Mar 16, 2011


March 16, 2011

“There are still a lot of dominoes on the table.”-Art Cashin, UBS

Equity markets are opening weaker this morning after housing starts fell to the lowest level since April 2009, and building permits were the lowest since 1970. Personally I feel we need the new housing market to continue to be weak to give us an opportunity to clear the excess inventory of pre-owned homes. The producer price index came in at 5.6% (y/y), well above last month’s 3.6% and expectations of 4.7%. The core rate rose at 1.8% (y/y). Bond markets are strong again as the flight to safety trade continues, with the 10 year yield now down to 3.26%. In a possible sign the dollar is no longer seen as a safe haven, weakness in the greenback continues as it now sits 17% below its 30 year average vs. a basket of global currencies.

The Fed met yesterday and signaled there would be no additional stimulus when QE2 is finished in June. They discussed a stronger economy and actually acknowledged inflation, although they feel it is “transitory.” I was sent a great analysis yesterday suggesting that even if the Fed completely stopped with QE programs, by holding their balance sheet constant they will be buying in $750 billion in treasuries per year as $250 billion mature annually and they receive $500 billion per year in principal payments on their mortgage back securities. That $750 billion could represent 80% of new debt issuance in 2012. So much for pulling back.

Japan remains in the spotlight as clean up from the earthquake and tsunami has taken a backseat to severe nuclear problems. The six reactors at Fukushima Daiichi are under different stages of meltdown due to a disruption in the power supply as a result of the natural disasters. Cesium from spent fuel rods and plutonium from reactor #3 are the immediate sources of radiation concerns. Cesium is especially dangerous because it can travel through the food chain and reside in the soil, animals and people for over 30 years. A small amount has been released so far. Korea and other countries have announced plans to begin screening food from Japan for radiation exposure. The situation is very fluid and changing almost hourly as officials try everything possible to stop the reactions and cool the cores.

The picture below is a before and after picture of a town in Japan. Clicking on this link takes you to a page that will allow you to slide the bar horizontally across the screen to view the shocking level of damage.

South Korea’s central bank joined the growing list of central banks expressing concerns about inflation.

Sales of sodium iodine in Asia and the US West Coast have been soaring off the shelves. Sodium iodine is used to ‘fill up’ the thyroid so it can’t absorb radioactive iodine after a radiation leak.

While the world focuses on Japan, problems in the Middle East, which were a primary concern just a week ago, are still brewing. In Bahrain the stock exchange was closed after protests between Shiite Muslim protestors against the Sunni government injured hundreds. The country’s 5-year credit defaults swaps have surged over the past few days, and now are higher than those of Lebanon. The government has declared a state of emergency.

China announced this morning that they were halting their nuclear development program. In the US there are two plants under construction and 20 awaiting permit renewals. Entergy’s Vermont plant is facing increasing scrutiny because it is the same GE design as three of the Japanese units facing problems today.

The Nikkei rallied last night, although the ETF’s are down in US trading today after a deterioration in the nuclear situation. Most Asian markets were up yesterday. European markets are down this morning.

Have a great day


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