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Japanese Stocks Swing to a Foreign Beat

Japanese stocks are possessed. At least it feels that way given their wild swings.

Traders in New York and London rub their eyes when they awake to see big moves overnight in Japan. The 4.2% drop last Tuesday in the benchmark Nikkei Stock Average was hardly unique. It has fallen or risen 3% or more in a day 16 times in the past year. The S&P 500, by contrast, hasn't moved that much once during that time.

That is the kind of drama that investors expect from Turkey, not the fourth-largest exchange by market capitalization in the world.

Japan has a stable government, a deep pool of institutional investors, free flow of capital and transparency. This is a formula for a liquid market that plunges only on remarkable occasions.

Yet the Japanese market's 30-day volatility, as measured by Thomson Reuters, is on par with emerging-market hotbeds Argentina and Thailand.

So what is behind all this to-ing and fro-ing? Blame a messy mix of feedback loops.

Japanese are a minority in their own market now, with overseas money accounting for nearly 60% of trades on the Tokyo Stock Exchange in January. A decade ago it was 35%.

That larger share of foreign investors may reflect that in 2013 Japan was among the best-performing stock exchanges globally, at least among developed markets. The Nikkei was up 57%, beating the S&P 500's 30% gain.

The catch is that for foreigners to take advantage of rising Japanese stocks, they have to short, or bet against, the yen. This is to prevent currency moves from erasing gains. Japan's biggest companies are exporters and book gains on foreign earnings when the yen falls. When it rises, the opposite occurs.

Tweak the yen, and stocks follow. Last week, fears that the U.S. recovery was losing steam sent U.S. bond yields lower. That reduced the difference, or spread, between Japanese and U.S. bonds. A narrower spread means that there is less incentive to hold dollars, so the yen rises.

Computer-programmed trading systems sense the yen rising and sell Japanese stocks, while also unwinding short yen trades. The cycle continues. Moreover, the increasing popularity of exchange-traded funds—especially among foreign investors desiring a quick, cost-effective way to dip into and out of foreign markets—likely exacerbates volatility.

The Bank of Japan and its monetary-easing program hangs over all this. More easing later this year, which many expect, should mean a weaker yen. That draws in more foreign investors, who made a ton betting on monetary easing in the U.S. and recognize a similar liquidity-driven opportunity. Similar to the U.S. in recent years, investors are tending to move together in a risk-on, risk-off fashion.

When will all this end? Getting Japanese pension, insurance and individual investors back into stocks would smooth the rough edges. They don't have yen trades to unwind. Seeing Japanese take more risks with their savings also would be proof that "Abenomics" really is working.

Until then, volatility rules.

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Sony Suffering Seen as Prelude to Loeb-Inspired Revamp: Real M&A 2014-02-09 20:10:39.169 GMT

(For a Real M&A column news alert: SALT REALMNA <GO>.)

By Brooke Sutherland, Tara Lachapelle and Cliff Edwards Feb. 10 (Bloomberg) -- Sony Corp.’s latest earnings disappointment held a silver lining: the company’s willingness to entertain some of activist investor Daniel Loeb’s suggestions. And it may be just the beginning. The Tokyo-based company forecast a $1.1 billion annual loss as it sells the personal-computer business and splits the TV- manufacturing division into a separate unit that it may divest eventually. While falling short of Loeb’s calls for a bigger breakup, the moves sparked an 11 percent jump in the shares last week, and followed a pledge to provide more transparency in Sony’s financial statements. “This goes a long way towards what Dan Loeb was talking about,” Lawrence Haverty, a fund manager at Gamco Investors Inc. in Rye, New York, said in a phone interview. Gamco oversees $47 billion and owns Sony shares. “I like the idea of first things first and one step at a time. There’s an awful lot of really encouraging stuff that’s happening.” More changes are needed at the $17 billion company, said Hudson Square Research Inc., which suggests spinning off a portion of Sony Entertainment, the unit that encompasses film and music, as Loeb suggested last May. Or Sony could follow the lead of rival Panasonic Corp. and continue to sell off pieces of its electronics business, said Jefferies Group LLC. Sony’s insurance and banking unit, which contributed the most operating income in the year ended March 2013, also could be split off as a separate company, Gamco’s Haverty said. John Dolak, a spokesman for Sony in the U.S., didn’t respond to a phone call or e-mail requesting comment. A representative for Sony in Japan didn’t respond to an e-mail sent after normal business hours.

