Birchtree's Account Talk

[Birchtree]

imported post

And perhaps on the 12th week the I fund rested - my international fund has had a 9 week positive run - makes this contrarian bull just a little skeptical of the good times to come. Sometimes a little pain is good for the next wholesome gain. Read on...

From TWSJ: While observers of the U.S. economy fret about whether the house-price boom will falter and hurt economic growth, Europe is already facing a slowdown in housing markets that could hold back the region's fragile consumer spending, and its economy. Average home prices in many American cities were rising at a strong pace during the first half of the year. Now there are mounting signs that home sales are cooling, prompting economists to forecast smaller price gains next year. But parts of Europe have already reached that point.

Britain is the most visible example of the trend. The U.K. economy has stumbled badly this year after increases in home prices slowed almost to a halt and heavily indebted consumers closed their wallets. The Bank of England cut short the U.K.'s property boom by raising interest rates steadily from late 2003; its low rates earlier had helped to fuel the house-price increases.

The central bank was wporried about rising house prices but faced a dilemma because officially its mandate is only to target inflation. Also in weighing a rate increase, it had to consider the weak state of parts of British industry. The Bank of England tried to deflate the porperty bubble by talking aggressively about its dangers - but in the end only rate increases had an effect. The cost of the housing slowdown: Britain's economy is set to grow just 1.8% this year, slowing from 3.2% in 2004. The worst may not be over: Pessimistic observers forecast a 20% fall in house prices over the next three years. You heard it here first. Now the rate of growth in house prices is also dwindling in euro-zone countries such as Spain and France. In Italy, Belgium, Portugal, Greece and Ireland, rapidly rising home prices also have begun to cool off this year to varying degrees. Different factors affect the housing markets of individual countries and even regions with countries. But a pan European trend is becoming evident.

While no crash in home prices or consumption is expected. a slowing propertymarket could be a drag on consumer demand, just when the euro-zone economy was starting to strengthen after four years of painfully slow growth. The European Central Bank which sets interest rates for the 12 countries that use the euro, has already increased the key rate on 12/1/05 to stem inflation but also to try to take air out of somecountries' housing bubbles. Britain isn't part of the euro zone.

Since the late 1990s, the cost of buying a house has risen by 35% more than the cost of renting - about the same increase as in the U.S. The effect on consumer spending is smaller in Europe because unlike Americans, most Europeans can't easily borrow money for consumption against the rising value of their home. But the psychological wealth effect works in Europe, too: People who feel wealthier because their homes are worth more save less of their salaries.That helps explain why the Frenchhave cut their savings sharply since 2003, boosting consumer spending even while household incomes have grown only slowly. French consumer confidence has started to weaken this year, while home-price growth has begun to slip. So sorry.

 

[cowboy]

imported post

Birchtree wrote:

Cowboy,

Truth be known - over the years I've had my taste of failure - but when I'm right I make money. I use my TSP account to dollar cost average into the C fund on an every two week basis - that way I catch most of the sideways action and continue to build my position. I'm concentrated at 100%. I have several other accounts where I'm also concentrated - only in an international fund and small cap fund. These actually belong to my wife's retirement plan. My C fund has currently returned me a $1.14 since posting on TSP. There is actually more money gained when you take into consideration the effects of dollar cost averaging and the accumulation of shares. I'm presently pushing up against a gain of $40K and really have no reason to pull the pistols out at the moment - dollar cost averaging is the way to go. There will however come a time when I'll have to move but that is a long way into the future- I spend a great deal of time searching for the next top - no one waves a flag.

Dennis-perma bull #2

Interesting! You continue to cost average into the C fund? Basically this is allanyone is doing by buying stocks at any given time. I just do it more sporadic then others or hope to hit a shorter term rise in a fund if possible some times your wrong sometimes right.I havedone ok and better then the buy and hold theory. My thought is that the C fund is a steady fund but if you want to makea better returnhaving a feel forwhen to get into S & I pays big dividends for the risk. I believe weare hitting a peak in the S & C funds andif you were to cost average into them now would not be the time. Wait till January or February! Of course buying them for a short play is always an option but very risky. I believe the internet allows us to play the more volitile funds for a profit and since were at risk any way why not do it. For an example; Yesterday if I had been close to a computer and setting in the C fund Imay have just bought into the S fund and hope it goes up today! Then return to the C fund and save a share of the loss and hope the funds continue tracking up! You would of gained .05 cents a share by buying S yesterday then if the funds go up, usually S goes up faster than C. You still lose some but not near as much. You would be cost averaging into the C fund butat a faster rate then every two weeks. Being able to with stand risk is 90% of the game. Consider it farming either you get a good crop or it gets hailed out! I hope you have continued success!

