Tag Archives: earthquake

more news from Japan on post-earthquake shortages

April 11, 2011 By in Japanese development Tags: , , , , , , 1 Comment

post-earthquake recovery

Industrial life in Japan is slowly recovering from the effects of last month’s earthquake and tsunamis.  The Financial Times, for example, is reporting that the Big Three automakers of Japan, Toyota, Nissan and Honda, plan to have all their factories back in operation by a week from today.  Output will only be about half the normal rate, as the industry continues to deal with component shortages.

autos and technology

We’ll begin to learn more about the effect of the disaster on the technology industry as March quarter 2011 earnings reporting season opens up in the US this week.

Everything I’ve heard/read about the auto and IT industries, however, is generally in accord with my initial thoughts.  That is, that the auto industry would be more severely affected than IT, that initial reports would overestimate damage, that the main shortage items would likely be less well-known and lower tech parts.

Electric power is proving to be the most important shortage commodity, as well as the one least able to be alleviated by field-expedient workarounds.

new shortage areas

A number of items that I hadn’t thought about are also proving to be in shortage, namely:

–according to the Asahi Shimbun (newspaper), two of the six plants manufacturing cigarettes owned by Japan Tobacco, the dominant maker in Japan, suffered heavy damage in the earthquake.  One of the two cigarette filter plants the company runs was flooded by a tsunami.  Production at the other is being interrupted by rolling electric power blackouts.  JT is hoping to reopen its earthquake-damaged plants today at 25% of capacity.

I don’t own tobacco stocks and I don’t particularly care for the industry.  But the shortage of cigarettes is a serious issue in Japan, a country where half the adult males and 10% of the adult females smoke (maybe I should write “are addicted” instead of “smoke”).  AS suggests that smokers are significantly increasing their usage as a means of coping with post-earthquake stress.

Therefore, the earthquake is providing an unusually favorable chance for foreign manufacturers, BAT and Phillip Morris, to get distribution.  Both are airlifting large quantities of cigarettes into the country.

–the Yomuiri Shimbun reports that distribution of bottled water, in great demand because of fears of water contamination, is being slowed by earthquake damage done to key bottle caps manufacturing plants run by Japan Crown Cork and by Nihon Yamamura Glass.  Nationwide output, coming from factories in western Japan, is only at about 60% of pre-earthquake levels.

–an ink shortage is causing postponement of scheduled comic book production.  The plant responsible for 100% of Japan’s production of diisobutylene, a key ingredient in making ink has stopped production due to earthquake damage.

For investors who are willing to hold tobacco stocks, Japan is a big enough market that market share shifts there might be enough to affect the stocks of industry participants.  The main significance of the other recently reported shortage items is likely that everyday life is unlikely to return to normal in Japan for a long time to come.  The fact that these difficulties are surfacing predominantly in consumer goods suggests to me that my assumption that the Japanese government will give capital goods and export-oriented industries priority over consumer businesses in use of scarce resources.

post-earthquake stock performance patterns

April 4, 2011 By in Analyzing performance, Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , , , , , , , , , Leave a comment

checking out a change in market direction

When the market makes a decisive change in direction, it’s always good to step back and analyze the composition of the advance.

Why?

When the market changes direction, market leadership often changes as well.  In addition, when the cause of the change is a readily identifiable event like the earthquake/tsunamis in Japan, it’s important to check what you think the market should be doing in response to the development vs. how the market actually is performing.  If you don’t, you may only acknowledge data that’s in line with your presuppositions.  If so, you risk losing performance by sticking too long with yesterday’s winning ideas in tomorrow’s market.

In this case in particular, my impression–before looking at the facts–is that the reaction of the S&P 500 to the earthquake has been too emotional and rather superficial.  In other words, I think that some stocks may be being unduly punished and others irrationally bid up in price in expectation of rewards that are unlikely to materialize.

begin with sectors

Let’s start with S&P sector performance from March 14th, the first day the US market was open after the full impact of the earthquake in Japan was known, through last Friday, April 1st.

Performance ran as follows:

Telecom          +7.2%

Materials          +6.7%

Energy          +5.3%

Industrials           +4.2%

Finance          +2.5%

S&P 500          +2.2%

Staples          +2.1%

Consumer discretionary          +1.9%

Utilities          +1.3%

Healthcare          +1.2%

IT          +.3%.

Full-month sectoral results for March and for the first quarter of 2011 can be found on the Keeping Score page.

post-earthquake differences

The main changes I see are these:

Telecom, Materials and Finance join Energy and Industrials as outperformers.

