How to play the coming Japanese rally

Japan’s big banks give you broad-based exposure to any upward move in equities.

By Jim J. Jubak Mar 27, 2013 6:15PM
It’s more accurate to think of Mitsubishi UFJ Financial Group (MTU) as a securities portfolio rather than as a bank, right now. And from that perspective, Mitsubishi UFJ is likely to be one of the biggest beneficiaries of the downward trend in the yen that I expect to resume as soon as the financial markets move past the chaos that is Cyprus.

For an indication of what the weak yen does to the income statement at Japan’s biggest bank, just take a look at the Feb. 1 report of third quarter earnings. Third-quarter profit doubled, as the rally in the Tokyo stock market based on a falling yen led to higher fee income and smaller stock portfolio losses. That doubling in earnings came even though as a bank Mitsubishi’s business continued to lag. Income from lending -- a core bank business, no? -- fell by 7.8%, for example.

Making up for that weakness was a big reduction in impairment charges on the bank’s equity portfolio -- Japanese banks typically take big equity positions in the companies they lend to --- and an increase in earnings from the bank’s brokerage unit.

Impairment charges from the bank’s shareholdings dropped to 90.9 billion yen in the nine months that ended on Dec. 3. That was a 41% drop from the same period a year earlier and was down from 174 billion yen in the first six months of 2012.

Earnings at the company’s brokerage business, Mitsubishi UFJ Securities Holdings, rebounded to a 10 billion yen profit from a loss of 12 billion yen in the year-earlier quarter.

With the Bank of Japan signaling that it will announce aggressive moves to weaken the yen at its April 3 to 4 meeting, I think we’re likely to see a resumption of the rally in Japanese stocks that has stalled -- as turmoil in the eurozone has led to a flight to safety in the yen, that stopped the decline of that currency.

Japan’s big banks give you broad-based exposure to any upward move in Japanese equities. Any of Japan’s Big 3 banks can do the job in your portfolio. I prefer Mitsubishi UFJ because the ADRs trade with a 1.2 million unit average daily volume in New York. That gives them better liquidity -- easier entrances and exits -- than ADRs of Sumitomo Mitsui (SMFG in New York with 670,000 unit volume) or Mizuhi (MFG in New York with 530,000 unit volume.)

I’m not looking to hold Mitsubishi UFJ for any longer than the yen decline continues. I’m adding the ADRs to my Jubak’s Picks portfolio, with an initial target price of $7.10, about 22% above the $5.92 New York close on Tuesday, on the ADRs. I’d re-evaluate policy at the Bank of Japan if the ADRs get to that level—or if it looks like the yen’s downward trend has stalled,  to see how much life there is left in a falling yen.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did not own positions in any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here
14Comments
Mar 28, 2013 9:58AM
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Coming rally?

What you mean is the coming increase in Japanese stocks as the Japanese government begins it's massive Yen printing?  Yes Japanese stocks will surge higher in Yen, as the government devalues the currency.  Just as US stocks have.

Assets always revalue higher in hyper inflation.

However, these gains will not translate to growth or increased purchasing power, nor will they increase anyone's true wealth.

You cannot print your way to prosperity, PERIOD.
Mar 27, 2013 8:40PM
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Japan's banks are totally bogus. The best play is to opt-out and let them crash.
Mar 27, 2013 8:42PM
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BTW Jim... did you hear that Toyota is deploying it's whole management to its markets and reducing its Japan operations to a single business suite? How much faith do they have in the homeland?
Mar 28, 2013 11:53AM
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Jubak has more aces up his sleeve than Tricky Dick.

Beware of this kind of advice. Portfolio mangers who try to profit from currency moves often lose a lot of money. Also these kinds of moves are very speculative and have no place in a conservative portfolio. 

I'd recommend going into something in Matthews Asia Funds for a position in either China or Japan.

Ho ho ho!
Mar 28, 2013 10:55AM
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All these cornucopian investment guys live on some dream planet with unlimited, cheap oil, resources, real wealth and exponential growth going on forever. In the real world where the rest of us live we are out of cheap oil, have dwindling resources, and pretend, conjured monetized debt has replaced real wealth. What is more, all the buttons, levers and algorithms of financial alchemy cannot change the permanent phase of compressive contraction that has replaced growth. Unless, of course, these investment guys actually do have a spare planet or two that we can pilfer for the sake of profit as we have this one.

Mar 28, 2013 5:10AM
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Ask Keith Fitzgerald about Japan investments.  He lives in Japan, after all. 
Mar 28, 2013 12:03PM
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And do pray tell....Should I invest in Noodles, Tuna Fisheries or Paper Lanterns...???
Mar 28, 2013 3:24PM
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I can't invest in things I don't like or believe in....

 

Your other Companies mentioned were good picks..

Mar 28, 2013 3:21PM
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I'm very glad Asians eat Seaweed and Kelp.....Less for us.

I've tried both, they taste like shidt...Same with Squid or Octopus...IMO

 

But on the other hand we eat twigs and seeds..??

And also Brussel Sprouts, Okra, Asparagus, Cauliflower and Broccoli..

Which of the latter, Neuman on "Seinfeld", deemed as a " Vile Weed."

 

I would go ahead and have Jack or others, with an umbrella..

But prefer sitting on a deck with it.."under an umbrella."

 

 

Mar 28, 2013 3:01PM
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If somebody brought me a Jack & 7 with a paper umbrella, I'd still drink it.

 

I love the old reliable mutinationals.  Conocco, Disney, McDonalds, J&J, P&G.  But, I also like "U.S.only" utilities like PNW.

 

How about a seaweed farm?  Asians eat that stuff.  Should be money there.

 

 

Mar 28, 2013 2:57PM
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Just read an Article, within the last couple days....Maybe here??

 

That the influx of Foreign monies and Investments have risen back to some new highs, after being down a couple years back....Seems the figure was close to $5 Trillion in U.S. dollars..??

 

Yes, I also agree with that part of Mirage's equation....Or statement.

Mar 28, 2013 2:48PM
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Forgot about those umbrellas....But Whiskey and Water...Normally do not use them..

Having pared off Nippon Investments several years back, I doubt I'm looking to return??

And dropping all other Asian positions within the last year or so...Probably the same?

 

But firmly believe being invested in Multi-nationals....That do business in, or manufacture within the countries for consumption...Such as China, India and others..

That alone gives us Foreign exposure, along with a couple others that are.

Mar 28, 2013 1:13PM
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Don't forget those little paper umbrellas that go into blender drinks.  I love those!  I have a bag of them.   I have a tradition that when I check out of a hotel room on a trip, I leave behind one of those paper cocktail umbrellas.  But that's just me.

 

I'm inclined to agree with MirageGuy.  I believe the U.S. markets are up due to inflation and scared foreign investment money fleeing their markets and buying into anthing in the good old U.S. of A.

 

So, in a way, if Japan starts up the old printing press, that would indeed equate to a rise in their markets.

 

But . . . . how many wheelbarrows of Deutschmarks does it take to buy one order of sushi?

 

 

Mar 28, 2013 1:46AM
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How to play?
NEVER GET IN IT!
This Jubak is a Know Nothing.
Why would he know anything about Japan.
This soon to be short lived rally which began months ago is already puttering.
I

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