Monday, March 14, 2011

Japan Disaster Dominates Markets

The general perception of the disaster in Japan - caused by a massive 9.0 earthquake and the resultant tsunami - is, as it should be, one that measures the human tragedy above the resultant damage to property and goods. Surely the people whose homes have been either crumpled by the force of the quake or simply washed away by the flooding sea waters face unknown futures.

It is still too early to tell how the government in Japan will deal with the now-homeless residents of the region most-affected, but the initial response has been less-than-heartening. The most glaring examples of ineptitude and unpreparedness have come in the form of communications surrounding the still-unfolding nuclear disaster, the third leg of the crisis and possibly the most severe.

Whether it is unwilling or simply unable to assess the situation at the various reactors that have been damaged, the government's response has been self-contradictory and incorrect at worst or unreliable and confusing at best. What is known is that two reactors at the Fukushima facility have suffered irreparable damage, suffered explosions and possibly begun to partially melt down. Radioactive gasses have been released both on purpose and by accident, though the danger of a full-blown nuclear nightmare still exists, despite many reports to the contrary.

Barring complete and concise factual information, a commodity in quite short supply in the island nation, there is simply no way of knowing exactly the conditions on the ground. As nuclear power events go, this one is still closer to the beginning than the end, though many experts are hopeful that the unstable rods can be quieted with a combination of sea water and boric acid. In any case, reactors #1 and #3 at the facility are kaput, with #2 also reportedly damaged.

An evacuation zone of some 20 kilometers suggests the release of radiation into the atmosphere has already gone well beyond a dangerous level to making the area in a 12-mile radius of the plant temporarily uninhabitable, as is the situation along miles of coastal land subsumed by the tsunami.

Capital and financial markets have done their level best to downplay the short and long term effects of the total disaster, though they too are fishing in a deep and muddied stream of information. There are still too many unknowns to make critical assessments and business decisions. One thing is for certain, that the costs will run much higher than initial estimates of $180 billion. Close to 10% of Japan's population has been directly affected, while the rest of the population has, and will, suffer tangential effects.

To a country as small - geographically - as Japan, this disaster is a game-changer. Even in well-protected Tokyo, there's incidental damage to personal property in addition to a high emotional toll, which would be a mistake to underestimate.

Being one of the largest economies in the world, though one of the least stable, Japan will recover and rebuild, but the effort will take years, not months, after the effects have long since dropped off the top of the news. That's why the markets probably will be unsettled to lower for the near term. The issues facing the Japanese people have the potential to have long-reaching effects into the global economy.

As such, stocks were off world-wide with a few exceptions; the Nikkei was down more than 6%.

In New York, the major indices reversed Friday's gains with a gap-down open, plunged through the morning, settled at resistance and gained into the close, though the effort was more day-trading than anything else. Volume was lower even than Friday, bordering on being one of the slowest trading days of the year.

Dow 11,993.16, -51.24 (0.43%)
NASDAQ 2,700.97, -14.64 (0.54%)
S&P 500 1,296.39, -7.89 (0.60%)
NYSE Composite 8,193.96, -54.57 (0.66%)

Losers backed down winners by a pretty healthy degree, 4416-2088. On the NASDAQ, new lows topped new highs for the third straight session, 75-33. Over on the NYSE, new highs narrowly nipped new lows, 37-30. It is advised to keep a close eye on the daily new highs/lows, because the markets are in flux and seeking direction. It's still looking like a 65-70% probability that the markets have already made a turn and the dominant direction for the next six to eighteen months will be lower.

NASDAQ Volume 1,810,942,250
NYSE Volume 4,571,130,500

Commodities were affected by the Japan disaster, though to a much smaller degree. Front end crude oil on the NYMEX spent most of the day under pressure, but ended up with a marginal gain of just 3 cents, at $101.19. Between the reduced demand in Japan and the still-unsettled situation in the Middle East, prices could go either way, but the trend seems to be following global trends lower.

Gold was up $3.10, to $1,424.90, but silver shed 10 cents, to $35.84. Both of the dominant precious metals are trading near record highs, consolidating for another leap forward. Any major global event of consequence will send both gold and silver off like bottle rockets, though with the momentum already built in, no further catalyst is really needed, as the continual, non-stop printing of fiat dollars, yen, yuan and euros is providing more than enough fuel for the PM fire.

Markets don't get much more distorted and unpredictable than when a major natural disaster unfolds. Putting that on top of an already shaky foundation and wasteful stimulus is a witches brew of unknowable mystical monetary force.

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