I really like Japan, a country where I started investing in the mid-1980s, but which I have barely touched over the past two decades.

A big reason for my attraction is that Japan is so startlingly different from the US that almost every initial instinct I have for judging intentions and performance turns out to be wrong. Japanese cities are beautiful (the hinterlands not so much). The food is excellent, if expensive. And after decades of economic stagnation and currency devaluation, Japan has begun to embrace its new role as a tourist destination.

an aside: measuring performance

In my experience, there are very few flat-out rules in equity investing. The FOR I’ve found over the years to be perhaps the most useful is that anyone who uses Dow indices as benchmarks is clueless (the Dow indices use per share stock price rather than market capitalization to establish weightings and produce wacky results because of this).

Dow indices exist in only two places I know of, the US and Japan.

recent interest in Japanese stocks

I’ve been struck by how often I’ve been hearing/reading members of the US financial press recently touting Japanese stocks. Representatives of asset management companies are saying the same thing in media interviews–superior performance year-to-date and more outperformance vs. US stocks to come.

This is weird, to my mind, given the poor economic backdrop in Japan: aging population; decades of economic stagnation; refusal to accept women as workers; the high level of government debt, and the resulting collapse of the yen; the brain drain of scientists to China; and a samurai-culture resistance to change by Japan’s largest companies.

So I looked.

Year-to-date, the Nikkei 225 is up by around 30%–and is (only now) approaching its 1990 all-time high. Topix, the S&P equivalent, is ahead by about 22%. That’s in yen, a currency that has fallen by about 8% vs. the US$ so far in 2023. In dollars, which is what matters to a US investor, the Nikkei is about +22% and Topix +15%. This compares with the S&P ahead by 16% and NASDAQ up by about a third. For what it’s worth, the US Dow industrials are +3.3%.

(Another aside: How could the Nikkei only now be approaching breakeven for the past third of a century? I really don’t know what has happened to the index structure over the past two decades (maybe nothing, but nothing good apparently). I do know that, frustrated with the relative weakness of the then-tech-poor Nikkei, Japan Inc. loaded the index up with local tech stocks just as the internet bubble was bursting in late 2000. That set the index up for close to a 60% drop in value over the following two years.)

Anyway, I don’t see the fabulous performance I’ve been hearing/reading about. The only way I can make the media story square with the numbers is to use an unrepresentative index and ignore currency losses.

there is an attractive Japan story, though

I think it’s in smaller non-establishment firms. I’m just starting to look, but what I’d consider bit plusses are: no association with traditional industrial conglomerates, low capital intensity, young top management, a woman as CEO.

The reduction, one million barrels daily–about a tenth of Saudi current production, and roughly 1% of world daily oil consumption–starts in July. The Saudis will reevaluate the decision monthly after that.

What I find most telling is that the oil price remained basically unchanged on the announcement, even though we’re coming out of the seasonally weakest part of the year for oil demand into one of the stronger. And because there are no easy substitutes for oil, even small supply/demand imbalances typically create strong price movement up or down.

The lack of price movement still makes sense if the Saudi move was (as I think it actually was) to prevent the oil price from declining. The more important question for us as investors is what the cause of downward pressure might be.

–one possibility is that the past winter in the eastern US and in the EU was warmer than usual, meaning there was less oil burned for heat–and therefore inventories are, for now at least, higher than normal

–another is that much more oil than the world thinks is making its way out of Russia, increasing supply. This might imply that Russia is pushing it wells harder than it should–and enough to shorten their useful lives by a lot–on the idea that the resulting long-term economic damage to the country won’t matter if it loses the war in Ukraine

–it may also be that world oil consumers are still conserving and/or that electric vehicles have already become important enough to make a permanent dent in gasoline demand.

The first of these is certainly true. I think the second is likely, both the extra oil part and the damage to Russian oilfields. The third is the hardest to know but would have the most important long-term implications.

