March continued the trend from the start of the year with the Nikkei 225 making yet another record intramonth high above the technically profound (but fundamentally meaningless) 40,000 handle while the result of the BOJ, the final central bank to end negative interest rates, completing this long-term economic experiment ended with a dud and actually weakened the yen above the 150 level; if there was ever a future event that was widely disseminated to the market well in advance, this was it. Now, with US rate cut expectations falling, the currency keeps flirting with the 152 yen while the powers-that-be keep talking up intervention which is probably why the currency volatility has fallen so dramatically in the last several weeks. It’ll be fun to see if anyone has the courage to push it above 152 (though this would not be good for us in the short-term if it sticks). Interestingly, the sectors that drove markets were more commodity-oriented such as oil, mining, paper, and nonferrous metals, as well as financials (banks, insurance, brokers) and real estate. In terms of factors, the trend over the quarter hasn’t changed much with 12M momentum, low PER, high beta, low PBR, and 1M momentum drove March index returns (for the quarter, it was 12M momentum, large caps, low PER, high EPS growth, and high beta that were the drivers).
 
As the fiscal year closed, we anxiously await Mar quarter results and, more importantly, next fiscal year’s guidance that should start coming out in about 3 weeks (although the majority of earnings will be released in May). As mentioned, the companies that we have been seeing (and I would note that we visit more companies that are not in our portfolio or in our industries) continue their highly cautious tone with most management teams expecting continued softness in the next quarter or two (excluding currency effects which are still favorable for exporters from a YoY perspective) with an economic recovery in the back half (meaning Oct~next Mar), although they provide little visibility or insight as to why that may be except that everyone else is saying the same thing (which might make it so).
 
We, of course, have no insight ourselves but we would expect that the currency to be, at best flat for the rest of the year, and more likely a headwind as the US starts cutting rates (eventually). Container shipping costs have fallen from their recent highs but still over 50% higher than the same time last year. Our once-a-year spring wage negotiations are in full swing and so far looks to exceed the 5% target that the Keidanren (Japan Business Federation), the Japanese Trade Union Organization, and the government has been pitching, which should finally turn around the 23rd consecutive month of negative real wage growth (the longest negative streak since data became available in 1991). However, whether that translates into improved consumption remains to be seen. While we greatly look forward to sustained inflation, as I’ve mentioned in the past, the short-term will be bumpy as corporate profits will have to absorb this increase. Our discussions with companies so far suggest further price hikes will likely prove to be more difficult than last year. And one other bit of trivia that I often provide in recent monthlies: unusually, foreigners were not the primary net buyer of Japan in March unlike Jan and Feb. It was, interestingly, retail investors that were buying (and who were net sellers of Japanese stock in the previous two months).
 
Now I don’t know what all that means except to say that we continue to be confused between the stock market optimism and corporate negativity. As such, our cautious stance will remain as is until we hear otherwise from the ground up.

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Masaki Gotoh

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“That phone call I got, it came from outside high walls and fancy gates; it comes from a place you know about maybe from the movies. But I come from out there, and everyone out there knows, everybody lies; cops lie, newspapers lie, parents lie. The one thing you can count on – word on the street … yeah, that’s solid.” – Charlie Barret played by Christopher Walken in Suicide Kings.
 
My older son, having turned 11 and in the 5th grade, wants his own room. Right now, my boys sleep in the master bedroom with their mom while I sleep in our tiny guest room. All of their clothes are also in the master bedroom while their toys, books, and desk for homework (which is being used more as a bookshelf than a desk) are in the living room. This layout is fairly normal in Japan (or at least in Tokyo) where space is tight. But, of course, as children get older, they want more privacy and it appears he is at that age. While it depends on which survey one reads (and, of course, most such surveys are done by furniture stores that probably have a slightly biased view), it appears that the latter elementary school years (4th~6th) is most common for children to get their own room.
 
While we should have anticipated this day would come eventually, admittedly, my wife and I have been too lazy to think about it. So we’ve been using the second bedroom as a place to put random stuff (including most of my clothes, seasonal clothing, a freezer, and a wine cellar). So, first, we need to make room in the master bedroom to move some of that over from what will be Leo's room. But I won’t be able to move everything so we have to clean the basement too to park some of the other items.
 
Now that is where things get tricky. The basement used to be spacious. But after 15 years, it has become a jungle, particularly as I am not very good at throwing things away. I still have my textbooks from Kellogg somewhere down there as well as my daily organizer (remember those?) from my time during Cornell and Hitachi and even my synthesizer and saxophone from my junior high school days. But, in addition to what was already there, we’ve accumulated quite a bit of random stuff like new suitcases (while keeping our old ones), a few sets of golf clubs (when I used to play golf), and old electronics like TVs, speakers, and PCs and peripherals (most of which probably don’t work anymore). And, on top of that, I still buy lots of books and DVDs (I only buy used DVDs that they sell for $1 now … though the space needed for a used $1 DVD and a new $25 Blu-ray disc is the same).
 
