March 2011 Market Update

HOW WILL THE JAPANESE CRISIS AFFECT WORLD MARKETS

While it is still too early to tell what the longer term effects of the Japanese earthquake may be, we can identify some obvious short term prospects;

  • Interruption Of Global Supply Chains – Japan is not a big importer of world goods so it should not affect sales in any significant way.

However, Japan is a major supplier of electronic parts to automotive and technology sectors. Japan produces 30% of the world’s flash memory that is used in electronic cameras and smartphones and around 15% of the D-RAM memory used in PCs.

General Motors for example has closed one of its auto plants in Shreveport Louisiana and has told its employees worldwide to limit their expenses until production is back to normal.

Manufacturing supply chains are extremely intertwined and breaks in them are not quickly repaired.

  •  Impact On the Oil market – Added to the turmoil in the Middle East, once rebuilding begins in Japan we can expect an increase in oil usage resulting from the loss of nuclear power which will likely drive prices up. In the short term however, oil usage will likely decrease in Japan.

 

  • Increase In Japan’s Debt – Japan is the most indebted country in the developed world and their government bonds have been downgraded from AAA.  How will they finance the rebuilding of their infrastructure?   Normally a country could issue bonds, but who in their right mind would buy them? The answer is the Japanese citizen.  The Japanese already own the lion’s share of their country’s bonds so they will be asked to step up to the plate and take on additional risk.

 

  • Big Hit To Insurance Companies – The amount that insurers will have to shell out to pay off life and casualty claims will be huge and likely threaten the viability of some majors companies. Aflac, for instance, has 75% of its business in Japan. A strong insurance industry is necessary for financial stability around the world and any big hit is worrisome. After hurricane Katrina Allstate Insurance, one of the largest home insurers, refused to insure homes on any of the U. S. coastlines where 65% of the population lives.

 

  • Affect On Nuclear Energy Industry – As you have probably already read, this accident has stopped the development of nuclear plants in their tracks. Angela Merkel, Chancellor of Germany, effectively turned off the switch on all of Germany’s nuclear plants. Like the BP Oil disaster, this is another reminder that man can only control fate up to a point. As a species we must decide whether our need for gas and electricity is worth risking the unthinkable.

 

  •  The Regulatory Worm Begins To Turn – The National Credit Union Association (NCUA) is charging Goldman Sachs, Morgan Stanley, Merrill Lynch and Citigroup with misrepresenting the risk of the $50 billion in mortgage backed bonds they sold to credit unions.  Those bonds are now worth $25 billion but the NCUA is demanding the return of the entire $50 billion.  Wholesale Credit Unions, also known as Corporate Credit Unions, are at the heart of the nations credit union system.

Attorneys connected with the case say there is plenty more litigation to come.  However regulators are going to have to tread carefully in this politically charged environment.  The big banks are backed by the most powerful players but at least justice is beginning to be served.

  • Impact On Our Investment – So how does all of this impact our investments?  Recently there has been a rush into treasuries which drives up the value in our short term treasury fund.  We may also see a rise in interest rates which will depress the value of our corporate bonds (as investors require a higher rate of interest if they perceive risk), but remember that their current value is not a concern since we will hold them to maturity and recover our principal.

 

Hope this summary has been helpful. Call if you have any questions.

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