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Jeff Saut: Six Reasons to Get Bullish on China & Japan


Looking to Asia for a sustainable recovery.

3. A lagging non-Japan Asian play. More than half of Japan's exports go to non-Japan Asia -- and nearly 20% to China. Japanese equities are now 16% below their (down) trend line relative to non-Japan Asia.

4. Japan is the world's largest creditor (net-foreign assets are 54% of GDP and household net wealth to income is the highest globally at 4 times). In my view, investors should be refocusing on creditors (not debtors), now that credit spreads have fallen to neutral levels (i.e., implying a reasonable default rate).

5. Since 1990, when Japan has outperformed, it has done so by an average of 37% over 7 months. This is because many investors are structurally short of Japan [as confirmed by Europe, Australasia, and Far East (EAFE) data].

6. Valuations are, as usual, mixed. Japan looks 5% cheap on Credit Suisse HOLT (methodology) [but then again, I assume cash-flow returns on investment (CFROIs) will partially normalize]. Cash on balance sheet is 25% of market cap (compared with 17% in Europe excluding the UK and 11% in the US). Price-to-book and price-to-sales are at a 32% and 43% discount to global markets, respectively, but none of this is particularly new.

This is a tactical call (i.e., 3 to 6 months) not a strategic call (1 to 2 years). I remain concerned about: (a) bad demographics; (b) very limited restructuring of domestic services; (c) huge government debt (199% of GDP); and (d) the general inability of the corporate sector to improve return-on-sales or return-on-equity levels."

I would note, however, that many strategic calls begin as tactical ones.

The call for this week: Even though I remain defensive in the short term, I continue to think it's a mistake to become too bearish. Still, the DJIA has been in a downtrend since its June 11 intraday high of 8877; we aren't oversold; new lows have been expanding; we've had 3 90% Downside Days; we've broken below the neckline of a head-and-shoulders top, rendering downside targets 7791 (DJIA); and senior index resides below most of the moving averages I watch.

Using my day-count sequence suggests the situation should be resolved this week.
No positions in stocks mentioned.
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