Healthcare, on the other hand, drops like a stone.  It, Consumer Discretionary and IT join Staples and Utilities as significant laggards.

It makes sense to me that investors would bid up the Materials sector on the idea that reconstruction, whether in Japan or elsewhere, will use lots of extra building materials.  Similarly, uncertainty about component supply might depress IT stocks.

On the other hand, I have no idea why Healthcare should suddenly become less attractive.  How does the Telecom sector benefit from the problems in Japan?  …I think the outperformance there is the result of the consolidation in the wireless arena and has nothing to do with Japan.  After all, the S&P sector only has 9 constituent companies, so changes in one or two names can make a big difference to sector performance.

a closer look:  individual stocks

Some investors, even professionals, try to stay on the level of the “big picture” and shape their portfolios based chiefly on what they consider overarching trends.  Known as “thematic” investors (calling someone that is an insult, though slightly veiled), they may have short-term success, but usually flame out in spectacular fashion.  The only people who can make money while remaining at this low level of sophistication are the talking heads on cable TV. 

Looking a little deeper, then:

currencies, since the earthquake

Korean won/¥          +5.4%

€/¥          +3.7%

$/¥          +2%.

Yen weakness may partly be the result of intervention.  There may be more to it than that, however.

I’ve been thinking that the earthquake may change multinationals’ ideas about where a second source of production should be located.  No manufacturing company wants to rely on a single supplier for key components.  Firms always want a second source.  I think that firms are being forced to the realization that having two Japanese component makers, one two miles down the road from the other, as sources gives you some protection against price gouging.  But it’s no help in a natural disaster.  In fact, the possibility that electricity will be rationed across Japan for some time to come suggests that even having a second source in the same country isn’t good enough.

I suspect multinationals will be trying to develop alternate sources of supply in Korea or Greater China–meaning a long-term net loss of economic activity in Japan.  The weak yen may be telling us this.

Looking at stocks (all percentage changes are calculated in US$):

indices

S&P 500     +2.2%

Topix (the Japanese equivalent of the S&P)     -6%

Japanese utilities

Tokyo Electric Power          -79%

Tokyo Gas          +6%

Tokyo Gas has outperformed the Japanese market by 12%, as investors look for alternate suppliers of utility services.  I no longer know Tokyo Gas well, but the move seems logical to me.

construction machinery

CAT          +13.1%

Hitachi Construction Machinery          +4%

Kubota          -4%

I don’t get it (I say this even though I own CAT).  All three companies do basically the same thing, and 100% of the reconstruction business is going to go to the Japanese firms.  There could be some subtle thinking at work here–maybe that Japanese public opinion or government action will force HCM and Kubota to provide machinery on concessionary terms, using up their productive capacity and leaving higher-margin business elsewhere for CAT.  My guess, although (again) I don’t know the Japanese firms well anymore, is that HCM and Kubota have upside that is generally unappreciated.  CAT has gone up because it’s easier for US investors to buy, even though it’s probably the worst positioned of the three to participate in Japanese rebuilding.

autos

BMW          +8.7%

F          +5.5%

GM          +1.5%

Honda          -3.5%

Toyota         -6%

The luxury brands of Toyota and Honda are the ones whose models have the greatest Japanese content.  The two automakers also have by far the biggest exposure to the Japanese car market.  So I understand why there should be a wide spread between them and luxury car maker, BMW.  If BMW sources its car electronics from European semiconductor companies, then the absolute price performance makes sense to me as well.

semiconductors

Samsung Electronics          +12.5%

MU         +10.5%

ARMH          +8.4%

WFR          +6%

TXN          -.5%

MIPS          -4.5%

INTC          -5.5%

Shinetsu Chemical          -6.5%

Renesas          -20%

Renesas is the product of the merger of semiconductor operations formerly run by NEC, Hitachi and Mitsubishi Electric.  It makes DRAM, and other commodity semiconductors used in cellphones and autos.  Its plants have suffered extensive damage.

Shinetsu is the leader in another commodity semiconductor business, making silicon wafers.  These are the main raw material chips are built on.  It too has had a lot of plant damage.  So it makes sense that the stocks of these two companies have gone down (although Shinetsu is an outperformer vs. TOPIX)–and that the shares of rivals Samsung (a world leader in commodity semiconductors), MU and WFR (two middling firms that happen to be in the right place) have gone up.

One anomaly I see is in the relative performance of TXN vs. INTC (I own it) and ARMH vs. MIPS:

TXN is roughly flat, despite having had considerable plant damage in Japan.  INTC is down, despite having had none.

