The Japanese tragedy continues to unfold and I, like the rest of you, watch on in horror. Meanwhile, the toxic sludge spewing from the traditional financial media outlets is at full throttle with spigots wide open.  Nothing like a good tragedy to create hysteria and boost ratings.

I’d like to take it down a notch and offer a reality check:

1) We don’t know what will unfold, hence a deep breath is required to make the correct financial decisions. Is it possible Japan will cease to exist as we know it? So many talking heads on TV breathlessly report this apocalyptic angle. I humbly suggest most of the supposed ‘experts’ are not experts in the field of nuclear fusion and are most certainly not experts regarding the fluid situation unfolding in Japan.

2) “But they are experts”, you want to say. After all, CNBC, etc., all laud their words and the string of letters after names (i.e. Ph.D., etc.) implies intelligence. Alas, perspicacity is not guaranteed with extra book learning. In fact, evidence suggests arrogance is the common illness acquired. I will remind you that so called ‘experts’ were trotted out during the Gulf oil spill last year and they were almost all invariably proven wrong.

3) Today, ‘experts’ say Japan sits on top of seven volcanoes and another like magnitude earthquake will surely swallow the country whole. Last May similar ‘experts’ assured us the blown drilling platform and pipe were just the beginning of a chain reaction that would create an enormous fissure in the Gulf of Mexico and subsequent tsunami. I’m still enjoying the beaches of Florida, what about you?

4) Today, ‘experts’ say cesium will undoubtedly billow out from the Fukushima site ruining arable land in Japan – and even in the U.S. if the winds are right. Can this tragedy happen? I assume so. I’m not taking the situation lightly but (and here is the key), I don’t know. What I do know is that so called ‘experts’ assured us that a methane bubble was going to explode in the Gulf of Mexico last year and rain down acid in the farm belt of this country. Reality: No acid, just quality rain that created bumper crops this past year.

5) Today, traditional media outlets as well as the blogosphere love to direct our attention to a view of an empty Tokyo street and a Geiger counter. We are implored to watch this scene closely for impending doom. Of course, last spring these same fear mongers beseeched us to watch endless hours of a subsea oil pipe spewing energy. I’m still trying to figure out how that energy footage was useful, so I can’t even begin to get to the Geiger counter, sorry.

Conclusion: Two months and five days after the BP oil explosion hit the news wire BP’s stock price bottomed at $26.83. One month later the stock price was up 45% and today the stock price sits about 65% off the low. I’m not suggesting the duration and returns will be the same in this case.  Certainly, events could unfold that will make this tragedy worse. In fact, one could argue this situation is already more dire and I would not disagree. The time for recovery could be longer. However, I am trying to add a little perspective. Financially remain calm and if the opportunity presents over the coming weeks, look to build a portfolio of companies that will benefit from the rebuild of Japan.

Precious Metals Outlook: Meanwhile, the precious metals (Gold and Silver) continue to offer the best harbor amidst the financial tempest.  Gold remains marginally higher in all currencies since the tragedy began last Friday. I would wager any decline in the metal price can be tied directly to the unwind of the Yen carry trade.

As the reader may recall, the Yen carry trade is a favorite of the leveraged fund manager. Said manager borrows Yen at extremely low interest rates and invests in other assets he feels will outperform the cost of the borrow. In a simple example, the manager invests borrowed Yen into Australian government bonds at an advantageous spread (let’s say he borrows at .25% and receives 5% clearing 4.75% on the investment if held for 12 months). He sells borrowed Yen, buys Aussi $s and buys Aussi bonds. The problem occurs when this overly crowded trade hits the speed bump of a rising Yen.  If the Yen rises in value too quickly this highly leveraged trade begins to lose money at an alarming rate as the cost to buy back the borrowed Yen exceeds the 4.75% annual spread.

The real world tsunami in Japan has created the financial tsunami described above. The leveraged carry trade manager has been forced to buy back Yen and unwind said trade due to the crisis. The Yen reached all time post WWII highs against the US$ yesterday. How long this unwind panic goes on is anyone’s guess, but this explains why on some days (like Tuesday) all asset prices go down together as margin requirements are being met and the carry is unwound.

