From; Calendar Anomalies and Arbitrage, by W.T. Ziemba

We are approaching year-end, often things happen at that time, perhaps because of all the good intentions that are mostly broken in a few days which may cause mood changes. This is the Nikkei 225. It hit a high of about 39000 around year-end ‘89  only to drop to 7000 in ‘09. People were so bullish that they completely ignored the ‘87 crash in the US. The world applauded their management skills and the only direction the market could take was up. Here in Canada Bankers Trust came out with an issue of warrants which were in reality put options. Options were so cheap that you could buy a 3-year leap with a strike such that you would break-even if the Nikkei dropped by a mere 6%, that is how bullish they were in Japan and willing to take the other side. The beauty of these warrants was that they were RRSP eligible. This was one of the first instances where derivatives were used to circumvent the CRA legislation with respect to RRSP eligibility.

To make a long story short, at around year-end we had the stock index of the then 2d largest economy turn on a dime for no apparent reason other than “enough is enough”. Who knows but history may repeat itself.

The Nikkei 225 turned on a dime on New Years Eve, 1989, maybe it will do it again this year. We have had this scenario (count) for almost two years. It is absurd and cannot be correct. But here are a few other facts that no one would have believed prior to the peak.

In central Tokyo a single square meter (about 9 sq. ft. for those that are measurement challenged) went for $79,000 at the then prevailing exchange rate of 135 Yen to a dollar.

Downtown Tokyo land values were about $800 mln. an acre and the Emperor’s palace was reputedly worth as much as the entire State of California, or all of Canada.

From 1949  ( the Japanese surrendered on the battleship Missouri in Sept of 1945) to 1989 the Nikkei 225 was up 221 times in yen terms and 559 in US dollars.

In 1989 Bankers Trust Canada issued 3 year put warrants on the Nikkei in Canada. They were priced in C dollars and side stepped all the then existing regulations. You could buy them in an RRSP.

After 23 years of on and off stimulation the Bank of Japan has just recently decided to up the ante again by adding about $120 bln. , far too little according to some but at least a start. The country’s debt to GDP ratio is running at about 230% but there is no cause for alarm because it is mostly domestic.

Japan has a population of 128 mln. dropping by about 1 mln. each year. By 2060 it is expected to have a population of 87 mln. with 40% over the age of 65. About 98% of the Japanese are ethnically Japanese.

If the Nikkei will in fact go much lower remains to be seen. It would take a break of about 11000 before the count is negated. For the moment this still appears to be the best interpretation. How absurd it really is, is demonstrated by this semi-log Wikipedia chart with my annotations.

Taking a very long time but , so far at least, the outlook has not been negated. Time will tell.

Heard the other day that the TOPIX index in Japan had made a new absolute low since the highs of ‘89.  The Nikkei 225 is not quite there yet but it did drop about 2000 points in the last two months. So far it is following our script quite accurately and the news seems to be getting worse with each passing day. We are looking for the 5th wave of this diagonal to complete. There is no precise point as it may go all the way to the trend-line or stop well before that. 5000 to 4000 is a reasonable guess but much lower levels are possible. See previous blogs.