Archive - Apr 2011 - Story

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.

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?

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?

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

Alcoa misses revenue, which prints at $5.96 billion: a $100 million miss to consensus. EPS in line with GAAP expectations of $0.28. EBITDA (cash flow proxy) of $955 million misses by a major $60 million. CapEx of $204MM is massively lower than consensus of $475MM (granted from one analyst): capital spending continues to be latent.

With everyone transfixed by the relentless move higher in silver, stories, myths and virtually anything is used a catalyst to explain any move lower in the precious metal. While earlier there already were two rumors that the COMEX would imminently hike gold and silver margins again (so for untrue) what is true, and what many are attributing the move in silver to, is what according to some is an outsized option bet that SLV will drop 37% by July. Bloomberg reports: "A trader’s almost $1 million bet that an exchange-traded fund tracking silver will plunge 37 percent by July was today’s biggest single options trade on U.S. exchanges as futures on the metal reached a 31-year high. The 100,000 options to buy 100 shares each of the iShares Silver Trust (SLV) at $25 by July changed hands at the ask price of about 10 cents and exceeded the open interest of 6,054 outstanding contracts before today, indicating that a buyer of a new bearish position initiated the transaction. The ETF rose to the highest intraday level since trading began five years ago, $40.33, before erasing gains. It fell 0.5 percent to $39.67 at 12:54 p.m. It hasn’t closed below $25 since November."

And some more bad news for rice farmers in Japan, who were already told that planting of this key crop would be banned in contaminated soil ahead of the rice planting season which begins in April and May. The problem so far has been the nobody really knows how to classify contaminated soil, and how far it spreads. Now a new study from Hiroshima and Kyoto Universities has found that the radioactive content of soil samples beyond the 30 km semi-evacuation zone is as much as 400 times the normal. From Asahi: "The predicted changes in the level of radiation at the ground surface were calculated after analyzing the amounts of eight kinds of radioactive materials found in the soil and taking into consideration the half-lives of each material. The study results are considered more accurate than the study conducted by the science ministry, which only released information concerning two types of radioactive material. [Scholars] collected soil samples from five locations in the village at depths of five centimeters. All the locations were outside the 30-km radius and were by roadways in various hamlets. The study found cesium-137 at levels between about 590,000 and 2.19 million becquerels per cubic meter." Comparing this to Chernobyl: "After the Chernobyl nuclear accident in the former Soviet Union in 1986, residents who lived in areas where cesium-137 levels exceeded 555,000 becquerels were forced to move elsewhere. The amounts of cesium-137 found in Iitate were at most four times the figure from Chernobyl." Which begs the questions: just who will be allowed to plant rice, who will have faith that the rice they are eating is not contaminated, and how soon before rice prices surge? And how long before the fully impaired disaster zone, which could possibly spread as far as 50 km away from Fukushima, be told about the inherent risks to their lives?

Recently there has been a meme spreading in the internet that the Fed does not really need to do QE3 as the central bank can maintain bid interest at sufficiently high levels by merely rolling and extending maturing debt, a form of QE Lite Version 2, where the Fed's balance sheet is kept constant even as MBS are prepaid and Treasuries mature. The argument goes that based on some "logic" and lots of estimates it is "reasonable" to assume that $750 billion in MBS prepays and Treasury maturities will depart the Fed's balance sheet and need to be repurchased in the open market in keeping with a pro forma QE Lite V2.0 mandate. This is false. Here's why.

As a reminder, on April 6 the Fed completed the auction of $1.3 billion in face value Maiden Lane II (AIG) assets. When we reported on this we commented: "Since there is another $38 billion in ML2 assets left, look for many more such Bid Lists over the next several months until the market crashes and yield chasing finally ends." Sure enough...

First we had FRBNY Dove Bill Dudley talking up the Goldman party line that QE3 may, just may, be necessary (recall Goldman initially asked for $2 trillion in QE), and now the dove from the west coast makes news as San Fran Fed (also known as the Captain Obvious academy) president Janet Yellen basically says that rising commodity prices don't warrant policy shift. And by policy shift she means a change to the current easing regime. Some other dovish statements: "it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains low" which is wrong - how many billions do American consumers "save" by not paying their mortgages; "structural explanations cannot account for bulk of rise in unemployment during the recessions" ... so why do we need economic "explanations"? "structural explanations cannot account for bulk of rise in unemployment during the recessions" - yup: Captain Obvious class 101; "long-term inflation expectations remain well-anchored despite jump in short term expectations" - anchored to what - the Rudy von Havenstein inflation projection wall chart?  "decline in jobless rate reflects in part drop in labor force participation" - advance topics In Captain Obviousness; "real consumer spending slowed around turn of the year after brisk gains in autumn, consumer sentiment weaker in March" - but CNBC just spent all of last week telling us how strong the consumer was in March; and most importantly: "accommodative monetary policy stance still appropriate because unemployment too high, underlying inflation too low" and "inflation effects from higher commodity prices likely to be transitory but must watch inflation expectations" uhh, what happened to well-anchored? To rephrase: the QE lunacy will continue until morale (and hyperinflation) improves.