Wednesday, March 16, 2011

Nuclear Situation in Japan and the Markets-Don't Join the Panic

Nuclear Situation in Japan and the Markets

News coverage from many sources has tended to exploit fear with sensational headlines and innuendo based on myth and rumor. Government officials have been pontificating, again with the goal of gaining attention to themselves, or perhaps an agenda that they support.

Here is an excellent source of factual information:

The 50 heroes that are tending to the nuclear power plant did not abandon it like the press reported: They were evacuated for about an hour but returned to the site to continue efforts to restore safe conditions at the plant. A fire reignited at Tokyo Electric Power Co.’s Fukushima Daiichi 4 reactor. The fire was extinguished after about two hours and was not related to the spent fuel pool, but rather an oil leak.

Certainly the situation in Japan is serious. Pray for all of the Japanese people. (On behalf of our clients, we made a recent contribution to the Salvation Army who has a long term presence and tradition of helping people in Japan.) In regards to the nuclear power plant, a worst case scenario could be very bad. But, facts indicate that things are not quite as bad as is being reported.

The most recent stock market performance in Japan that closed today was UP 5.6%. A comment by European Energy Commissioner, Guenther Oettinger caused a big drop in US markets this morning when it was reported he told a European Parliament committee, according to news reports. “In coming hours there could be further catastrophic events which could pose a threat to the lives of people on the island.” He had no real knowledge about the subject, other than what he had read in the press. When a bureaucrat thousands of miles from the real picture can move markets with careless comments--you know the markets are spooked.

As an investor, it is important to remember that there is a big difference between a panic selloff and a crash related to a bubble deflating. As I mentioned in previous commentary, stock markets were a bit ahead of themselves. We were overdue for a normal correction. So far, the S&P500 is down 5.8% from the peak on February 18. We are essentially back to December 31 levels. Reasonably Reliable Leading Indicators are beginning to look positive. This is a simple panic selloff—and other than the stock of Tokyo Electric Power, the owner/operator of the troubled nuclear power plant , long term intrinsic values of well managed companies have not really changed. We may be closer to a buying opportunity than a selling one. Seems to me the biggest risk continues to be inflation and higher interest rates.

My advice is to never make major changes in reaction to a panic sell off. They can happen at any time. Your portfolio should already be prepared for them. You can see bubbles (2007-08) and therefore the resulting crashes that will come—making major changes to protect yourself. This does not appear to be a crash.

I am focused on the news in Japan to determine if any action is justified. So far, no major changes are recommended. If circumstances deteriorate—not based on hyperbole, but real facts, then you should give me a call for further discussion.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.