Loeb Push

Loeb, who heads hedge fund Third Point LLC, urged Sony in May to sell as much as 20 percent of its entertainment division in an initial public offering so that the company could focus on turning around the struggling electronics business. At the time, shareholders had lost more than $100 billion in market value since 2000, according to data compiled by Bloomberg. After Sony Chief Executive Officer Kazuo Hirai and the board rejected the proposal in August, the activist investor said he was “disappointed” with the decision and intended to “explore further options to create value for Sony shareholders.” Last month, Third Point called for a “serious effort to restructure the PC and TV businesses,” according to a letter sent to the hedge fund’s investors. Third Point declined to comment last week.

Right Direction

Sony announced Feb. 6 that it’s selling the Vaio computer business to buyout firm Japan Industrial Partners Inc. and splitting its TV manufacturing unit into a separate operating entity. CEO Hirai also said he hasn’t ruled out a divestiture of the TV division in the future after receiving “various offers.” The company’s shares had their the biggest three-day gain in more than eight months on news of the sale. Before the rise, Sony had dropped 18 percent since Loeb first pushed for changes. Separating “the TV segment and selling the PC business are steps in the right direction to unlock value,” Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees about $17 billion, wrote in an e-mail. Sony has more to do and should reconsider Loeb’s advice on the entertainment spinoff, according to Daniel Ernst, a New York-based analyst at Hudson Square. The unit makes the “Spider-Man” movies and represents music artists such as Miley Cyrus.

Undervalued Shares

Sony is cheaper than most of its peers. Last week, it was valued at a 28 percent discount to its net assets. Consumer electronics makers with market values exceeding $1 billion have a median price-book ratio of 1.7, data compiled by Bloomberg show. “The shares are quite undervalued,” Albert Saporta, the head of research at Makor Capital Ltd. and a managing director at AIM&R, said in a phone interview. ‘We’re pretty much on the same wavelength as Daniel Loeb.’’ Based on the sum of its parts, Sony should be valued at least 50 percent more than last week, Haverty of Gamco said. That implies about $25 per American depositary receipt, or about 2,500 yen a share. The stock closed at 1,691 yen last week. Sony could consider spinning off its financial services unit, which is consistently profitable and could exist on its own, Haverty said. The company sold shares in the division in 2007 and currently retains a majority stake in the unit, which has a market value of about $7 billion.

Electronics Exit?

Others think Sony’s focus should instead be on selling more assets in its consumer electronics division. Competitor Panasonic has jumped about 57 percent in the last 12 months in part because of shrinking its TV and handset business, and Sony should take note, according to Atul Goyal of Jefferies. “For them, salvation is an exit from electronics,” Goyal said in an interview last week with Bloomberg Television. “If there’s any buyer whatsoever in the electronics business -- and there might still be some today for TV and others -- get out now.” Besides TV’s, Sony makes products including digital cameras, headphones, MP3 players and speakers. While Haverty said he would be happy to see Sony break up, he’s optimistic about the prospects for the TV business, which he said is showing the most promise among Sony’s electronics products. Sony may make a comeback in the next 18 months as the company introduces ultra high definition TV sets that cost as much as $25,000 to meet consumer demand, he said. 

‘New Cycle’

“The consumer electronics business, I don’t really want to be an owner of that,” Haverty said. “But within electronics, investors have a shot at making money on the television business. It has a shot of working because we’re going into this new cycle.” It’s difficult for Japanese companies to make drastic changes, said Masahiko Fukasawa, co-Japan representative and managing director at AlixPartners LLP. “Discussions over strategy at Japanese companies are veiled in a haze,” Fukasawa said. “It’s hard for them to make a decision to dispose of a business that is sometimes profitable and sometimes not. In our view, it’s a waste of resources trying to sustain a business with little expectation for growth.” While Sony’s management may not think seriously about a transformation unless performance suffers even more, the moves announced last week signal at least somewhat of a shift in the company’s attitude toward the consumer electronics business, according to Goyal of Jefferies. “These are the first baby steps in the right direction,” the analyst said. “If they continue, that’s a good sign.”

For Related News and Information: Sony Forecasts $1.1 Billion Loss as Hirai Misses TV Profit Goal NSN N0LJ2B6KLVRK <GO> Sony Rejects Loeb Push to Sell Part of Entertainment Unit NSN MR3FS70D9L35 <GO> Sony’s $100 Billion Lost Decade Supports Loeb Breakup: Real M&A NSN MMVU6A6KLVRN <GO> Loeb Pushes for Sony Breakup With Entertainment IPO Proposal NSN MMT2F06S972K <GO> Sony deal news: 6758 JT <equity> TCNI MNA <GO> Real M&A columns: NI REALMNA <GO> Top deal news: DTOP <GO>

--With assistance from Mariko Yasu in Tokyo and Beth Jinks in New York. Editors: Beth Williams, Sarah Rabil

