When I signed off on Friday morning, the currencies were enjoying a very nice rally, which remained in place the rest of the day. The Consumer Income and Spending data was very much as I describe it would be, and so there was no surprise for the markets to deal with. You may recall, that I told you that Spending would be greater than Income, as the “Cars for Clunkers” probably had something to do with the Spending be so much stronger than the Income piece…

The currencies ran into a speed bump in the overnight markets though… When I checked the Japanese market last night, stocks were rallying on the news of the election results. The ruling party was voted out, and a pro-consumer driven growth party was put in… But, I guess what turned this around overnight was the fact that while the opposition party in Japan ran on a platform that promised change, when the dust settled, there are many questions… And when there are questions about leadership, risk assets don’t fare too well… And thus, the reversal of the currency rally.

So, as we all know, the trading pattern of the last 9 months… When risk assets don’t fare well, the dollar and Japanese yen do… And vice-versa. Yes, even though Japanese stocks sold off overnight, the yen was in play. It’s just some strange phenomenon that has a grip over the markets for 9 months…

It will be interesting to see if the opposition party in Japan will actually change the way the Gov’t does business… And if it does, what kind of “change” will take place. One would hope for the Japanese economy that it lifts the economy from the doldrums that have hung over the Japanese like the Sword of Damocles for a very long time now… That’s right! We’re not talking 2-3 years, not 5-6 years, not even 9-10 years… Japan’s problems go back to the early 90’s… YIKES!

Every time, the economy would attempt to pull itself up by the bootstraps the Japanese Gov’t would introduce some sort of stimulus, and burden its Gov’t with more debt… I know it sounds familiar… And I long ago told you all that the U.S. was following Japan’s steps, but hoped that the U.S. would not take 15 years or more to reverse their steps… Unfortunately, those hopes and dreams are taking a beating!

Which is why I questioned the reappointment of Big Ben Bernanke last week. The leader of the Fed Heads, has really, in my opinion, stepped in the doggie dookie and followed the Japanese even though he said he wouldn’t! My friend Bill Bonner had an interesting thought about Bernanke’s reappointment… “Obama picked him to continue as head of America’s central bank, the Federal Reserve…even though his predecessor, a Republican, appointed him.”

I know, I know, the media is making Big Ben out to be the “savior of the world” right now… I suggest we all wait-n-see if all that he’s done really does “save the world” or if it just masks the problems, and they come back even worse in the near future… If I were a betting man, I would put money on the latter of those things.

I noticed a story on the Bloomie this morning that says “The Federal Reserve will be unable to prevent the Trillions of dollars in Government stimulus pumped in the U.S. economy from stoking inflation later this decade, according to a survey of business economists.”

They didn’t ask me… But I would have been all about that idea!

In fact, I think the cartel, I mean the Fed Reserve will have to accept the fact that inflation is growing at first, because they 1. won’t recognize its beginnings, and 2. won’t have the guts to raise interest rates, and remove quantitative easing at the first signs of inflation, because the economy’s recovery will be nascent at best. So, a higher level of inflation will have to be accepted by the Fed… And unfortunately, you and me!

OK… Let’s stop talking about the Fed, they make my stomach turn any way!

When I got home last night, I was reading a story that really got me thinking… The story was about how China has gone from Exporter to Importer. The story explains that the stimulus that the Chinese Gov’t put into the economy this year, has really spurred consumer demand, and exports from South Korea jumped 26.6%, Taiwan 41%, Japan 30.2%, and the European Union 23.5%…

The idea here was that the Chinese Gov’t wanted to reduce their dependence on the U.S. consumer… You see, from my vantage point, the Chinese Gov’t has done their part in curbing the global imbalances that used to exist, and I used to rant about almost every day! Now the trick is to see if the domestic demand can really take off from here now that the stimulus has, well, stimulated the economy! And did you see where China announced that they are going to begin to build light trucks? Putting people to work making things… Wow! What a concept! It’s what made the U.S. economy powerhouse that it once was…

The South China Morning Post had a very interesting story in it this morning regarding the Chinese renminbi becoming an international currency. Let’s go to the tape! “Vice-Premier Wang Qishan has been put in charge of a task force to make the renminbi (yuan) a currency for international trade. The recession has encouraged Chinese officials to speed up the currency programme. As the downturn erodes U.S. influence, China is losing faith in the dollar and sees the time coming for the renminbi to become a major world currency.

The renminbi is not convertible for purely financial purposes, ruling it out as a reserve currency for now, but China has started to carve out a bigger international role for it, beginning with the currency swap agreements China has put in place.”

SEE! I TOLD YOU! I TOLD YOU that was what China was doing when it signed those currency swap agreements with 6 different countries, and is currently working on ones with Brazil and Thailand! China was gaining a wider acceptance for their currency… Slowly but surely (who’s Shirley?) China was begin to provide convertibility to the renminbi, and then and only then will it be picked up by currency dealers all around the world! It’s all happening right before our eyes folks… Don’t close your eyes, this won’t go away by closing your eyes!