 

[cowboy]

imported post

cowboy wrote:

Birchtree wrote:

Cowboy,

Truth be known - over the years I've had my taste of failure - but when I'm right I make money. I use my TSP account to dollar cost average into the C fund on an every two week basis - that way I catch most of the sideways action and continue to build my position. I'm concentrated at 100%. I have several other accounts where I'm also concentrated - only in an international fund and small cap fund. These actually belong to my wife's retirement plan. My C fund has currently returned me a $1.14 since posting on TSP. There is actually more money gained when you take into consideration the effects of dollar cost averaging and the accumulation of shares. I'm presently pushing up against a gain of $40K and really have no reason to pull the pistols out at the moment - dollar cost averaging is the way to go. There will however come a time when I'll have to move but that is a long way into the future- I spend a great deal of time searching for the next top - no one waves a flag.

Dennis-perma bull #2

Interesting! You continue to cost average into the C fund? Basically this is allanyone is doing by buying stocks at any given time. I just do it more sporadic then others or hope to hit a shorter term rise in a fund if possible some times your wrong sometimes right.I havedone ok and better then the buy and hold theory. My thought is that the C fund is a steady fund but if you want to makea better returnhaving a feel forwhen to get into S & I pays big dividends for the risk. I believe weare hitting a peak in the S & C funds andif you were to cost average into them now would not be the time. Wait till January or February! Of course buying them for a short play is always an option but very risky. I believe the internet allows us to play the more volitile funds for a profit and since were at risk any way why not do it. For an example; Yesterday if I had been close to a computer and setting in the C fund Imay have just bought into the S fund and hope it goes up today! Then return to the C fund and save a share of the loss and hope the funds continue tracking up! You would of gained .05 cents a share by buying S yesterday then if the funds go up, usually S goes up faster than C. You still lose some but not near as much. You would be cost averaging into the C fund butat a faster rate then every two weeks. Being able to with stand risk is 90% of the game. Consider it farming either you get a good crop or it gets hailed out! I hope you have continued success!

Looking at today if you would have made moves into and out of the S fund cost averaging back into C fundwould have cost you in the neighbor hood of $.03 a share verses the .11of losssince Tuesday. There is afair chance the markets may go up tomorrow ifC fund goes up 4 cents you actually win versus being behind. When the markets making lemons, you just need to make lemonade! Of course this may not alwaysworkthis way. If you average into all funds youare reducing risk, such are the L funds, also reduces reward.This is not for everyone and it may not be forBirchtree or othersbut I am just trying to give everyone a different view and strategy. The internet is the tool, now allweave to do is learn how to use it to our advanatage.

 

[Birchtree]

The Tokyo Exchange is considering whether to change its margin-trading rules, making tighter regulations a possibility at a time when long margin-trade balances hover at about 14-year highs.
From the WSJ:
Japan's largest stock-exchange operator said it is constantly monitoring market conditions but has made no decisions about tightening the exchanges's stock margin-trading rules.
Japan's Nikkei Stock Average of 225 companies has risen about 40% this year, and the country's markets have repeatedly reached five-year closing highs in recent weeks. The stock markets's quick rise has been accompanied by a massive buildup of long margin positions, leading to concerns that the market is overheated. Concerns over the margin-trading rules triggered profit taking in recent gainers such as insurers and real-estate developers.
The Tokyo Stock Exchanges's most recent weekly data showed that the balance of long margin positions on the Tokyo, Nagoya and Osaka exchanges declined slightly to 5.067 trillion yen ($43.59 billion) as of Dec. 22. This was the first decline in 19 weeks, though it was still just less than the 5.095 trillion yen mark reached Dec. 16 - the highest level since Aug. 2, 1991.
A TSE official said tightening margin-trading rules is one possible choice but stressed that no decision has been set.

 

[Birchtree]

Margin trading enables investors to trade shares in amounts exceeding the cash or stock they have on hand. Stricter margin-trading rules could be implemented by reducing the upper limit on the value of stock that can be counted as collateral or increasing the minimum margin deposit or both. While some market participants worried that the possible higher burden on retail investors could weaken investor sentiment, others said any selling impact would be short lived. The stricter rules may discourage individual investors from buying more stocks on margin. But the current rules were implemented by softening guidelines in the aftershock of the bursting of Japan's bubble economy, so the new TSE regulations may simply be a rollback to the original ones.
The comments by the TSE reported that the exchange is weighing plans to toughen margin regulations as early as the beginning of the new year, the first overhaul since 1990. News of the possible measure prompted selling in shares of big online brokerage houses, which have enjoyed strong earnings growth on the back of increased Internet-based trading activities.
IMHO 16,000 might turn out to be an intermediate top for awhile.

