Notes From Underground: August goes out with a whimper (equities find no solace in the lazy, hazy days of summer)

The global equity markets in the northern hemisphere wilted in the hot August sun. The bears were not in hibernation but foraging on the uncertainties of a global recovery. Risk-off trades were the central theme of the month and the rush to safety was en vogue. The yen and Swiss franc were the strongest currencies of the developed world. The YEN is impacting Japanese growth and it is certainly reflected in the NIKKEI, which was down more than 7 percent for the month. Many commentators still believe that the strong YEN is not that severe a problem for Japan, but as our readers know that is not our view, especially in regards to the EURO. Bloomberg ran a story today about Japanese concerns regarding the failed stimulus plans of Prime Minister Kan. Several of the giant Japanese corporations are openly complaining about the strong YEN and its impact on profits. Canon, Nissan and Panasonic said they would be moving production outside of Japan. Toshiyuki Shiga, Nissan’s chief operating officer, said,” The number one priority is to curb the strengthening yen.”

Now, we are not naive enough to believe that Japanese corporates don’t have an agenda of their own. It seems that the tradeoff for large corporations to accepting a strong YEN would be a significant cut in corporate taxes. The problem with tax cuts is that it creates more fiscal problems in a country beset by terrible demographics and a very high government DEBT/GDP ratio. Throw in the fractious political situation in the ruling DPJ and the entire situation becomes more clouded. Will Kan initiate a powerful economic package in the two weeks before his leadership is officially contested at the DJP meeting on September 14?

The other news out of Asia today was a mixed bag. Growth in New Zealand appears to be slowing and financial strains are appearing. South Canterbury Finance, a large Kiwi institution, was placed into receivership with the government having to backstop losses up to 1.1 billion NZ DOLLARS. The losses were due to stresses in the domestic housing and credit markets, which puts downward pressure on the KIWI. The good news was that Australian GDP was stronger than expected. It’s another mixed bag of data creating that much more uncertainty. Chinese PMI was released tonight and while some will say the number was better than expected we wonder how anyone really knows. On what basis do the autocrats in Beijing weigh such things? Yes, we know the Abacus was invented in China and that was the last accounting mechanism we had any faith in when comes to measuring things Chinese. All in all, we enter September with a great deal of uncertainty overhanging the markets. If we hear one more pundit discuss the seasonality of equity markets in September, we are moving to Beijing.

For the Obama administration we will offer one bit of advice: Cut the tax rates on dividends and raise the capital gains tax a touch to pay for it. The corporations that are hoarding cash need an incentive to distribute that money to shareholders. The democrats believe that dividends are only for the rich but some of the work we have read throughout the years has suggested that they are much more important to the middle and upper middle classes, especially the pension plans. One thing we know is that Wall Street hates dividends for it likes to have piles of cash in management ‘s hands so as to do mega deals. In our opinion, most of these deals fail to perform as advertised resulting in wealth destruction on a massive scale. If a deal is so strong, in theory, let the acquire borrow the money, especially since corporate bond rates are so low. If the merits of a merger cannot stand the scrutiny of the lenders, then the deal is flawed. The infusion of cash into the pockets of shareholders would provide an immediate boost to the economy and we can finally get the talking heads to stop pointing at the “cash hoard” in corporate coffers. The stock market is crying out for creative policies. And tonight at NOTES we have thrown one against the wall.


9 Responses to “Notes From Underground: August goes out with a whimper (equities find no solace in the lazy, hazy days of summer)”

  1. Ron Says:

    Now we are throwing up creative ideas, this will get the readership to comment!

    Well if the root cause of the malaise is real estate prices are still too high causing a need for consumers to save instead of rely on the housing ATM, then government could buy a few million homes for the bulldozer.

    Or if the root cause is jobs, the government could ban any technology investment that is labor saving. haha Maybe more practically slap a large currency undervaluation tariff of 40% to 100% on the chinese mercantilists.

    Luckily, we are not in charge!

  2. yra Says:

    I am only talking about dividends Ron and not the bigger issues which I assume you offer up very tongue in cheek.One thing you can be sure of—-Wall Street hates dividends that is a certainty—if the goal is to aid main street then get the shareholders the cash

  3. brendo Says:

    Great idea Yra,

    Quite fresh too. Reading old books about investing, (baruch, livermore) a dividend increase could make or break a stock…. Now it seems like its 80% capital gain, 20% popularity contest for what stock you own.

    The economist had a neat article on dividends and Pharmaceuticals…Showing how they pay great dividends and constantly raise, yet are hated by most in the stock area….I’d go there first if your idea gets any merit.

  4. Arthur Global Practice Says:

    Great post Yra. Maybe countries (Japan, the US, Spain, whatever) can survive in a deflation economy but for investors that means one thing: falling shares, rising bonds, less profits… Probably Canon, Nissan and Panasonic should know.

  5. yra Says:

    Brendo ,Arthur–thanks for the comments and the ideas and conversation generated by the readers makes it a worthwhile endeavour.and selfishlessly I get to think out loud and generate conversation whichs helps me realize where there is holes in my thinking

  6. Arthur Global Practice Says:

    You are the Maestro, we are students. Thanks to you.

  7. yra Says:

    arturo tuscanini—please don’t diminish me with that word –i can’t screw up the world like that and i try to be percise and concise and when the facts change I do also unlike some oracles who speak so no one understands and therefore can never be wrong

  8. Arthur Global Practice Says:

    everybody can be wrong. In Spanish language (my mother language) “Maestro” means teacher, schoolteacher or master, usually someone with strong knowledge who try to instructs others in the field.. Maestro is not a guru, not Greespan… at least in Spanish.

    So to me, you are a maestro…

  9. yra Says:

    ok thank you for the clarification

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