Staying in Asia… The Indian GDP surprised on the upside when it printed last night… A 2nd QTR 6.1% rise in economic growth VS last year, is a very good performance for India. The rupee has been hanging around a corner for the past couple of months, so maybe this kind of news will attract foreign investment once again, and drive that currency higher VS the dollar…

You know… The data that printed in the U.S. last week, wasn’t half bad! In fact, as long as you don’t want to turn it over to expose the rot on the underside, you might begin to feel as though the economy is recovering… Unfortunately, there is that rot on the underside to deal with… Therefore, I’m pinning my colors to the mast of a “W” shaped economic future… I know Chris talked about this while I was in San Francisco, and gave all his reasons for his thoughts… So I won’t go over them again… But just to say that the rot on the underside of the economy is what leads me to think this…

The data cupboards all over the globe will get a workout this week… There are 2nd QTR GDP’s to print, Manufacturing Indexes to print, Jobs Jamborees, and Central Bank meetings… So, the currencies won’t have to take their only direction from stocks! The currencies will bet taken in so many directions this week, which is why I’m saying right here, right now, that this will be a very volatile week… This Friday will be interesting in that, a lot of the “big boys” on currency trading desks will be gone to add a day to the Labor Day Holiday weekend, and volume will be thin, but Friday is also a Jobs Jamboree Friday…

The sell off that I saw going on in the currencies when I first began writing this morning, has picked up steam… But still, not a strong sell off just yet…

And on that note, I’ll head to the Big Finish! But for one more thought… The U.S. 10-year Treasury Note yield has fallen in the past week, which means there had to be some buying of the note to drive up the price (remember, with bonds, when the price goes up, the yield goes down, and vice-versa). You don’t think it could be more Fed buying do you? I have my suspicions for sure!

Currencies today 8/31/09: A$ .8380, kiwi .6815, C$ .9060, euro 1.4280, sterling 1.62, Swiss .9415, rand 7.7875, krone 6.0250, SEK 7.1550, forint 190.30, zloty 2.8750, koruna 17.77, RUB 31.8350, yen 93.25, sing 1.4435, HKD 7.7505, INR 48.82, China 6.8305, pesos 13.29, BRL 1.8810, dollar index 78.49, Oil $71.15, 10-year 3.41%, Silver $14.72, and Gold… $955.37

That’s it for today… It’s going to be a hectic week here, so I had better get my rest when I go home! Mike Meyer just walked in, and he had Lasik done on his eyes Friday, and he’s smiling from ear to ear! So… I guess it all went OK! A great weekend for the Cardinals, who are really on a roll, and probably hate to see August end! We were all sitting around a campfire on Friday night, listening to the ballgame, when Albert Pujols hit his “walk off” home run… High fives all around! This coming weekend will be a 3-day Labor Day Holiday weekend. College football begins this weekend, which means my beloved Missouri Tigers play Illinois at the Dome downtown. Go Tigers! It’s a rebuilding year for the Tigers, but I still expect them to be good! And congrats to the U.S. kids from California who won the Little League Championship yesterday… OK… Time to go… I hope your week starts off with a Marvelous Monday!

Source: Renminbi To Become An International Currency?

The opposition has different ideas about what the Japanese economy looks like. That means you should be buying different Japanese stocks, not the well-known names.

The Liberal Democratic party (LDP), in power since 1954 except for 11 months in the 1990s, hasn’t done a bad job. After all, Japan is hugely richer than in 1954. However, after a successful period in 2001-06, the country has had three prime ministers in three years. The current leader, Taro Aso, believes in heavy government spending, particularly on infrastructure. That reflects the party’s traditions, which have favored exporting companies and the construction sector. Those traditions and priorities have also made Japan’s public debt 180% of gross domestic product (GDP).

The opposition Democratic Party of Japan includes the Socialists, and favors higher social spending. However, it also wants to encourage domestic consumption, and to kill the big construction projects on which the LDP has spent so much. Economically, the Democratic Party’s platform makes sense, certainly given its shift in emphasis away from the programs focused on in the last few years. Politically, voters are tired of the LDP and badly want a change. Hence the DPJ is likely to win a majority in next month’s election.

That probable victory has major implications for investors.

• For starters, let’s consider the big exporting companies. Such players as Panasonic Corp. (NYSE ADR: PC), Sony Corp. (NYSE ADR: SNE) and Hitachi Ltd. (NYSE ADR: HIT) – may become less prominent, as they won’t have such strong backing from the government bureaucracy. The construction companies – Komatsu Ltd. (OTC ADR: KMTUY), Kajima Corp. (OTC ADR: KAJMY),Sumitomo Realty & Development Co. Ltd. (OTC: SURDY) and the like – will do less well.
• On the other hand, domestic-oriented companies, particularly in consumer products, should benefit. Low-end consumers may do better than high-end, so we’ll look for basic goods.

