Gains unsurprisingly erased in Tokyo; patient buyers needed

Japanese stocks “rallied” a spectacular 14% last Tuesday, but in spite of that (and being surrounded by massive days of selling), I lacked the broader market’s bullish conviction and explained why in “Trying not to rain on the Tokyo stock parade.” Overnight, the Nikkei sold-off about 6.8% to fall back below 9,000 again to 8,674, erasing the gains from a three-day rally. During that period there was a spooky appearance of bullish stories on Japan, particularly advocating banks. In fact, it is a recurring theme: whenever there’s page space to be filled, a couple days of higher closes in Tokyo, or the desire to sound smart and talk about valuations. Unfortunately, it is easy to be misinformed and fooled.

That said, today’s 6.8% decline was not panic selling by any means. Volume and turnover were quite modest, suggesting profit-taking and a dearth of buyers (investors can buy-on-dips only so many times), although Japanese stocks may fall further on Thursday, pending selling in the U.S., as investors react to the size of the overnight drop.

However, the problem is far bigger than this. MarketWatch would like to have you believe that suddenly there was realization of a “double whammy” of relative yen strength and earnings concerns in Tokyo. Not the case I’m afraid. Recognize that there are some bright people out there slogging around value land in Japan, but the best plays are ones oblivious to most other investors. Furthermore, playing in the land of the rising sun and falling valuations necessitates patient capital, and therefore unlocking value remains elusive. Contrary to the bearish tone of this article, I’m rather optimistic and exploring a new/different approach to realistically realizing true value. No need for haphazard kumbayas and no reason to be spooked by the selling.