July was trending as a fairly dull month with the Nikkei 225 and the broader Topix indices barely moving more than +/-1% each day and cumulative -1.8%/-0.6% respectively until July 23 when the US and Japan struck a deal. The reciprocal tariffs would be reduced from 25% to 15% including that for the all-important auto sector, and included a $550 billion investment into the US, although details on the latter appear hazy with the White House saying 90% of profits will remain in the US while the Japanese government claims the bulk of investments (over 90%) will be in the form of debt or other loans (probably both would then be correct?). Until very recently, there were still questions whether the reciprocal tariffs would be on top of other levies or whether it replaces other levies. For now, it appears it is the latter (excluding sectoral tariffs) but the timing as to when the US chooses to correct the tariff is uncertain; as of today, Japan is still subject to the higher rate. Other details are similarly at odds such as the rice to be imported will be for staple use only, thus protecting Japanese farmers, or that Japan will be importing the huge Ford F-150s … anyone who has walked the streets of Tokyo (or most other cities, urban or rural) would know that US pickup trucks simply won’t fit so I’m not sure if lowering any barriers would help Ford’s revenues.

Nevertheless, the uncertainty has definitely diminished causing markets to rip with the indices making new all-time highs in August. Furthermore, growth stocks have made a huge comeback, marking their widest outperformance against value since Jun 2020.

​

Within that backdrop, we have entered June quarter earnings season and, again, it has been incredibly volatile. I would remind investors that the June quarter is probably the least fundamentally important. It is only 3 months in the new fiscal year and 2 months since the annual AGM, probably the most stressful event of the year for senior management (regardless of any activist campaigns). Additionally, there are other seasonal factors such as new grads entering the workforce, quiet summer business activity, slow public works (which tend to be concentrated in the March quarter), and too early for year end inventory build. This year, we also had the tariff uncertainties and several firms opting to delay their full year guidance (or, if they did, they did so without including the effect of potential tariffs, direct or indirect).

​

In essence, this quarter doesn’t really matter all that much. And yet volumes were nearly as high as April when Liberation Day was announced, in comparison to most years where July is the second quietest month of the year after September. And, from the stocks that we’ve observed, post-earnings stock volatility felt much higher than normal. Now whether this is because of the additional uncertainties or not, I do not know. But it also feels oddly synthetic. For example, one name we have been watching closely announced their quarterly results intraday at 14:00. They reported sales of -1.3% YoY, operating profit of -7.2% YoY, and EPS of -24.4%. Bloomberg flashes “[The Company] Maintains FY Operating Income Forecast, Misses Estimates”. This, by the way, is a meaningless comment. Among the 16 sell-side analysts that cover this company, there are only 5 that provide quarterly estimates which, for Japan, is relatively high but still pretty small. Additionally, at 14:01, Bloomberg’s AI highlights that “Demand To Be Weighted To H1 Partly On Tariffs” and the presentation actually does say that.

​

But clearly, someone else’s AI parser figured it out faster because during the second between 14:00:00 and 14:00:01, the stock fell -3.0%. It proceeded to make an intraday low at 14:03:40 by falling an additional -4%. It closed an hour and a half later at -5% from the intraday high made at 14:00:00 and -3% close-to-close.

​

Not having a machine that can scrape the presentation, I hadn’t even downloaded it until about 14:30 or so; I was probably out getting coffee or going to the bathroom or some other inefficient human task. But when I did, my immediate impression was that it looked fairly decent, knowing that there was an FX hurdle. Sure enough, the presentation does say that, ex FX, sales were up +4.7% and OP +12.0%. Moreoever, it had accelerated QoQ. Book-to-bill was above 1.0, utilizations were rising, and inventories were low. Given the macro uncertainties, the company would obviously maintain full year estimates, but since Q1 was likely ahead of forecasts, they’d have to say something that would justify maintaining those forecasts and tariffs would be an obvious reason. But if you were to read between the lines of every other slide in the presentation, there was absolutely nothing to indicate caution, and it was almost entirely positive.

​

Now, in Japan, that’s rather unusual and most firms almost always provide reasons as to why their forecasts are not conservative. And there were some comments that one could latch on to if one were negative on the stock such as “Profits decreased year-on-year due partly to price decline …” However, this is a tech component company whose products ALWAYS decline year-on-year. It’s a matter of pace and mix and they already showed that FX was the primary reason for the profit decline. Or that, for one of there segments, revenue decreased across all subsegments. However, this segment accounts for 0% of profits (in fact, it is loss-making and they have been restructuring it from last year which is why revenues should be down).

​

Taking all of this into consideration as well as the fact that the stock was at 5-year lows, I was surprised that the stock had fallen intraday. I thought that I must’ve missed something. But I hadn’t. The next day, the stock closed +5% and by the end of last week, had closed nearly +12% since the Q1 earnings announcement.

​

Admittedly, this is an extreme case. But I observed many similar cases where the stock fell intraday or even the following day, only to make up part or all of it by the following day or two. Now this could still be too short term, and, by the end of August or the quarter, the stocks may drift toward the direction of the initial reaction. But what is notable is the speed and magnitude of the price action. I do not know for a fact if it’s the quants/AI funds that is causing this volatility, though I doubt that a human could manually download the files and read through it in less than one second, much less react to it. And I suspect some quants models react to the price action rather than the content (which may be why the stock, in the example above, fell another -4% in the 3 minutes and 39 seconds after the 1st second reaction). But if it is AI, I guess my newfound faith in AI could still use some work.

​

Masaki Gotoh​​

​

===

​​

“Thinking is the hardest work there is, which is probably the reason why so few engage in it.” – Henry Ford, founder of Ford Motor Company.