The Japanese market is still down more than 75% from its 1990 high, although it has rebounded about 30% from its March lows. Japan had a bad recession: The Economist expects 2009 GDP to be 6.1% below 2008. Nevertheless, the economy looks poised for recovery. If that happens, the market will do well, and consumer-oriented stocks will do especially well. Many Price/Earnings (P/E) ratios look high – as is common in Japan – but Japanese accounting is conservative and a real economic recovery could bring rapid earnings growth. Still, in searching for the most-promising profit plays, I will look for P/Es of 20 to 22, or less, to keep values reasonable. How to buy them: Most Japanese companies these days trade as American Depository Receipts (ADRs), that trade only on the “Pink Sheets.” Those are not very liquid in New York. However, some brokers – such as E-Trade (Nasdaq: EFTC) – now allow you to trade directly on the Tokyo stock exchange. So I’ll give you both the Tokyo symbol and the OTC ADR symbol, and you can choose which way to go. Here are the seven ways to play Japan’s election (with one bonus pick for good measure):

• Kao Corp. (4452; OTC ADR: KCRPY) is a classic consumer-products company – kind of like a Japanese version of The Procter & Gamble Co. (NYSE: PG) here in the United States. Kao produces cosmetics, laundry and cleaning products, making it a domestically oriented company that should do well as Japan’s consumer spending improves. Stock stats: The company’s stock trades at 17 times earnings and yields 2.7%.

• Kirin Holdings Co. Ltd. (2503; OTC ADR: KNBWY) produces beer, soft drinks, food products, whiskey and pharmaceuticals. In addition to its strong position in Japan, Kirin is a major player in the East Asian market. Stock stats: P/E ratio 16; stock yields 1.6%.

• Circle K Sunkus Co. Ltd. (3337; PINK: CLKSY) is a nationwide convenience store chain that sells food, beverages and gaming software. Stock stats: P/E ratio 13; dividend yield 2.7%.

• QP Corp. (2809; OTC ADR: QPCPY) produces mayonnaise, salad dressing, egg products and health foods. Stock stats: P/E ratio 17; dividend yield 1.5%.

• Showa Sangyo Co. Ltd. (2004; OTC ADR: SHSGY) produces and sells flour, cooking oils and confectionary products. Stock stats: P/E ratio 19; dividend yield 2.4%

• Seven and I Holdings Co. Ltd. (3382; PINK ADR: SVNDY) is a merger of Ito-Yokado, 7-11 Japan and Denny’s Japan. It operates convenience stores, food stores and fast food restaurants.Stock stats: P/E ratio 22; dividend yield 2.5%.

• Eisai Co. Ltd. (4523; OTC ADR: ESALY) produces and sells prescription drugs and medical equipment in Japan and overseas. Stock stats: P/E ratio 19; dividend yield 4.2%.

Check the companies carefully before investing (most have Web sites), but the above are some suggestions of companies in interesting sectors that appear solid and not overpriced. If you don’t feel confident about investing directly in Japan, you could also consider investing in the largest Japan-focused exchange-traded fund (ETF), iShares MSCI Japan index (NYSE: EWJ). The EWJ ETF currently has a P/E ratio of 15. 

Source: Eight Ways to Profit From Japan’s Game-Changing Election

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Asia, unlike major Western markets, already suffered from an economic depression in 1997-1998 as country after country was sucked into a massive currency and debt crisis smashed into the region.

Asia’s quick response to the crisis – mainly thanks to China – combined with easy credit financing from the West helped to lessen the severity and duration of the blow.

Currently, the FTSE Asia-Pacific Large-Cap Index (excluding Japan) yields 3.8% while the Tokyo Nikkei yields 2.7%. Both sectors yield more than local government bond markets.

The S&P 500 Index currently yields 3% or slightly below the yield on benchmark ten-year Treasury bonds.

Amazingly, Japanese stocks barely yielded 1% for years until the Nikkei began to hemorrhage starting in 2004. Since then, many Japanese large and small-cap companies have boosted dividends over the last five years, including share buybacks.

Some world-class companies in Japan continue to pay attractive dividends, including Canon (3.4%), Nintendo (5.5%), Nippon Oil (3.6%) and Takeda Pharmaceuticals (4.8%).

What’s truly amazing is how for many decades the United States continued to raise dividend payouts while emerging markets paid little or nothing to shareholders. Now that trend is changing amid the worst credit deflation in 75 years…as banks and other companies chop or eliminate dividends to conserve cash.

Dividends in the MSCI Asia Pacific Index are derived from companies in 14 countries with the top ten dividend-paying stocks accounting for about 20% of total dividends paid. In contrast, the top ten dividend stocks in the S&P 500 Index accounted for almost 33% of all dividends paid by that index in 2007.

According to research compiled by the Matthews Asia Pacific Equity Income Fund, between 2002 and 2007 dividends paid by the constituents in the MSCI Asia Pacific Index grew at a compounded annualized rate of 24% compared with 10% for the S&P 500 Index. That trend is accelerating since 2008 as Asian stocks maintain or boost payouts while American companies reduce or eliminate them altogether.

At some point in the future, it’s inevitable that currencies in Asia will be revalued vis-à-vis the American dollar. That makes dividend investing in the Pacific even more compelling as the total return equation grows more rewarding for long-term investors.

