A number of companies have been raising equity in the past few weeks, including two clients: Digital Garage (4819) and Ferrotec (6890). Comparing the case of Ferrotec and Elpida Memory (6665) makes for interesting observations. Ferrotec was looking to raise about 7.4 billion yen (see our report here), and Elpida about 80.0 billion yen (see English language Elpida release here). Both said they needed money for capex and R&D. So far, so similar; but Elpida comes out a winner in consistently diluting and bleeding its shareholders into a coma.
Based on experience, the level of disgust and indignation by existing shareholders is normally low when the dilution is 10% or so, and starts rising rapidly after that. At 15% you get irked. Anything above 20% smacks of criminal intent. Now, this is a family publication so we wouldn’t go as far as using foul language to describe Elpida’s dilutive behavior, but the company definitely deserves to be called a recidivist. Recidivists are the worst of the bunch — you know they will do it again and have no feelings for their victims. Here is the big difference between criminal justice and the stock markets though; in one case you lock them up, in another… you just give them more money.
Oh, enough of the rant. Elpida just did it again and will get away with the cash. 28% dilution. Well done. Ferrotec is diluting by 17.0%, a mere misdemeanor. The media reaction was again similar to criminal reporting – Elpida got a big article in the first few pages of the Nikkei while Ferrotec was relegated to the back pages and small print, next to unsmiling new CEO appointees of the companies you never heard of. Some justice.
Speaking of publicity, rather than justice. Over in the other side of Tokyo, JIN (another client of ours) held its launch event for its new Functional Eyewear line . Appropriately, a prominent male golfer and prominent female model (Miss Sayo Aizawa) were at hand to promote sports sunglasses at unbeatable prices. Oh, and protective eyewear was also present. Have a dry eye problem? The new model with a miniature water tank attached to the frame is for you. I was impressed.
I bought the stock a few months ago (one of my indefinite holdings) and wanted to add at some point. I really liked what I saw on the presentation day and I don’t only mean Miss Aizawa; the new line was exciting stuff and I bought a few more shares as the launch event progressed – thanks Mr. Market for letting me do it at a price more or less unchanged since 2010. The market did, however, respond enthusiastically the next day by driving the stock up 12%. I wonder if foreign investors will only come to the name when it is on every salesperson’s lips and the stocks is above 600 yen? I saw this price-driven “discovery” in the case of another client of ours, Start Today (which I regrettably did not buy back in the day).
Why am I positive on JIN? Well, the Functional line could be JIN’s answer to Fast Retailing’s fleeces that got Uniqlo noticed by consumers. Fast Retailing/Uniqlo came along and offered 3,000 yen fleeces in numerous colors and designs, before you paid say 15,000 yen for one out of a department store. Can JIN make a similar jump with glasses? The average price point for the SPORTS Series is 7,990 yen; a pair of Oakley 04-418’s will cost you 23,600 yen off Rakuten (see here). Now admittedly, you can get other Oakley’s for around the same price as JIN’s SPORTS series off Rakuten, but at JIN you can walk into a store and make an impulse purchase. Like Uniqlo’s fleeces it becomes a matter of why NOT have them rather than why have them at all.
Does this impact higher end glasses retailers? Perhaps, perhaps not as the markets tend to be different. JINS Functional Eyewear series isn’t going after, say, Paris Miki’s high-end Kimpo-do operations. And JINS is doing something very different from the others– instead of selling to people who need glasses to correct poor vision JIN wants to create a new market for people who do not need corrective lens glasses but want them for functional purposes (as the new series’ name suggests). Yes, it’s a bold move so rivals probably won’t go after the space until it’s been at least semi-proven. If the concept does get traction though the ultimate losers are likely to be the smaller glasses retailers running a handful of stores as they get squeezed out.
(See our JINS report here; and our Paris Miki report here and Megane Top report here.)