 

[oldschool]

Birch, thanks for posting the info on possible margin policy changes in Japan. Very interesting - makes me wonder if some of the brokerages in Japan were/are generating much of their profit from interest charged on margin accounts. Some of the big primarily online brokerages here in the US had around 40% of their profits in 2000-2001 period from interest charged on such accounts. I seem to recall some thought the decline in trading, and trading revenues, for US online brokers after 2001 didn't hurt them as much as the disappearing margin account interest revenues.

- oldschool

 

[Birchtree]

The good news about last year's flat stock market? Stocks got cheaper. The bad news? They could get cheaper still. In 2005, the Dow Jones Industrial Average had one of the most uninspiring annual performances of its 109-year history, finishing the year down 0.6%-which is to say almost perfectly flat. The broader market did a bit better, but with the S&P's 500 stock index gaining 3%, it, too, drew yawns rather than applause.

But even as the market treaded water, corporate profits grew quickly. Company analysts polled by Reuters Estimates predict that earnings for companies in the S&P 500 increased 13.6% in 2005. Because the S&P 500 went up less than its earnings, it's price/earnings ratio slipped. On Friday, the S&P 500 closed at 16.4 times 2005 earnings. IT finished 2004 at 18 times that year's earnings. In fact, it's the lowest S&P 500 P/E ratio in 10 years.

But Raymond James strategist Jeff Saut cautions that just because the stock market is less expensive now, doesn't mean that it's a coiled spring. (Wanna Bet) Rather, he thinks the Federal Reserve will keep raising short-term rates and that P/E ratios will continue to fall as a result. If even a savings account is giving a decent return, investors - conditioned to a market that hasn't been doing all that much - aren't going to buy stocks unless they're even less expensive. The result, Mr. Saut thinks, is that the market will stay basically flat as earnings rise - a situation akin to what happened through much of the 1970s into the early 1980s.

The S&P 500 finished 1972 at 118.05. At the end of 1981 it closed at 122.55 - 3.8% higher. Yet during that same period, annual earnings for companies in the S&P 500 had more than doubled. When the stock market doesn't go anywhere, fewer investors expect it to, and dividends become more important as a result. It is also the sort of environment where the biggest-capitalization stocks, which had come to be thought of as bellwethers in the days of the bull market, do poorly relative to their smaller, lesser know peers. Remember the secular bull market started in 1982 - and the Birchtree was there. I see a lot of positive similarities. I'll gladly wait longer for the C fund to command a lead.

 

[Birchtree]

I posted this information previously - but with so much focus on the dollar it may be worth repeating. A turndown in the dollar can be expected to have its benefits as far as the stock market is concerned - almost 40% of the S&P 500 revenues are derived from overseas operations. From a big picture standpoint, a weaker dollar is good for large-cap export oriented growth companies. Not that great for I fund companies - will reduce their exporting revenues. Non-financial companies in the S&P 500 could have some $700 billion in cash by the end of 2005.

Also, capital expenditures, which include all kinds of spending that enhance a business's long-term prospects, such as buying or upgrading buildings or equipment, have been growing at a rate of about 11% in the U.S. for more than a year, though that has been edging up a bit lately. But there are some signs that the spending is starting to rise faster, at least among larger public companies. Companies in the S&P 500 stock index increased their spending on capital expenditures during the third quarter of 2005 by 24%, compared with the same period in 2004. That is quite a change. After a surge in the late-1990s, capital expenditures for these larger companies declined on a year-over-year basis between the third quarter of 2001 and the fourth quarter of 2003, and have averaged about 9% increase each quarter subsequently.

A number of analysts expect a jump in this kind of spending in the next year. That is in part because U.S. companies are sitting on a record pile of cash, and many haved pared their debt, giving them ample funds to boost spending. While many have used that largess to increase share buybacks, dividends and acquisitions, a jump in capital expenditures could be in store for 2006, as the recovery grows long in the tooth and companies deal with capacity strains in their businesses.

