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Weekend Reading – The Good, the Bad and Fukushima

Hey, remember Fukushima? 

Arnie Gundersen is freaking me out!  Gundersen is no tin-foil hat guy, he’s the chief engineer of energy consulting company Fairewinds Associates and a former nuclear power industry executive who served as an expert witness in the investigation of the Three Mile Island accident.  Gundersen has said that the U.S. nuclear industry and regulators need to reexamine disaster planning and worst-case scenarios, especially in reactors such as Vermont Yankee, which have the same design as the crippled nuclear plant at the center of the 2011 Japanese Fukushima nuclear emergency. Vermont Yankee and similar plants are vulnerable to a similar cascade of events as in Japan.

The Nikkei had fallen down to 8,227 from 10,678 (23%) at the quake and has since recovered 10,017 on May 2nd but was back to 9,648 on Friday (3.6% off the bounce) and the 50 dma has now formed an aptly-named "death cross" below the 200 dma.  Japan is already on the hook for $124Bn from the earthquake and will also have to cover TEPCO’s $31Bn (so far) liability as the alternative is let the country’s biggest energy supplier go bankrupt and that would be lights out on their economy.    

Warning: Do not watch this video on a full stomach:  

This is one of the things holding down the financials as there is no way to know right now, what the real damages are going to be from this ongoing disaster for the insurance companies (and the banks that lend them money).  As Gundersen observed on Friday and as is not being reported officially, two other reactors are seriously damaged.  A worker at the plant dropped dead on Saturday and Japanese banks and Insurance companies are all suffering with Daiici Life’s net profit down 66% from last year due to the accident.  

Accident is a funny word isn’t it?  With 435 active plant and 250 more under construction, even if they are 99.9% safe, that would still mean we get an accident like this every year.  Hopefully they are 99.99% safe and we only have a major catastrophe every 10 years – wouldn’t that be nice but, so far, that’s not the case as we’ve had about 16 in 50 years with 9 of those considered "major."  So accident applies to this situation in the same way that it’s an "accident" if the number you bet on in Roulette comes up on the wheel – it doesn’t USUALLY happen but, if you spin the wheel enough times – it’s GOING to happen and we spin the wheel on 435 power plants 365 days a year – giving them 158,775 opportunities for failure each year.    

Residents of Kawamatamachi and Iitatemura, both in Fukushima Prefecture, began evacuating today. About 1,200 residents in Kawamatamachi will evacuate from their homes. In Iitatemura, about 4,500 residents will move from the village to accommodations in Fukushima city, such as housing for local government officials and hot spring hotels. Most of Iitatemura is located more than 30 kilometers from the Fukushima No. 1 power plant. However, the level of radiation detected in the village was as high as that in areas within a 20-kilometer radius of the power plant, which has been designated as a no-entry zone.

The WSJ has some nice interactive graphics to play with.  On the one titled "Ring of Fire," notice that the entire Pacific plate has been very active this decade and then notice that not only is japan cut in half by an adjacent plate but that Tokyo sits right on the intersection of 3 plates.  Keep that in mind before buying the dip in Japan or holding too many Yen, for that matter.  Maybe not today, maybe not tomorrow but you keep rolling those dice over and over and over and – eventually – you WILL crap out!  

Now, initially, the earthquake sent the Dollar down to the lows of the year on nonsense that Japan was going to have to repatriate hundreds of Billions of Dollars to rebuild but, the fact is, Japan is borrowing more money and printing more money and offering more stimulus into a flagging economy – in other words, they are doing what Ben and Timmy have been doing for the past two years so why do people think when they do it, it will have the exact opposite effect?  

The Skybridge Capital held their annual Salt Conference in Las Vegas this week and  Thursday’s pre-lunch panel discussion was titled: "Investing for the End of the World: How to Profit from Economic Armageddon" – very apropos as George Bush gave the Keynote that morning.  After all, who knows more about causing Economic Armageddon than our former President?  Panelists took turns offering their dire assessments of the West, the culprits being the usual suspects: too much debt, fiscal irresponsibility, energy crises, etc.  

John H. Burbank III, the chief investment officer of Passport Capital, a $4 billion hedge fund, started things off. “The West is bankrupt and failing, and it’s just a matter of when,” he told the crowd assembled in the hotel’s grand ballroom. Mr. Burbank also took a bit of a shot at asset managers, decrying crowding in the marketplace and how it distorts price. That means when bad things happen and investors move in tandem, there is an element of unpredictability. “Information and stability can change so quickly,” he said.   Robert Sinnott, the chief executive of Kayne Anderson Capital Advisors, put it, when the markets seem like “a pond with black swans interbreeding and laughing at us.” 

