Kass: My 'Fast Money' Recap

This blog post originally appeared on RealMoney Silver on May 20 at 8:13 a.m. EDT.

It was another fun segment on "Fast Money" last night with Melissa and the gang.

The subject was my renewed affinity surrounding the Japanese stock market.

But, first, a housekeeping item.

Melissa seemed to be of the view that I had been long Japan since late 2010, which is not the case at all (even though I was confused as well!). Factually, my interest in the land of the rising sun was first disclosed on May 2, 2011, after receiving an interesting email from Barton Biggs. In that column, I outlined why I began buying the Japanese market on that day. One of the main catalysts was the investment ramifications of the March 11 earthquake and the resulting nuclear accident. I am not underwater on my investment in Japan; I currently have a small gain (which was larger a week ago!).

I am sure that Mel will correct her impression on my next appearance in a week or so!

My presentation started with a haiku, which, in Japanese poetry, describes the combination of content, form and language into a compact and meaningful manner.

I began by saying that the Japanese stock market is boring, frustrating and painful but, in the fullness of time, could make investors rich.

Bottoms are made on very bad news, and tops are made on good news. In my view, the news in Japan is not likely to get worse.

In terms of an actionable idea, I am long the iShares MSCI Japan Index Fund ( EWJ) and investment bank Nomura Holdings ( NMR). The latter is an interesting speculation priced below $5 a share. (Nomura shares sold at $22 in April 2007, at over $9 a share in 2009 and over $8 a share in early 2010.) The investment bank stands to profit if the Japanese rebuild is as strong as I document.

I first showed a chart of the Nikkei.

In looking at this chart, it is clear that the Japanese stock market has experienced one of the most drawn out and pronounced secular bear markets in history. One can argue that no country in modern history has moved so swiftly from worldwide adulation to total dismissal, or even contempt, as did Japan.

The tipping point was 1990. In the 15 years that followed, amid crashing stock and property markets and mountains of debt, scores of corruption scandals, vast government deficits and stagnating growth, Japan mutated from being a giver of lessons to a recipient of lectures (which were all but ignored by the politicians).

It's hard to say that Japan isn't now cheap on a valuation basis -- the market sells at book value and at half of sales. In fact, one can make the case on valuation alone that the Nikkei is as cheap as the U.S. market was at its generational low in March 2009.

There is both a mystical and fundamental side to the bull case for Japan.

There is the mythology in Japan that the major earthquakes that have haunted the country have presaged major cultural and social changes:
  • The 1855 Tokyo earthquake marked the beginning of the end of 200 years of isolation; it was followed by a Japan that was more industrial and open to the world.
  • The 1923 quake signaled a new age of aggressive militarism and an obsession with Asian conquest that culminated in World War ll.
  • The Kobe earthquake of 1995 is thought by many to have signaled the end of the postwar industrial boom and marked the beginning of recession and deflation.
So, though possibly far-fetched, it is conceivable that the effects of the earthquake are analogous to creative destruction and could kick-start the lethargic Japanese economy and end the long period of stagnation.

The earthquake damage and the nuclear crisis led to an enormous supply shock. Electric power was rationed and ruined production facilities were shut down at a time during which Japanese companies had been paying down debt, but now companies are going to have to borrow money to rebuild. This could activate loan demand, and production shortages should narrow the output gap and maybe even trigger modest inflation.

Here are seven fundamental reasons for my optimism on investing in Japan:
  1. Expectations are low or nonexistent for the Japanese economy to turn around. Economic dislocations caused by the earthquake have threatened near-term GDP forecasts, but I reminded viewers that the U.S. stock market's generational low was achieved under similar economic uncertainty. Moreover, there is widespread optimism that the worldwide recovery will be smooth and self-sustaining -- as such, it could facilitate a meaningful improvement in Japanese exports.
  2. Since the devastating earthquake and tsunami on March 11, the Japanese market is down by about 7% while the Morgan Stanley World Index is up smartly.
  3. The condition of the Fukushima Daiichi nuclear power plant has been stabilized.
  4. The electrical supply outlook has improved. According to Goldman Sachs, Tokyo Electric Power Company's electricity output by this summer should not force large-lot users to restrict electricity usage.
  5. The Japanese government appears to be implementing fiscal stimulus that is reasonable in scale and timely in policy. The Kan administration has submitted a first fiscal-year 2011 supplementary budget, and a second supplementary budget is expected by the end of June.
  6. Japan's monetary policy is market-friendly/economic-friendly. Base money growth has surged since the March nuclear accident. In mid-March, the Bank of Japan increased its asset purchase program, and in early April, the Bank of Japan announced a new loan program geared toward assisting financial institutions in their response to the likely increase in reconstruction funding demand.
  7. Finally, the post-recovery future for Japan will hopefully accelerate reforms (e.g., free trade agreements). It might also lead to accelerated production diversification (and more M&A activity) and rising demand for alternative energy technologies.
Let's go to the tape!

Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

At the time of publication, Kass and/or his funds were long EWJ, NMR and GS, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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