Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

The global rally appears to be losing steam as the bearish rising wedge patterns we highlighted last week in the MSCI ACWI, ACWI ex-US, EM, and EAFE indexes ended up breaking down. Additionally, the aforementioned indexes and major indexes in Europe, Japan, and Hong Kong have been unable to break above longer-term resistance. While we believe global equities remain vulnerable to a pullback, some near-term consolidation is another possibility. For now we believe some consolidation makes sense as we remain in a sort of wait-and-see period as it relates to what will happen as countries and states aim to re-open.

The global rally appears to be losing steam as the bearish rising wedge patterns we highlighted last week in the MSCI ACWI, ACWI ex-US, EM, and EAFE indexes ended up breaking down. Additionally, the aforementioned indexes and major indexes in Europe, Japan, and Hong Kong have been unable to break above longer-term resistance. While we believe global equities remain vulnerable to a pullback, some near-term consolidation is another possibility. For now we believe some consolidation makes sense as we remain in a sort of wait-and-see period as it relates to what will happen as countries and states aim to re-open.

Global Equity Rally Losing Upside Momentum

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

Ito En Ltd Preferred Shares / Equity Bottom-Up

<div class="content-highlight"><div class="content-remarks">
<h2>The History</h2>
The stated concept was that the company wanted to attract more individual shareholders, but because most did not vote in shareholder meetings, the idea was to offer shares without votes but with higher dividends to attract long-term individual shareholders. 
The idea was, in all likelihood, not that.
It was instituted near the height of the 2007 fear of foreign "hagetaka" (vulture) activist funds to create a different kind of permanent poison pill.
The terms of the preferred shares were that they would receive a dividend which was 125% of the common share dividend, and would not have voting rights unless no dividends had been paid for two consecutive years. If the company ever went into liquidation, the pref shares would have identical rights to common shares, but they would not be convertible to common shares at the option of the holder. They would, instead, be mandatorily convertible if the company did not survive a merger, or if a Tender Offer resulted in the company having a new owner of common shares of a ratio greater than 50%.
For any would-be acquirer, if they bought the common shares but did not also buy the pref shares, they could be diluted post tender offer so that they didn't own as much as they wanted. 
</div></div>The first day of listing, 3 September 2007, the shares traded at a 5% discount to common shares while offering a dividend yield 0.4% higher. That was the tightest discount and dividend spread the pair would ever see.  Three months later, the dividend spread was more than a percent wide because the prefs had fallen to a 30% discount, and another 3 months later the pref shares had reached a 40% discount to the commons.The Prefs now trade at a discount of 57+% to the common shares, and because of the tiny non-market-cap portion of Enterprise Value, at a similar discount of PER and EV/EBITDA. That actually makes the prefs a very inexpensive way to own the future of Ito En. But the very fact that these Prefs exist 13 years later is a serious governance matter. Seasoned Japan capital structure and relative value investors will look at the headline and ticker and dismiss this insight out of hand. The discount always widens.I will agree this has been an unfortunate outcome for shareholders of the common who received the prefs and did not bail immediately.Over the medium-long-term, it is strange that the company has not allocated its excess capital to buying back the prefs. It is accretive to everyone. Much more below.


