Ramblings of a Portfolio Manager

Interim Ramblings -- Japan

10 basis points of World GDP growth. That’s it. One tenth of one percent of world GDP is expected to be affected by the terrible tragedy in Japan. And that is in the short term. No one has yet to quantify the longer-term benefits to manufacturers and exporters in the US and China from the strengthening Yen and the enormous needs for building materials and equipment soon to be hitting the order books during Japan’s reconstruction phase. It sounds perverse (and cruel) to say but it is very true that this tragedy has become Japan’s own Economic Recovery and Rebuilding Act—similar to our own except that the funds will doubtless be channeled into needed, productive projects rather than the many worthless make-work boondoggles the current Administration has squandered our funds upon here. And US exporters might just be the beneficiaries.

The US currently imports one half of what it did from Japan just 10 years ago and while our exports have increased, estimates are that only about 2% of the S&P 500 earnings are dependent on that trade. And it is unclear if exports from the US will even drop off. True, some industries like auto parts may suffer but food, medicine, building materials and energy (oil, coal) may actually increase to satisfy immediate needs and to replace lost productive capacity. For example, Japanese steel and aluminum plants are offline or damaged and much of both of those commodities will be needed for reconstruction. So far many tech companies have announced supply disruptions but they remind us that these disruptions will only be temporary and are the result of power outages rather than damages. Furthermore, for some segments of the Tech Sector, the damage to Japan’s infrastructure should be a good thing down the road: First, competitors are eliminated from the market temporarily. Secondly, some sectors, like optical components, were in a glut prior to the quake—the disruption will help them work down inventories, eventually raising prices. Finally, when the rebuilding occurs, the repairs will most certainly include the Country’s technology infrastructure and that will be good for US Tech manufacturers. Multiply these factors across many US industrial sectors and you will see where we’re going.

US equity markets are trading on sentiment—fear of nuclear fallout and of economic disaster in Japan, fear of the Middle East burning and fear of European debt defaults. Yet we have lost only about 6% from the top on all major US equity indices. That’s not bad considering the spike in the VIX and the huge drop in investor sentiment. For those of you who have hit the sell button, we suggest a long bike ride, maybe a cocktail and some re-runs of Two and a Half Men rather than shivering in front of CNN or CNBC, pondering more sales. The images coming across TV and the minute-by-minute conflicting headlines are only a recipe for angst and making an investment mistake. As Warren Buffet is fond of saying, be greedy when others are fearful, be fearful when others are greedy. Right now, it sure looks to us that others are panicking. It may sound mercenary and vulture-like but we’re investors so we are taking advantage of the situation. We suggest that you do too—but before the TV talking heads figure out that this tragedy, in the long run, may be just what both Japan and the US need to pull our respective economies out of their current malaise.

Happy St. Patrick’s Day.