Monthly Archives: November 2014

Takata airbags (ll)

November 7, 2014 By in Current Market Thoughts, Japanese development Tags: , , , , , Leave a comment

Today’s New York Times contains an article saying that two former North American employees of Takata have come forward to say the company knew about airbag defects as early as 2004.  The company reportedly conducted secret tests at night and on weekends, but ended them and covered up the results when they showed the metal container holding airbag propellant had a tendency to crack, potentially spewing shrapnel into the body of the car’s driver if the airbag deployed.

The article seems to confirm that Takata is another name to add to the long list of Japanese operational or financial coverups–from milk companies, to refrigerators, to solar panels to Olympus’s enormous losses in failed financial markets speculation, to Tokyo Electric Power and Fukushima Daiichi, to the “hot potato” practice of tobashi in the 1990s (see my post on Repo 105 and tobashi).

I want to draw a distinction between Takata and GM.  Maybe it’s right, maybe not.  Anyway,…

…what I’ve read about the GM ignition switch problems makes me think of the GM culture of the time as one that might be called shared conspiracy.  That is, everyone in middle and upper management knew the company was dysfunctional.  So they defended themselves from potential personal liability by taking care to leave nothing in writing and by employing an army of lawyers to advise them on how to dance around the potholes.  While outsiders may not have known details, the company had an aura that told people something was wrong and to stay away.

For Takata, on the other hand, my sense is that the officials who orchestrated the airbag coverup thought they were simply fulfilling an ethical obligation to their CEO, sort of the way a samurai would have protected his daimyo centuries ago.

You might say that this is a distinction without a difference, it involves only the motivations of the coveruppers, not the bad consequences of their actions.  My point would be that the latter behavior is much harder to detect–and is a reason to think twice before owning a Japanese industrial or financial.

 

Takata’s airbag problems

November 6, 2014 By in Industry Analysis, Japanese development, Stock ideas Tags: , , , Leave a comment

The National Highway Traffic Safety Commission issued a Consumer Advisory late last month urging owners of a long list of Japanese-, EU- or US-made cars to act immediately on a recall notice they may have received about Takata airbags in their cars.

Although the facts are not yet clear,  Takata appears to have produced and sold defective airbag products since at least 2008.  Regulators seem to suspect that both Takata and some of its auto company customers knew the airbags didn’t work but used them anyway.   The immediate connection being made in the press is with GM’s ignition switch issues and related coverup.

 

I should emphasize that I don’t know any more about Takata than I’ve read in the financial press. The company may have done absolutely nothing wrong.  My immediate reaction, however, is not to think of GM but a medium-sized, family-controlled manufacturing company I researched years ago instead.

I was interested in that firm because at that time it made the best cellphone batteries.  The company had a bunch of other divisions, as well.  One made solar panels for sale to Japanese homeowners.  The panels had to meet certain specifications to qualify for a government subsidy that was a major attraction of the panels.  The division came close, but couldn’t quite get up to the minimum government requirements   …so it mislabeled its panels and sold them as meeting the required specs.

The company had another division, one that made commercial refrigerators.  It couldn’t make them well enough that the doors would stay on, though.   Naturally, the division shipped them anyway.  At the time I was doing my research, it was being sued by restaurant workers who had been badly injured when heavy refrigerator doors fell on top of them.

The solar panels and the refrigerators were enough to convince me that I didn’t want to have an investment in the parent firm.

My research back then alerted me to two things that I’ve since found to be true of traditional Japanese companies:

1.  If an older person, or a higher-ranking person, in the company gives operating instructions–no matter how crazy they may be–it’s very difficult (in a way that I as an outsider can’t imagine) to do anything other than try to carry them out.  No give and take, no questioning feasibility   …just try to make the impossible happen.

2.  There’s no “fail hard, fail fast, fail often.”  It’s exceptionally difficult for a subordinate to report to a superior that he is unable to perform a task–even if (point 1) the task is absurdly difficult, or just absurd.  Reporting failure shames the employee, the boss, the company, the employee’s family…  Psychologically, it’s much easier to report success even if it hasn’t been achieved.  That’s why the faulty panels and fridges get shipped.

In short, in the absence of heroic efforts (which may be futile anyway) to create a corporate culture of free dialogue, traditional Japanese companies are prone to the risk that situations like the solar panels or the refrigerators will happen.

, This is perhaps the biggest reason I’m not interested in Japanese manufacturers as investments.  Let’s hope this isn’t the case with Takata.

 

 

actively managed ETFs?