With the end of the World scheduled for Saturday and options expiration on Friday, we’re going to have a very busy week organizing our virtual portfolios.  We have our disaster hedges in place so I’m feeling good about that and we expect follow-through selling down to our reference lines (see Stock World Weekly for updated charts - possibly our last issue if the pamphlet is right!), which are still a good 2.5% below where we finished on Friday.  A combination of Dollar strength and Yen weakness (coupled with a Nikkei sell-off) should keep things heading down a bit longer although I’m sure there will be some attempt at a market rescue first.  

[DSK0515]The rescue of Greece is back in doubt as the head of the IMF, Dominique Kahn, was arrested on sexual assault charges (hard to tell whether this helps or hurts his bid to become France’s next President).  The IMF doesn’t really have any provisions for this and that makes for uncertainty and uncertainty leads to panic and panic dropped the Euro all the way to $1.405 last night but they gained a point back since then.  Greece was scheduled to meet with the ECB and IMF at 3pm TODAY in talks that were meant to resolve their issues and free up some much-needed cash.  

Europe’s donor countries, led by Germany, are demanding deeper budget cuts in exchange for granting Greece extra aid or giving it more time to pay back official loans, and are weighing whether to make bondholders share the costs.  Any extension of Greece’s bond maturities would need to prevent “the private sector steadily withdrawing from its positions” and shifting the burden to taxpayers," German Finance Minister Wolfgang Schaeuble told ARD television yesterday. “If there is an extension, then everyone has to be extended.”  The euro hit its lowest since March today after Germany put up hurdles to an expanded aid package, with public discontent simmering in northern Europe over the costs of propping up high- deficit countries on the continent’s periphery.

It’s pretty clear that this program is ultimately not going to work and Greece is going to have to be bailed out and there’s going to be a restructuring of their debt,” Eswar Prasad, a senior fellow at the Brookings Institution in Washington, said in a Bloomberg Television interview. “The presumption was that with Strauss-Kahn at the helm the IMF would not turn its back on Europe, that the IMF would continue to support Europe. Now, with Strauss-Kahn gone, that proposition becomes a little dubious.” 

Greek bonds slipped today, sending the yield on 10-year Greek bonds up 15 basis points to 15.59 percent as of 8:45 a.m. in London. Two-year note yields gained four basis points to 24.93 percent. Eighty-five percent of international investors surveyed by Bloomberg last week said Greece will probably default on its debt, with majorities predicting the same fate for Ireland and Portugal.

Strauss-Kahn, 62, denied the charges and will plead not guilty, his lawyer, Benjamin Brafman, said in an e-mailed statement. He’s scheduled to appear today at 11 a.m. for arraignment in Manhattan Criminal Court on charges that a maid came in to clean Kahn’s $3,000 a night suite and he came out of the shower and attacked her.  I have no idea what the truth is but it does occur to me that shorting the Euro on Friday and paying a girl to say Kahn assaulted her could have net a clever investment banker an easy Billion Dollars.  

Hell, for $100M, you might have been able to just pay Kahn to assault someone himself – that’s the problem when there are so many Billions of dollars riding on the actions of so few people.  The timing of this could not possibly have been better for Euro shorts. Also on the agenda for the European finance ministers are approval of 78 billion euros in aid for Portugal and the nomination of Bank of Italy Governor Mario Draghi to be the next president of the European Central Bank.



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  1. Look at Arnie’s face at 11:28 in that video. He looks like he’s about to break down. When I saw that, I realized this is much worse than most people realize.  
    What I would like to know is how many shops and factories are now in the evacuation zone, how many more are in areas likely to be evacuated in the near future, and the impact this is likely to have on Japanese companies and the Japanese economy. 

  2.  See my note on shorting oil in previous post!  Also a CAT play.  

  3. Phil Thanks on the soothing thoughts on HOV but but we set up about 230 short puts twice in 2010. My worry is they trading at 2.52 with HOV 2.48  so the delta is – 1.00 No more premium left. Even if they 2012 some one might call for the 5$ stock value.
    So it is a good chunk of money.

  4. are right the look on his face is disheartening. I have been following this disaster on a couple of blogs, the best being , but to see Arnie have that reaction is alarming. Makes me wonder just what else they are attempting to hide.

