After raising cash and reducing risk exposure by selling positions in the Central Europe and Russia Fund (CEE), (down a stunning 20% since the sale last Monday morning), reducing some holdings of the Russell 2000 (IWM), and swapping from small and mid caps to large caps, I decided to put a little money back to work late last week.
My vehicle of choice was iShares MSCI Japan (EWJ)….

The Nikkei has been destroyed of late. EWJ had fallen 16% since May 10th and 9% in just the first four days of last week. Despite the thrashing, I believe the long-term fundamentals in Japan remain largely the same as they were when the market was rallying to multiyear highs – renewed economic growth, healthier bank balance sheets, renewed loan demand, and long-term benefits from growth in China and other smaller Asian market economies. I am moving toward making Japan a 4-5% across all client portfolios, up from prior positions closer to 3%.
The Nikkei has rebounded a little since the purchase including some gains today following the release of an updated 1Q06 GDP report for Japan. Several statistics noted in the Bloomberg article support my bull case on Japan. GDP grew by a healthy 3.1% in 1Q06, revised upward from 1.9%. Corporate spending rose at its second fastest rate since 1990. Machinery orders were up almost 11%. Inventory investment rose sharply. Bank lending has risen for four straight months. These datapoints all indicate that corporate confidence in continuing GDP growth is high. Modestly improving consumer spending shows that consumer confidence also supports future growth. Inflation is up in Japan, the GDP report showed prices rising 3.3%. In the US and Europe, inflation is big worry for investors. Japan is not immune to inflation risks but given that the country experienced deflation for the most of the last 15 years, the pickup in consumer prices is less of a problem.
If my timing was bad and the Nikkei continues to melt, I expect I’ll average into the position further unless the current stock market crisis morphs into a global economic dislocation. I remain of the belief that this will not be the case. I think investor confidence has been fragile and once the market took a couple beatings, the shallowness of bullish conviction was quickly revealed. The stagflation (weak employment, falling GDP growth, and rising inflation) scare is just that — a scare — and a scared market is something different than a bear market.