November 5, 2014 By in ETFs Vs. Mutual Funds, Industry Analysis, Investment firms, securities markets Tags: , , , , , Leave a comment

ETFs vs mutual funds

ETFs are just like mutual funds, with two exceptions:

–investors buy and sell mutual fund shares directly with the fund itself.  All transactions take place at net asset value, without commission, once a day, after the close of trading. (Load mutual funds will be subject to a bid-asked spread, as well.)  The (high) costs of maintaining this sales and record keeping organization are borne by fund shareholders.

–ETFs, on the other hand, use the (much cheaper) already existing sales and record keeping system maintained by the brokerage community to record transactions in individual securities.  This allows ETFs to trade continuously throughout the market day.  Buyers and sellers pay a commission when they trade ETFs, and they also pay a bid-asked spread.  (I know of no reliable source that calculates these spreads.  The only information that ETF managers provide is a comparison of the last trade of the day with NAV calculated after the close.  This, of course, tells us nothing about what happens during the day.)  For a buy-and-hold investor, though, I think there’s no question but that ETFs are cheaper than mutual funds.

One other feature of ETFs:  brokers authorized by the ETF actually assemble themselves the securities that are in an ETF.  They only transact with the ETF manager when their holding reach a certain size, say, 50,000 shares.  This is another way to keep costs down.  But it also means that the broker has to know, every day, what’s inside a given ETF.  So the SEC requires ETFs to disclose their portfolio holdings and structure once daily.  This contrasts with mutual funds, which disclose holdings once every three months, shortly after the end of their quarter.

active ETFs

The daily disclosure requirement poses a huge problem for active management firms controlling large amounts of assets.  Their ability to outperform their peers depends (in their minds–and marketing materials, anyway) on having different (and better) portfolio composition than their rivals.  This can mean having different weightings in stocks everyone holds.  But it more often means identifying and buying a securities with favorable characteristics before anyone else, or getting rid of dog that the consensus thinks are stars.

The most attractive actively managed ETFs for most investors, I think, would be clones of existing mutual funds that have favorable long-term records.  For portfolios like these, however, it can take at least several days–and maybe weeks–to add or subtract a holding.  So secrecy is very important.  Once the name is known, brokers will frontrun the asset manager’s trading; rivals can quickly imitate its actions.  Therefore, any competitive advantage an asset manager may have from proprietary research is lost.

According to the Financial Times, large asset management firms have been inundating the SEC recently with requests to form “opaque” actively managed ETFs, where the daily holdings disclosure requirement would be waived.  The SEC has refused them all, on the grounds that brokers would hesitate to support what would be in a sense a pig in a poke.

This doesn’t mean there won’t be actively managed ETFs.  There are already a number.  But they’ve either got to be created by small asset management firms which don’t have the size problem, or (less likely) completely novel ETFs from larger firms.

 

October Macau gambling results

November 4, 2014 By in Asian economic development, Casinos, China, emerging markets, Entertainment, Hong Kong, Industry Analysis, Macau Tags: , , , , , , , , , , , , Leave a comment

Just at midnight, New York time, the Macau Gaming Coordination and Inspection Bureau (DICJ) posted its report of aggregate casino win for the SAR during October.  The win, that is, the amount gamblers lost in the SAR, was MOP 28.0 billion (US$3.5 billion).  That’s up by 9.8% month-on-month, but down 23.2% year-on-year.

The result had been widely anticipated–and heavily publicized by the companies themselves, the government of the SAR and Hong Kong-based securities analysts.  Consensus estimates of the decline seem to me to have centered around -21% yoy.

The Hong Kong casino stocks were up a couple of percent in midday trading today when the DICJ report appeared.  Despite the wide publicity, the stocks immediately lost all their morning gains.  They drifted lower throughout the afternoon, ending down by around 3% for the day.

How could  stocks drop 5% on news that had arguably so fully anticipated?

I don’t think it’s that win was down 23% instead of 21%.  Both are equally weak.  More likely, in my view, is that short-term traders used the DICJ report to take profits after the stocks’ 15% gains in recent weeks.  It’s also possible that the market hadn’t grasped the current Macau casino situation as fully as I had thought.  It could be, as well, that the discounting mechanism for stocks nowadays in Hong Kong works more like the bond market in the US (reacting to strongly to current news as it hits the media) than the stock market.  (I doubt this last, but it has been a while since I devoted a serious chunk of my time to studying the Hong Kong market.)

my take

I’m not in a huge rush to buy, partly because I already have a pretty full weighting, both through the Hong Kong stocks and through WYNN and LVS.

My working hypothesis is that cyclical lows–10%+ below today’s close–have already been made.

Could the stocks drop another 5% from here–i.e., get halfway back to the lows of September?   …maybe, especially since the market upturn I anticipate will likely be in the spring or summer of 2015.  But it would take at least that much to get me interested again.  For now, I’m content to watch.