 

[Birchtree]

Japanese economic growth may not translate to stocks

The good news from Japan: Its economy is looking more robust than ever. The bad news, for investors: 2006 may not produce the kind od stock market gains seen last year. The government forecasts the economy will expand 1.9% in price-adjusted terms in the fiscal year ending March 31, 2007. While that would be slower than the 2.7% forecast for the current fiscal year, economists say they expect this growth will be more sustainable.

Much of Japan's growth in fiscal 2003, when it expanded 2.3%, and in fiscal 2004, when it grew 1.7%, came from exports. But dependence on exports makes Japan vulnerable to slowdowns in its main markets - the U.S. and China. Public-spending packages and exports drove bursts of growth in 1996 and 2000, but those quickly petered out into recession.

In contrast, domestic demand, particularly consumer spending, fueled the past year's growth. That is because, during the long downturn, Japanese corporations slimmed down. According to the latest installment of the Bank of Japan's much watched tankan business survey, the ratio of recurring profits to sales , a good measure of an organization's ability to generate profits, is now the highest ever. Corporations have started to use their earnings to take on more workers, and increase pay, which hadn't risen since 1997.

But optimism about the economy doesn't automatically translate into stock market gains. One reason is Japanese corporations will find it harder from now on to boost their profits. Their recent profit increases depended heavily on cutting costs. But wages are rising, and so is the price of raw materials like oil and steel, leaving little room for further cost cuts. Another reason is the stock market rose strongly last year in anticipation of higher profits likely to be announced later in 2006. The 225-share Nikkei Stock Average rose 40% during 2005 to end the year at 16111.43. So far this year, market participants have continued to be bullish. Yesterday, the Nikkei average hit its highest close in more than five years - the Nikkei rose 0.4% to 16425.37, marking its highest close since September 2000.

A survey of chief executives of large corporations showed 18000 as a typical expectation for the index's peak this year. I prefer a top of 24000 and will hold my international position until we get close to it. Have fun.

 

[Birchtree]

Alittle negativity never hurts.

Few forecasts call for strong gains in the stock markets, especially in light of the advanced age of the bull upswing. The Fed is normalizing interest-rate levels in a healthy economy rather thantryingtocooloverheated conditions. Technical analyst think the current bull market will run out of steam and begin a sustainable cyclical decline that would set the stage for a new advance in 2007-08. On a longer term basis, the outlook for bonds remains bullish. The Fed's preoccupation with inflation seems to be overdone, as demonstrated by benign core inflation data and the flat yield curve. When VIX volatility troughs and begins to rise, higher-quality strategies, which tend to be earnings or dividend driven valuation models and generally have lower beta exposure, are more likely to start to outperform. Reminds me of C.

And a little something bullish - try to remain calm.
Pull backs in a wave 3 are of minor magnitude and short duration. This market has motivation to rally into March 28th. I'll be there for that.

 

[Birchtree]

What negative divergence?

Once we get to Dow 10,940.55 and an in the clear, if the bull market is continuing, as such a move would confirm, then this market completed its third year on Oct 9'05 and the odds are 87% that it will continue to its fourth anniversary. Over the past 100 plus years, there have only been eight times that bull markets lasted three years, and then seven of them went on to last four years or longer with an average gain of 20% in that fourth year. I'm projecting that eventually we'll see more technical analysis people like the Technician proclaim that we are indeed in a secular bull market - can't wait.

But until then there is immediate risk that a negative divergence could occur if the DJIA were to reach a new high but the DJU, which are nearly 8% below their October peak, fail to hit a new high. Just another rock in the rock wall of worry like the inverted yield curve. As a side comment, there are still very few people who are bullish - and that is exactly the way it's supposed to play out - the bull wants to take as few people for the ride up as possible.

 

[Birchtree]

Oceanic and Tugboat update -

I thought I would take a few moments to update several of my accounts to set a base line for the new bull market of 2006 - 2008. The Oceanic is rapidly pushing its way to the $1million mark - as of this morning for yesterday the value is setting at $971K. The smaller yet vibrant Tugboat is pushing the $450K mark - setting at $448K and entirely in the wall flower C fund. The wife has substantial assets tied up in the OTCFX small cap fund and the AEPGX international fund. And of course what is hers is also mine - right? But inorder to protect the privacy of the innocent I will only tell you she is approaching $350K. The 2lt daughter has joined the TSP program and is in the long and hopefully enduring process of accumulation - and is presently following Dad in the C fund. When she is deployed in August'06 we'll change the contribution allocations to 75%C fund and 25% I fund.