Our client. I tend not to buy my client stocks unless I am ready to hold them indefinitely. Round One isn’t on my ‘indefinite’ list, so I don’t. But gosh, the chart is starting to look good! Given that the refinancing risks are probably to a larger extent diminshed and the current trading is getting stronger, this one may have some fuel in it. An interesting angle to this stock is that the free higway exercise will probably have to come to an end to pave the way (punt unintended) for reconstruction. The Round One management has been speculating for some time that making it cheaper for people to drive long distances detracted them from going to their nearby bowling center. Also, wait till shopping malls get a bit worn as a source of entertainment which should probbaly happen at some point (not to me, not yet!). The only place a family can go when the toll road is expensive and the shopping mall is where kids beg for more goodies is… You guessed it. Not a pachinko parlor.
Today we are going to use one of our most advanced proprietary technical trading tools to gauge risk-reward pay-offs in the US and Japanese markets. Usually we wouldn’t be divulging this kind of stuff publicly. And similar to Navy SEALS Team Six, we would not even normally acknowledge this tool’s very existence. But given our own trading success… and Navy SEALS Team Six more modest success in getting OBL we thought we would confirm the use of Human Eyeball Mark I as our favored technical trading tool for the indices.
Proprietary technical analysis trading tool.
(Source: one of our staff… he still has one more to spare.)
Now the thing with the S&P is the upward support line that has been in place since the market bottomed out in March 2009 looks pretty strong. There have been a few wobbles over the past 26 months but the trend line suggests some decent support lurking around the 1200 mark on the S&P, on the other hand is earnings growth (or QE3) going to push the market above 1400?
And if you’re going by that old gem of “Sell in May and go away”, then you should at least be expecting 9% odd downside from its last close of 1320.47 and perhaps 6% or so upside if you think we can get out to 1400.
Now flick over to the Topix. Technically, it’s a market that you should be intrigued by: the index has moved in a box-range between 800-950 since Lehman with two tests of the 750 zone in the period – the March 2009 low and the post-Tohoku quake sell-off. Depending on whose forecasts you are looking at the market trades at around 0.8x forward book – see here.
Not exactly expensive, even when the companies are not generating high ROEs, so if the market makes a trip southwards one should expect some valuation support kicking in around the 800 mark and given how foreigners have been buying over the past few weeks one should probably also expect some support from these folks if the market were to suddenly weaken.
Meanwhile 1000 has been a concrete coffin lid for the market post-Lehman and there’s not too much reason to expect otherwise for the moment either.
So applying our rigorously scientific and back-tested Human Eyeball Mark I trading tool at the charts it would seem that there is 9.3% downside to 750 if stuff really falls to bits on the Topix but more likely about 3% odd of downside to 800 before a mix of technicals and fundamentals kick in and about 15% of upside to 950 before stuff begins to look overheated on technicals… a better risk-reward offering than stuff Stateside.
So what say ye to a small long Topix position with a tight stop-loss around the 780-800 mark?
OZ and JM
Two great bloggers (and professional money managers) – Ultimi Barbarorum and Bronte Capital – have posts up on the nature of fundamental research and reference two classic investment reads: Utlimi Barbarorum makes a nod to Peter Lynch’s One up on Wall Street, while Bronte draws from Phillip Fisher’s Common Stocks and Uncommon Profits.
Both posts have slightly different focuses but read together the pair could be a continuum of each other in
Ultimi Barbarorum’s is a long piece calling for mid-size retail investors to begin taking back control of their equity portfolios
“I think people should start to do some research with the aim of buying 3 to 5 single stocks, maybe just as an experiment. And if the experience is good, they can do it, and they gain expertise, they should make single stocks a big chunk, say 1/3 or more, of their retirement account in the next 10 years.”
Oh and how true is this…
“I turn over my portfolio well over 3x in a year. You should do less than 50%, probably 20%-30% is optimal. I think of a stock position in terms of weeks and months; you need to think in years. I check my portfolio obsessively every 5 minutes or so, and field calls about my core bets 2-3 times a day. You should check your stock prices once a week (or every month, if you can), and give each stock a check-up every six months or so…
The entire financial media and most of the blogosphere is about this news cycle, who is doing well now, who is buying who, what the charts are saying, which sectors are hot and which are not.”