The History
The stated concept was that the company wanted to attract more individual shareholders, but because most did not vote in shareholder meetings, the idea was to offer shares without votes but with higher dividends to attract long-term individual shareholders. 
The idea was, in all likelihood, not that.
It was instituted near the height of the 2007 fear of foreign "hagetaka" (vulture) activist funds to create a different kind of permanent poison pill.
The terms of the preferred shares were that they would receive a dividend which was 125% of the common share dividend, and would not have voting rights unless no dividends had been paid for two consecutive years. If the company ever went into liquidation, the pref shares would have identical rights to common shares, but they would not be convertible to common shares at the option of the holder. They would, instead, be mandatorily convertible if the company did not survive a merger, or if a Tender Offer resulted in the company having a new owner of common shares of a ratio greater than 50%.
For any would-be acquirer, if they bought the common shares but did not also buy the pref shares, they could be diluted post tender offer so that they didn't own as much as they wanted. 
The first day of listing, 3 September 2007, the shares traded at a 5% discount to common shares while offering a dividend yield 0.4% higher. That was the tightest discount and dividend spread the pair would ever see.  Three months later, the dividend spread was more than a percent wide because the prefs had fallen to a 30% discount, and another 3 months later the pref shares had reached a 40% discount to the commons.The Prefs now trade at a discount of 57+% to the common shares, and because of the tiny non-market-cap portion of Enterprise Value, at a similar discount of PER and EV/EBITDA. That actually makes the prefs a very inexpensive way to own the future of Ito En. But the very fact that these Prefs exist 13 years later is a serious governance matter. Seasoned Japan capital structure and relative value investors will look at the headline and ticker and dismiss this insight out of hand. The discount always widens.I will agree this has been an unfortunate outcome for shareholders of the common who received the prefs and did not bail immediately.Over the medium-long-term, it is strange that the company has not allocated its excess capital to buying back the prefs. It is accretive to everyone. Much more below.

Itoen Pref (25935 JP) - Big Discount, Ongoing Governance Disappointment

Event-Driven

Maeda Road Construction Co / Event-Driven

On January 20th 2020, after months of behind-the-scenes overtures and rejections, <a href="https://www.smartkarma.com/entities/maeda-road-construction-co" target="_blank" data-smartkarma-citation="entities:2168:1" rel="noopener">Maeda Road Construction Co (1883 JP)</a> asked its 24.8% shareholder <a href="https://www.smartkarma.com/entities/maeda-corp" target="_blank" data-smartkarma-citation="entities:6781:1" rel="noopener">Maeda Corp (1824 JP)</a> to cancel their capital ties (Maeda Road owns 4.3% of Maeda Corp as well). A few minutes later, Maeda Corp upped the ante and offered a 50% premium to minorities in Maeda Road Construction to lift its stake from 24.8% to 51.0%. It said there would be many synergies and growth and lots of good things. Maeda Road responded four days later with a <a href="http://www.maedaroad.co.jp/ir/2020/info_20200124_EN.pdf" target="_blank" rel="noopener">Position Statement</a> rejecting Maeda Corp's position, claiming there was almost no business (0.76% of consolidated annual revenues) between the two and there would be no synergies.<blockquote>
We have determined that becoming a consolidated subsidiary of Maeda Construction will impair our corporate value in all aspects and hinder our sustainable growth.
We will take necessary measures as soon as possible. We would like to ask our shareholders not to apply for the Tender Offer.
</blockquote>When explaining the reasons why they rejected Maeda Construction's tender offer, Maeda Road looked at the fact that Maeda Road had far surpassed its once-larger partner in market capitalization and profits, Maeda Road does not respect Maeda Corp's governance (though Road has its own issues with a fine paid related to asphalt cartel activity, and has paid five fines within the last five years from the Japan Fair Trade Commission), and would mean shifting to a situation where part of their business competed with its own customers. But that was not the crux of things. The crux was elsewhere.<blockquote>Furthermore, due to the extremely poor business relationship between the Company and Maeda Construction, the creation and increase of business synergies based on the above alliance is currently not expected.</blockquote>Basically, Maeda Road hates Maeda Corp. The shares popped, but they haven't gone above the Partial Tender Offer Price of ¥3,950/share. In the Position Statement (Against), Maeda Road said all nine directors who were not from Maeda Corp came to a consensus that such a transaction would damage the corporate value of the company and asked shareholders' understanding (i.e. to not tender). Separately, there have been stories since the day of the announcement that Maeda Road would seek to find a white knight.What Magic Could Maeda Road Conjure Up?Investment Bankers have libraries full of tomes in the Defence Against the Dark Arts section of their libraries. But all magicians know that such defence tactics may take a toll on the magician.It is worth thinking through what could happen.

