Notes From Underground

The news for most of the day was about Japan and the continuing despair as a result of Friday’s earthquake and tsunami. Markets were fixated on the problems of the nuclear reactors that were severely damaged by the tsunami and whether or not there was going to be a meltdown of the core. The talking heads were dragging out the experts from central casting. Each had an axe to grind on whether they were pro- or anti-nuclear energy. I am certainly no nuclear expert but the best research that was sent my way focused on the importance of the 72-hour period as being the most critical. Hopefully, those nuclear experts are correct and the most significant danger has passed. Many pundits offered opinions that this was the end of the nuclear energy debate for no citizens would want the reactors built in their areas.

I would be cautious in that assessment for the new reactors are of a much safer design–PEBBLE BED REACTOR. Further more, if the Japanese reactors hold it will give the nuclear industry a boost. If a 40-year-old design could withstand a 8.9 measured earthquake, well certainly the newer, safer models should certainly be put into operation. Remember, the French are the biggest developer of nuclear power plants and they will certainly be at the vanguard of promoting and defending the benefits of nuclear power. There may be great opportunities in the uranium and nuclear construction sectors, so as always, look for well-defined support levels on the battered stocks. If you think OIL is expensive now, try generating electricity from petroleum on a global basis.

The YEN rallied further today even as the Bank of Japan (BOJ) added trillions of YEN in liquidity. Many traders have bought YEN in the belief that the present situation is a mirror of the KOBE EARTHQUAKE of January 1995. The YEN has had a substantial rally as the markets perceived that the Japanese investors and corporates would repatriate money. I would caution against relying too much on that comparison for the calendar sets up differently. The markets are now deep in the repatriation period and as I pointed out last week, there is a large amount of Japanese DEBT coming due that may just not be reinvested in JGBs but sit in cash as Japanese corporates and insurance companies assess their funding needs.

There was a BLOOMBERG story that Japanese SWFs and investors might sell their Brazilian DEBT to raise needed cash. It is reported that Japanese investors hold $50 BILLION worth of Brazilian-based debt instruments. Now, SWFs may control the ultimate OPM, but I find it insane to sell off 9.25 percent bonds when you can sell questionable U.S. 2- and 5-year notes that are yielding a negative return. The Brazilians have a REAL RATE of RETURN rather than the NEGATIVE return on short-term U.S. TREASURY instruments.

Tuesday is the FOMC meeting and at 1:15 p.m. CST, the FED will release its intentions for the next period until April 27. There are a few important things to listen for: 1. Does the phrase” ..are likely to warrant exceptionally low levels for the federal funds rate for an EXTENDED PERIOD.” If this phrase remains, then the DOLLAR and the yield curve will remain on its current paths. If the phrase were to be removed, the market would buy DOLLARS and the short end of the curve would get sold off but I think the long end would hold up better. 2. Will the FEDERAL RESERVE BOARD maintain the stress on it s DUAL MANDATE?

Will the FED also make a case to stay the course of Supreme Ease and invoke the terrible situation in Japan for further cause to keep the QE in place. And 3. The last vote was unanimous so it will be of importance to see if there are any no votes as FISHER and PLOSSER have been very vocal in their suspicions about the need for further FED aggressive action. If there is a change to any of these three things, I think it will give a bid to the DOLLAR. It will be interesting to see for how long.

A quick follow up to a BLOOMBERG article on March 8. In a clear challenge to the ECB, it seems that 97 percent of Spanish mortgages have a variable rate interest so any move by the ECB to raise rates will have an immediate effect on Spanish homeowners resulting in higher monthly payments. Trichet may talk tough on inflation but any move to raise rates will have ripple effects onto European consumers. In an economy with 20 percent unemployment, how much pain can the private sector absorb, especially as the Spanish public sector is under the stress of an austere budget. Just something to keep in mind as the market is so assured of a ECB rate hike.

Tags: Bank of Japan, Brazilian debt, dual mandate, earthquake, ECB, extended period, Fisher, FOMC, France, Japan, Kobe Earthquake, nuclear reactors, oil, Plosser, SWFs, U.S. Treasury, Yen

This entry was posted on March 14, 2011 at 8:35 pm and is filed under Currency, Debt Market, ECB, Federal Reserve, Japan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.