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NTT – Hedge Your Dollars

The Dollar has been in a free-fall against the Yen. There are a number of reasons, most related to the coming end of ZIRP and the repatriation of massive amounts of Japanese capital that was borrowed for nothing and invested offshore. The reasons are beyond the scope of this blog but sentiment appears to be turning against the dollar.

USD_JPY

One way to add some Yen-Dollar portfolio protection is to buy Japanese equities. You can buy ETF’s like the iShares (EWJ), but you have exposure to the Japanese export economy, something that could be negatively impacted by a rising Yen. I think this is an acceptable risk (Opinion: Taiwan and China stand to benefit most from China’s growth) but some don’t, so another solution is needed.

My preferred way, and one that is consistent with our investment strategy is to buy NTT (Nippon Telegraph and Telephone Corp) equity (NTT). NTT generates large amounts of cash and has little foreign market exposure. More importantly, the cash it generates is domestic sourced Yen.

You then own a speculative play on a company that is at the forefront of innovation and committed to driving down operational expenditures in their network. More importantly you’re buying Yen cash flow with your Dollars, and getting the currency hedge you need.

I believe buying NTT is less risky than buying the whole Japanese market, provides a superior currency hedge, and holds the potential for upside as they find ways to reduce costs and launch new services with their advanced infrastructure. It’s a Japanese value stock and a great way to reduce your dollar exposure.

Do your own research, don’t make decisions based on what you read here, and read my disclaimer.

Update May 15 - Seeking Alpha expanded on my idea and added some valid criticism.

Discussion

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  1. why dont you include chart on NTT?

    could ntt be like ATT?

    J boyd

    Posted by james boyd | May 14, 2006, 1:59 PM
  2. Good write-up Andrew — it was thought provoking and prompted me to dive into it on The Japan Stock Blog at Seeking Alpha. Also, I came across something today inline with your thinking. How about Aflac (ticker: AFL) which according to a Bloomberg article from yesterday says it derives 73% of its revenue from its Japanese unit? I did read at Reuters however, that Aflac is unhappy with its recent performance out of Japan and hopes to improve upon it — Aflac is still maintaining its guidance. Without getting into the nitty gritty of Aflac’s business and positioning, my stance on AFL is the same as NTT because it has been on somewhat of an uptrend and is trading near its 52-wk high, and we still see the dividend yield at about 1%.

    Posted by Steven Towns | May 16, 2006, 11:29 AM
  3. I know zero about Aflac other than they sell insurance and have a duck as a mascot.

    Posted by Andrew Schmitt | May 16, 2006, 2:13 PM