Friday, December 17, 2010

Have I Got An Investment Opportunity for You


OK, here's the pitch:

The government of this country has just announced that it will be offering hefty tax breaks to foreign companies in an effort to attract business.

In addition, all companies operating in this country will enjoy a 5% cut in the their current corporate taxes, meaning qualifying companies will pay tax between 20.4% and 28.5% (all data according to this morning's Financial Times).

But wait, there's more: this country's central bank has just announced that it will be buying risky assets like exchange-traded funds (ETF's) and REIT's. Think QE2 on steroids.

Also, this country's largest 500 companies saw free cash flow per share grow by almost a fifth over the past 12 months - seven times the rate of cash accumulation at S&P 500 companies.

You want momentum in stock prices? Well, this country's stock market has been the best performing index in the world since the beginning of November, as investors have poured over $10 billion in new investment funds have flowed into this country in that period.

So where is this great opportunity?

Japan.

And that's the problem. Japan - which I fear is the country whose problems foreshadow our own - has been mired in a deflationary sluggish economy for more than 20 years. And all of the "good news" that I just listed ignores some very important facts.

After years of being battered by prematurely betting on economic recovery, Japanese corporate executives are tired and pessimistic.

Rather than invest all of the cash their companies are generating, they would rather hoard the cash. December's Tankan survey indicates only a slight increase in plans to invest in cap ex, but this is only among big companies: smaller companies indicate they are planning to cut spending in 2011.

Until the mood among Japanese executives changes, the economy is unlikely to show much spirit in 2011, despite the government's best efforts.

So when you read stories about President Obama urging corporate executives in the United States to spend some of the $2 trillion in cash that corporate America is sitting on and hire more people, just look across the Pacific to see how well government entreaties work.