MIPS and ARMH are both intellectual property companies.  They sell their chip blueprints to a wide swath of fabless chip firms who incorporate them in their designs.  The profits of  both are vulnerable to any earthquake-induced materials or components disruptions that slow component manufacture; that slows the flow of royalties customers pay them.  I don’t think there’s any sure way to figure out how their businesses are likely to be affected.  The most reasonable assumption is that the same thing is likely to happen to both.  Yet MIPS (trading on 23x historical earnings) is down and ARMH (trading on 90x) is up strongly.

consumer electronics

Panasonic          -.3%

AAPL          -2%

Sony          -5%.

Two thoughts:

–AAPL is down;  ARMH, which powers AAPL cellphones and tablets, is up a lot.  ???

–Panasonic, a strong company, is flat;  Sony, a bad one with high exposure to Renesas, is only down 5%.  ??

luxury goods

LVMH          +4%

Hermes          +1.3%

TIF          -1%.

The oddity that I see is that, despite all three having significant exposure to Japan, their stock prices have been relatively unaffected by the earthquake and loss of electricity (hard to buy stuff in a store where the lights are out) in this important market. (By the way, I own TIF.)

summary

There has been a market reaction to the Japanese earthquake.  It can be seen in the S&P 500 through relatively good performance by the Materials sector, and though an accelerated underperformance of the IT sector.   Hard to argue with that, though I personally think supply chain disruptions will be far fewer than the market now thinks.

The investor response within sectors is a bit more uneven, though not the crazy level I had anticipated finding.  The company performance relationships seem ok to me in the Japanese utility, auto, consumer electronics and luxury goods industries.

In construction machinery, on the other hand, the Japanese firms that will presumably receive all the rebuilding orders have substantially underperformed CAT, which probably won’t receive anything.

Investor behavior in the semiconductor sector is the most eccentric, in my view.  My guess is that professional portfolio managers have examined their IT holdings with an eye to : 1) reduce weightings, and 2) eliminate holdings that are exposed to plant damage in Japan.  But they’ve ended up doing something different.  In my experience, this often happens.

They’ve ended up selling weaker, or poorer performing, names in a sub-sector, and using part of the money to build up their positions in companies that have shown positive price momentum.  They may also have trimmed huge positions, like AAPL, which just about every professional portfolio manager owns.

Whatever the reason may be, companies whose fortunes are closely linked, like ARMH and AAPL, have performed differently, for no good reason that I can see.  So too have TXN and INTC, and ARMH and MIPS.  My guess is that the relative performance of these pairs will soon reverse themselves.

One other point:  with the punch of a few buttons, a professional can almost instantaneously have a printout of the absolute and relative performance of all of his positions over any time frame–including from March 11-April 1.  If he wants, he can have the report show his portfolio constituents–broken out by individual stocks, industries and sectors–compared with the performance of the corresponding portions of his benchmark index.  He can not only see his performance at a glance, but also what stocks outside the portfolio are doing better or worse than his.

Try getting this info as an individual from your broker.

Why aren’t these data available?  For one thing, you might need some instruction to be able to read a report intelligently.  For another, it would show whether your trading activity is profitable or not.  Your brokerage firm makes most of its money based on the amount of trading you do, not on your success.  So there’s no upside to letting you know you’d be better off trading less, or not at all.


investment thoughts on Japan, post earthquake

March 15, 2011 By in Asian economic development, economics, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

the earthquake

The Japanese government is calling last Friday’s severe earthquake and resulting tsunami the worst disaster to befall the country since the Second World War.  Early estimates suggest that at least 10,000 are dead, and perhaps many more.  Hundreds of thousands are homeless.  Severe damage to nuclear power plants in the worst-affected prefectures, north of Tokyo, has necessitated rolling electricity blackouts in Japan for the first time in a half-century.

investment implications

This is a terrible human tragedy.  But today I’m taking off my hat as a human being and putting on my hat as a portfolio manager to write about what I see as the major investment implications of last week’s event.  They are:

1.  The yen will have a short-term tendency to rise, as insurance companies liquidate foreign investments and bring money home to pay earthquake-related claims.  Both individuals and companies will do the same thing.  In the months after the Kobe earthquake of 1995, for example, the Japanese currency rose by about 20% against the dollar.  If so, export-oriented firms will struggle some more.

2.  Technology-related parts shortages are possible, but I think they’ll be less serious and shorter in duration than commonly expected.  Several reasons why:

–In the thirty+ years I’ve analyzed companies it has invariably been the case that the damage to industrial plants due to explosions, wars and natural disasters is initially overestimated–usually by a lot.