For those of you needing encouragement to stay the course with your Gold and Silver holdings, Gary offers the following thoughts:

1) World gold production is approximately 2500 metric tons (mt)

2) 2010 production in China was 341 mt

3) Thus, world production excluding China equals about 2159 mt

4) Chinese central bank buys all internally produced gold; thus, imports are bought by Chinese citizens

5) 9.3% of estimated world production of 2159 mt in 2011 was imported for Chinese consumers through Feb or 55.8% annualized

6) World gold production was flat to down over last 3-4 years and not expected to grow in 2011

7) The Industrial and Commercial Bank of China Ltd. (ICBC) started physical-gold linked savings accounts in December. Account openings have surpassed 1 million, with already more than 12 tons of gold stored on behalf of investors. The ICBC has more than 20 million accounts. If the savings account program is introduced throughout China, Chinese demand could easily overwhelm world gold output.

Tags: Australian, Australian bonds, BP, carry trade, Cesium, chinese, CNBC, earthquake, Fukushima, gold, Gulf of Mexico, ICBC, Industrial and Commercial Bank of China, Japan, Methane, Oil Spill, precious metals, Precious Metals Outlook, silver, Tokyo, tsunami, Yen carry trade

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The news cycle is moving almost as fast and furious as the equity markets. I have combined commentary from around the web that I feel best represents the issues we are all facing.

Needless to say, the CNBC story suggesting a ‘fat finger’ was the cause of the market chaos we witnessed last week is pure tripe…unless of course they are referring to a certain infamous finger located in the middle of the hand….

ZeroHedge: Summary Of The Biggest Bail Out Ever: Even Keynes Is Spinning In His Grave

Europe has now followed the Fed in its all in move to prevent the disintegration of the euro and of Europe. As we expected, the EU was leaking various rumors to gauge market interest, and as speculated earlier, the final cost ended up being just short of one trillion. Here are the key summaries:

• EU Crafts $962 billion show of force to halt crisis
• Full blown monetization: ECB will buy public and private bonds
• Fed reactivates swap lines with Bank of Canada, BOE, ECB, BOJ, and the SNB

In other words, total and unprecedented monetary lunacy, as every cental bank, under the orchestration of the Federal Reserve, will throw money at the problem until it goes away, which it won’t. As we have long expected, Bernanke is now willing to sacrifice the dollar at any cost to prevent the euro unwind. This is nothing than a very short-term fix, whose half life will be shorter still than all previous ones.

Read More…

Market-Ticker: EFA Euro Zone Notes

I’m listening real-time to the “conference” this evening… these are “first blush” comments…

They’re throwing the kitchen sink at this, but it’s not real money for the most part – it’s “guarantees.”  Exactly how they get the rest of the €600 billion is open to question.  Only €60 billion is “real money.”

Read More…

Market-Ticker: Bernanke: Liar (Again)

From The Fed:

In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities.

There’s been no “strain” in dollar funding markets.

There has been an extreme level of strain in Euro funding markets.

Read More…

Mark Fisher is a legend on Wall Street and in the commodity trading world. His take on the Selloff last week is spot on…

http://www.cnbc.com/id/37002752

Mark J. Lundeen from Lemetropolecafe writes: …If I’m correct that we will be revisiting the March 2009 lows, and then on to new Bear Market lows, we will see plenty of big up days ahead of us.  How’s that?  Well, unknown to most people, the really big up days occur during the Big Bear Markets.

The venerable Richard Russell wrote: “I believe that bear market has taken over again. I expect stocks to be locked into an extended downtrend for the rest of the year. For that reason, I expect a flood of bullish propaganda to pour out from the Administration, the Treasury, and the Fed. But it will be so much water over the dam, and after a while the voting public will realize that is just more of the government’s BS. The government’s rosy propaganda will become a joke.”

Tags: CNBC, equity markets, EU, euro, Fed, keynes, Richard Russell, Wall Street

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Hedge fund investors, hurry up and circle November 10, 2009 on your calendars!  Late that Tuesday afternoon, HedgeCo will be holding one of its largest capital introduction conferences to date, in roundtable discussion format.  Held at the famed US Trust Building in midtown Manhattan, the event will allow investors the opportunity to meet with a select group of hedge fund managers within a truly intimate setting.

