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Buyers Creep In Amid Broad Market Tumult

Date: Wednesday, March 16, 2011
Author: E.S. Browning, Gregory Zuckerman and Mark Gonloff, The Wall Street Journal

Fears of a Japanese nuclear disaster drove stocks and commodities down around the world on Tuesday, but signs emerged that investors were beginning to buy again—and stocks in Tokyo staged a defiant snapback rally on Wednesday morning.

Stocks sank as worries deepened over the specter of a nuclear crisis and economic slowdown in Japan, but encouraging comments from the Federal Reserve limited the losses. Paul Vigna has details, including why oil and gold prices fell sharply.

Some prominent investors on Tuesday said they were beginning to buy Japanese stocks on the grounds that they had fallen further than was warranted.

Indeed, at Tokyo's close of trading on Wednesday, the Nikkei Stock Average was up 488.57 points, or 5.7%, at 9093.72, after the Bank of Japan injected 3.5 trillion yen ($43 billion) more into the money markets. During regular trading Tuesday, the Nikkei had fallen nearly 11% after a 6% decline on Monday.

Investors weren't exactly upbeat Tuesday, but they were heartened by news that Japanese authorities had regained partial control, at least temporarily, of a damaged nuclear complex.

The Dow Jones Industrial Average recovered more than half its early decline of 296.91 points, finishing down 137.74 points, or 1.15%, at 11855.42. As the Dow rebounded, so did U.S.-traded futures on the Nikkei.


Treasury bonds, seen as refuges, rose in price Tuesday, while futures on industrial commodities such as copper fell, as did oil futures, in a continuing sign of concern about the effect of the Japanese calamity on world growth.

A chorus of economists and market strategists continued to advise clients that, barring a nuclear catastrophe, the earthquake's impact on world growth was likely to be limited, and that appeared to help fuel the late-day buying in New York.

Exchange-traded Japanese-stock funds that are available in the U.S. saw strong buying Tuesday as some investors used them to bet blue-chip Japanese stocks would rebound, fund-research firm Morningstar Inc. reported.

Some money managers said they were buying Japanese stocks. Barton Biggs, former chief strategist at Morgan Stanley who now runs $1.4 billion hedge fund Traxis Partners LP, said he is buying shares in Japan. Mr. Biggs said he began buying on Tuesday, and he said his investment is a broader bet on Japanese rebuilding. After being bullish on Japan in 2005, he said, he bailed out when "the fundamentals didn't improve," but now is buying back in, arguing that the rebuilding will boost the Japanese economy.

First Eagle Investment Management, which oversees more than $50 billion in New York, has been "selectively adding" to some of its positions in Japanese stocks, said Chairman John Arnhold. Mr. Arnhold said First Eagle isn't buying the broad Japanese market, but instead is boosting its existing exposure to selected companies based in Japan that have global businesses, and whose stocks have suffered since the earthquake.

United Press International

ROCKY RIDE: Traders work in the CBOE Volatility Index trading pit at the Chicago Board Options Exchange on Tuesday.

He declined to name the companies, but among the firm's larger Japanese holdings are Fanuc Ltd., a maker of robotics; SMC Corp., which produces pneumatic equipment; Secom Co., a maker of security systems, alarms and related camera systems; Keyence Corp., which makes sensors and measurement equipment; and Shimano Inc., a cycling and fishing-equipment company. "From a company-by-company perspective, most companies we are talking to are seeing no major outages or factory destructions," Mr. Arnhold said. "It isn't business as usual, but valuations are at compelling levels given that it is an uncertain environment."

The Japanese stock market is trading at about 1.1 times book value, compared with about 2.4 in the U.S. and 1.7 in Europe, making it "stinking cheap," says Alan Zafran, co-founder of Luminous Capital, a Los Angeles-based investment adviser.

"The problem in Japan is not the bleak economic outlook nor the country's poor demographics, but the fact that most Japanese companies are not shareholder-focused, though there's some evidence that's changing and some are increasing dividends and returning value to shareholders," Mr. Zafran says.

Even so, commodities tied to global economic growth suffered Tuesday, with crude-oil futures for April delivery down 4% in New York to $97.18 a barrel, and copper for March delivery down 1.2% to $4.1250 a pound.

The dollar fell again against the yen as traders continued to bet that Japan would repatriate foreign holdings, selling dollars and buying yen, to finance rebuilding.

The move to refuges pushed up the price of the benchmark 10-year Treasury note and pushed its yield down to 3.323%, the lowest since Jan. 25. Treasury-bond yields had been even lower earlier in the day, but their prices fell and yields rose as stocks rebounded amid hopes authorities would get damaged nuclear reactors under control.


In addition, bonds were hurt and stocks helped after Federal Reserve policy makers sounded slightly more upbeat about the U.S. economy following a regularly scheduled meeting.

Riskier high-yield bonds recovered a bit during the day, reflecting the stock move, but still finished down. Prices for the most heavily traded junk bonds have fallen to their lowest levels of the year, according to Standard & Poor's Leveraged Commentary & Data Group. Several companies, including CDW, Toys "R" Us and Swift Transportation, delayed debt sales.

Overall, interest rates could stay relatively low, even if Japan gets its nuclear-plant problems under control, bond analysts said. They said the damage to Japan's infrastructure could affect global inflation and keep central bankers in the U.S. and elsewhere globally from raising short-term rates quickly.

Some analysts said Tuesday's late-day stock recovery could be a sign stocks and other risky assets are close to a bottom. "Today, there's obviously a lot of fear around the market, but there's not a lot of follow-through in the selling," said Dan Cook, CEO of IG Markets.