Perspectives on the Japan Earthquake

Charles Sizemore, Editor of the Sizemore Investment Letter, gave his analysis of the developing crisis in Japan to Reuters following the earthquake and tsunami and offered his suggestions of how investors can profit from an improvement in sentiment.

BOSTON, March 15 (Reuters) – Japan’s stock market, usually one of the world’s dullest, has turned into a gripping 24-hour roller coaster fueled by fear and punctuated by only short moments of relief.

The U.S.-listed iShares MSCI Japan Index exchange-traded fund (EWJ) turned over 400 million shares worth some $4 billion on Tuesday, more than 10 times the fund’s average volume over the prior three months. Another 37 million shares traded in the first hour on Wednesday on the New York Stock Exchange.

Why would anyone want to trade amid such uncertainty?

“American investors wanting a short-term play on a Japanese recovery can consider (the fund),” Charles Sizemore, who runs Dallas money manager Sizemore Capital Management, said. While not advocating a long-term bet on Japan, “in the short to medium term, I like Japan as a contrarian value play. Natural disasters tend to have only very short-term effects on the stock market,” Sizemore added.

OTHER TRADES INVESTORS ARE MAKING

In any eventual economic recovery, the biggest gainers might be funds that specialize in smaller Japan companies. These companies populate small-cap stock funds like the SPDR Russell/Nomura Small Cap Japan Fund (JSC) or the iShares MSCI Japan Small Cap Fund (SCJ), according to Ron Rowland, chief investment officer at Capital Cities Asset Management in Austin, Texas.

In the past, Rowland has worried about the funds’ light trading volume but that has changed since the disaster. “They’ve been around for four or five years, but now that they’ve been discovered, perhaps investors will take a continuing interest in them,” Rowland said.

Money manager Sizemore agreed that small caps might get a bigger bounce, but warned that Japan has deep, underlying problems that won’t go away when the damage is repaired.

“Longer-term, Japan is the short of all shorts,” Sizemore said. “The country has debts it can never hope to repay and demographics that are catastrophically bad.”

Charles Lewis Sizemore, CFA

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