DIS

DIS was entering a graceful old age under Michael Eisner when Bob Iger replaced him as CEO in 2005. At that time, something like 3/4 of DIS earnings came from ESPN, whose attempt to expand its dominant US sports coverage to other countries was in the process of being thwarted by foreign rivals like News Corp. So its star was turning into a cash cow. But where to reinvest?

The company was, and still is, a brilliant marketer of DIS-themed products. But Euro Disney was a very expensive disaster. The DIS brand had little appeal to boys (Jack Sparrow was its only male hero). Its movie business was lackluster. And, a particular irritant to me, the company was much more interested in providing information to Wall Street analysts than to shareholders, compelling us to pay brokers for information about our own company. Btw, I’ve found this to be a sure-fire indicator of incompetent management signaling to employees how to behave.

The Eisner formula: In 2005, DIS acquired Pixar. In 2009, it bought Marvel, not only giving its movie business another shot in the arm, but providing a whole slew of male characters to more or less double the overall DIS brand’s appeal to children. Then came Lucasfilm and Fox–and, with no more worlds other than streaming to conquer, Iger stepped down. He yielded his place to Bob Chapek, the architect of DIS’s parks expansion.

DIS is far larger today than it was in 2005 but the same issue of where growth comes from in a mature company remains. Almost by default, the answer–ex streaming, which has proved to be less growthier than anticipated, is: the parks. And, by a wide margin, the biggest of them is Disney World in Florida, where DIS is already one of the state’s largest employers and taxpayers.

Ron DeSantis

DeSantis, the governor of Florida, has launched his campaign for the Republican presidential nomination on the race- and gender-hatred platform of the right wing of that party. In implementing this strategy, he has decided to single out and demonize DIS as “woke” for its support of the LGBTQ community. Backed by a surprisingly complaisant legislature, he has begun to remove government development incentives that encouraged Disney from creating and expanding its theme park in Florida. He’s also threatened new Disney World-targeted regulations that would discourage visitors from going to/staying at DW.

DIS is one of the largest employers and taxpayers in Florida. So I’m not sure how shooting your home state in the fiscal foot is supposed to enhance your attractiveness as a candidate. I imagine that the thought (if any) behind the move is that DIS has so much invested in Florida that it has no choice but to quietly accept whatever DeSantis does–or at least that he will personally gain more than the state might lose. From a solely DIS point of view, the recent plunge in DeSantis’s national popularity suggests he’s likely to be back as governor relatively soon.

why investors might be interested…

Before the DeSantis attack, it seemed to me that DIS was in the same sort of situation today that it was two decades ago–it’s a collection of mature/maturing businesses, a firm without much growth focus, and with its hotel/theme park segment intended to serve as the main vehicle for reinvesting cash flow. The issue with this for investors interested in capital gains rather than dividends is that hotels/parks is a mature, highly-cyclical–in other words, low PE–endeavor. Arguably, earnings gains and PE contraction would offset one another.

These dreams of early retirement now appear to be out the window. To me, the issue isn’t just DeSantis’s actions. It’s also the probability of his imminent return and the overwhelming support his agenda has had in the Florida legislature. Despite a half-century in Florida, DIS, it seems, has no friends in high places.

The DIS response, so far:

–firing the CEO whose main expertise is hotels and theme parks–which is basically Disney World, as I see it

–cancelling a billion dollar+ project to transfer support staff from California to Florida, with other investment in the state presumably on hold for now

–a lawsuit to reverse DeSantis’s actions so far

–a more aggressive than anticipated staff reduction throughout the company.

An investor’s hope would be that the DeSantis attack has forced the DIS board off cruise control and a fundamental rethink of the company’s growth plans is underway. Slimming down corporate staff could be an early sign of this.

As a potential investor, I’m still on the sidelines. I owned the stock for about ten years, from the Marvel acquisition to 2016, when I thought it was fully valued at just south of $100. Yes, I missed the streaming spike. I haven’t done the work to decide what price I would pay for the stock. My preliminary guess is that we’re around fair value now, assuming that some non-damaging resolution to the Florida situation is achieved. Even if so, the road to resolution is likely to be bumpy. At this point, I’d only get really interested if the stock sold off considerably on one of those bumps.