Bronte, which tends to have focused more on the short side, flags Phil Fisher’s scuttlebutt method of “finding out what is really going on in companies by asking customers, suppliers and competitors. Information that comes from the company is either inside, self-serving or both. Sure you need to read and analyse accounts but real information – stuff you dredge up on your own – creates an edge.”
The lengths Bronte has gone to are clearly indicative of a lot of due diligence.
“The company has a factory which has a working (and clearly polluting) smoke stack. (I know because I paid someone to observe it.) The company is however primarily an R&D shop so you would expect typical nerds to work there – starting late and ending very late (tech geeks keep often keep very odd hours). However my spy tells me the car park is largely empty by 5pm which is unusual in a tech-research company where the end-goal is to change the world…
Now I discover the founding-CEO is living with his mistress more than twelve hours flight from the working-class locale of the main R&D shop. The mistress is substantially younger and the new locale is exotic (think South of France, Tahiti or Byron Bay Australia or similar). The mistress has a daughter by an earlier relationship and hundreds of thousands of dollars are spent on the daughter’s glamorous hobbies and lifestyle.”
Hiring private investigators, a la Kroll, is probably out of the reach of most individual investors but this is clearly more feasible…
“There is no short interest – and there are (highly) reputable people on the board. Board members “check out”. Nobody has a history in pump-and-dump schemes – the board seems suitable…
The stock is widely distributed having been well promoted by regional stock brokers… the founding CEO claims a PhD from in a relevant area from one of the top universities in the world. (I have not checked this PhD was actually awarded.)..
Most the rest of the material you found by befriending people on Facebook (using your real name). Would this method of research be kosher?”
Interesting stuff worth chewing on in full.
Aw, congrats Will and Kate! (Makes me all emotional being 1/2 English – JM)
Stumbling and Mumbling in praise of monarchy,
“First, the existence of a monarchy is irrational, out-of-date and absurd, with all its pomp, invented tradition and flummery. But this is an argument for it, not against it. The monarchy is much like the NHS: idiotic in theory but surprisingly successful in practice. It therefore reminds us that rationality is a very weak tool for judging the efficacy of institutions…
I suspect it’s not a coincidence that the countries which are best at equality overall (e.g. Sweden, Denmark, Norway, the Netherlands) [he might have added Japan - CD] also tend to be monarchies… If we had an elected presidency, what sort of preening, self-loving narcissistic egomaniac would think they were capable of representing and symbolizing the nation? (Tony Blair, you all answer.)”
Anyway, we’re on a bit of a commodity bent this week…
Great bunch of slides on silver, which seems to be the new commodity du jour.
And gold and commodities can also generate “income” apparently if the changes in Oppenheimer’s Strategic Income Fund’s prospectus (page one) are to be taken at face value… or perhaps they’re calling a top to all this precious metals silliness?
“Effective as of April 29, 2011: The following will be added to the selection of the Prospective titled Principal Investment Strategies: The Fund has established a Cayman Islands company that is wholly-owned and controlled by the Fund (the “Subsidiary”).
The Fund may invest up to 25% of its total assets in the Subsidiary. The Subsidiary invests primarily in commodity-linked derivatives (including commodity futures, financial futures, options and swap contracts) and exchange traded funds related to gold or other special minerals (“Gold ETDs”).”
Or does this explain things?
Crispin Odey conference call transcript…
“Our point here is to say once interest rates went to zero there were a lot of speculations that have become assets. Gold basically yields at best 2% on lending, if you lent it suddenly at zero interest rates, gold looks very interesting. In our scenario, we do not see interest rates going from 0.5% to 3%.”
Ernst & Young have a great research report out on rare earth metals,
“It is possible that China will become a net importer of some heavy rare earths in the foreseeable future… Lynas Corporation and Molycorp Inc., whose combined market capitalization is over three times the estimated annual size of the entire rare earths market today… the light rare earth (neodymium) and the four heavy rare earths (dysprosium, europium, terbium and yttrium) seem to represent the greatest opportunity over the short and medium term. “
Everyone is looking at oil, but have you checked out the price of coal recently?