Source:  Increasing Dividends, Higher Total Return Mean Asian Equities Might Be Worth a Look

Japan’s exports for February were down a shocking 49.4% on a year-over-year basis. The Japanese economy suffered a fourth-quarter decline of 3.2% – twice the decline of its U.S. counterpart – and is expected to drop by a similar amount during the current quarter.

What went wrong? And, for us investors, are the low current prices of Japanese stocks a buying opportunity or a trap?

Partly because of its efficiency and my fondness for sushi, I have always been inclined to favor Japan and Japanese investments. In 1989, it was obvious that the market was overvalued and I said so – in the process alienating several of my friends who thought they had found safe career niches managing investment funds investing in Japan.

In the 1990s, it was obvious that whatever Japanese governments were doing didn’t work, so I welcomed the 2001 arrival of Junichiro Koizumi as prime minister, and from there wrote frequently about Japan’s growth prospects – until last year.

Until August last year, it looked as though I would be right in the long run, even if the Japanese stock market tended to droop. Since September, however, it has all gone wrong; Japan’s economic performance has gone from adequate to truly dreadful.

Pinpointing the date enables us to pinpoint the reason. In September, Japanese Prime Minister Yasuo Fukuda, who had supported Koizumi’s policy of public-spending restraint, resigned and was succeeded by Taro Aso, still of the long-governing Liberal Democrat Party (but from its opposing faction). Aso is an enthusiastic proponent of “stimulus” public spending programs, particularly on public works in rural constituencies. That’s the policy that notably failed to conquer recessionary conditions in the 1990s, leaving Japan with a public debt equal to 160% of gross domestic product (GDP).

Aso has already proposed four stimulus programs, raising Japan’s budget deficit from 3% of GDP in 2007-2008 to an estimated 11% of GDP in 2009-10. The public debt/GDP ratio is rocketing upwards, because of public borrowing and the decline in GDP. Interest rates, which had been rising gently towards normal levels in 2006-08 (though short-term rates had only reached 0.5%), have been reduced to zero again and the Bank of Japan (BOJ) has begun “quantitative easing” – buying up government debt.

Currently, there’s a general agreement among Western politicians that these are the policies to follow. So why haven’t they worked in Japan?

At this point, the London merchant banker in me is irresistibly tempted to snarl: “Because they don’t (expletive-deleted) work in general.”

My own preference is for balanced budgets, low public spending and high interest rates – you may not get much economic growth with those policies, but what you get you’ve earned – without burdening your grandchildren. Even now, some countries – such as Brazil – are following those policies, and doing quite well.

Setting aside the question of whether stimulative policies work in general – within a year or so we shall have tested them exhaustively in the United States and most of the western world – I do think there may be reasons why they work particularly badly in Japan. Japan has traditionally had very high savings rates; it still has a limited Social Security system and an aging population. Low interest rates may well therefore damage demand from consumers living off savings more than they boost demand by helping companies and other borrowers. While low interest rates boost exporting companies, that boost may simply raise the yen exchange rate to a level at which in a recession exports fall catastrophically.

As for budget deficits of 11% of GDP, if you already have a public debt in excess of 160% of GDP, you may well be at the point at which the extra debt and the uncertainty about how you are going to pay it all back eliminate any boost to demand that the budget deficits would normally bring.

It is thus clear that Aso’s policies will work less well in Japan than they would elsewhere. Indeed, they may make matters worse in Japan, even if they would be effective in some other countries.

Japanese voters will have a chance to choose something different at a Diet election due in September or before. The bad news is that, while the opposition Democratic Party of Japan is theoretically pro-market, its leader, Ichiro Ozawa, in practice is a former LDP stalwart, of the faction founded by 1970s’ kingpin Kakuei Tanaka that favored heavy public spending.

Furthermore, many of Ozawa’s supporters, from the former Social Democrat party, also favor heavy public spending, albeit on different things than the LDP barons. In other words, an Ozawa victory may not bring much of a policy change, at least on economics. What’s more, Ozawa himself has now been caught up in a campaign-fund scandal, so even though Aso’s popularity ratings are down to around 10%, the LDP still may win – which would boost Aso at the expense of the free-market Koizumi supporters.

The bottom line: In the election this year, if the Japanese people want the economic policies that seem to work, they will have to be damn clever about it. There are many supporters of free-market policies in both the LDP and the DPJ, but they are not currently represented among the leadership of either party.

Japan remains a country in which everything works beautifully – except the politics. But the country is still worth keeping an eye on, though, because if the politics change, the potential from a Japan with higher interest rates and lower public spending is absolutely gigantic.

Source:  Investing in Japan: Lots of Potential, Little Growth

This from Money Morning:

Japan has been an infuriating country for U.S. investors for almost 20 years now, since its benchmark Nikkei 225 index hit its trading high of 38,957 in late December 1989. The market then dropped steadily to a third of its peak value by the end of 1998, zoomed back up to 20,000 in March 2000, fell to a low of 7,600 in March 2003, and then recovered to 17,600 in June 2007.

Now, however, it has swooned to 8,695, infuriating global investors. And there’s two ways to look at it.

You can regard it as hopeless case, a market stuck in permanent recession.