Presently I have some concerns long term regarding the performances of both the S fund and the I fund. So I'm a contrarian vigilant bull - disciplined to hold my positions for the immediate future but geared to exit over time when the situation presents itself.

I'm not a follower of Elliot wave but I do pay attention to what all bears have to opine. The R2K may be set up for a good decline. Here's why: the geometric differences between the impulse and diagonal pattern are that the impulse pattern tends to form a parallel channel line, where as the dagonal forms a converging channel line. In all cases diagonals are found at the termination points of larger patterns, indicating exhaustion of the larger movement. If they could be correct the R2K is heading for a dramatic reversal - only question is when. It would seem reasonable that we may actually be in a blow off top for the small caps - but time will show the answer - just have to be cognizant. It's like not forgetting about the 4-year cycle low that will be due.

Until then - full speed ahead. I simply enjoy a good bull market and if this puppy developes into a secular bull market I may end my employment early and seek my own retirement.

 

[ocean]

Birchtree,

Congrats. Very nice portfolio and I'm sure you can retire comfortably.

Ocean

 

[Birchtree]

not so fast Gene Autry

Only can do (hedge this one) if Dow shows 17,000 and the S&P 500 shows 1700. And a C price of $17.00 would provide a cushion to be able to at least hedge even more by working part-time. It all at the moment depends on the term secular rather than cyclical. I will be buying all the way up providing that is the direction, or I'll be buying on the way down providing that is the direction. I don't want dollar cost averaging to end yet - that would be one great sacrifice - I enjoy the roulette of the distribution and I especially enjoy the agony of a correction consolidation bottom. I'm such a fool for pain - if I'm not experiencing the joys of pain then I start to become suspicious like the bears - and I have to remind myself that I profess contrary - but the moments in the sun provide the vitality to perservere and eventually you reach the point that you could become well a part-timer. Take care.

 

[Birchtree]

During the 12th week the I fund rested - quietly

The trade report today showed the trade gap narrowed in November - beating expectation estimates. The trade report may be a sign of good things to come on the trade front. In recent months, it appears that U.S. households have been slower to take on debt, which, overtime, will mean their spending will grow by less - cutting into import growth and contributing to a narrow trade deficit. Also, rising exports may be a freah sign other countries' economies are picking up steam. The upshot, after more than a decade of the U.S. propelling the world economy, other countries might be stepping up to the plate.

In the U.S. consumer spending now accounts for about 70% of gross domestic product. Meantime, other countries have heavily depended on their exports to the U.S. for growth. The U.S. has a trade deficit with all six of its partners in the Group of Seven leading industrial nations. Some of those countries, such as Japan, have benefited from U.S. consumer spending in other ways, too. It looks as though China exported about $250 billion of goods to the U.S. in 2005, up from about $100 billion in 2001. A wealthier China is buying more goods from Japan. Generally speaking, stocks are seen as leading indicators of consumption, so surging overseas stock markets in the past year may suggest that many countries are going to see their domestic consumption pick up.

The rallies in Tokyo and Frankfurt, in particular, suggest a level of optimism over the Japanese and German economies not seen in years. The pickup in those economies should help mute the effects of a slower U.S. economy this year. It should be a boon for U.S. exporters that do a lot of overseas business. Almost 40% of S&P 500 revenues are derived from overseas operations. A weaker dollar is good for large-cap export-oriented growth companies. I would not overly concentrate on dollar currency valuations as a reason to own the I fund. They are all in secular trends in my opinion.

 

[Birchtree]

small caps - why?

Even though the yield curve is now flatter, long term yields are still historically low, keeping mortage-lendig rates attractive. That means the housing market, and the economy, should remain strong next year, and the multiyear run by small-cap stocks - which tend to thrive in a healthy economy because they have more room to grow than their large-cap brethren - will continue. If the yield curve doesn't slow the economy, you do not want to be in blue-chip large-cap defensive stocks; you want to be in the smaller caps.

Proponents of the idea that a flatter yield curve doesn't bode dark times for stocks point to the mid-1990s, when the spread between the two-year and 10 year Treasury note narrowed dramatically after a rate-tightening cycle by the Fed. In the wake of that narrowing spread the S&P 500 rallied 34% in 1995, and 20% in 1996.

 

[Birchtree]

MCO and MCSUM

The McClellan Oscillator reflects the short term strength and direction of market liquidity. MCO is the difference between the 5% and 10% indexes, which are a 19-EMA and 39-EMA of daily advances minus declines. A longer term view is provided by the Summation Index, which is the cumulative total of the McCellan Oscillator values. These indicators move within a trading range and also help determine the overbought/oversold condition of the market.