“Prices of Newcastle coal, the Asian coal price benchmark, are poised by rise by as much as 30% this year, approaching the peak levels seen in 2008.”
And talking of hydrocarbons, some great dirt on the Chinese oil major to be now known as… Sino-puke
“Lu was demoted after an online whistleblower revealed that he had spent some 1.6 million yuan (roughly $230,000) in company money buying alcohol.”
(JM – Reminds me of the time when a Sinopec exec took two of my former colleagues out to lunch in HK; they came back a lot less sober.)
Shake n’bake… wheat prices and revolutions
Great story from the Berg,
“For two centuries, fund managers in Edinburgh built their companies by handpicking stocks. Now, an academic and former bodybuilder from Mexico is in the city trying to prove a computer can teach itself to do better.”
CitronResearch have a great track record in digging up shorts – their latest on a large (non-RTO) Chinese software company is a gem.
This says a ton about the luxury goods boom in China – Chinese Vogue so overloaded with ads it may split itself in two, and Jimmy Choo considers HK IPO (clearly everyone will be wearing an Asian IPO this summer then).
$24mn flying algos on Amazon.
Wow, fascinating
“CTAs actually need crises to generate their returns. Strip out crisis periods and you can cut in half the BarclayHedge CTA index returns… precisely the opposite applies to hedge funds in general: exclude the crisis periods and the returns will double.”
Crowd sourcing & social media taken to a new nasty place… Mexico’s real-time narco death blog.
10 world leaders when they were young… Berlusconi hasn’t aged is my take-away observation. Play-ah.
Goldfish (literally)
“Welcome to the booming world of high-end aquariums. Latest figures show that sales have doubled in the past year at aquarium sellers from Lancashire to Southampton. There are rumours of oligarchs and Premier League footballers frantically trying to out-tank one another, with items such as a £3m aquarium made from solid gold and mammoth tusk.”
And finally, don’t order the beef next time you go for a Chinese: Quite revolting… a Chinese “process” for turning pork into beef - yuk
Brett Arends is one of the smarter guys working at WSJ.
His latest on uranium is a good read and why it’s not going away.
On that topic interesting to note recent Nikkei story
“Tepco May Announce Restructuring Plans By Month’s End… efforts to reduce personnel expenses and asset sales likely to play key roles – real estate and noncore businesses at home and abroad.”
Well, the month is almost over so we won’t have long to see what is gonna hit with selling pressure and spun off.
All risk assets are go, high-quality ones less so.
Time to become cautious?
A fascinating report by the WEF and especially timely considering the recent fiasco over Apple’s iPhone storing location data
“personal data will be the new “oil” – a valuable resource of the 21st century . It will emerge as a new asset class”
How to win friends and influence people… don’t bother appealing to logic and reason
“Reasoning is actually suffused with emotion (or what researchers often call “affect”). Not only are the two inseparable, but our positive or negative feelings about people, things, and ideas arise much more rapidly than our conscious thoughts, in a matter of milliseconds—fast enough to detect with an EEG device, but long before we’re aware of it…
In a classic 1979 experiment (PDF), pro- and anti-death penalty advocates were exposed to descriptions of two fake scientific studies: one supporting and one undermining the notion that capital punishment deters violent crime and, in particular, murder. They were also shown detailed methodological critiques of the fake studies—and in a scientific sense, neither study was stronger than the other. Yet in each case, advocates more heavily criticized the study whose conclusions disagreed with their own, while describing the study that was more ideologically congenial as more “convincing.”…
In other words, people rejected the validity of a scientific source because its conclusion contradicted their deeply held views…
And that undercuts the standard notion that the way to persuade people is via evidence and argument…
This theory is gaining traction in part because of Kahan’s work at Yale. In one study, he and his colleagues packaged the basic science of climate change into fake newspaper articles bearing two very different headlines—”Scientific Panel Recommends Anti-Pollution Solution to Global Warming” and “Scientific Panel Recommends Nuclear Solution to Global Warming”—and then tested how citizens with different values responded. Sure enough, the latter framing made hierarchical individualists much more open to accepting the fact that humans are causing global warming. Kahan infers that the effect occurred because the science had been written into an alternative narrative that appealed to their pro-industry worldview.