Or you can look at the money investors made in 1998-2000 and 2003-2007 and say: “It’s down close to 8,000 again, lads. Time to pile in!”

On the whole, I’m inclined to the second view.

Burst Bubbles

Japan made a number of mistakes in the 1990s – most notably in allowing its public sector to grow so much that it delayed the recovery from the inevitable downturn brought on by the huge Japanese stock market and real state bubbles of 1985-1990.

However, the Japanese economy’s productivity hasn’t stopped growing: According to The Conference Board Total Economy Database, the world’s second-largest economy grew at an average annual rate of 2.0% from 1990 to 2007, outstripping the U.S. productivity growth rate of 1.8%, and the 1.6% rate of Germany, for instance. Thus, Japan’s economy retains considerable dynamism, and being almost two decades from its bubble excesses, has worked the bad debts and overvaluations out of its system.

One factor that trends in the opposite direction is the September ascent to power of new Japanese Prime Minister Taro Aso.

Back in 2003, before Aso came to power, then-Prime Minister Junichiro Koizumi had finally (it seemed) quelled the public spending barons in Japan’s Liberal Democratic Party and cut back infrastructure investment. Koizumi’s two successors were both similarly committed to spending restraint – highly necessary in a country whose debt had peaked at 180% of gross domestic product (GDP). However, Prime Minister Aso also is a believer in “stimulus,” and with so many bad examples internationally (and others – such as China’s – so new that we can’t yet pass judgment on them), it seems inevitable that he will relax Japan’s budget discipline. This may help the country’s slowing economy in the short run, but in the long run it threatens to return Japan to its stagnant state of the late 1990s.

Nevertheless, Aso’s first stimulus program – announced Oct. 31 – was a fairly modest $30 billion (about 27 trillion yen), or roughly 6.0% of GDP. What’s more, only $5.56 billion (about 5 trillion yen) of that outlay represents actual new spending, with the rest represented by tax rebates and service-charge reductions. So, while Japan’s deficit and debt will increase, the government’s share of the economy won’t increase much. This brings hope that Aso will remain sufficiently restrained in new public spending programs to allow the Japanese economy to start growing again.

The financial markets seem to think the outlook for renewed growth is quite good; the yen has been very strong in the last few months, reaching a level of Yen 92 = $1 that it had only touched in the middle 1990s (Yesterday, Yen 95.95 = $1 USD).

Of course, it doesn’t hurt that Japanese banks – restrained from rapid expansion in the 2003 to 2007 time frame because of their previous bad debt problems – had been lucky enough to avoid most of the U.S. subprime mortgage mess. This all bodes well for carefully chosen Japanese stocks.

Reaping Profits

With faster productivity growth than the United States, a reasonably valued stock market, and some degree of shelter from the storms afflicting the rest of the world, Japan is an essential home for a portion of your international investments. While Tokyo will most definitely be affected by a continued decline in the worldwide stock markets, if viewed solely on its own merits, the Japanese stock market seems more likely to rise than fall. You never know: We could be close to the beginning of a long, secular bull market – it has been a full generation since the last one. More likely, the market will just bounce a bit. Still, even bounces are worth buying.

In terms of which Japanese shares to buy, the major electronics and consumer goods exporters should be avoided – their earnings have been decimated in the past few months. One exception to this is in the auto sector: Honda Motor Co. Ltd. (ADR: HMC) has a better model range and is better aligned for a world marketplace plagued by expensive fuel and environmental pressures than any other manufacturer on the planet. But it too has been knocked back by the problems of auto manufacturers in general.

Honda’s American Depository Receipts (ADRs) are down about 36% from their 12-month highs. But at about 9.0 times estimated earnings to March, with a dividend yield of 3.6%, they seem a good value.

The profit problems of the major Japanese high-tech companies have caused the entire tech sector to suffer earnings reverses – except the domestically oriented cellphone company NTT DoCoMo Inc. (ADR: DCM). Naturally, DCM’s sales and earnings have been growing only slowly in Japan, because the wireless-communications market is saturated. But the company addressed this problem on Nov. 12 by shelling out $2.7 billion for 26% of the Indian cellphone company Tata Teleservices Ltd., entering into a technical cooperation agreement.

As of Sept. 30, India had 315.3 million cellphone subscribers, up 51% in the year and surpassing the overall U.S. population for the first time. With a forward Price/Earnings (P/E) ratio of 13 (based on earnings to March), and a dividend yield of 3.0%, DCM is also a bargain – given the technological improvements in the sector and its new growth potential in India.

Finally, a “fundamental” product – and one that’s primarily domestically oriented – is the chief business of Wacoal Holdings Corp. (ADR: WACLY), the world’s largest manufacturer of intimate apparel. Wacoal dominates the Japanese market, which accounts for 85% of its sales. Any economic recovery in Japan is likely to be domestically based, thanks to sluggish export growth and the strong yen. Hence, Wacoal is well positioned to benefit. The stock is trading at about 20 times forward earnings to March, and has a dividend yield of 2.2% – pricier than the other two, but worth a modest investment.

