What Worked – With TOPIX down 11% this week, FY1 PE was beaten up the most in the Value category. FY1 PE came in with a negative 39% IC. FY1 PE has only worked once in 2016. Low PE names that were hurt were Dowa Holdings down 28%, Taihieiyo Cement down 28% and NEXON down 24%. Surprisingly low PBR names did not do that poorly given the huge drop in TOPIX. However PBR has not worked at all this year. Kaneka Corp was down 25%, Mitsubishi Materials was down 22% and Tokai Tokyo Financial was down 22%. Beta continued to be get destroyed this week. Beta has continued to do very poorly since the middle of October last year. Sysmex was down 26%, Aiful was down 22% and Toyo Tires was down 23%. Low ROE names also took a big hit this week. As with the other factors, ROE has really only done well once since the beginning of December last year. Names with a high percent of Retail Investors did do well this week and continue to be the only factor really working. Lion was up 2% and Oriental Land was up 2%.
Who Moved – 50 names moved on volume this week. There were only 9 names with positive returns in TOPIX 500 and none of them moved on strong volume. So on the negative side, Asahi Glass was down 26%, Yamaha Motors was down 23% and Nomura Holdings was down 22% all on strong volume.
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What Worked – In what has been a pretty terrible week for equity markets around the globe, Australia has not been spared by any means. Momentum fared well for the week, driven equally by a sell-off in the laggards, and a good helping of outperformance in the winners. All guises of momentum saw good headline numbers this week, although it was the shorter term (1 Month Price Momentum and 1 Month Earnings Revision Momentum) that took the show. With a slew of negative interest rate talk around, the finance sector took the worst of it this week, although likely more of a contagion affect from their European and US cousins than any real threat of it happening in Australia. Already the focus of a good sell-off, Magellan Financial (MFG, -9.1%), Macquarie Group (MQG, -8.3%) and Henderson Group (HGG, -12.5%) where amongst the worst affected, while the miners rebounded – Northern Star Resources (NST, +16.7%), Evolution Mining (EVN, +22.4) and Independence Group (IGO, +17.7%) were are the top of the list.
Who Moved – 27 names posted substantially higher than normal volumes this week, and for the most part ended the week lower than they started. OzForex (OFX, -39.2%), Bank of Queensland (BOQ, -16.9%) and Computershare (CPU, -13.9%) faring the worst, while Evolution Mining (EVN, +22.4%), Ansell Limited (ANN, +13.4%) and Cochlear (COH, +11.7%) all came out on top.
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As a longtime follower of Softbank, I’ve always enjoyed what new challenges and dreams Masayoshi Son would lay out. And though I appreciate guidance, I was a bit taken back by his 300 year plan in 2010. Despite some earlier stumbles with Ziff-Davis and Kingston Technologies, Softbank finally succeeded with the listing of Yahoo Japan in 1996. When Softbank bought Japan Telecom in 2004, many didn’t know what to believe, thinking that it was quite a departure from their core strengths. One of their competitors lamented, “We don’t know how to respond, [They] are used to fighting guerilla wars and we don’t know how to fight a guerilla war”.
Several years later, I ran into one of the former executives at Japan Telecom who oozed with admiration saying, “What they did with Japan Telecom was nothing short of miraculous”. Given this record of success and increasing forecasts for the value of Alibaba, from $25bn in 2009 to $300bn shortly after the 2014 listing, one can appreciate why Mr. Son enjoyed a certain ‘confidence’. Then Softbank purchased Sprint in the summer of 2013, just after Sprint had bought Nextel with the massive bandwidth that it owned. I must say though, that I was perplexed and it wasn’t until the following year when Softbank made a bid for T-Mobile when it all made sense. It would have been the perfect strategy, had not the misguided US federal antitrust officials nixed the deal, questioning the anti-competitive aspects of the deal. Such convoluted logic, that two weak players and two dominant players, make for a more competitive playing field; would probably have Joan Robinson, with her ‘monopolistic competition theory’, rolling in her grave.
In late 2014, Softbank was raising money to pad down its war chest and some brokers called me, asking whether I was interested. I remembered how Softbank had had to offer the syndicate of 15 or more banks its cash flow from the 2004 Japan Telecom purchase as collateral and over 4% interest to close the ¥1.7trn loan. So when the broker said that the subordinated 7-yr bonds paid only 2.5%, I decided to pass. In the last year, Softbank’s interest bearing debt has reached ¥11.6trn and net debt ¥8.3trn (including ¥3.1trn in bonds). Markets have increasingly priced Softbank against its core assets (Ch1). As the share price of its assets have fallen, fears that Softbank getting out of its US quagmire would take more than [a] Sprint, have weighed heavily on the shares. The price of insuring Softbank’s debt has also risen to 383bps, but surprisingly, the recent bonds have held up much better than the equity. (Ch2) Like the former JT executive, however, my admiration for Mr. Son’s chuzpah is unshaken.
Chart 1: Softbank and its Holdings
The yellow line represents the combined market capitalisation of Softbank's holdings in Alibaba, Sprint, Yahoo Japan and Gung Ho
Chart 2: Softbank Shareprice, Volatility, CDS and Bond Prices
Note: Chart shows Softbank's share price (inverted) against stock volatility and CDS. Softbank's 53/8 bond traded at 98.741 as of 2/10/16 while Softbank 21/2 traded at 100.446
With the market bouncing all over the place, we know that volatility is through the roof. However, we took a closer look to see which Sectors and which particular names have seen the biggest volatility jumps in 2016. At the sector level, Energy Minerals saw an 80% jump in volatility this year compared to last year. Volatility in the Industrial Services and Producer Manufacturing sectors is up 61%. On an absolute basis, Commercial Services has the highest volatility in 2016, followed by Technology Services and then Non-Energy Minerals.
At the Company level, Seiko Epson’s volatility is up 186% compared to last year. Mcdonalds Holding volatility is up 162% and Cookpad’s volatility is up 159% compared to last year. Seiko Epson and McDonalds Holdings are actually only down slightly over the last month. If we just look at the large-cap names. Murata Manufacturing’s volatility is twice that of last year and volatility in Nomura Holdings is up 119%. While both names are down over the last month they are definitely bouncing around a lot. Nippon Steel & Sumitomo is also down 12% and is bouncing around even more.
NTT Docomo and Canon Marketing are the exception. Both made the screen below but are part of the few names with positive returns over the last month.
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