'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

Former Japan Equity PM with over 30 of experience now providing database-driven analysis of the market, sectors, peer groups and stocks for LightStream Research.

Leveraging data and graphic analysis provided by Japan Analytics, and the related Japan Analytics iPad App, we provide insights on companies are often ignored by the sell-side as well as challenging conventional wisdom on the market overall.

'Quantamental' Japan Specialist

Japan: 2018 Market Review - Bear Market Rally Ahead

Japanese Banks:  These Lifeless Things (The Ozymandias Syndrome)

Japan: The Long and the Short of It - Recommended Portfolios

Softbank Corp, Takeda, and Newton's Three Laws of Motion

Japan: Fortnightly Update - Thanksgiving Rally

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<p><strong>AND SO IT GOES</strong> - After our eight-day 4.5% 'Thanksgiving rally', the market reverted to recent type and promptly fell 6.5% to Tuesday's low, which is now likely to be surpassed on the downside this Monday. Although the market has yet to fall 20% from the January 23rd peak, the odds of Japan joining the growing list of global 'bear' markets are lengthening and, in US$-futures-terms, we are already there.  Certainly, there is now clear 'daylight' between the 50-day and the 200-day moving average. However, a much wider spread is required before a clear 'bottom' is reached. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/180/original/2018-12-15_19-56-07.png?1544871389" class="editor-image img-responsive" data-smartkarma-image-id="73180"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>BoJ STEPS UP</strong> - The Bank of Japan' market-support programme bought ETFs on six of the last ten trading days and should be active again on Monday. As the Bank is now constrained in its ability to buy JGBs by a lack of supply, the equity markets (via the ETF mechanism required to circumvent restrictions on direct equity investment) appear to offer more scope for quantitative easing, although the longer-term consequences of such a 'nationalisation' are far from positive.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/181/original/2018-12-15_19-57-34.png?1544871470" class="editor-image img-responsive" data-smartkarma-image-id="73181"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/203/original/2018-12-16_11-14-42.png?1544926491" class="editor-image img-responsive" data-smartkarma-image-id="73203"></figure>
<p>Source: Japan Analytics</p>
</div>
<p><strong>1,000 NEW LOWS</strong> - The current down cycle has already produced two days of 1000-day new 52-week lows. A 'proper' climactic 'low' requires over 1,500 on a single day or over 40% of listed stocks - an event that has occurred on only ten of the last 3,426 trading days. As can be seen above, such an event is, however, only the end of the beginning of a market recovery. For now, the question is - are we replaying 2008 or 2016? </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/184/original/2018-12-15_20-07-06.png?1544872107" class="editor-image img-responsive" data-smartkarma-image-id="73184"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>McCLELLAN SUMMATION</strong> - Our preferred long-term advance-decline ratio, the McClellan Summation will reach a new three-year low this week, but should reach 'oversold' territory of below -4,000 by the end of January. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/205/original/2018-12-16_11-41-38.png?1544928113" class="editor-image img-responsive" data-smartkarma-image-id="73205"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>MARKET-IMPLIED GROWTH FORECAST</strong> - The Market Composite PER is now below 13x. Assuming a 'normal' earnings multiple of 16.7x, Mr Market is suggesting that Japanese corporate profits are due to fall by 22% on average to the level last reached in the first quarter of 2017, further implying declines of greater than 50% for some key 'global' sectors such as <strong>Autos</strong>, <strong>Machinery</strong>, <strong>Chemicals</strong>, <strong>Electrical Equipment</strong> and <strong>Technology Hardware</strong>, which together comprise one-third of aggregate Net Income.</p>
<div class="content-highlight">
<p style="text-align: center;"><strong>OUTLOOK &amp; RECOMMENDATIONS</strong></p>
<ul>
<li><strong>We continue to recommend an underweight position in Japan in global portfolios. </strong></li>
<li><strong>The rate of the current equity market decline is well in advance of the underlying trends in the economy and corporate profits and appears to be anticipating an all-out trade war. As our title suggests and as 'pure-pop-icon' Nick Lowe <a href="https://www.youtube.com/watch?v=UCaf8woXAeM" target="_blank">sings </a>- '<em>But where it's going no one knows'. </em></strong></li>
<li><strong>In contrast to global trade trends, the domestic Japanese economy remains overheated, the rate of inflation continues to rise, and Japan is close to full employment. Under such conditions, the Bank of Japan would be expected to taper its monetary easing policy. However, global trends have prompted a delay in any such move until well into next year. In the near term, we continue to favour less-overbought domestically-orientated companies and look to accumulate better quality companies into any weakness in the coming month. For a list of recommendations, please see our recent Insight - <a href="https://www.smartkarma.com/insights/japan-the-long-and-the-short-of-it-recommended-portfolios" target="_blank" data-smartkarma-citation="insights:26731">Japan: The Long and the Short of It - Recommended Portfolios</a>.       </strong></li>
</ul>
</div>
<p>In the <strong>DETAIL</strong> section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on <a href="https://www.smartkarma.com/entities/4701" target="_blank" data-smartkarma-citation="entities:4701:1">Kobe Bussan (3038 JP)</a>, <a href="https://www.smartkarma.com/entities/8467" target="_blank" data-smartkarma-citation="entities:8467:1">Workman (7564 JP)</a>, <a href="https://www.smartkarma.com/entities/20665" target="_blank" data-smartkarma-citation="entities:20665:1">Inpex (1605 JP)</a> , <a href="https://www.smartkarma.com/entities/2458" target="_blank" data-smartkarma-citation="entities:2458:1">Yaskawa Electric (6506 JP)</a>, <a href="https://www.smartkarma.com/entities/7245" target="_blank" data-smartkarma-citation="entities:7245:1">Nidec (6594 JP)</a>, <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, and <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/12434" target="_blank" data-smartkarma-citation="entities:12434:1">Dentsu (4324 JP)</a>, and <a href="https://www.smartkarma.com/entities/14181" target="_blank" data-smartkarma-citation="entities:14181:1">Sohgo Security Services Co (2331 JP)</a>.       </p>