Source: If Japan Bounces Back in the New Year, Investors Will, Too

You’ll recall that one of the fairest of the Bubble Era’s revelers was the idea that, over the long run, you would make money in stocks. All you had to do was ‘buy and hold.’ Who didn’t like her? She seemed so easy…so willing…so fetching and attractive.

Yesterday, the Dow lost another 203 points. Investors are down 44% so far this year. Worldwide, they’ve lost $10 trillion this month – far worse than the crash of ‘29.

The most successful economy of the 20th century was the United States of America. The second was probably Japan. It rose from the bombed-out ruins of WWII to become a worldwide export powerhouse, dominating the auto and electronic equipment industries.

But yesterday, stock prices in Japan fell to more than a quarter-century low. Investors in Japanese stocks – including your editor (who is better at giving advice than taking it) – have made nothing in 26 years.

Here’s the press report:

“Tokyo’s Nikkei 225 index closed down 6.4 percent to 7,162.90 – the lowest since October 1982 – with exporters like Toyota Motor Corp. and Sony Corp hit hard. The losses came despite a report that the government was considering massive capital injection into struggling banks in a bid to calm jittery financial markets.”

“Decades of pain and still no relief,” adds the Financial Times, noting that investors in Japan have been waiting for a recovery for the last 18 years.

With the mask off, stocks in Japan are giving investors a Halloween fright.

But what other masks are coming off?

How about the sweet mask worn by housing? ‘Housing always goes up.’ And, ‘you can’t lose money in property.’ Remember those beauties? Those masks hit the floor a year ago. Since then, the whole world has looked at the property market and gasped in horror. How could houses be so ugly, homeowners have wondered; they look like they just woke up.

Oh and there’s oil…down to $63 yesterday. Oil was supposed to go up forever. At least, that was one of the favorite masks of the late Bubble Era.

But there are still a few Bubble Era masks that have not yet come off. In fact, the belle of the ball is the mask on ‘progress.’ People still believe that the world grows and improves – if not steadily, at least episodically. It’s certainly true that long periods of history show what appears to be economic progress. Things get better. But occasionally, something terrible happens – plagues, wars, revolutions, Great Depressions and Dark Ages. Then, the world turns backward. The bull market in progress turns into a bear market of progress turns into a bear market of backsliding.

Today, people are losing faith in stocks and housing…but they still have faith in progress. Just a few months ago, they thought capitalism would make them rich. But wicked capitalism has disappointed them badly; it didn’t guarantee rising asset prices after all. So, now they turn their sad eyes to the feds. ‘Oh ye all-knowing, all-seeing, all-powerful ones…hear us. Save us – from capitalism!

They figure the feds will do the trick… And sure enough, all over the world the federales are playing along. The G7, the IMF, the central banks, the finance ministers and Treasury Secretaries – all have put on their own masks…strutting around, pretending to know what they are talking about. Curiously, France’s president Nicholas Sarkozy is a leading strutter. He’s trying to organize a New World Financial Order…based on something other than the dollar.

These poseurs don’t look too bad – as long as they leave the masks on. Take them off, of course, and you will see the same silly clowns who CAUSED the crisis in the first place.

That is what is so amusing about this stage in the collapse of Western Civilization. You see, most of the world’s financial press has come around; they see things much the way we do. They see, for example, that the U.S. Fed erred – big time – by fixing the price of credit too low for far too long.

Of course, there’s nothing in the Manual of Capitalism that allows the feds to fix the price of credit or support the housing market. This was the government at work, not the market. With the misleading signal coming from the credit markets, the capitalists just did what they always do – they overdid it.

Still, the world’s press, pundits and politicians have convinced themselves that the fault lies not in themselves…but in capitalism. And now, they expect the feds to do something about it.

But that’s just the way it works…one hallucination gives way to another. One delusion on the way up; another on the way down.

*** Even star mutual fund managers are getting walloped by this market. Chris Mayer offers us a few examples:

“Managers with great track records are faring poorly, and it may help you feel better about how you are doing. Jean-Marie Eveillard, for example, has been running money for 50 years. He’s beaten the market handily for a long time. He is a cautious type. He likes gold stocks. He likes Japan. He’s down 27% this year. Robert Rodriguez, another cautious money manager who holds a lot of cash and runs FPA Capital, is down 29%. These are among the best of the best, as the market is down more than 40% this year. William Fries at Thornburg is down 43%. David Winters at Wintergreen is down 37%. Wally Weitz at Weitz Value is down 39%. The list goes on and on…

“So you see, nothing is really working well in this market right now – at least not for investors in stocks. However, there are a lot of cheap stocks out there, bargains I haven’t seen in a long time. Unless the world comes to an end, which it has a habit of not doing, future investors will be a happy lot. Count me a cautious buyer of stocks.”

Caution is the name of the game here…and if you’d like to see what Chris has been thoughtfully recommending to his Capital & Crisis subscribers, see here.

And the bargain hunters were abound this morning, setting up a rally worldwide in the markets.

Also boosting the markets is the anticipation of the Fed’s two-day meeting, that begins today. It is widely believed that the Fed will cut rates…but it remains to be seen what, if any, lasting effect it will have on the markets.