Currently there is a series of tops beneath tops on three year graphs controlling the MCSUM pattern from the high point in 2003. The top seen in 2003 was an all time high on the traditional NYSE breadth MCO. Each of the rallies that have taken place since the initial bottom of March 2003 has had the MCSUM move above this level, including the current sequence. The level is +500. If we break above the declining tops line which currently crosses at around the +750 level, this wouldsuggest a new bull market in process. A break above the resistance line of MCSUM will seal the deal. It has been suggested if this happens that the 4-year cycle bottomed last October - a full year ahead of schedule. Every day is another day in the grid - looking for a secular bull market confirmation.

 

[Birchtree]

Nyse

NYSE breadth MCO has moved back to the area that provided prior resistance in mid December. This down move in the MCO has also slowed the rate of ascent of the NYSE breadth MCSUM as it approaches +750 resistance area (currently at +686). Components of the MCO remain positive, and overall bottoms above bottoms continue to control the MCO pattern.

In both the NYSE and NASDAQ, the 10% component of the MCO either held or moved higher Friday 1/13/06.

The MACD on the NASDAQ chart has just moved back into positive territory intimating that we could see some more upside.

In 2005 the S&P 500 companies spent more than $300 billion on buybacks, up more than 50% from 2004.

 

[Birchtree]

C-man here

With real interest rates low, an end to the current Fed rate increase cycle would suggest that another round of asset inflation may be around the corner. Housing assets have been inflating recently; looking ahead, a stable monetary policy and a slow down in housing demand would probably encourage investors to allocate assets away from housing and toward equities.

For U.S. equity investors, it's important to note that the composition of GDP differs a great deal from the make up of the S&P 500, in which industrials, tech, and basic industry account for almost 30% of market capitalization and consumer cyclicals accountr for only 10%. Housing is more than 5% of GDP, for example, but it is a fraction of 1% of the stock market. There is probably a one to one split between what is consumer-related and what is business related in the S&P 500; in the GDP data, the split is about five to one. Moreover, exports are barely 10% of the broad economy, but foreign-derived sales account for more than one-third (40%) of the revenue stream of the S&P 500 companies.

Although the large percentage gains and new bull market highs on most of the market averages were impressive, the most-outstanding technical feature of the revived uptrend was the 5.5 to one weekly ratio of advancing issues to declining issues on the NYSE. History shows that, during the past 35 yeras, there have been only 23 previous weeks when that average had a ratio of five to one or higher.

Looking at those instances to determine if such a broadly based advance had any consistent implications for the market's future performance, there are some interesting results. One month later, the S&P 500 was up 17 of 23 times, with an average net change for all 23 experiences of plus 2.6%. Three months later, that index was up 16 of 23 times, with an average net change of plus 4.3%. Six months later, it was up 17 times, with an average net change of plus 8.8%. One year later, it was up 18 of 23 occurrences, with an average net change for all occasions of plus 11.5%.

 

[Birchtree]

Pavlov is in Japan

From TWSJ:

Because hedge funds have been big players in Japan, one might expect the recent trouble in the Tokyo stock market would have them yelping in pain. Instead, it has got them drooling like Ivan Pavlov himself was ringing the bell. A Tokyo District Prosecutors Office raid of the offices Internet company Livedoor on Monday night in Japan unleashed the heaviest bout of selling Tokyo has seen since 2004. The Nikkei index fell 5.7% over the next two sessions, but the real pain came in the smaller, tech-oriented stocks that Japan's burgeoning culture of day-trading individual investors have been embracing: The Tokyo Stock Exchange's Mother Index (the name stands for "market of the high-growth and emerging stocks") had a two day drop of 22.4%.

For professional investors, it smacks of the kind of panic selling that can create hugh buying opportunities. One reason the hedge funds are being so brave: It is the beginning of a new calendar year, so they can afford to take chances. After all, if one investment strategy sours this early in the year, they still have 11 months or so to make it up. But if the Livedoor raid had happened a month ago, they might have been bailing out of the market just as actively as Japan's day traders rather than risk seeing their returns for full-year 2005 take a hit.

What U.S. investors may not recognize, however, is that professional Japanese investors don't have the same sort of buy-on-the-dips mentality that they do. As the hedge funds scoop up shares, Japqanese institutions may be more than willing to sell.