Green shoots
Illustration: Adam Fitzcharles

After the roller coaster

The recent rally amidst the recession has eroded value and the yen is no help.

The Nikkei, like many other benchmark indices, is hardly the volatile, motion sickness inducing headline producer that it was of months past. But no matter how hard I’ve tried, I just haven’t been able to turn myself into a green shoots market cheerleader. Nevertheless, I may be willing to concede that downside risk (in terms of a trading level) has lessened, although common sense would now suggest that significant further near-term upside is likely limited, too.

Now, on to the Nikkei 225’s valuation readings as of the end of May compared to a year ago’s levels.

* P/E ttm 05/08: 16.7 vs. 05/09: negative

* F/P/E 05/08: 17.1 vs. 05/09: 40.5

* PBV (book) 05/08: 1.68 vs 05/09: 1.24

* Dividend yield ttm 05/08: 1.4 percent vs. 05/09: 1.9 percent

* Dividend yield expected 05/08: 1.5 percent vs. 05/09: 1.6 percent

In case you’re wondering, the readings for Topix-1 suggest more “value” as the forward PE is at 35x, book value is 1.15x and the expected dividend yield is 1.8%. The benchmark 10-year JGB last had a yield of 1.49 percent.

If you are bullish, you would argue that Japanese stocks are still undervalued and you could even claim the bullishness of the old dividend yield indicator (vs. the JGB). On the other hand, the deep value of the N225 trading for less than book and with a dividend yield a full 100 basis points over the ten-year are history since the rally from the March bottom.

The yen is interesting at 95 per $1 because it’s near its reported break-even value for exporters, even though it’s 10 percent stronger than a year ago. While cost-cutting has clearly been helpful, the big boosts from forex profits are gone for now. Finally, Steel Partners continues to win ground against Aderans (JP: 8170), but the stock price is moving in the wrong direction. Who knows, maybe Warren will prove everyone wrong. I hope so. Meanwhile, it really is a comical game that most AIMs play in Japan.

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