Lurking behind this rally is this unsurprising tidbit: consumer confidence in the United States hit an all-time low in October. The Conference Board reported that expectations have turned “significantly pessimistic with the percentage of consumers expecting business condition to worsen over the next 6 months rising to 36.6% from 21% and those expecting fewer jobs rising to 41.5% from 26.9%”

*** Perhaps the biggest delusion of the financial world now is that the dollar…and dollar-based Treasury obligations…are a safe refuge. In a sense, of course, they are. The U.S. government is in no danger of defaulting on its loans. In an emergency, it can always just print up the money. But that’s the problem. An emergency is coming. More on this when we get a chance to think about it…

*** “I’ll be all right down here,” said our old friend Doug Casey. Doug has bought a place in Cafayate, a town that reminds us of Santa Fe or Aspen, before they were ruined by rich people. He’s building a world-class resort – complete with golf course, riding trails, tennis, health spa, library…everything he wants.

Cafayate also has several things going for it that Aspen and Santa Fe did not. First, it is prettier and the weather is better. It is always sunny, with pleasant temperatures. Wherever you look, you see beautiful mountains. What’s more, it produces some of the world’s best wine.

Doug’s place is right in the middle of a vineyard. In fact, he’s got it set up so that revenue from the vines pays much of the operating costs of running a golf course and so forth.

“Another big plus,” says Doug, “is that this place isn’t going to suffer too much from the credit crisis. Nobody down here had any credit.”

*** Doug is not completely right about Argentina’s credit situation. Believe it or not, there were lenders – mostly big banks – who were foolish enough to extend the nation credit. Naturally, the Argentine government treats these angels like taxi drivers in Buenos Aires treat other foreigners.

Almost every time we go to the airport, the taxi driver tries to pull a fast one. “My meter is broken,” said one, “the standard fare is 200 pesos.” (It is really about 70 pesos.) “We crossed into another zone,” said another, “so I have to add another 50 pesos.” “It’s night time,” came another invention, “after dark you have to pay a surcharge.”

It’s all good fun. The taxi drivers are merely establishing the going rate. The price for a run to the airport is much higher for naïve foreigners, but why shouldn’t it be?

So is the price for lending to the Argentine government.

This from MoneyWeek:

“In December 2001 [Argentina] reneged on its $95bn of sovereign debt.

“At the time, that was the biggest default in world history, though these days such a number looks like chicken feed compared with what the world’s bankers have recently managed to mislay. Only in 2005 did Argentina sort the final details, with a ‘take-it-or-leave-it’ 70% ‘haircut’ on face value, again the largest sovereign debt markdown ever.

“Three years later, it’s back to square one. Inflation is rocketing (some estimates put it at 20% annualized) and the government is once again running out of cash. Argentina’s borrowing needs will swell to as much as $14bn next year from $7bn in 2008, says RBC Capital Markets. And any confidence that the country will be able to repay what it owes is fast flying out of the window.

“Argentina’s 8.28% government bonds are due to be redeemed in 2033. Fat chance of that, the way things are looking right now. Now priced at 22 cents on the dollar, they currently yield 31%, as against ‘just’ 12% a month ago. And still no one wants them.

“What’s more, the price of credit default swaps – market insurance that investors can buy to protect themselves against default (Read: All you need to know about credit default swaps for more) – covering the country’s sovereign debt has more than quadrupled over the past month. These CDS now stand at more than three times the Icelandic level, and suggest there’s almost a 2:1 chance that Argentina will go bust this year.”

Does this worry your editor – who has substantial (for him) investments in Argentina? Not at all. As a dear reader pointed out, the average Buenos Aires taxi driver knows more about financial crises than Bernanke, Paulson and Greenspan put together. The Argentines know how to get through a crisis, in other words, and still put steak on the table and wine in their glasses.

We’re going to learn from them.

*** Finally, another dear reader sends a news item explaining why there was a bagpiper in front of our neighborhood church last Sunday.

It was the “kirking of the tartans,” said the headline. Turns out, the local Scottish Argentine society does this every year…a kind of blessing of the clans, performed by the local priest. “Kirk” in Scottish means church.

Source: The Masquerade is Over

More from Today’s Financial News:

Financial crises like the one we are enduring tend to have a mind of their own. While the talking heads on TV will quote historic recessionary trends or technical trading wisdom, their market wisdom is rarely wise.

Just as no two bull markets are the same, no two bears are alike. If they were, figuring out what will happen tomorrow, or the next day, or next year would be easy.

But we are not that lucky. Every day, we are given new variables, new moves by global governments, and new investor interpretations. Combine the seemingly infinite number of variables and you will get a financial environment like we have never seen before.

Look at what we have today. The credit markets are still ultra-tight. Economies across the globe are are declining at incredible rates. The United States, where this mess started, is actually one of the financially strongest economies and our currency is jumping in value.

And so is Japan’s yen. It has risen nearly 20% versus the American dollar and over 30% to the euro and the British pound.