You can follow the logic to its conclusion: Conservatives are more likely to embrace climate science if it comes to them via a business or religious leader, who can set the issue in the context of different values than those from which environmentalists or scientists often argue. Doing so is, effectively, to signal a détente in what Kahan has called a “culture war of fact.” In other words, paradoxically, you don’t lead with the facts in order to convince. You lead with the values—so as to give the facts a fighting chance.”
People say I am sensitive to this whole radiation problem. Maybe. I don’t want to glow in the dark – bite me! So when I heard about www.rdtn.org I was interested, intrigued, impressed, all that. And wanted to help. Check them out. Donate. Spread the word. Be proactive rather radioactive.
Remember all that chitter-chatter about replacing the greenback with SDRs that Beijing has been randomly pushing around ever since 2009?
You ever wonder where the hell you get a chance to use SDRs in real life?
No, not really? Yeah same here…until today when we found somewhere that actually does use SDRs in everyday life: Japan Post.
OK, “use” may be a bit of a strong term since we’re pretty sure Mr. Posty probably has never seen an SDR, let alone actually ever accepted one.
But we were browsing the JP website and came across this (link here)
Yep, the world’s biggest financial institution which has a sideline in delivering mail and selling postage stamps in this country actually uses SDRs. Time to kiss dollar and yen supremacy good-bye??
Or just a great trade YTD??
“A Portuguese, a German, a Greek and an Irishman walk into a bar. The German pays.”
Macro-man on Zombie nations and here.
Pettis on Chinese recycling and U.S. interest rates,
“A lot of people were very concerned that if China does indeed rebalance, US interest rates will soar.
The argument runs like this. If China raises the consumption share of GDP faster than investment declines, this will result in a reduction in China’s current account surplus. Clearly if China’s current account surplus drops, the amount of capital it exports must drop in tandem – since a rising share of consumption means a declining share of savings and so a declining excess of savings over investment which must be exported.
But because it is recycling the world’s (and history’s) largest current account surplus, China is one of the world’s largest purchasers of US government bonds. If China’s current account surplus declines, and so China sharply cuts back on its purchases of US government bonds, this should automatically cause US interest rates to rise.”
Chovanec on Chinese inflation
“When CPI passed 3% in the late spring and early summer, most analysts — particularly the i-bank economists — focused on temporary disruptions in food supplies and argued that inflation would peak in the summer and start declining in the Fall. I argued that monetary expansion, not supply shocks, were the primary driver, and that – given the fact that China’s money supply had surged more than 50% of the past two years — the real question wasn’t why we were seeing rising inflation, but why we weren’t seeing even more inflation sooner.”
Check the rout on timber, one thing that hasn’t benefited from the QE2 trade this year.
Some videos to watch and while away time to:
- Michael Burry speech at Vanderbilt Uni
- Taleb talks Black Swans at Wharton
- Jim Grant interview on Consuelo Mack
Wow, random… makes me think how we should decorate our office
“The psychologists, at the University of British Columbia, were interested in looking at how the color of interior walls influence the imagination. They recruited six hundred subjects, most of them undergraduates, and had them perform a variety of basic cognitive tests displayed against red, blue or neutral colored backgrounds.
The differences were striking. When people took tests in the red condition – they were surrounded by walls the color of a stop sign – they were much better at skills that required accuracy and attention to detail, such as catching spelling mistakes or keeping random numbers in short-term memory. According to the scientists, this is because people automatically associate red with danger, which makes them more alert and aware.
The color blue, however, carried a completely different set of psychological benefits. While people in the blue group performed worse on short-term memory tasks, they did far better on those requiring some imagination, such as coming up with creative uses for a brick or designing a children’s toy out of simple geometric shapes. In fact, subjects in the blue condition generated twice as many “creative outputs” as subjects in the red condition. That’s right: the color of a wall doubled our imaginative power.”
