Archive - Apr 2011

Tepco comes clean ...

"The United States is fortunate: unlike Greece, Spain and other countries that ran out of time, public and private sector investors are giving the US the benefit of the doubt. Treasury yields are stable, even with Fed support for Treasury markets expiring in the summer. The last 100 years of solvency, entrepreneurship, growth and military power led to the acceptance of the US dollar as the world’s reserve currency, and of its debt markets as “riskless”. The ballooning amount of government debt outstanding, the costs of servicing it and future entitlements could change that. Absent some of the changes discussed on prior pages, it may become difficult for markets to avoid factoring this in. In our view, the long-term US fiscal situation argues in favor of shorter-duration G7 government bond holdings, non-dollar assets and portfolios positioned for volatile markets (hedge funds, distressed assets and credit as a complement to equities). It also argues against applying 1990’s valuation multiples to today’s corporate profits. We are optimistic on profits growth this year, but do not believe the markets will be paying more for them." Michael Cembalest, JPM

The story that continues to expose the dirty laundry of Berkshire, much the Octogenarian of Omaha's chagrin, refuses to go away. According to the a newly released version of the Lubrizol proxy statement, it appears that there was a modest change in the "recollection" of events from Lubrizol's perspective, most notably a change in language describing the amount of information relayed to Sokol by Citi's bankers expressing just how seriously LZ was taking Berkshire's preliminary interest in the firm ahead of Sokol's major $10 MM stock purchase.

Back in October, Zero Hedge discussed a Costco offer for Shelf-Reliance THRIVE's one year's supply of dehydrated, freeze dried food, better known as "apocalypse rations." Six months ago a one year's supply of food for one person which included 5,011 total servings (84 #10 cans) could be purchased for $799.99 (the link for the offering is here, or rather was, here). A series of events made us encounter a comparable THRIVE offering at Costco. To our amazement in six months, the real price inflation in apocalypse rations, when factoring proportioning, is almost 50%! While the original set that was presented back in October is no longer available, what Costco does offer is a Shelf Reliance THRIVE 6 month supply supply for the price of $579.99: this represents the pinnacle of that ultimate in inflation disguising techniques: cutting the price by X while cutting the amount offered by Y>>>X. Indeed, to last a person a full year, one would need to be two of the 6 month supplies for a price of $579.99 or $1,159.98. And even that has to be indexed: the current set has 2,470 total servings, whereas the previous offer had 5,011, or 203% more. In other words, to index for the proper serving ratio the final price is actually $1,176.65. We can only hope that there are those who purchased this product when we first presented it (and don't worry, with a 25 year shelf life, it lasts a looooong time) and saved themselves the 47% inflation in 6 months! And then there are non THRIVE product offerings, such as the one below for 2 people for 3 months for $999.99 (and includes its own 55 gallon water storage set), which represents price inflation well over 100% for those who need a little extra caloric kick (and, naturally, post-apocalypse social status with the neighbors). Something tells us in another 6 months, the Costco price today will be just as lamented as the price from 6 months ago currently is.

Should we be cautious, or is this just fearmongering? I don't know ... make your own decisions.

Dr.Andrew Bogan is a managing member of Bogan Associates, LLC in Boston, Massachusetts. In an attempt to understand the relatively new but wildly popular Exchange Traded Funds (ETFs), Dr. Bogan did extensive research into the structures used by ETF operators, with a special focus on the potential risks that might arise should they be faced with large and sudden liquidations. Given that there are about 2,000 ETFs in existence, with assets totaling over $1 trillion, we thought it appropriate to find out what Dr. Bogan has learned in his research.

The purpose of this essay is to address certain common perceptions, or rather misperceptions, about Japan that prevailed before the latest crisis. In particular, I wish to examine the dreaded Ds which have afflicted Japan in recent years: demographics, deficits, deflation and (corporate) decline – to which must now be added (natural) disaster. Do investors in Japanese stocks face yet another lost decade?...There’s little doubt that Japan’s economy is capable of growing again and that returns on investment are capable of improving. All that’s needed is the will. As a nation, Japan has often moved at a painfully slow pace. But few peoples have demonstrated such a capacity for rapid change once they have decided upon it. The Japanese modernized at a blinding pace after the Meiji Restoration of 1866. The same spirit was on display during the reconstruction miracle after the Second World War. It had become fashionable to decry the unadventurous younger generation as stay-at-home “herbivores.” Yet the world’s admiration for the Japanese people has been rekindled by their stoic response to the most recent national catastrophe. If this spirit and sense of unity were directed toward Japan’s economic revival, a third lost decade would surely be averted.

