyoda family well, and they have assured me that they are pulling out all the stops to restore their brand, as well as their own name. When heads roll in Japan, they really do.

There are a few additional angles here. Since the company is Japan’s largest exporter, it would benefit greatly from any weakness in the yen, which I consider as the world’s most overpriced currency. Think of the stock as a long dated yen put. Look at the charts for Ford, US cars sales, and the palladium used for catalytic converters, and it is obvious that the world is seeing a surge in global car sales.

I know the philosophy, and the strengths of this company intimately, and they will come roaring back. Let the ruckus over the recall burn out, and add Toyota to your “buy on dips” list. Keep in mind that this is not a day trade, but something to bury in your portfolio and then lose behind the radiator. It will also not be immune from the calamities that strike the stock market.

Nissan Motors (NSANY) – Nissan Motors, Japan’s number two carmaker, is just in the process of rolling out its all electric Leaf sedan, giving it a huge lead in the global electric car market. Despite having one of the most exciting futures in the auto industry, the stock has tanked 20% since the earthquake. While production of the Leaf was halted for two weeks, damage was minimal as its plants are far inland, and the assembly line will roll again on Monday.

The Leaf has a 100 mile range, can be recharged at home in eight hours, or at a public parking lot in 30 minutes. A GPS system constantly displays your remaining range on a real time map, as well as the locations of the nearest charging stations. If you run out of juice on the freeway, Nissan offers free roadside service with an immediate recharge. With a 600 pound lithium ion battery lining the bottom of the chassis, it has tremendous stability, and corners like it is on rails. The battery comes with an eight year warranty and a ten year life.

My local utility, PG&E, is offering a special Plug-in-Vehicle rate of only 3 cent per kilowatt hour rate from 12:00 am to 7:00 am, compared to the standard top tier rate of 40 cents per hour, a 92% discount. That means the Leaf’s 100 mile drive will cost me 72 cents. This is the same as buying all the gasoline I want at 15 cents per gallon! In other words, the fuel is basically free. Not bad when compared to the $4.29/gallon demanded by my local gas station.

When I asked the chief engineer about maintenance costs, I got a blank stare. Then he answered in a deadpan fashion, “there is no maintenance”. During the first 100,000, the only expenses will be for brake pads and tires, as the 107 horsepower electric induction engine only has five moving parts.
You can get all of this for $33,000. Giveaway price, free fuel, free maintenance. It works for me.

The car will only be sold initially in eight states, and I will be one of the first to get one in California. The entire US production run of 25,000, or 50,000 globally, has been sold out for next year, so you will have to wait until 2012 to get one. Nissan plans to ramp production in Tennessee up to 250,000 by the end of 2012, or 500,000 globally. CEO Carlos Ghosn thinks electric cars will account for 10% of the global car market by 2020, or some 5 million units.

There are broader implications for the stock market with all of this. When Nissan Motors (NSANY), General Motors (GM), and others launch their advertising campaigns, I think there will be a media frenzy. Take a look at the share price of Ford Motors, and you know the industry has the wind in its sales, and an electric car boom could build it to hurricane force.
Think about what will happen next. What will these cars cost when the price of oil doubles, which I expect in the next five years? They should go through the roof. The production ramp up will, at the same time, cause economies of scale to kick in and costs to plummet. So Nissan will be working the income statement from both sides. That is what Ghosn is betting the company on.

Bottom line: For your longer term portfolios, buy Nissan shares on dips, and cash in on the hype.


Canon (CAJ) – Consumer electronics giant, Canon, has long been one of the world’s best run multinationals, and has long been a hedge fund favorite. If managers have to name a single stock in Japan they like for the long term, it is usually Canon. But that hasn’t stopped skittish foreign investors from trashing the stock by 21% since the beginning of the year.

You will know and love this company from its vast array of products, including cameras, printers, scanners, calculators, IT imaging equipment, broadcast hardware, and medical equipment. Based in Tokyo, this is a Japanese company in name only, with much production offshored to low coast Asia decades ago, and one of the most wide ranging sales and distribution networks in the world. Their products can be found everywhere from discount shops on New York’s Times Square to souks and bazaars throughout the Middle East.

Fanuc (FANUY) – Fanuc is Japan’s preeminent manufacturer of factory automation systems, numerically controlled machine tools, and industrial robots. They have a leading market share in many of its products and is a model of operating efficiency. It is headquartered in Yamanashi prefecture, west of Tokyo, so earthquake damage is minimal. The ADR’s trading in the US are illiquid, so it will be better to buy the domestically traded stock in Japan.


Komatsu (KMTUY) – Komatsu is Japan’s top maker of bulldozers, heavy industrial machinery, and mining and construction equipment. They are the Caterpillar (CAT) of Japan. The stock was already on a tear, driven by the commodities boom and strong economic growth in neighboring China. The company was already running double shifts when the earthquake hit. Now it has the greatest reconstruction project since WWII sitting on its doorstep. The stock popped 10% on the earthquake news. But given the immensity of the task ahead of it, there may be much further to run.


I have one cautionary piece of advice when investing in Japan. I think the Japanese yen is way over valued here. So you don’t want to get into a situation where your stock pick turns out to be correct, but you lose your gains through a future fall in the yen. There is no point in putting money in one pocket, only to take it out of the other. So it would be prudent to hedge any long position in the stock with an equal value short position in the yen (FXY), (YCS). That would give you the best of both worlds, a pure play on the underlying business.

By. Mad Hedge Fund Trader

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Leave a comment
  • Anonymous on March 28 2011 said:
    You may want to have your proof reader look at "patients" at the end of the first paragraph. I think the wrong one is being used. Since I'm a physician, I noticed it immediately. Otherwise, great article, especially the last paragraph concerning shorting the yen in case a weakening occurs. Great advice to hedge your investment to cover the strength of the opportunity with the potential downside of the currency due the government injection of yen.

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