The J-curve: sort of useful What it implies for US stocks

What the J-curve is

In economics, the J-curve theory is a (very, overly: take your pick) simple attempt to explain or describe what happens to trade between two countries when the currency of one trading partner declines vs. the other’s.  The theory takes its name from the shape of a graph of the balance of trade, assuming the explanation is correct.  The graph initially bulges in one direction before moving gently and gradually in the other; that is, it looks like a “J” lying on its side.

Like most academic stuff, it rises or falls on the simplifying assumptions the theorist makes.  In the basic form of the theory, they are:

1.  there are only two countries trading.  Let’s call them A and US.

2.  all exports are priced in the currency of the country where they are produced.   Let’s say the currencies are ¥ and $.

3.  prices change immediately, but the quantities imported only gradually respond to the new prices.

An example Continue reading

The trouble with luxury goods

Luxury goods stocks have been good performers this year…

The stocks of luxury goods companies have been stellar performers during 2009, despite the fact that the companies are showing unusually sharp declines in revenues and profits.   This apparent disconnect is not peculiar to luxury goods, but instead is a characteristic of stocks in general, where buyers are doubtless anticipating a sharp bounceback in corporate earnings in a more normal economy in 2010.

…but will expectations be fulfilled?

There are several reasons, however, to think the expected surge in revenues and earnings may not occur for luxury goods in the way it has in the past. Continue reading

Pricing illiquid assets

The New York Times had a recent article on the sharp decline that university endowments have suffered over the twelve months ending in June.  The worst of the results reported, those from Harvard and Yale, are roughly the same loss as the S&P 500 suffered over that period.

One question jumps out at me that this article, and other similar recent articles chronicling college endowment woes, doesn’t address:  How do they know?

The hallmark of university endowment investing strategy for more than ten years has been deep involvement in illiquid “alternative” assets.  Yale and Harvard have been leaders in this movement.  In the case of the S&P 500, Standard and Poors furnishes the index numbers, which are supported by billions of daily transactions in the S&P 500 constituents.  The main feature of illiquid assets, on the other hand, is just that.  They’re illiquid–they seldom, if ever, trade. So where do the prices that the holders use come from? Continue reading

Update on Sinopharm; prospects for Wynn Macau

Sinopharm (ticker: 1099), the largest drug distributor in China, stated trading yesterday in Hong Kong.  It spiked up to a 25% gain early in the morning, but faded in the afternoon session (yes, the market does close for lunch) in a declining market to end the day up “only” 16%.  This is apparently better than the average IPO first day trading experience this year in Hong Kong, but to my mind a bit disappointing.

The stock fared better in trading today.  Volume was half the 360+ million of its debut, but Sinopharm was up sharply, again in a down market and with a failed IPO debut of a construction company, to boot.  Sinopharm closed at HK$19.98 (vs the HK$16 offering price) and restoring my confidence in the state of the bull market in Hong Kong.

Still looks good for Wynn Macau.

New Japanese government says: no currency intervention

Mr. Fujii speaks

Shortly after their dramatic election win, the finance minister appointed by the Democratic Party of Japan gave an interview in which he said that under normal circumstances (which today’s are) the new government had no intention of intervening in the currency markets to influence the value of the yen.

At first glance, this seems like a statement of the obvious.  This biggest reason that governments have stopped intervening in the currency markets in recent years is that they have learned that even with multi-national coordination their resources are dwarfed by those of the big global commercial banks.  In other words, national governments no longer have the power to make their currencies move as they might like.

Two messages

I don’t think that this is the point, though.  I see this statement as containing two messages, one internal and one external.

1. The internal message is to the Japan Business Federation (Keidanren).  Throughout the Liberal Democratic Party rule, the Japanese government was committed to the export-oriented manufacturing model of economic development.  As late as 2004, Tokyo was intervening in the currency markets in an attempt to lessen the volatility of the yen, and, implicitly, the profits of Japan Inc.  The message is that the cozy old relationship is gone.

2.  The fact that Japan was defeated by the US in WWII had a profound effect on the attitude of an earlier generation of Japanese leaders toward the US.  The burden of having lost the war compelled them to accede to American government requests that were not in the Japanese national interest.  Limiting for the first half of the Eighties the number of automobiles it would export to the US to levels way below what American consumers wanted to buy, because Washington requested it, is a prominent example.  Participating in coordinated currency intervention in support of the dollar has been another.

This is an attitude that was already gradually fading as politicians who experienced WWII left public life.  It is also one that former prime minister Koizumi took great pains to try to change.  The DPJ message is simply–No more.

Investment conclusions

Why is this of any investment interest at all?

For one thing, Japan has been one of the staunchest economic allies of the US over the past fifty years.  Its changing relationship with the US is emblematic of attitudes in the rest of the world.

The Democrats seem also to be thinking that a currency crisis involving the dollar is not so far-fetched and is saying in advance that it will not be part of a dollar rescue.

Finally, they may be saying that the old “convoy” system, where the strongest members of an industry slowed themselves down while they and the government propped up the weakest–resulting, of course, in plenty of very weak firms in each industry, is also out.  If so, that would be a very good thing for the best Japanese firms, like Toyota, Honda or MEI, who will no longer be held back by the clunkers in their industries.