Good News on Employment Bad News for Employment Agencies?

Japan's index of leading economic indicators in December stood at 70.0, above the boom-or-bust threshold of 50.0. The leading index stayed at or above the boom-or-bust threshold for the eighth straight month, and the reading for November was revised up to 54.5. Consumers may also loosen their purse strings as Japan's jobless rate fell below 5% in December for the first time since June 2001. Housing starts in the month jumped 9.4%, the first rise in two months. The coincident index is also highly likely to stand above 50% in January, on prospects of steady growth in production.


TT's Take The good news on employment sounds like bad news for employment and outplacement agencies. But Pasona Inc. (4332) is in the process of creating an an outplacement agency with 34 major companies including Sony Corp. (6758), Nomura Securities Co. and Canon Inc. (7751). In addition, the government will begin farming out employment services to private firms, paying outsourcing fees according to three different schedules, and paying up to JPY700,000 per job seeker. Employment agencies will bid on this business every 3 months.


Analysts, once wild-eyed bulls on employment agencies and outplacement firms in Japan, have recently become more cautious, suspecting that demand for these services may move inversely with unemployment ratios. In addition, companies have begun to introduce competitive bidding for oursourced services, which is resulting in lower unit prices.

NIF Ups Offer in Contested Bid for Sotoh

NIF Ventures, the white knight in a contested takeover bid for Sotoh, has raised its offer price in a takeover bid for Sotoh 3571) by a little more than 200 yen per share from its earlier price of 1,250 yen, sources familiar with the matter said Thursday. Sotoh is expected to announce later this afternoon that it will accept NIF's offer. NIF will likely extend the planned period of share purchase from Feb. 26.


TT'S Take The ball is in Steel Partners' court, but they are only expected to bid to a level that ensures they can make a profit on the restructuring/break-up of Sotoh. Moreover, NIF's offer effectively represents a leverged buyout of the Company, and they are borrowing mone from banks lke Mizuho and Shinsei for the purchase, to be repaid by cash from Sotoh's balance sheet. TT fails to see how taking money from Sotoh's balance sheet to pay back bank loans used in the takeover is good for shareholder returns, especially if NIF, ostensibly a white knight, does not intend a general shake-up of the company to revitalize it.

Cats Inc. Hung Out to Dry for Stock Manipulation

In the first case of its kind where a president or founder of a publicly traded company has been arrested for such a crime. The crime was to conspire with senior managing directors and two collaborators to pay speculators to place frequrent buy and sell orders to give teh appearance that the stock was a hot issue.


TT's Take the Company's stock peaked at JPY4,000 around January 2002, but by Wednesday of this week, had fallen to under JPY150 last December, as performance deteriorated to the extent that a rehabilitation plan was announced in 2003. Current management claims that the alledged crime was a concern of the ex-president and that it has nothing to do with the current company.

After plunging, the stock's P/E is a mere 4.4X, but it stil trades at a price/book value of JPY1.43X, or at a healthy premium to break-up value. Thus from a balance sheet perspective, the stock is not selling at bargain basement prices.

All Eyes on the Yen After G7

Traders and investors are now focusing on;
a) bank inspections by the FSA


b) G7 Financial ministers' joint announcement following meetings


c) the tech stock sell-off following street-disappointing numbers from Cisco and NASDAQ's tumble.


Historically, sharp rises in the yen have only lasted around six months, while stock prices discount yen movements real time, but actual earnings are affected with considerable delay and in a much more dampered fashion. The time to buy Japan's export blue chips is when the strong yen peaks and begins to change direction.

Tokyo Market Takes on a Decisively Defensive Tone

In looking at the best and worst performing sectors over the past month, sectors with the most leverage to the market rally (i.e., high beta stocks) and stocks with the most exposure to a strong yen have taken the brunt of selling pressure. From January 20 to recent closes, the broker stocks are off 11%, followed by a 7% correction in the precision stocks. In turn, the gaining sectors have been gas (+5%), land transportation (+4%) and pharmaceuticals (+4%)--all classic defensive plays. It appears that foreign investors are also moving to more defensive sectors.


The large cap Topix is definitely looking top-heavy, and needs to confirm downside support before the next upleg can occur. As mentioned in our ABW Market Letter, however, the JASDAQ is not fettered by such concerns, and has rebounded smartly from October lows of last year.

NTT Docomo. If They Bid for AT&T Wireless, They're a Sell

AT&T Wireless is apparently on the block, stimulating a rebound in the long-moribund telecommunications services sector, the fallen darlings of the TMT bubble. AT&T Wireless would be a huge purchase worth some JPY3 trillion, compared to total M&A activity in Japan last year of JPY2 trillion. While investment bankers do not see Docomo as a serious candidate to buy AT&T Wireless because of various impediments still hindering Japanese companies from using schemes such as special purpose companise set up for the purchase, another Docomo takeover move would be a strong signal to sell the Japanese major mobile phone company.


TT's Take At the height of the TMT bubble, NTT Docomo was on top of the world. Their extremely popular iMode was groundbreaking and showed promise of becoming a global de-facto standard. They made forages into the US and European M&A markets, with disastrous results. In effect, they bought at the top, and suffered massive write-downs on the value of their overseas takeovers. Moreover, in each case, they gained no direct control of the companies they invested in, creating doubt that the heretofore domestic-centric Docomo management could really handle a truly global operation. Yes, the company has abundant free cash flow, of about JPY800 billion. Considering the track record of past overseas takeovers by Japanese firms, investors should look at any potential overseas takeover by a Japanese firm from a negative starting point. Moreover, in M&A cases anywhere in the world, it is usually the firm that gets taken over which sees the best short-term price performance.

Davinchi Advisors Sets Up JPY10 billion Buyout Fund

Davinchi Advisors, a real estate investment firm, is changing tact and setting up a corporate buyout fund within the year. They have also applied for a loan agent license to position themselves for structured finance. They will be drawing some JPY4 billion in funds from domestic and overseas investors for M&A as well as debt securitization.


TT's Take The firm is another of a growing number of "restructuring" players looking for undervalued assets among long ignored listed companies in Japan heretofore protected by a web of crossholders. The Ripplewoods, Carlyles and Cerbus's of this world were in early and have paved the way for smaller operators able to gather pools of funds. Japan has also lost its adversion to hostile takeovers, with several examples (including Sotoh) of late, and even an example of a domestic-domestic leveraged buyout.

Economists Bullish on Japan's Q4 GDP

A Nikkei poll of 10 domestic sell-side and buy-side institutional economists shows expectations for Q4 2003 GDP growth of 1.2%, implying annualized growth of nearly 5%, or higher than the US. Export growth will lead the charge, growing 4.8% in the quarter, followed by 3.8% growth in capital expenditures. Personal consumption would inch up 0.7%, but the uptick instead of the declines recently seen is welcome.


TT's Take...The stock market of course has already discounted these numbers, and indeed is looking top-heavy of late, leery of the renewed upward pressure and other real or perceived risks. The Nikkei 225 has slipped well below its 25-day moving average and is bumping along its 26-week MA, threatening to break-down. This could be a classic "setsubun tenjyo" where Japan's market peaks just as the coming of spring festival is held. How much downside there is depends on how well the US market holds up, but 9,600 on the Nikkei is certainly on the radar screen.