On January 20th 2020, after months of behind-the-scenes overtures and rejections, Maeda Road Construction Co (1883 JP) asked its 24.8% shareholder Maeda Corp (1824 JP) to cancel their capital ties (Maeda Road owns 4.3% of Maeda Corp as well). A few minutes later, Maeda Corp upped the ante and offered a 50% premium to minorities in Maeda Road Construction to lift its stake from 24.8% to 51.0%. It said there would be many synergies and growth and lots of good things. Maeda Road responded four days later with a Position Statement rejecting Maeda Corp's position, claiming there was almost no business (0.76% of consolidated annual revenues) between the two and there would be no synergies.
We have determined that becoming a consolidated subsidiary of Maeda Construction will impair our corporate value in all aspects and hinder our sustainable growth.
We will take necessary measures as soon as possible. We would like to ask our shareholders not to apply for the Tender Offer.
When explaining the reasons why they rejected Maeda Construction's tender offer, Maeda Road looked at the fact that Maeda Road had far surpassed its once-larger partner in market capitalization and profits, Maeda Road does not respect Maeda Corp's governance (though Road has its own issues with a fine paid related to asphalt cartel activity, and has paid five fines within the last five years from the Japan Fair Trade Commission), and would mean shifting to a situation where part of their business competed with its own customers. But that was not the crux of things. The crux was elsewhere.Furthermore, due to the extremely poor business relationship between the Company and Maeda Construction, the creation and increase of business synergies based on the above alliance is currently not expected.Basically, Maeda Road hates Maeda Corp. The shares popped, but they haven't gone above the Partial Tender Offer Price of ¥3,950/share. In the Position Statement (Against), Maeda Road said all nine directors who were not from Maeda Corp came to a consensus that such a transaction would damage the corporate value of the company and asked shareholders' understanding (i.e. to not tender). Separately, there have been stories since the day of the announcement that Maeda Road would seek to find a white knight.What Magic Could Maeda Road Conjure Up?Investment Bankers have libraries full of tomes in the Defence Against the Dark Arts section of their libraries. But all magicians know that such defence tactics may take a toll on the magician.It is worth thinking through what could happen.

Maeda Road Needs A Rabbit From The Hat - What Rabbit's Possible? What Rabbit's Likely?

Most major indexes are currently trading at the lower end of their May trading ranges. Barring improving headlines regarding tariffs &amp; trade or comments from the Fed suggesting a potential rate cut on the horizon we believe global markets are vulnerable to further weakness. We review all major markets and highlight attractive opportunities within Japan, and global real estate developers, and consumer staples stocks.

Most major indexes are currently trading at the lower end of their May trading ranges. Barring improving headlines regarding tariffs &amp; trade or comments from the Fed suggesting a potential rate cut on the horizon we believe global markets are vulnerable to further weakness. We review all major markets and highlight attractive opportunities within Japan, and global real estate developers, and consumer staples stocks.

Major Indexes Testing Support & Vulnerable to Further Weakness

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

MARKET COMPOSITE<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/799/original/2018-12-22_16-48-37.png?1545464931" class="editor-image img-responsive" data-smartkarma-image-id="73799"></figure><div class="content-caption">Source: Japan Analytics</div>TRADING ZONE - As of last Friday, the Japan All Market Composite has now entered a bear market, having declined by 20% from the January 23rd high if Y757t. At the close, only 8% by number and 11% by value of Japanese stocks were trading above their weighted composite of 5, 20, 60, 120, and 240-day moving averages. These were the lowest closing values since February 2016 when the All Market Composite reached a low of Y475tand  offer an entry point for a short-term trade for those happy to hold over the extended New Year Holiday period.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/800/original/2018-12-22_16-49-53.png?1545465006" class="editor-image img-responsive" data-smartkarma-image-id="73800"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/801/original/2018-12-22_16-52-17.png?1545465147" class="editor-image img-responsive" data-smartkarma-image-id="73801"></figure> Source: Japan Analytics</div>BREAKOUTS -  The 'Breaking Bad' percentage reached 11% on December 4th, the tenth-lowest reading in three years bu thas yet to fall below '-15-.  Adding the Breaking Above and Breaking Below percentages together provides a more straightforward view of the 15% threshold that has marked previous short and medium-term turning points, and which again we have yet to reach.<hr> SECTORS<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/804/original/2018-12-22_18-10-04.png?1545469815" class="editor-image img-responsive" data-smartkarma-image-id="73804"></figure><div style="text-align: left;" class="content-caption">LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative 'crossovers'.</div>SECTOR BREAKDOWN - The top six sectors measured by the percentage above the weighted average of 5-240 Days are all, predictably, domestic and defensive -  Food, Beverages &amp; Tobacco, REITs, Information Technology, Internet, Media and Utilities. Equally predictable are the bottom half-dozen - Banks, Non-Bank Finance, Autos, Metals, Electrical Equipment and Chemicals. <hr>COMPANIESCOMPANY MOVING AVERAGE OUTLIERS - As with the market and sectors, out moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/073/816/original/2018-12-23_15-00-13.png?1545544826" class="editor-image img-responsive" data-smartkarma-image-id="73816"></figure><div class="content-caption">Source: Japan Analytics</div>THE 100% CLUB - As of Friday 21st, there were 16 extreme positive outliers and 622 extreme negative outliers. The number of extreme negative outliers suggests we are a short-term bottom.<div class="content-highlight">In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note. </div>