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This is an old-time UK market saying (in the pre-Brexit days when the UK market had some world equity investor relevance) that has its roots in Northern Hemisphere weather patterns. Two related aspects: August is the hottest month of the year, so it’s traditionally when factories shut down and companies gave workers vacation time; suppliers of raw materials to these factories, from wood to coal to copper to cloth began to slow their production lines a couple of months earlier, in anticipation of this.

The long-ago shift in the nature of work among publicly-traded companies toward intellectual labor has made the traditional summer market slump much less of a thing. Still, summer doldrums is where I sense the US stock market is right now.

That’s actually good for you and me, however. It gives us more time to think about how the post-pandemic economy in the US–and maybe elsewhere–is evolving.

The sagging market for urban office space, for example, is something I’ve been interested in for some time. Where’s the bottom? How is economic energy being redistributed, which is another way of asking who the winners and losers will be?

An interesting turn that I’ve just been reading about–meaning it has been under way for a while–is the banks’ reaction to giant real estate investment firms, like Brookfield, defaulting on office building loans where current cash flows don’t cover loan payments and they don’t see the situation improving any time soon (the dynamic is that the newest, state-of-the-art office buildings lower rents to entice firms in older buildings to upgrade–if for no other reason than to keep from looking like it’s unwise or unsafe to be there.) So essentially they’re putting the keys in the mail and sending them to the lender bank.

The latest chapter in the story is that banks, who aren’t either eager or equipped to manage real estate themselves, are beginning to sell their suspect loans at a discount

I’m not sure to whom, but what I take from this is that the discounts will be big enough to satisfy a buyer who is either going to run a cut-rate office operation or (more likely, I think) to repurpose the buildings as residential.

It’s probably too early to buy the new owners, but this is a significant wealth transfer. It also is another point of economic stabilization, one more worry removed.

I was talking with my younger son the other day about Nvidia (NVDA), a stock we’ve both held for years–and I bought after he brought my attention to it. He’d decided to trim his position, which had gotten too large a portion of his portfolio after its recent run. I had two suggestions: watch the stock after the sale to see how far it runs before peaking; and get at least a preliminary idea (down by 20%?) of where to get back in.

The first is to develop an awareness of how close to the top your mind kicks in with the “sell” thought. The second is the possibility that NVDA is one of those unusual growth stocks (think: Walmart, Apple or Microsoft (ex the lengthy Ballmer descent into irrelevance)) that is able to periodically reinvent itself–and is therefore worth hanging onto.

I woke up this morning to Heather Cox Richardson, the Harvard-trained, Boston College-employed historian of the post-Civil War United States (her general view is that Trump Republicans are the KKK-ish pro-slavery 19th century Democrats redux), reporting the news about the recording of a Trump interview in which he apparently declares that he possesses ultra-secret government documents, which he knows are still classified and which he knows he is not supposed to have.

The elephant in the room in all this is what triggered the government search for the documents Trump had. The most obvious explanation, I think, is that the US suffered a crushing setback, maybe literally, in the secret war of spies and Washington began to try to figure out how a potential foe found out.

The Financial Times, the UK’s financial newspaper, ran a comparison of the domestic stock market there from 70 years ago vs. now. In the UK, home of the Thatcher revolution, the top names are more or less the same as back then. The economy there barely has a pulse, less so since Brexit foolishly cut off access to the UK’s largest export market. The local stock market is less than half the size, relative to the rest of the world, that it was a generation ago. Top market cap names: Astrazeneca, Shell Oil, HSBC, Unilever, BP. Virtually no tech to be seen. Even #8, British Tobacco (!?!), is talking about listing in New York in search of a higher PE multiple.

In the US, Simplicity Pattern, Digital Equipment, Xerox et al are long gone. Other former top names, like GE, still exist, but are mere shadows of their former selves. They’ve been replaced by Apple, Microsoft, Amazon, Nvidia and Alphabet, none of which existed back then.

The difference between the US and UK? I would guess it’s not the neoliberalism and xenophobia that are powerful influences in the politics of both countries.