Tag Archives: Japanese earthquake

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.


more on the Tokyo Electric Power nuclear plants in Fukushima

March 23, 2011 By in Asian economic development, Current Market Thoughts, economics, Japanese development Tags: , , , , , , , Leave a comment

In my post on March 15th, I suggested that as the story of the failure of the Tokyo Electric Power (TEPCO) nuclear plants in Fukushima unfolds, there was a good chance we would find out that faulty construction or substandard maintenance, deliberately disguised from public view, would be revealed.  I didn’t expect, however, that it would happen so quickly.

Yesterday’s New York Times contains an article titled “Japan Extended Reactor’s Life, Despite Warnings.” It makes the following points:

1.  The #1 TEPCO reactor at Fukushima had reached the end of its useful life (it’s a GE plant that was installed in 1971), but was approved by government regulators last month for another ten years of operation.  This was done despite design deficiencies that have been corrected in later models and worries about the backup diesel power generators.

2.  Shortly after regulators granted the extension, TEPCO said it had failed to properly inspect the cooling systems at all of the six Fukushima reactors.

3.  At the same time as they were approving the extension, regulators were criticizing TEPCO’s failure to properly inspect or maintain all the reactors.

4.  In a 2003 scandal, it came out that TEPCO had falsified reactor safety inspection reports over a sixteen year period in order to avoid spending money on repairs.

5.  The article suggests, correctly, in my view, that the failure to enforce regulations stems in part from the Japanese practice of amakudari, meaning “descent from heaven.”  Jobs in the Japanese government bureaucracy offer very high prestige but relatively low pay.  Customarily, at the end of long careers, senior bureaucrats “descend” to high-paying positions in one of the companies whose industry they formerly regulated.  In the case of utilities, the best of such jobs wold be with TEPCO.

Since a job with TEPCO may well be your future “pension plan,” a regulator has got to be conflicted about how strictly to enforce the rules.  Also, it may be difficult to refuse the request of your former boss–who has retired to be come in effect a lobbyist for TEPCO–when he asks for a lenient interpretation of a regulation.

I’m sure this won’t be the last we’ll hear on this topic.

post-earthquake supply disruptions from Japan

March 20, 2011 By in Chemicals, Current Market Thoughts, Industry Analysis, Japanese development, Recent Market Action Tags: , , , , , , , , , 1 Comment

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It has only been a little more than a week since the devastating earthquake/tsunamis in Japan.  However, a lot more information about possible supply disruptions is available now.  As an investor, the main conclusions I see, based on what we know to date, are:

1.  Many of the disaster-affected plants that are sole sources for key components supply the auto industry.  A number of auto manufacturers have already announced that they may soon have to shut down either individual production lines or entire factories for lack of parts.  Although I’ve owned auto stocks from time to time, this is not an industry I’m particularly interested in or familiar with.  But one of the main reasons I’m not a fan is that the industry is characterized by chronic (and huge) overcapacity.  So far it doesn’t appear that there’s any one component in potential shortage that’s used in virtually every car in the world.  So the effect of plant closings will be market share shifts, not a shortage of cars or trucks.

2.  It’s possible that electric power will have to be rationed, at least in the Sendai area, for many months.  The Japanese government tendency is always to prefer industry over the consumer.  Public outrage over currency speculators who bid up the yen in the aftermath of the earthquake–they’re being described as criminals who exploit human tragedy, the moral equivalent of gangs that loot stores during a fire in the city–suggests there won’t be any popular opposition to this.  The practical questions for factories where the problem is power (not that the earthquake destroyed the machinery) will be how quickly power lines can be repaired and what the limitations of the Japanese power grid are in delivering electricity from other areas of the country. (I’m assuming that, as the latest reports are suggesting, the Fukushima reactor crisis is finally coming under control.)

3.  With one notable exception, the Japanese technology-related firms that have announced earthquake-related shutdowns make commodity products, like DRAM or NAND flash, where alternate sources of supply are available.  Prices may go up a bit but devices will still get made.

The one exception: bismaleimide-triazine  resin (BT), a compound used to glue semiconductor chips to printed circuit boards.  BT is used in all smartphones and tablets.  90% comes from Japan.  The largest producer, Mitsubishi Gas Chemical, which accounts for about half of what the tech industry uses, has shut down production due to earthquake damage.

The other major Japanese source of BT is Hitachi Chemical.  It’s plants are still operating.  But, according to the Financial Times, the BT made by different chemical companies isn’t simply interchangeable.  Output differs enough that at the very least a period of testing is required before you can use BT from another supplier. The Wall Street Journal says this process could take a month for most kinds of circuit boards.  For cellphones, though, because of their small size and the specific amount of heat a given chip may throw off, the entire design may need to be changed in order to accommodate a different flavor of BT.

But the main issue is there’s no way for the rest of the industry to double production overnight–which is what would be needed to keep cellphone production rolling along at the current clip.

Mitsubishi Gas Chemical will likely make an announcement about the extent of damage to its Fukushima BT plant in the next few days.  All we really know now is that production has been halted.

In the meantime, MGC customers are doubtless talking to Taiwanese and Korean suppliers of chemicals that they wouldn’t have given the time of day to a month ago.   And they may be seeing what they can do to get increased allocations from Hitachi Chemical (good luck with that).

The BT story bears close watching.  If MGC production isn’t restored soon, disruptions to the supply chains of phone makers whose products use the MGC output could be severe.  Pain will be felt not only by the phone manufacturers but by all their component suppliers, as well.