Taking some profits in Japan

Hard for me to argue with the record of Bill Cara, so his call today for a top in Japan is worth heeding. I have sold some Japanese and Korean Holders and am a net seller of US stocks this week.

Thanks Bill –

December 27, 2005Cycle peak in Japanese equities, Tues., Dec. 27, 2005, 6:50 AMJapan’s main stock market index has been rising at an unsustainable pace. The Nikkei 225 now stands at 15,969, which is a +48.3 pct move since mid-May-05 when it reached a cycle bottom of 10,770. What is striking about this bull phase is that it comes not off a major over-sold spike bottom, but one that had been flat for 18 months.

But today the Nikkei suffered a loss of –0.86 pct (-138.27 points) as traders learned the Tokyo Stock Exchange (TSE) may soon raise the margin rates, according to the financial newspaper Nihon Keizai. Traders everywhere need to take heed.

Internet stock trading in Japan, which is based on loose margin rules, has been exploding in volume, and the Nikkei has just reached a five-year high. Speculation abounds.

According to the Japan Securities Dealers Association, about 30 percent of all trading is now done via the Internet (versus ~20 pct two years ago) and individual traders who use margin extensively are doing about 60 pct of that.

According to Nihon Keizai, the TSE may soon increase the minimum margin deposit from 30 pct of the purchase price to 40 or 50 pct. In addition, the upper limit on the value of stock that can be counted as collateral for margin trading will drop from the current 80 pct to 70 pct.

Such a move would be like shouting “Fire!” in a crowded theater.

Shares that have been bought on margin on Japanese exchanges now exceeds 5 trillion yen, which is an increase of +1 trillion yen in just one month. Not since the Aug. 1991 has total margin debt been so high.

In fact, the all-time margin debt record (10 trillion yen) was set in 1Q90, as the Japanese reached a massive speculative all-time peak in equity prices. After new margin rules had been installed at that point, the Nikkei dropped from ~40,000 to ~20,000 in one year.

Today’s warning to individual traders of equities is clear: a +48.3 pct gain in seven months is not sustainable. Moreover, such a price move in Japan cannot be justified by economic or corporate fundamental reasons either.

And the almost +5 pct move last week in four days, was speculation, pure and simple.

Such enthusiasm – speculation really — will now likely come to an end with the increase in margin requirements. Moreover, the Bank of Japan is set to raise its bank rate for the first time in many years. So a cycle peak in Japanese equities is at hand.

The timing of the pull-back in the broad market indexes in the world’s second largest economy, which I am suggesting could be next week, is likely to coincide with the same cycle peak on the NYSE and Nasdaq.

As I see it anyway.