Time to upgrade Fukushima from 7 to 7¼? From Reuters: "A fire broke out at Japan's crippled Fukushima Daiichi nuclear power plant, operator Tokyo Electric and Power (TEPCO) said on Tuesday, although flames and smoke were no longer visible. A worker saw fire at a building near the No.4 reactor at around 6:38 a.m. (21:38 GMT) and a fire fighting unit of the Self Defence Forces was sent to fight the blaze, a TEPCO spokesman said. "Flames and smoke are no longer visible but we are awaiting further details regarding whether the fire has been extinguished completely," he said. Japan has been battling to bring under control the plant damaged severely by last month's devastating earthquake and tsunami."

Update: TEPCO says fire out at battery storage bldg near Fukushim-1 reactors 1-4. No effect to reactors, water cooling continues.

George Galatis became world famous in 1996, when Time Magazine featured him in its cover article “Nuclear Warriors”. Today, he warns that that the situation in the USA may soon become much graver than that in Japan. Working as a Senior Engineer at Northeast Utilities company (NU) in Connecticut, Galatis noticed that across the country, high-level radioactive waste was being stored in overfull spent-fuel pools, creating the kinds of risk that could lead to a nuclear disaster with radiological consequences greater than those in Japan today, graver than even the Chernobyl disaster. Indeed, along with a host of other safety related issues, his 1992 memo specifically mentioned that some of the pool’s cooling pipes weren’t designed to withstand an earthquake as they were required to. So what does whistleblower George Galatis make of the global nuclear crisis that developed since the earthquake and tsunami of March 11?

Yellen is a Dove. I want her on record.

What started as less serious than Three Mile Island has just become as serious as Chernobyl, with the Fukushima disaster assessment having been raised to the highest, Level 7. From NHK: "For a series of accidents happening at TEPCO's Fukushima Daiichi Nuclear Power Station, Nuclear and Industrial Safety Agency of the Ministry of Economy, which released large amounts of radioactive substances that affect human health and the environment in a wide range As an assessment based on international standards of the accident, the worst "level seven" decided to raise. "Level 7" is the same as the evaluation occurred in the Soviet Chernobyl disaster. Nuclear Safety Agency, 12, held a press conference with the Nuclear Safety Commission has decided to publish the contents of the evaluation." Of course, due to the much greater concentration of people, and the far smaller land territory, should Japan continue to persist with "controlling" the crisis with the same success as it has over the past month, very soon a Level of 8 and/or higher may be required. In the meantime, we are getting unconfirmed reports that radiation content in Hawaii milk is orders of magnitude greater than Federal Drinking water limits. While one can bicker over the exact number, it is certain that as long as Fukushima continues to billow radioactive smoke, steam and/or water, cumulative radiation levels, both domestically and globally, can only go in one direction.

With oil once again supposedly doing a headfake on the second round of Libyan peace reports (remember when Hugo "Peacemaker" Chavez was going to usher in a new era of world peace?) here is Stratfor with a much needed analysis beyond just the headlines, of the real and very deep obstacles to a ceasefire in Libya, which may pour some water over the next attempt at spinning a "give ceasfire a chance" meme, which as we predicted yesterday will last at most a day or two. As for our comment that Goldman is now merely loading up on oil, well: we were right. Following the closing of Goldman's Top trade of 2011 which told GS clients to sell Crude, Copper, Cotton And Platinum who do you think was on the other side of the trade?

WTI, Brent or Gasoline?

In addition to everything else, The Fed is now in charge of the VIX: "There is compelling evidence the Federal Reserve is artificially suppressing spot volatility through the quantitative easing program. Consider the chart below that shows how the VIX and the S&P 500 index performed on days when the Federal Reserve purchased US Treasury bonds as part of QE2 compared to days without Fed intervention (November 10,2010 to March 30, 2011). On days without debt purchases the VIX index was up +2.14%and the S&P 500 registered as light decline. On days with debt monetization the VIX dropped-0.45%and the S&P 500 index increased. What is even more convincing, the greater the amount of the debt monetization the larger the corresponding drop in volatility and increase in stock prices. During the 44 days on which the Federal Reserve purchased $7 billion+ in debt or more the VIX index dropped-0.57%and the S&P 500 gained0.21%! The connection between lower volatility and QE2 is undeniable. It is not hard to imagine that spot volatility would be much higher absent government intervention in markets. The artificially low volatility in markets may contribute to a dangerous build up in systemic risk."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 11/04/11