Market Overview

Japan Trading Theses

Share:

The large scale devastation and the loss of human lives caused by the tsunami are saddening, and we can only hope that the population unaccounted for after the event are merely those who lost communications, but are still alive. Our condolence goes to those who lost their loved ones and saw their properties destroyed. While the tsunami induced damages were bad enough, it is the potential nuclear catastrophe in Fukushima that really caused panic selling on Tuesday, first in Japan, then spread to the rest of Asia and spilled to Europe. It also caused quite some damages in the US indices early on, but aggressive dip buyers along with unwavering desire to print money by the Fed caused only minor damages with approximately -1% in the S&P 500 index.

When Japan's prime minister Naoto Kan said that this was the largest crisis Japan faced after World War II, he was not exaggerating. While most people tried to compare this event with the Kobe earthquake in 1995, there are many differences, not the least of it was that the world is stilling trying to recover from another tsunami, the financial tsunami, merely two and a half years ago. Nonetheless, three main trading theses had emerged since the tsunami struck, and they paralleled the trading strategies used after the Kobe quake.

Production Disruption

Scenes of burning automobiles to be exported piling on top of each other should give investors the clue that Japan's automotive industry is suffering. The tsunami also destroyed ports and factories, and this is giving Ford (NYSE: F) and General Motors (NYSE: GM) some boost when comparing with their Japanese competitors. Other than automobiles, semiconductor companies such as Micron Technology (NYSE: MU) is benefiting from the disruption in production of memory chips from Japanese manufacturers. It is still unknown how extensive and long lasting damages to the production facilities are, and this trading thesis should be holding up for at least the short term.

Rebuilding

There is no doubt that Japan will be spending a lot of money and effort to rebuild the damaged infrastructure, and this requires a lot of oil, steel, and various commodities. While oil has dipped as Japan's refinery plants were shut down, lowering temporary demand for now, unrest in the Middle East is far from over, with situation in Libya still dicey and foreign troops inside Bahrain added another layer of complexity. Coupled with the Fukushima nuclear crisis, which could take out a major energy source for Japan, it's hard not to expect oil prices to continue its strength.

For other commodities, the potential surge in demand should hold their prices up as well. Sans a collapse in China's demand, we can expect commodity prices remain strong. Also, besides raw material, the construction effort would require a lot of heavy equipment and infrastructure equipment, and thus companies like Caterpillar (NYSE: CAT) and Cummins (NYSE: CMI) should benefit from this.

Currency

Our last article on using USD/JPY to track interest rate was simply thrown out the door once the tsunami struck. Yen has now strengthened against US Dollar again with traders expecting strong repatriation of Yen to fund the rebuilding effort, like how it did after the Kobe quake. However, unlike last time, Yen has been strong already prior to the tsunami, and we don't think Yen can strengthen as much as 20% as it did last time. We also don't think the Yen strengthening can last as long either, as Japan will certainly maintain its loose monetary policy while US's QE2 might be ending soon.

Nonetheless, there's no telling whether the Fed might end QE2 on time, and whether it will initiate QE2.5 or QE3, as its whole monetary policy seems working diligently to debase USD to a point so the US can get out its debt liability painlessly. The bottom line is, with no QE3, Yen will certainly suffer in the longer term. With QE3, we can be assured that USD will tank not just with JPY, but with all major currencies as well.

Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.

Posted-In: Earthquake infrastructureNews Forex Events Global Economics Markets

 

Related Articles (CAT + CMI)

View Comments and Join the Discussion!
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com