 

Once or twice a year, I get to break out my tuxedo to attend a ceremony by the L’Ordre Des Coteaux De Champagne which, in Japan, they call the Order of the Knights of Champagne. Apparently, it started about 300 years ago and has about 5,000 Knights and Lady-Knights globally with titles such as Chevalier, Officier, Chambellan, and Consul. Their aim is to “contribute to the promotion of Champagne wines”.
 
Due to the limited opportunities to gain entrance requiring a recommendation from a Champagne Maison, the Japanese Order began a new program called the Ecuyers program in 2023 which apparently marks the 300th anniversary since Champagne was introduced to the Palais de Versailles. With an official sponsorship from an existing Knight, attendance of a course on Champagne, and a graduation dissertation, one can join the Order via this program. My wife joined in its first year in 2023 with the Bronze Ecuyers followed by Silver last year. This year, she was promoted to the Gold Program and therefore, we again attended the Chapitre des Ecuyers where new members of the 3 classes are ordained, followed by a gala dinner.
 
Not being nearly the connoisseur that my wife is, I admittedly am a little uncomfortable at these events. My only knowledge of what a fraternity is like is from movies, but if there is any truth to them, the ceremony felt like the initiation rites of fraternities and sororities. There was a sermon by someone who looked very prestigious, and the “pledges” seemed to make some sort of pact or allegiance (it was in French so I couldn’t understand; only one phrase I was able to catch that sounded like “only Champagne can be named Champagne”).
 
We proceeded to the foyer offering free-flowing Champagne, followed by a formal dinner in a grand ballroom where the 60 or so Ecuyers, maybe 10~20 Chevaliers (out of the several hundred in Japan), and their partners in addition to other distinguished guests were seated. Before each dish, they would introduce the next Champagne, donated by one of the Champagne houses, and everyone at my table would raise their glass into the chandelier, remark on its color, swirl and sniff it (with another set of educated remarks), take a sip and roll it around their tongue, and, of course, make another round of smart or witty commentary. I, not having the vocabulary, would take a swig and say it tasted swell, while fidgeting with my clip-on bowtie, not realizing that I can’t loosen it like a normal tie.
 
Not knowing anyone nor understanding its significance, I can’t say that I have a great time at these events. But all of the attendees take it very seriously and, admittedly, I am proud that my wife, who is a pharmacist by trade from a family where no one drinks alcohol, has been admitted to this prestigious Order and has developed an incredible network among the wine community, not just in Tokyo but other major cities in Japan. Also, it keeps me working hard as this is not a cheap hobby … thankfully, I don’t have any hobbies except reading, watching movies, and collecting Lego sets for my boys.
 
My ever-curious self began to wonder why the Order started this new program after so many centuries without it. I do know that, while there are several hundred Chevaliers in Japan, it is very difficult to gain Knighthood and requires connections in the industry given the prerequisite of a recommendation from a Champagne house, which almost necessities it being a wine distributor, importer, retailer, or a commercial buyer. And yet, I noticed that there were several in Japan who appeared to be just general wine connoisseurs such as sommeliers and influencers or regular people, like my wife, who are simply very big fans of Champagne. I just assumed that they were formerly in the trade and that the Order wanted a program to invite Champagne enthusiasts into their program, especially given that Japan is the 4th largest consumer of Champagne (after France, USA, and UK).
 
While that is true on face value, the real reason is, apparently, economics. Unlike the Comite Champagne (or the Champagne Committee), which is a trade association representing the 16,000 growers, 130 coops, and 370 Champagne houses, the Order is not a trade organization but a guild. The Committee enforces the standards of Champagne as defined by the Appelation d’Origine Controlee (AOC) including not only the production of Champagne but even the use of the brand (for example, apparently, it is an infringement to even use the word “champagne” as a color of non-alcoholic items which they aggressively enforce). In contrast, the Order is an organization that promotes the education, knowledge, and appreciation of Champagne. The Committee also promotes Champagne through programs such as the official Champagne Specialist designation that just started in Japan in 2024 which my wife quietly obtained as well; there appears to be some rivalry between the two organizations.
 
But because the Order is a guild, they are financed by the annual dues of its members. While it is very difficult to become a Chevalier now, it was apparently much easier in the past. The Japan Order opened in 2006 and, therefore, to attract new members, they allowed admission without the Champagne house recommendation and could be admitted with a recommendation from an existing Knight. Given the obsessive fascination by the Japanese regarding titles (another interesting topic for another time), some Knights would sponsor friends and family (and mistresses, according to my wife) in order to get that nice-looking pin and medal. However, the Order couldn’t enforce payment of annual dues. Many Knights would simply stop paying once they became a member in order to claim membership on their business card or their store or restaurant. Since there is no public roster of the Knights, there was no way to know. Besides, it’s just a guild, which is just a cool way of saying a fan club.
 
And, so, the Order leveraged their strong brand to create the Ecuyers Program who are true enthusiasts that would likely pay the annual dues to maintain the membership and the prestige of belonging to the Order; outside of bragging rights, there isn’t much practical benefit to being a Knight (or a Champagne Specialist or even an official Wine Sommelier of which there are over 40,000 in Japan and rumored to be the largest in the world). My wife is hoping that if she could highlight her enthusiasm, that she’d be knighted one day. And, so, we, at least, will continue to pay our dues.

Understanding the reason, to me, was very comforting. When one discovers the logical reason behind a phenomenon, there is a profound joy in that discovery. And sometimes, like in the case of investing, that enlightenment can be profitable.​​​

​