I don’t want to sound like a broken record … but Wow! The Nikkei 225 was up a whopping +16.6% for the month, the second highest move since at least 1970 which is as far back I can get from Bloomberg. The broader Topix was up only (?) +6.2% so the N/T ratio was driven to a new all-time high in addition to our indices.

What that means is that the breadth was poor. In fact, I read a note from Goldman that if one were to sort the names in Topix by MTD returns and owned the median company, you would’ve been down for the month. In case you were curious, that stock is a recently listed company called Shimadaya that manufacturers frozen noodles (and, oddly enough, whose founder’s son started one of the leading Japanese PC parts manufacturer under the Buffalo brand). Shimadaya was down -1.5% (and Buffalo was down -3.1%). In fact, 1,018 of the 1,671 names in Topix were flat or down for the month and the top 42 names accounted for 100% of the attribution for the month. While the exporter-heavy Nikkei 225’s median name was up, the top 29 names accounted for all of the Nikkei’s rise (and the top 5 accounted for 80% of it). I remember back in early 2000, I think I wrote a note during my own Goldman days of how the +36% return of the index in 1999 was driven by 10 names or so. It feels eerily similar. Back then, it was the dot-com boom and, this time, AI. More on this below.

Against this backdrop, we underperformed this month in our flagship portfolio, primarily due to the fact that our top 2 positions are non-tech, domestic names (an office equipment wholesaler and a pharmaceutical company that, I would highlight, has zero US exposure). Our 3rd largest position, which is a tech stock, had very neutral earnings vs consensus and our forecasts. In this era, neutral is negative if you’re a tech stock. While that stock fell -8% after earnings release, it was still up +11% for the month and essentially fell back to where it was only 2 weeks prior. By the way, we didn’t build it to make it our 3rd largest position … it organically got there after we first invested on Liberation Day and have been adding a little on dips. We’ll probably continue to do so but I think I’d like to see a bigger dip before I add more.

Not surprisingly, stock reactions to earnings (and the market as a whole) have been very volatile. But the magnitudes have yet again been much larger than I had expected. I suppose with these lofty stock prices and valuations, it can’t be helped. But as we start to enter the final week of earnings, they tend to be more domestic and definitely less techy so maybe we begin to slow down a bit. I could definitely use a short breather!
 

​Masaki Gotoh​​

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“We’re going up, up, up, it’s our moment; You know together we’re glowing; Gonna be, gonna be golden!” – lyrics from the song Golden by the fictional K-pop group Huntr/x from the movie KPop Demon Hunters.

 

My younger son, Louis, has been grounded from playing games for nearly 2 months now. He’s generally a really good boy, very kind and considerate. He helps mom make breakfast, completes his homework diligently, and even brings up a blanket when someone is taking a nap on the sofa. He has a lot of friends and is very active, being on the swimming team, the school choir, the student council, attends lego school on Saturdays, and recently became a book bowler which surprised me the most because his reading and writing skills can use improvement. But when he starts playing games, everything changes. He’s loud, demanding, and simply doesn’t listen. His schoolwork becomes hurried and messy, doesn’t help around the house, and sometimes barks at his older brother, Leo, whenever something doesn’t go right, regardless of whether Leo was involved or not.

To be honest, I’ve forgotten why we grounded him. But, while it has been probably a bit stressful for him without his addictive games, we’ve had a very quiet, peaceful and overall happy 2 months. I know he occasionally plays games on Leo’s iPhone when we’re not looking. And I’ve allowed games on play dates and other occasions when he’s been particularly good. If I could, I’d like to keep him off the devices, but I know he’s looking forward to next Saturday when he gets his games back. And I know most of his friends play so I’m guessing he’s falling “behind” and he’ll want to catch up.

In place of the hour or so that he usually has during weekdays to play his games, my wife and I have tried to do other things with him such as playing board games, helping him make his Halloween costume (he dressed up as a lego brick), and watching movies together as a family. Because Louis is easily frightened by his extremely broad definition of “scary movies” (the Mission Impossible series was scary because Ethan Hunt shoots people), we almost always watch animated movies. But there are plenty of “scary movies” that are animated too like the Demon Slayer series, and therefore, we were running out of new movies to watch.