To contact the reporters on this story: Brooke Sutherland in New York at +1-212-617-0448 or bsutherland7@bloomberg.net; Tara Lachapelle in New York at +1-212-617-8911 or tlachapelle@bloomberg.net; Cliff Edwards in San Francisco at +1-415-617-7074 or cedwards28@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at +1-212-617-5992 or srabil@bloomberg.net; Anthony Palazzo at +1-323-782-4228 or apalazzo@bloomberg.net

Pacific trade winds stall global warming

Researchers have cast new light on one of the most baffling riddles in climate science: why has global warming stalled when emissions of the greenhouse gases blamed for climate change have kept soaring? The explanation lies in an unprecedented strengthening of Pacific trade winds over the past 20 years, according to a study by US and Australian scientists. These easterly winds, which blow across the tropics, have speeded up ocean circulation at the equator, pushing heat deep down into the ocean’s depths and bringing cooler water up to the surface. This has driven more cooling in other regions and accounts for much of the reason why global average air surface temperatures have stayed virtually steady since 2001, says the paper, published in this week’s Nature Climate Change journal. This pause could persist for much of the present decade if the strong trade winds continue, but the paper warns that once they slow down "rapid warming is expected to resume". "Scientists have long suspected that extra ocean heat uptake has slowed the rise of global average temperatures, but the mechanism behind the hiatus remained unclear," said the study’s lead author, Professor Matthew England of the Australian Research Council’s Centre of Excellence for Climate System Science. The implications of the research were of concern, he added. "We should be very clear: the current hiatus offers no comfort. We are just seeing another pause in warming before the next inevitable rise in global temperatures." The stalling in air temperature rises, which follows a steady trend of warming through much of the 20th century, has led some to question whether climate change is a serious problem, or whether it exists at all. The proportion of Americans who do not believe global warming is happening rose 7 percentage points to 23 per cent between April and November last year, according to a recent US study. While nearly two-thirds do believe climate change is occurring, the number who think humans are causing it has fallen slightly since 2012. However, some climate scientists say the findings on the role of Pacific trade winds, which build on previous studies pointing to the oceans’ role in absorbing heat, suggest the change is linked to human activity. "These changes are temporarily masking the effects of man-made global warming," said Professor Richard Allan, professor of climate science at the University of Reading in the UK. "It is likely that the current slowdown is only a temporary reprieve from rapid increases in global temperatures," he said, adding that it would be surprising if big changes in atmospheric and ocean circulation over the past 20 years had not already disrupted weather patterns. The past two years have been marked by a series of unusual weather extremes. Australia recorded its hottest year on record in 2013, while the continental US had its warmest year in 2012. In the UK, where large parts of England have just had their wettest January in more than a century and the country’s south has been hit by serious flooding and coastal damage, Met Office scientists said it was still not possible to say definitively that climate change was to blame. "Nevertheless, recent studies have suggested an increase in the intensity of Atlantic storms that take a more southerly track, typical of this winter’s extreme weather," the scientists say. "There is also an increasing body of evidence that shows that extreme daily rainfall rates are becoming more intense, and that the rate of increase is consistent with what is expected from the fundamental physics of a warming world."

Apple Can't Buy Back Confidence

As much as it is, $40 billion doesn't always buy your way out of a jam.

Apple AAPL +1.40% has been on a buyback tear, repurchasing $40 billion of its own shares over the last 12 months. About $14 billion alone came the last two weeks. That is since the company's fiscal first-quarter results disappointed and the stock fell 8% in one day.

While part of an existing $60 billion buyback plan, chief Tim Cook painted the move during an interview with the Wall Street Journal last week as an investment in Apple, effectively saying the stock is undervalued. With Apple's shares currently trading at less than eight times forward earnings—excluding its $159 billion cash hoard—the valuation is certainly undemanding.

But buybacks aren't making the best use of Apple's resources, even if they helped Apple in its most recent period deliver its first quarter of earnings-per-share growth after four straight declines.

If anything, they make the company appear reactive.

Activist Carl Icahn has been pushing for $50 billion more in buybacks. However, share repurchases haven't been a major driver of Apple's share price. The stock is still more than 10% below its level of March 19, 2012, when the company announced its first dividend and buyback.

Little wonder, since the return on Apple's stock purchases isn't great. Looking at the $14 billion of stock the company bought back on the open market in the last three quarters of 2013, the return to date, excluding dividends, is less than 8%.

Granted, not much time has elapsed. Yet with Apple's actual business generating an average return on invested capital of 28.6% in fiscal 2013, according to FactSet, the company's efforts at financial engineering pale in comparison.

Having spent nearly $4.8 billion on research and development in the last calendar year, Apple clearly has new products in the hopper. Those are what will drive higher returns, not a campaign to appease Mr. Icahn.