MARKET COMPOSITESource: Japan AnalyticsTRADING ZONE - As of last Friday, the Japan All Market Composite has now entered a bear market, having declined by 20% from the January 23rd high if Y757t. At the close, only 8% by number and 11% by value of Japanese stocks were trading above their weighted composite of 5, 20, 60, 120, and 240-day moving averages. These were the lowest closing values since February 2016 when the All Market Composite reached a low of Y475tand  offer an entry point for a short-term trade for those happy to hold over the extended New Year Holiday period.
 Source: Japan AnalyticsBREAKOUTS -  The 'Breaking Bad' percentage reached 11% on December 4th, the tenth-lowest reading in three years bu thas yet to fall below '-15-.  Adding the Breaking Above and Breaking Below percentages together provides a more straightforward view of the 15% threshold that has marked previous short and medium-term turning points, and which again we have yet to reach. SECTORSLEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative 'crossovers'.SECTOR BREAKDOWN - The top six sectors measured by the percentage above the weighted average of 5-240 Days are all, predictably, domestic and defensive -  Food, Beverages &amp; Tobacco, REITs, Information Technology, Internet, Media and Utilities. Equally predictable are the bottom half-dozen - Banks, Non-Bank Finance, Autos, Metals, Electrical Equipment and Chemicals. COMPANIESCOMPANY MOVING AVERAGE OUTLIERS - As with the market and sectors, out moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. Source: Japan AnalyticsTHE 100% CLUB - As of Friday 21st, there were 16 extreme positive outliers and 622 extreme negative outliers. The number of extreme negative outliers suggests we are a short-term bottom.In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note. 

Japan: Moving Average Outliers - Year-End Blues

Japan

ITO EN, LTD. produces various types of Japanese tea and canned beverages.

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Ito En Ltd (2593 JP)

Global Equity Rally Losing Upside Momentum

The global rally appears to be losing steam as the bearish rising wedge patterns we highlighted last week in the MSCI ACWI, ACWI ex-US, EM, and...

Vermilion Research

Itoen Pref (25935 JP) - Big Discount, Ongoing Governance Disappointment

The History The stated concept was that the company wanted to attract more individual shareholders, but because most did not vote in shareholder...

Travis Lundy

Maeda Road Needs A Rabbit From The Hat - What Rabbit's Possible? What Rabbit's Likely?

On January 20th 2020, after months of behind-the-scenes overtures and rejections, Maeda Road Construction Co (1883 JP) asked its 24.8% shareholder...

Travis Lundy

Major Indexes Testing Support & Vulnerable to Further Weakness

Most major indexes are currently trading at the lower end of their May trading ranges. Barring improving headlines regarding tariffs & trade or...

Vermilion Research

Japan: Moving Average Outliers - Year-End Blues

MARKET COMPOSITETRADING ZONE - As of last Friday, the Japan All Market Composite has now entered a bear market, having declined by 20% from the...

Campbell Gunn

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