    What bothers me is the seeming lack of a coherent plan or attempt to do something that’s communicated clearly and concisely. If any of that radiation were to start getting Americans sick or worse(think bio-accumulation, ie taint our water or food), Obama would be toast and so would much of the rest of our leadership, so I am a bit puzzled by the lack of urgency or discussion. I wonder how much radiation, per day is still leaking…we didn’t nuclear test all day everyday for 60 days(again, how high is the release?) how do we know the effects of this kind of release?

    Crazy stuff…

  5.  Phil,

    "Also a CAT play. " 

     I have looked and don’t know what you are referring to… please direct me to the post or repeat it..

  6. Good morning!  

    Woo-hoo, oil hit $97.75 before stopping out.  I dread the day when the counterparties run out of money to give us…

    Dollar just under 76 but not helping futures at all.  

    Asia off about a point (great for EDZ), Europe more like 1.5% at day’s lows 3 hours before our open and heading into lunch for them. Our futures are off about half a point and I don’t see any reason they won’t open this low or lower as all we had was Thursday’s fake pump to interrupt the downturn. 

    HOV/Yodi – 230 puts?  23,500 shares of HOV, twice?  Well, if you have a $4M portfolio, that’s fine I suppose but only if you intended to make it 10% of your portfolio and, if that was the case, then it better have been as a long-term hold you intended to ride out and not just tossing a quarter of a million dollar risk at a stock you didn’t really, REALLY want to own.   If you didn’t REALLY want to own them, then a stop would have been prudent at some point – maybe next time, right?

    No more premium left is only bad if they keep going down, if they head up, it’s fine.  If this position is hurting you then you need to stop focusing on your total and focus on your loss, which is .73 and you can roll to the Jan $3 puts at .85 and those can be rolled to the 2013 $2.50 puts (now .80) and if HOV claws back to $3 you still make .12, which is actually not too bad, considering.  If you want an additional buffer, you can sell the Jan $2.50 calls for .50 as that way you are selling .85 of premium out of $1.35 so you don’t take additional losses to the downside until $1.15 and you can buy the stock to cover over $2.50 (with a stop at that line) to make sure you can’t get burned to the upside.  

    CAT/MJJ – I am liking just selling the CAT Jan $80 puts for $2.75, which TOS tells me has a net $8 margin to make $2.75 (34%) in 8 months.  The 2013 $70 puts make a nice sale at $4.80 for net $7 in margin, which works out to a 68% return on margin and all they can do is make you buy CAT for net $65.20, which is back to last summer’s lows.  Do keep in mind though that CAT flopped all the way to $20 in the crash so, LIKE ANY SHORT PUT, this is a great trade idea if you are scaling in and will happily DD at $40 and again at $20 to have a 4x position at an average of $36.20, which is still a horrible loss at $20 but, as we have hopefully learned, it’s only a loss if you lose faith in CAT just because the PRICE falls and sell it – otherwise, it’s a cheap entry on a long-term hold.  

  7. Great article Phil,
    As you wrote yesterday it’s crazy how fast people start to ignore things, and than it’s very important that smart guys like you remind them what is important from time to time. I think we all suffer from an information overload disease. Twenty years ago you had few dozens of important things to consider. Today you get hundreds to thousands of more or less important information pieces. This means that finally the more important things are not valued appropriately anymore.

  8. @Felipe
    "…..that’s the problem when there are so many Billions of dollars riding on the actions of so few people…"
    There are quadrillions riding on the actions of few.  And my estimable argument for a dismantling of ALL countries of any size, the elimination at the very minimum, of Central Banks whose intentions may be good but whose halls are inhabited by black-eyed, black-hearted human beings only interested in the beautiful fate of their own. The FED, IBS, ECB, and IMF are innocuous sounding, four, three-letter acronyms that belie the horrific damage they have done to global finance.  And they must be stopped.
    If we want to solve the problem or at the very least make it more manageable, the Oligrachs, the Plutocrats whose very existence is only possible in a world composed of nations that they are herding into a One-World order, is  to take away their ability to do it.
    (Or at least let us in on their actions before the opening)

  9. on dsk phil he’s a shoo in for italian premier

  10. meanwhile, japan never improves, but nobody cares now…i guess when our kobe beef hotdogs start glowing in the dark we might. look at naz….it plunges and then stops on a dime…normal pattern for msb would be rally now until close….or one more test before 1:30…then rally..ha…dsk bail denied just now