Archive - Mar 2011

Now that the market has had some time to digest the events over the weekend, it may be time to hedge risk on the company most exposed to the nuclear shock in Japan, Tokyo Electric Power Company. The company was just downgraded by Goldman Sachs to Neutral (which means it held it as a Buy until now) as the firm does not see "a dividend hike"... We see far greater issues for the company's equity investors than just a dividend hike. Number one: TEPCO (9501.T) has over $90 billion in debt and roughly $30 billion in equity buffer. As Bruce Krasting points out vis a vis the equity - "it's gone." More from BK: "I used to work on financing these things. It's all long term leases. The actual debt behind the power plants is multiples of what they show on the balance sheet."

Based on information provided by Japanese authorities, the IAEA can confirm the following information about the status of Units 1, 2 and 3 at Fukushima Daiichi nuclear power plant.

"Increased volatility and a wider trading range from current low levels in $/JPY mechanically increases the likelihood of marking new record lows below 80. As seen in the past, this could lead to some disruptive price action. We doubt that the Japanese authorities would want to expose their economy to a potential exchange rate shock in addition to the earthquake. The authorities have already made clear that they will do their utmost to stabilise markets, and while the focus has been on liquidity interjections in local money markets, this commitment likely includes an FX intervention threat in case of disruptive $/JPY price action." - Thomas Stolper, GS

Contrary to expectations that the BOJ would injected "only" JPY2 trillion in its emergency operation earlier, Shirikawa came out with a stunner, putting in a whopping 7 trillion yen into Japanese money markets. From Reuters: "The Bank of Japan on Monday injected a hefty 7 trillion yen ($85 billion) into the money market in a same-day market operation aimed at soothing market jitters after a massive earthquake and tsunami hit northeastern Japan. This was the central bank's first so-called same-day operation since last May, when the Greek debt crisis roiled the global financial markets. BOJ Governor Masaaki Shirakawa said on Sunday that the central bank would provide huge amounts of liquidity to the banking system on Monday, reinforcing the bank's determination to keep markets stable in the wake of the disaster." In the meantime, after the Nikkei has plunged over 5%, and the Topix down by 7%, circuit breakers have been activated on the Tokyo Stock Exchange. Elsewhere, the US plunge protection is hard at work, sending futures surging from the overnight drop, after reality threatened to impose itself. Another masterful showing by Sack Frost.

As the dollar plunges (supposedly on news of that Frankenstein of a Euro treaty announced on Saturday morning and on capital repatriation in Japan) the real reason for the plunge can be found in the action of the precious metals, where both gold and silver are about to take out period highs on more imminent global fiat dilution.

Over time, it’s complacency that kills you...

As per the BBC, newly emerged footage shows the force at which the tsunami struck Japan's coast. In the fishing port of Miyako, in Iwate prefecture, boats were overturned, while video from Kamaishi city shows cars being dragged down city streets by the water. Footage courtesy of TV Asahi.

Japan's 9.0 earthquake is most likely a non-event for the crude oil, but the nuclear power basically has met its Deepwater Horizon.

While nobody has any idea just what lies in store in the coming week which is expected to be abnormally volatile, here is a summary of the key economic events from Goldman's FX desk. "It all came at once last week with the major drivers of market price action rolling across the newswires on Friday. Front, back and centre stage was dominated by the still unfolding tragedy in Japan. First and foremost our thoughts are with those affected by the situation. In terms of asset markets, it is tough to draw concrete conclusions until we have a greater handle on the monetary cost of the disaster which is likely to run into trillions of Yen. There are also many potentially offsetting economic forces at work after a natural disaster, which we will try to assess in coming days and weeks."
The Eurozone summit arguably produced a positive surprise in that steps have been taken to a final political deal at the European council meeting of 24/25 March...The week ahead will continue to focus on developments in Japan and the Middle East and any further political commentary associated with the European summit. The BoJ has shortened its monetary policy meeting to one day on Monday. In addition to pledges to provide ongoing liquidity and the maintenance of financial stability, the BoJ may decide to extend the QE proposals from September in order to shore up confidence

No one can predict exactly how this will all shake out, but Doug Casey has long said that a return to a gold standard, or some modern equivalent, is almost inevitable. That’s because, for the reasons Aristotle outlined 2,000 years ago (it’s durable, divisible, consistent, convenient, and has intrinsic value), gold is hands-down the world’s best money. Now, Gresham’s Law tells us that bad money drives out good, but that’s only true when legal tender laws hold sway (incentivizing people to hoard what’s perceived to be “good” money and spend the “bad” money as fast as they can). When people give up on the local legal tender, Gresham’s Law goes into reverse, and good money chases out bad. The dollarization of third-world economies is an example of this, the dollar being perceived as being good when compared to many shakier currencies.

For all who want to be up to speed with all the latest developments out of Japan, below we provide our readers with a live feed from the NHK, or the Japan Broadcasting Corporation.

Breaking news from Kyodo: the cooling system at Tokai, a third nuclear power plant now said to have cooling failures, has stopped according to the fire department. Tokai was Japan's first nuclear power plant. The plant has two reactors: a 1965 built Magnox-type 166MW, and a 1978 built Boiling Water Reactor generating 1100MW. As Wikileaks reports: "This Boiling Water Reactor  was the first nuclear reactor built in Japan to produce over 1000 MW of electricity. By some formalities in the paperwork, the unit is technically separate from the rest of the nuclear facilities at Tokai-mura, but it is managed with the rest of them and even shares the same front gate. The power produced at the unit is sold by both the Tokyo Electric Company and the Tohoku Electric Company." SkyNews adds that the cooling has failed at the bigger, BWR reactor.

As Gulf stock markets celebrate the lack of Days of Rage in Saudi Arabia on Friday, Bahrain is again reminding that not every country can buy the undying love of its citizens.  Per the AP, "thousands of anti-government demonstrators cut off Bahrain's financial center and drove back police trying to push them from the capital's central square - shaking the tiny island kingdom Sunday with the most disruptive protests since calls more freedom erupted a month ago." As a reminder, in February, Bahrain was the location of some of the most graphic atrocities against protesters. Since then, a swift surge in pressure from Saudi to moderate tensions resulted in an uneasy "ceasefire" although that now appears to have ended. "Demonstrators also clashed with security forces and government
supporters on the campus of the main university in the Gulf country, the
home of the U.S. Navy's Fifth Fleet." And as we pointed out before, should the Bahrain situation reach melting point, religious tensions across the area are sure to flare up: "The clashes fueled fears that Bahrain's political crisis could be stumbling toward open sectarian conflict between Sunnis and Shiites, who
account for 70 percent of the nation's 525,000 people."Add to this resumption of violence the fact that there was another round of protests in Saudi Arabia in front of the Interior Ministry on Sunday, and the "good" news from Friday are now long forgotten.

Something very serious is happening with Japan's underlying geology: while the north has been paralyzed by the aftermath of the 9.0 magnitude earthquake and resulting Tsunami, and is scrambling to prevent a nuclear disaster, the south is issuing flashing red light signals of its own: the Shinmoedake volcano, which had resumed eruptions after last known was reported in 2009. As Wikipedia notes: " As of February 2011, a lava dome was growing in the volcano's crater." It is unclear if the volcano's activity, which is notable for having been used as a location in the 1967 James Bond film, You Only Live Twice, as the volcano in which the villains' secret rocket base is located, is related to the geological tremors beneath Japan but it is very likely. The question is just how many faultlines will have shifted after all is said and done, and just what may have precipitated all of this.