Worth more is worthless

Japan’s currency valuations are starting to worry economists. As a huge global exporter, an expensive Japanese currency will mean expensive Japanese imports.

Last Friday, the yen jumped so high, one American dollar would buy just 90 yen, a 13-year high. The surge in value and the downturn in global demand are coming at exactly the wrong time for the country, creating a one-two economic punch.

Japan’s stock market has been destroyed by the crisis. After dropping more than 6% over the last day, the Nikkei index hit lows that it has not seen in 26 years.

There are plenty of Japanese manufacturers suffering from the downturn. Sony (NYSE:SNE), which earns the vast majority of its revenues outside Japan, cut its annual profit forecast by nearly 60% last week. It is the same news out of Toyota (NYSE:TM). Experts believe its earnings will be slashed in half. That is not good news for a company that has been a strong leader over the past 36 months.

During economy crises like this one, the world’s interconnected economy becomes obvious. Fortunately, the United States has become a haven to investors looking for safety. That means our stocks and our bonds will remain relatively stronger than our global brethren.

There are more tough times ahead; that is certain. Fortunately, there are some international financial catastrophes that will overshadow America’s problems, creating opportunity for us. Our stock market will be the first to climb. And we will be the first to profit.

Pay attention to the news. Keep an eye on foreign markets. And watch how it is all connected. There are some very interesting phenomenons shaping up across the globe. All of them have the potential to make you money.

Source: Yen’s strength is Sony (SNE) and Toyota’s (TM) weakness

Japan’s Nikkei 225 Index set a record one-day gain today, soaring 14.2%, or 1,171.14 points, to close at 9,447.57, after being closed Monday for a holiday. Hong Kong’s blue-chip Hang Seng Index extended its 10% rally from yesterday with a 3.2% gain this morning, adding another 520.72 points to close at 17,832.88.

Stock markets in the Philippines, South Korea and Australia also saw gains today.

“The U.S. and Europe now seem to be promising unlimited support to remove the deep-rooted disbelief in the financial system,” Yoo Byung Ok, who oversees the equivalent of $3 billion at Mirae Asset Investments Co. in Seoul, told Bloomberg News. “The key issue here is whether these market gains can be sustained or not. I believe more time is needed to dispel worries about the ripple effect on global economies.”

Europe enjoyed similar strong results, with the FTSEurofirst 300 Index closing up 2.8% for the day after earlier being up as much as 6.8%. The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit gains.

Russia’s Moscow Interbank Currency Exchange, or MICEX, where the bulk of Russian trading occurs, climbed 11.2% before regulators halted trading, The Associated Press reported.

These global gains were a response to international efforts to recapitalize banks, as well as some easing in the short-term credit markets. The dollar-denominated three-month London Interbank Offered Rate (LIBOR) fell slightly today, down 0.12% to 4.64%. LIBOR’s euro and pound counterparts also fell, albeit by slightly smaller amounts.

“We are now seeing solvency being dealt with, we are seeing huge amounts of liquidity being thrown at the market,” Simon Ballard, a senior portfolio manager at Fortis Investments, said in a Bloomberg Television interview. “Banks will little by little start to face one another in the interbank market.”

In Japan, the central bank pledged unlimited dollar funds to shore up capital positions, according to a Washington Post report.  The Japanese government will also relax rules that prevent companies from buying their own stock, Finance Minister Shoichi Nakagawa said. The government will immediately cease the sale of any of the $33 billion in bank stocks it acquired during that country’s “Lost Decade,” Nakagawa added.

Europe announced its bank recapitalization plan yesterday, while the United States announced its own $250 billion plan this morning.

Source: Strong Gains in Asia and Europe as Governments Act to Instill Confidence in Global Banks

“The businesses we are acquiring are hugely successful with excellent management and staff. This is a once-in-a-generation opportunity,” said Nomura Chief Executive Kenichi Watanabe of the deal, MarketWatch reported.

“Our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength and demonstrates how well we have managed the credit crisis. This deal is validation for our strategy,” Watanabe said.

PricewaterhouseCoopers LLP is leading the search for buyers of Lehman’s European assets. Unnamed sources close to the deal named Nomura as the final suitor for the European units. Barclays PLC (ADR: BCS), which earlier acquired Lehman’s North American operations for the bargain basement price of $1.75 million, had only been interested in the equities division.

“We are now focusing on one party as they are interested in acquiring a wider team, which should result in a better deal for staff and creditors,” PwC partner Dan Schwarzmann said, but declined to identify the sole bidder by name. “Given the complexity of Lehman Brothers, these negotiations are difficult, but I’m hoping to give certainty to all involved in the short term.”

Many felt the purchase of Lehman’s Asia and European units was a good fit for the expansion-hungry Nomura.

“Nomura’s global hub for this business is London, rather than New York, so bidding for Lehman’s European operation makes sense,” Wataru Kasatani, senior financial analyst at Meiji Dresdner Asset Management, told Reuters. “Lehman’s Asia operation will also add value to what Nomura has been doing in Asia.”

Source: Japan’s Nomura Broadens Horizons With Purchase of Bankrupt Lehman Assets