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The rising sun

It took over 34 years, but trading floors across Tokyo today erupted in cheers and applause at the end of the market session. The Nikkei 225 (NKY:IND), Japan's main stock index, closed at a new all-time high above 39,000, following a record run last seen during the country's late-1980s asset bubble. In fact, the Nikkei has been the world's best-performing major index in 2024, surging 17.5% only two months into the year and trouncing the impressive near 5% advance of the S&P 500.

Why so hot? There are several factors at play, with many seeing a new era for the Japanese market. A falling yen and the fading promise of China have lured foreign investors (like Berkshire's Warren Buffett) and boosted earnings of heavyweight exporters. Additional bright spots have been the corporate governance changes that have sent stock buybacks soaring, while excessive cash balance sheets have declined, as well as strategic crossholdings between conglomerates. It also comes amid optimism that Japan has finally escaped from the doldrums of deflation, and big industry that has been pumping in investment from semiconductors to artificial intelligence.

"Japan is re-emerging from its multi-decade long hibernation with multiple government initiatives that have held back share valuations starting to reverse course, for both Japanese shares and the yen," SA analyst Dan Stringer wrote back in December, when determining the "Best Idea for 2024." He recommended the iShares MSCI Japan ETF (EWJ), highlighting that it traded at a 15x multiple, compared to the over 26x earnings multiple of the S&P 500 (SP500). However, the "biggest risk is that the government bodies start to lose confidence in the policy pivots" for reasons that include "wage inflation not taking hold like it is currently anticipated."

Thought bubble: The record stock gains are taking place at a time when Japan is mired in a recession. Germany last week even ousted the country as the world's No. 3 economy (per nominal GDP in dollar terms) due to a weak yen and an aging population that is not being easily replaced. "Thankfully the economy is not necessarily the stock market," adds Stringer, referencing a common divergence that factors in monetary policy, stock ownership and cash flows, and forward-looking sentiment.

AI boost

Nvidia (NVDA) surged 9.1% to $735.94/share AH on Wednesday as the chip giant once again surpassed expectations with its Q4 results, with AI accounting for around 40% of its data center revenue last year. During Nvidia's earnings call, executives detailed an exhaustive list of companies and industries embracing its generative AI, providing a never-ending deluge of demand. "Accelerated computing and generative AI have hit the tipping point," said CEO Jensen Huang. “Demand is surging worldwide across companies and nations... Auto, health, robotics, financial services... multibillion-dollar industries are embracing our generative AI." (57 comments)

Cutting too soon

Most Federal Reserve policymakers highlighted the risk of moving too quickly to ease policy, according to minutes from the FOMC's Jan. 30-31 meeting, with a minority feeling that keeping policy too restrictive could tip the economy into recession. There was no discussion on when rates might get cut, but policymakers noted the importance of monitoring data to see whether inflation continues to move toward the Fed's 2% goal. Perhaps more importantly, members agreed that the federal funds rate is "likely at its peak for this tightening cycle," and the FOMC also discussed the process of reducing the size of the central bank's balance sheet. (39 comments)

Economies of scale

The oil and gas industry is set for more consolidation. Chord Energy (CHRD) and Enerplus (ERF) have agreed to an $11B cash-and-stock merger, creating a Williston Basin-focused E&P company. The combined firm's Q4 production is expected to be 287K boe/day, and oil would comprise about 56% of its output. Recall that Devon Energy (DVN) had reportedly offered to buy Enerplus, but the latest news sent shares of the latter soaring 9.6% AH on Wednesday, while Chord rose 2.4%. Wall Street Breakfast also recently discussed the reasons behind the growing M&A activity, assessing the rampant consolidation in the Permian Basin. (10 comments)

Today's Markets

In Asia, Japan +2.2%. Hong Kong +1.5%. China +1.3%. India +0.7%.
In Europe, at midday, London +0.2%. Paris +1.1%. Frankfurt +1.4%.
Futures at 7:00, Dow +0.3%. S&P +1.3%. Nasdaq +2.1%. Crude -0.2% to $77.77. Gold +0.2% to $2,039. Bitcoin +1.1% to $51,653.
Ten-year Treasury Yield -1 bp to 4.31%.

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Chicago Fed National Activity Index
9:45 PMI Composite Flash
10:00 Existing Home Sales
10:00 Fed’s Jefferson Speech
10:00 Quarterly Services Report
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
3:15 PM Fed's Harker Speech
4:30 PM Fed Balance Sheet
5:00 PM Fed's Kashkari Speech
5:00 PM Fed's Cook Speech
7:35 PM Fed's Waller Speech

Companies reporting earnings today »

What else is happening...

Boeing ousts 737 Max leader, names new quality control head.

iSports: Apple (AAPL) launches free new app for the iPhone.

UAW reaches deal with Ford (F), averting strike at Kentucky plant.

Rivian (RIVN) slides after posting another loss, announcing job cuts.

Lucid (LCID) falls as Q4 sales drop, production outlook disappoints.

Reddit (REDDIT) inks first AI content licensing contract with Google.

Royal Caribbean Cruises (RCL) raises annual adjusted profit guidance.

Demand concerns: Sunrun (RUN) shares tumble after earnings miss.

Super Micro Computer (SMCI) launches proposed $1.5B note offering.

Intel (INTC) unveils Microsoft partnership, new foundry system for AI.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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