AND SO IT GOES - After our eight-day 4.5% 'Thanksgiving rally', the market reverted to recent type and promptly fell 6.5% to Tuesday's low, which is now likely to be surpassed on the downside this Monday. Although the market has yet to fall 20% from the January 23rd peak, the odds of Japan joining the growing list of global 'bear' markets are lengthening and, in US$-futures-terms, we are already there.  Certainly, there is now clear 'daylight' between the 50-day and the 200-day moving average. However, a much wider spread is required before a clear 'bottom' is reached. 

Source: Japan Analytics
BoJ STEPS UP - The Bank of Japan' market-support programme bought ETFs on six of the last ten trading days and should be active again on Monday. As the Bank is now constrained in its ability to buy JGBs by a lack of supply, the equity markets (via the ETF mechanism required to circumvent restrictions on direct equity investment) appear to offer more scope for quantitative easing, although the longer-term consequences of such a 'nationalisation' are far from positive.

Source: Japan Analytics


Source: Japan Analytics

1,000 NEW LOWS - The current down cycle has already produced two days of 1000-day new 52-week lows. A 'proper' climactic 'low' requires over 1,500 on a single day or over 40% of listed stocks - an event that has occurred on only ten of the last 3,426 trading days. As can be seen above, such an event is, however, only the end of the beginning of a market recovery. For now, the question is - are we replaying 2008 or 2016? 

Source: Japan Analytics
McCLELLAN SUMMATION - Our preferred long-term advance-decline ratio, the McClellan Summation will reach a new three-year low this week, but should reach 'oversold' territory of below -4,000 by the end of January. 

Source: Japan Analytics
MARKET-IMPLIED GROWTH FORECAST - The Market Composite PER is now below 13x. Assuming a 'normal' earnings multiple of 16.7x, Mr Market is suggesting that Japanese corporate profits are due to fall by 22% on average to the level last reached in the first quarter of 2017, further implying declines of greater than 50% for some key 'global' sectors such as Autos, Machinery, Chemicals, Electrical Equipment and Technology Hardware, which together comprise one-third of aggregate Net Income.

OUTLOOK &amp; RECOMMENDATIONS

We continue to recommend an underweight position in Japan in global portfolios. 
The rate of the current equity market decline is well in advance of the underlying trends in the economy and corporate profits and appears to be anticipating an all-out trade war. As our title suggests and as 'pure-pop-icon' Nick Lowe sings - 'But where it's going no one knows'. 
In contrast to global trade trends, the domestic Japanese economy remains overheated, the rate of inflation continues to rise, and Japan is close to full employment. Under such conditions, the Bank of Japan would be expected to taper its monetary easing policy. However, global trends have prompted a delay in any such move until well into next year. In the near term, we continue to favour less-overbought domestically-orientated companies and look to accumulate better quality companies into any weakness in the coming month. For a list of recommendations, please see our recent Insight - Japan: The Long and the Short of It - Recommended Portfolios.       


In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Kobe Bussan (3038 JP), Workman (7564 JP), Inpex (1605 JP) , Yaskawa Electric (6506 JP), Nidec (6594 JP), Keyence (6861 JP), and Nomura (8604 JP), Dentsu (4324 JP), and Sohgo Security Services Co (2331 JP).       

Japan: Fortnightly Update - And So It Goes