So my home project before my son finishes the 6th grade (which would be next summer) is to clean the master bedroom and basement to empty our second bedroom for my son. In all honesty, I could probably finish this summer but, I admit, I’m procrastinating. Just thinking about this project makes me want to leave the house and sit in the comfort of our very clean and organized office.
 
But I try to spend a few hours every weekend on this new chore. And, inevitably, I end up finding an old book to reread or an old DVD to rewatch. Suicide Kings was one of them. I think I mentioned the movie in one of my previous monthlies about great supporting actors who also do leads in good films but are often less well-known. Christopher Walken and Suicide Kings would fall under that category (at least in my view … though the movie only gets a 6.9 on IMDB). It’s about a gangster (played, of course, by Mr. Walken) who gets kidnapped by a group of preppy college kids as one of their sisters was, herself, kidnapped and they needed the help of the gangster. Yes, it’s a ridiculous plot line. But the acting was fantastic. Christopher Walken made a masterful performance despite the fact that he’s tied up in a chair for most of the movie, as did his side kick played by Denis Leary, another great actor.
 
Anyway, the quote above is one of many great quotes from the movie and one that stuck with me, even before rewatching the DVD for the umpteenth time. Now I don’t come from “out there” and grew up in a very average, lower-middle class family. But I don’t think you have to come from “out there” to understand the quote. Think back to school life where there were a lot of unwritten rules and unspoken knowledge that just got around. This is also very true in our adult life in Japan, both business and society as a whole. There are things that are just not spoken of in public and needs to be inferred or implied. Some people are good at “sensing” them while others may be oblivious. I often differentiate between people who are street-smart and people who are book-smart, and I’ve always had a very strong admiration for the former (and probably do not give enough credit to the latter). When it comes to what we do, I’d argue that the former is more important than the latter.
                            
I learned that on my first day interviewing for a summer intern job in Equities at Goldman Sachs in 1997. I quickly saw a difference between my Goldman Sachs Equities interviews vs my Morgan Stanley Fixed Income interviews vs my McKinsey and BCG interviews. The questions, the people, and the interview content were all very different (partifcularly at Goldman Sachs when it was still an unlisted partnership – I suspect it might not be as unique as it used to be). Most notably, the sheer volume of interviews was an order of magnitude larger at Goldman. When I later became an interviewer myself at Goldman, I understood why. We were looking for the right “fit”, not the smartest person, and so you need more people to feel them out and see if they were street-smart and a good cultural fit. It’s pretty easy to figure out if someone is book-smart, but much harder to assess street-smartness. And so I was immediately drawn to Goldman.
 
And I think, on the buy side in Japan (with a fundamental-based strategy), this becomes immensely important, particularly, as discussed in a recent monthly, because the Japanese are hardly known for their clarity. Asking the right questions in the right tone of voice with the right body language will get you a vague answer which one must read. You might have to ask it again from a different direction in a different tone of voice with differing body language. And then, you speak to their comps or industry peers or companies in the supply chain or their customers and you continually triangulate. This is true when speaking with sell-side analysts too. Just because they have a BUY doesn’t mean they actually think you should buy the stock today at this price. Each firm has its own set of rules on how they are told to set ratings and the analyst needs to provide a view within those parameters (which themselves change when there is a change in senior management within Equities Research). So it’s usually better to speak to them rather than just read their research. At the minimum, one should read all of the notes from the analysts covering that company to get a feel for what the street is thinking.
 
In Japan, there aren’t enough sell-side analyst figures to get real “whisper” numbers. But that doesn’t mean it doesn’t exist. It’s not unusual to see a stock move in the opposite direction of the fundamentals after earnings release (and before the company provides their presentation of the results), even for companies with little or no coverage. So someone or a group of people had a number that they were expecting which deviated enough from the actual results to cause them to push the stock in the opposite direction of the people who didn’t have that number (or at least not enough impact to make the stock move in the other direction).
 
This is all part of the “word on the street”. Now, of course, we don’t try to preempt such moves. That is not our strategy. But with the word on the street in hand, we might be able to move faster after the stock moves. Normally, we’d probably wait to see the company (and we would also need to consider when to see them whether immediately after results or later after they, too, had met with a variety of buy side analysts). But if we had the word of the street, we might be able to understand the rationale behind why the stock did what it did despite what was announced and, if we feel that view is too short-term or not a structural issue, the move would be an opportunity so we could buy or sell a little before the meeting (and we’d always leave room to buy/sell even more after the meeting, of course). While we are long-term fundamental investors, we watch the stock very carefully, whether it be our companies, comps, suppliers, customers, or the market as a whole to understand the word on the street. I think this part of our job often gets neglected, allowing one to hide behind the “long-term” concept. I’m sure some long-term fundamental investors probably think this is a waste of time. But more information is always better than less and, if for no other reason than to make small talk at the next meeting with the company or its peers, I believe it is a very important part of the monitoring process.
 
I suppose that’s also why I write these monthlies, even if we did little to no trading (which is usually the case). It is because I am also trying to understand, every day, the word on the street to help us be better, knowledgeable investors. Alas, it is a never-ending, stressful game, but also a thrilling one that one never tires of.

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