Doug Kass, columnist for theStreet.com, a regular on CNBC’s Squawk Box, and President of Seabreeze Partners Management will serve as the night’s keynote speaker.  Kass, a self-professed “Anti Cramer,” has garnered accolades in recent years for correctly forecasting the financial meltdown.

Fund managers representing many different strategies of the alternative investment world will be on hand to discuss the key differentiators in their funds.  Managers will spend time sitting at each investor table, personally discussing their strategies and answering questions from attendees.  This should make for a dynamic event, spotlighting several of the industry’s leading thinkers in the same room for one night.

Space for the event is limited, so investors are encouraged to sign up for the event ASAP.  If you are interested in attending the event, please click here to be redirected to the event page.  The event, which is scheduled to begin at 4:30 PM, is intended for accredited investors only.

Tags: Anti Cramer, Capital Introduction, CNBC, Doug Kass, hedge fund, hedge fund investor, HedgeCo.Net, Roubini Global Economics, roundtable discussion, Seabreeze Partners Management, Squawk Box

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A letter dated December 22, 2008 and sent from Fairfield Sentry Limited to its investors recently surfaced here.  The fund, part of Fairfield Greenwich Group, had invested in excess of $7 billion in Bernard Madoff Securities, making it Madoff’s largest feeder fund investor.  In wake of the surrounding facts which have surfaced in the case, we have received a rough rewrite of that letter to investors which includes several suggested revisions.  It is provided below…

FAIRFIELD SENTRY LIMITED
Romasco Place, Wickhams Cay 1
Road Town, Tortola
British Virgin Islands, VG 1110
December 22, 2008

Dear Shareholder,

Suspension *Edit: Elimination of the Calculation of Net Asset Value
Reference is made to the extraordinary events of last week regarding Bernard L. Madoff Investments Securities LLC (“Madoff”). As you are most likely aware, on December 11, 2008 Bernard Madoff was arrested and charged with securities fraud for operating in essence a giant Ponzi scheme. It has been alleged that Madoff’s fraud involved a loss in both cash and securities of possibly US$50 billion.

As you will have read in the press, Fairfield Sentry Limited (the “Company”) was significantly exposed to *Edit: blindly dumped all of your money into Madoff.  At this point in time the value of the Company’s investment in Madoff is not certain *Edit: basically a pipe dream. There may be residual assets *Edit: presumably, proceeds from the sale of Ruth Madoff’s jewelry collection in Madoff to be distributed or, alternatively, there may be no assets *Edit: you’ve been totally had.

With the view to acting in the best interests of the Company and all of its shareholders and creditors *Edit: To save what little dignity we have left, the Board of Directors *Edit: Glorified “Yes” Men of the Company (the “Board” ) has suspended the calculation *Edit: fabrication of net asset value with a corresponding suspension of redemptions and subscriptions pursuant to Article 11(4) of the Articles of the Association of the Company, due to the fact that the Board determined that  (i) that circumstances exist as a result of which in their opinion it is not reasonably practicable for the Company to dispose of investments or that any such disposal would be materially prejudicial to shareholders, (ii) that a breakdown has occurred in the means normally employed in ascertaining the value of investments of the Company, (iii) that the value of the investments of the Company cannot reasonably or fairly be ascertained and (iv) that the Company is unable to repatriate funds required for the purpose of making payments due on redemption of shares *Edit: okay, we get it, blah, blah, blah, maybe ignorance does not equal bliss. As such, pursuant to the powers contained in the Articles of Association of the Company , the Board has suspended the determination of the net asset value. As a result of such suspension, all subscriptions into and redemptions from the Company have been suspended *Edit: good luck paying this month’s electric bill! With respect to redemption requests received for the November 30, 2008 dealing date, the payment of these proceeds of redemption have been similarly suspended pursuant to the powers contained in the Articles of Association of the Company *Edit: some document we just found out we have!