So, when my partner at work, Shizuka, suggested KPop Demon Hunters, I was thankful for the suggestion but also skeptical. Not being a K-pop fan, the title certainly didn’t get me excited. When she explained the story, I was even less interested. She said, “Just get through the first 30 minutes and you’ll be hooked”. When I suggested it to the family, both of my boys said “NO!”. They hadn’t seen it, but they knew the songs and even the storyline (how is that even possible??). They said it was too “girlie”. But I know Louis, in particular, loves musical movies (he’s a huge fan of Glee and the Pitch Perfect series), and he already seemed to know the lyrics. And so, the three of us watched it a few weeks ago (Leo refused to watch with us).

Shizuka was right. We got instantly hooked. The songs are really catchy. And the story, while admittedly a little ridiculous (then again, aren’t all animated movies?), was fun and the visuals were great. Since then, we’ve watched several covers of the songs and read up on the background on the development of the movie and the songs. Apparently, it’s the first soundtrack in history to hit four simultaneous top 10s on the Billboard Hot 100 and the Huntr/x's hit “Golden” was the first female group to hit #1 since Destiny’s Child in 2001. Sony must be kicking themselves that they didn’t keep their exclusive rights. We’re watching it again this weekend but Leo still refuses to watch with us. However, last time, while he generally hid in his bedroom pretending not to hear the songs, he’d occasionally come up to get something to drink or some other excuse and just stand in the hall, staring at the TV screen. I suppose that way, he can deny ever having watched the movie to his friends at school.

Needless to say, the lyrics are not only catchy, but very timely for Japan. While the AI craze is part of it, the market is making new highs thanks to our new PM Takaichi-san. And, at least in my opinion, she’s already doing a great job, starting with her foreign diplomacy debut with President Trump. I must say, she played the “former PM Abe” card masterfully. The traditional media outlets still seem to want to put her down but, so far, they’ve been unsuccessful. Her approval rating currently stands at 82%, the second highest post-war level since PM Koizumi in 2001 who hit 88%. Of course, like I presume most countries, approval ratings only go down from here but it’s a great start.

Having said this, she inherits a very difficult environment where, like many other countries, we are becoming more divisive. We, too, have a rise in anti-immigration sentiment and she came to power with a tough stance on immigration as a major policy issue, despite our population problem that can only be solved via immigration. Real wages are still negative, and persistently high inflation continues to be a major issue. While she’s (thankfully) toned down her dovish monetary jabs toward the BOJ, she’s still a fiscal dove and, as everyone knows, we already have the world’s highest debt-to-GDP ratio which doesn’t portend well for our weak yen, a key reason why our costs are so high. While she says she’s looking to achieve nominal growth above bond yields and lower debt-to-GDP, she also said that achieving a primary balance surplus will no longer be reviewed on an annual basis so I think it fair to say that our debt burden will accelerate, at least until her reflationary policies kick in.

She has a new coalition partner, Ishin or the Japan Innovation Party, who (in my personal opinion) is infinitely better than the LDP’s former partner and much more policy aligned (I used to vote Ishin after Abe-san passed because their ideologies were similar to the LDP without all of the baggage). But the coalition still does not hold a majority which means she’ll require a lot of political finessing as all of the other parties stand economically left compared to both the LDP and Ishin.

And she leads at a time of extreme global uncertainty, both politically and economically. It certainly doesn’t help that our 2 largest trading partners, together accounting for over 1/3 of all trade with Japan, have a volatile relationship which might temporarily be, on the margin, a little better but one that is unlikely to alleviate in the near future.

With the market going up, up, up in such a hurry, I do fear that expectations are incredibly high. When it cracks, it does so quickly and takes a long time to recover. Remember, it took 15 years for the Nasdaq to convincingly exceed the dot com highs.

I’m not suggesting we are approaching such a crash. Yes, I believe that valuations are bubble-like. But there are a few key differences. One is that the companies driving the market are profitable. Also, historically, I think most bubbles pop due to a credit event, but, at present, I don’t think there is an obvious candidate. I suppose if inflation reaccelerates in the US, such an event may happen (unless the Fed bends to the will of the US President and, I suppose, a similar dynamic in Japan). But as I’ve mentioned a few times, I’ve converted to an AI-believer, at least to believe that AI will be a global game-changer, just as the Internet came to be. During the earnings call with the tech company above, the CEO said, (paraphrasing) “Think of how the Internet changed how we live. Who would’ve imagined that we can stream any movie on the go, 24 hours a day, when the Internet first became a household technology? Three years ago, who would’ve believed what AI has come to achieve now? And who knows what the next 3 years will bring?”.

I don’t know where the indexes will go from here. But I believe in Takaichi-san’s slogan that “Japan is back”. I believe she could make it happen. As a country, I hope it’s gonna be, gonna be golden, a feeling we haven’t had in a while.
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