–Ingeniously jerry-rigged solutions to production bottlenecks are almost always found.

–Ex autos, Japan isn’t the cutting-edge technology giant it was twenty-five years ago.  It’s major IT products are commodity semiconductors, glass for flat panel TVs and monitors, and consumer electronics thingamajigs, like capacitors and connectors.

–The earthquake missed the industrial heartland south of Tokyo, where most of the country’s factories are located.

–Korea, Taiwan and China make adequate substitutes for almost everything (ex autos) that Japan produces.  These areas can take up at least part of any slack from Japan.  For example, TXN, one of the few international firms announcing significant damage, says it has already found replacement manufacturing capacity for 60% of the output from its Japanese fab in Miho.

3.  Electric power may be an issue for some time.  The obvious reason is that it will take a while to fabricate and install new nuclear power plants.  NIMBY is another issue, especially if damaged reactors begin to release radiation.  In addition, I think there are two non-obvious factors at work here as well:

–The main political platform of the post-WWII Socialist Party in Japan was anti-nuclear weapons, based on the damage done at Hiroshima and Nagasaki.  After the Cold War ended, the Socialist became the Social Democrats.  Their anti-nuclear stance transmuted itself into one against nuclear power plants.  The 21st century successor to the Social Democratic Party is the Democratic Party of Japan, which is in power now for the first time since a brief stint (before self-destructing) over twenty years ago.  Will the DPJ be as aggressively pro-nuclear as the Liberal Democrats, the other main party, were?  I don’t know…but probably not.

–The predominant feeling today is that the half-dozen or so nuclear reactors that aren’t completely stable or that have already failed, have done so because no one planned for a 9.0 magnitude earthquake or a tsunami.  I hope that’s right.

But in my experience, Japanese managers are under intense social pressure–in a way I as an American can’t really understand–to produce products that are up to specifications, and delivered on time and on budget.  It’s virtually impossible for a manager to endure the shame of letting down his company, his coworkers, his neighbors, the people he went to school with…by telling his boss he can’t do so.  That’s true, even if the requirements are completely unreasonable.

A manager may resolve this conflict by building a sub-standard product and asserting that it does indeed meet required specifications.  I’ve seen this phenomenon in many Japanese companies, including (unfortunately) one or two that I’ve owned, where apparently no one has checked the manager’s work.  Any hint of this practice in the nuclear reactor post-mortems could delay the approval of new nuclear plants.

Update: the LA Times suggests that two separate worker errors at one of the nuclear power plants owned by Tokyo Electric Power have increased the chances of a significant release of radiation into the atmosphere in Japan–escalating the political and stock market crisis there.  It now seems to me that the odds of an anti-nuclear backlash have risen significantly.

4.  Infrastructure being rebuilt will be state-of-the-art, and very energy-efficient, particularly so if there are delays in adding to electricity-generating capacity.

5.  What the private sector rebuilds, and where, is open to question.  Individuals will likely rebuild their houses, though perhaps on a more modest scale than they had.  But corporations with a freshly signed check in hand may opt to move production overseas, something they might feel constrained from doing under normal circumstances.

early stock market reaction

The Japanese stock market opened on Monday down almost 10% on news of the earthquake/tsunami damage but rallied to close down about 6%.  As I’m writing this on Monday night, another reactor explosion has been announced and the TOPIX is down another 4%.

Some people are arguing that this decline represents a buying opportunity.  They reason that money policy will be accommodative enough, and that reconstruction spending will give the economy a big enough fiscal boost, to break Japan out of the malaise it has been in for two decades.

I don’t agree.  I think that the core Japanese economic problem is its decision to defend the status quo of the 1980s rather than let creative destruction reshape the country to meet current and future needs.  The country has chosen to retain a traditional way of life, even if that means no economic growth.  While this remains so,  I continue to think that Japan is reduced to being a special situations market, not one you need to have general exposure to.  Of course, the current downturn is giving you a chance to buy special situation names relatively cheaply.

In New York, COH and TIF both sold off by more than 5% on Monday, on worries about their Japanese businesses.  I guess I can’t quarrel with that, given that both stocks are up 50% or so in the past six months.   Declines in LVMH or Hermès, which were down on the day by 2.5% and 3.5% respectively, despite the fact that both have arguably more to lose in Japan that either TIF or COH.  On the other hand, the Europeans haven’t been the recent market stars that the American firms have.

The main point with any foreign luxury goods firm in Japan, however, is that the market there went ex-growth during the recent recession.  Western companies have since switched strategies from expansion to extracting their invested capital as quickly as possible.

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