The Company has retained counsel in the British Virgin Islands *Edit: Retreat and the United States to represent its interests. These counsel will advise as to what action should be taken to ensure the Company’s interests in the remaining assets of Madoff are represented, to ensure an orderly running *Edit: potential winding down of the affairs of the Company and to ensure that all shareholders and creditors are treated equitably and fairly *Edit: you are all equally screwed. In this regard and as advised by counsel, we are not able to respond to requests for information *Edit: death threats, complaints, legal action by individual shareholders at this time. Rather, information will be provided to all shareholders to ensure that no one shareholder is at an advantage. We note that the manager to the Company, Fairfield Greenwich (Bermuda) Limited, has waived all fees until further notice *Edit: we emerge from hiding. We *Edit: CNBC will endeavour to keep you advised of developments with respect to the Company.

Yours faithfully *Edit: shamefully,

The Board of Directors

Tags: Bernard Madoff Securities, board of directors, British Virgin Islands, CNBC, Fairfield Greenwich Group, Fairfield Sentry, fund, Investors, madoff, Net Asset Value, Ponzi, Ruth Madoff, United States

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Cerberus denies talk of fund defaults – Reuters
Reuters reports Cerberus Capital Management yesterday dismissed market speculation that some of its hedge funds, which have suffered losses and heavy redemptions, are in danger of default. Traders in London and Frankfurt were buzzing with talk that a major hedge fund was headed for default. Much of the talk was directed at Cerberus, a private-equity and hedge-fund firm hit hard by losses at Chrysler and GMAC. “There is absolutely no truth to the speculation,” said Tim Price, a Cerberus spokesman.

Where have we heard this type of denial before? Oh yes, I remember, last year with Bear Stearns and Lehman denials to name just a few. We better keep an eye on this story. We learned last year that big hedge fund failures can lead to big problems for the equity markets.

Weak back-to-school sales spell trouble for holidays - WSJ
WSJ reports shoppers are focusing on deals and limiting buying mainly to necessities, based on August sales estimates that herald another tough holiday season for beleaguered retailers. Despite sales tax holidays in several states designed to spur sales, back-to-school spending remains lackluster, according to industry experts.

Retailers’ recent efforts to shake customers from deep discounts and spur buying by tightly controlling inventories are fizzling. Now, retailers that traditionally rely on back-to-school sales as an barometer of demand for the remainder of the year face tough choices on stocking and hiring. Customers should find ever slimmer pickings and fewer clerks (this doesn’t bode well for those thinking unemployment is close to the peak) as stores hold off on early holiday orders and further trim costs…

We have seen an equity market recovery in the first half of this year based on a return to normalcy in the credit markets. Going forward, a new catalyst will need to develop to push the equity markets higher. One such catalyst will be an economic recovery and in turn better earnings in Q3 and Q4. However, stories like the one above cast a pall over a possible economic recovery and raise the question: Can the equity markets continue to move higher if positive earnings momentum does not materialize?

The following two stories add to the shroud being drawn over any possible recovery in Q3 and Q4…

FDIC’s Bair says commercial loans “looming problem” - Reuters.com
Reuters.com reports the chairman of the FDIC said commercial real estate issues will increasingly drive U.S. bank failures. FDIC head Sheila Bair told CNBC Tuesday evening that commercial real estate loans remain a “looming problem” for banks’ balance sheets and she expects the area to increasingly be a driver for bank failures during the remainder of this year and 2010.

Bair said she would try to avoid tapping its line of credit with the Treasury Department. “We’d like to try to avoid that,” Bair told CNBC in an interview… Bair said the FDIC has not yet decided whether to charge the bank industry more special assessments to replenish the fund. She defended the loss-share agreements that the FDIC has extended to acquirers of failed banks, saying the arrangements have saved the agency billions of dollars over the past two years.

Pace of delinquencies for prime borrowers is accelerating – WSJ.com
WSJ.com reports the long recession and rising joblessness are taking an increasing toll on the nation’s most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers. Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for subprime loans, according to the Washington-based trade group.

Periodically I will post the EPS news or other relevant coverage of companies we find interesting. This is not a recommendation to purchase or sell the shares. I will not engage in the hackneyed approach of other bloggers and give advice about when to buy or sell. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.

Tags: back-to-school, blair, cerberus, CNBC, defaults, FDIC, july retail sales, prime borrowers, subprime, treasury department, virtualization, VMW, VMware

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