Finance for kids or kind of:
- When school-kids prepare your tax return (last graf with Citi’s former Sandy Weill is great, props to the WSJ journalist who wrote this one)
“Mr. Weill said his own taxes were too complicated to be handled by high school students. “Unfortunately,” he said, in a telephone interview. Then he paused and added: “Or, actually, fortunately.”"
- Talking money with Elmo from Sesame Street.
And finally, 888GB iPads for the afterlife…
U.S. listed reverse-merger Chinese small caps are slightly off-piste for us given the usual scope of our musings, but we caught wind of a rather interesting trade people are trying to structure with these.
For those not familiar with the back-story:
The Chinese government strictly controls who can and can’t list on the mainland markets (A-Shares) and the Hong Kong authorities are reasonably strict about letting Chinese small caps come list on their exchange so about five years back many gravitated to Singapore (aka S-Chips), which at the time was keen to become the Asian regional exchange of choice for IPOs.
S-Chips were an unremitting disaster as the whole space got hijacked by unsavory types (see here for an excellent little write-up of the scams and here to get an idea of quite how dodgy these ‘companies’ turned out to be). Eventually, the regulators down Singapore-way got their act together and the circus moved on in about 2008/09 to the land of the free and home of Charlie Sheen in the form of SPACs/reverse mergers .
Some rather shady investment banks have made a decent buck listing and promoting these reverse mergers/SPACs (your humble scribe remembers in his previous life as a journalist one of these bank’s rep offices in Shanghai being particularly abrasive and evasive when he called them up to ask a few questions about WTF they were up to).
The scam though has become very well-documented over the past 18-months. For example, the lovely Leslie Norton of Barron’s wrote a jolly good piece on the fiasco in August last year, the guys at Muddy Waters have made a good name for themselves unearthing all kinds of shenanigans, and John Hempel at Bronte Capital has spent plenty of time blogging on and shorting some of these names while crossing swords with the ‘smart-money’ at the Carlyle Group.
Anyway, the place has been a disaster for longs. What’s interesting is that “chort the chit” the U.S. listed Chinese small caps has become consensus trade du jour.
Check the stats on, say, China Media Express ( US CCME):
Now we’re not passing judgement on whether CCME is dodgy or not, but clearly quite a few people are passing some kind of judgement: 21.9% is a helluva lot of the free float to be lent short.
Interactive Brokers came out with an announcement last week that caught our eye: it hiked margin requirements on a swathe of these reverse mergers. Yes, 100%… that’s a tad high for a margin requirement, and even before IB’s move we were hearing annualized rates of 50% plus on borrowing these things being bandied around. Given the 10-year treasury is yielding all of 3.625% that’s some decent pick-up for anyone looking for a bit of yield (more attractive than Tepco’s trailing dividend yield, at least).
So we weren’t too surprised to hear over lunch the other day from a friend on a sales desk that some funds are going long these names not out of any conviction they are viable companies but simply to lend out to the shorts and pocket the yield.
The trick has been in getting a structure where instead of receiving the 50% or so over the course of the year you try and pocket a smaller up-front fee of say 30% for the period and bet your underlying long position doesn’t go belly up before Christmas.
Kinda makes us wonder whether it might be time to start rummaging around the Chinese small-cap space for some deep value and a tasty yield pick up. Here are some of the names on Interactive Broker’s hit list with the highest short interest:
| Ticker |
Name |
Short Interest |
| CAGC |
China Agritech Inc. |
13.1% |
| CCME |
China MediaExpress Holdings |
21.9% |
| CGA |
China Green Agriculture |
13% |
| CHBT |
China-Biotics Inc |
18.4% |
| DEER |
Deer Consumer Products |
16.3% |
| HRBN |
Harbin Electric Inc. |
19.9% |
| RINO |
RINO International Corp. |
16.2% |
Now there are some (not many mind you, bit some) decent Chinese businesses listed in Singapore (Hsu Fu Chi is one that springs to mind). Meanwhile in the U.S. some of these smaller Chinese companies are wondering now why the hell they are even listed State-side and are looking at delisting and relisting closer to home (for those interested VIC has an interesting write-up on Harbin Electric, although that also comes with 19.9% short interest).
JM
