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While oil – and just about everything else but Treasuries -- sold off today in the wake of the Japanese nuclear crisis, oil prices may be poised to surge as demand for 'alternative' energy sources to replace lost nuclear power in Japan ramp up.
I spoke with Brad Schaeffer, CEO of INFA Energy Brokers, after the closing bell Monday to get his perspective on the global oil markets.
The situation in Japan remains grave , as workers struggle to regain control of the nuclear reactors at Fukushima Daiichi nuclear power plant.
But when the crisis passes, the third largest economy in the world will need to begin planning how it will replace the energy production capacity it lost to the tsunami.
"Japan has some of its industry curtailed," Schaeffer says, "like auto and steel – but that's not going to last too long. People are starting to realize that there economy is not going to be shut down for long -- and they're going to have to start to look for alternative fuel sources."
In this context, Schaeffer means 'alternative fuel' in the exact opposite sense of what it usually denotes – as Japan turns from nuclear energy to burning fossil fuels.
As Schaeffer points out: "About 27 percent of their power needs come from nuclear plants. So if they take them all offline, they are going to have to compensate for the shutdown by running their generators on other fuels."
And oil will likely be the natural choice to replace.
The other option, on the fossil fuel front, is liquefied natural gas.
Fears of a serious nuclear catastrophe pushed Japanese stocks far lower in Tuesday trading.
But there is another problem building, and some fear it could lead to a much more widespread crisis in financial assets.
The problem is that banks, Wall Street firms and hedge funds have built up exposures to riskier assets over the past two years. Much of the 'smart money' has been chasing bargains—bottom fishing in sovereign debt, muni debt and financial sector securities.
If sentiment turns suddenly away from risky assets, some of these investors could find that there was no market for the risk they hold. Although there is no direct connection between, say, the situation in Japan and Illinois revenue bonds, a sharp pullback in risk tolerance could see these very different asset classes decline together.
In a crisis, assets that seem uncorrelated on a fundamental or technical basis can suddenly trade together. As the saying goes, in a crisis, all correlations go to one.
Gilbert Gottfried, now the former voice of the Aflac duck, was fired on Monday by his employer for jokes he made about the Japanese tsunami on Twitter.
This isn't the first incident where a high-profile employee was fired over the content of a tweet. In July of 2010, Octavia Nasr, a former CNN Senior Editor covering Mideast affairs, was fired when she praised a controversial Muslim cleric who had just died . But the Aflac case is the first one, that I know of at least, where a celebrity was fired for tweeting jokes.
But Gottfried may be more than just a victim of his own bad taste and bad timing: He may also be a victim of Aflac's bad earnings exposure as well.
Goldman Sachsconsidered buying troubled insurer AIG in 2008, according to wire-tapped phone conversations played on Tuesday at the insider trading trial of Raj Rajaratnam.
The government played tapes today of Rajat Gupta discussing a Goldman Sachs board meeting with Rajaratnam. Rajaratnam wanted to know about a rumor that Goldman could buy a commercial bank.
Retail stockscontinue on their slide as investors worry about the world's second largest consumer market.
I decided to ask Brian Sozzi, a StarMine top-ranked Equity Research Retail analyst, about his outlook on the sector.
LL:Japan is a supplier to the world. Now we are hearing that some products might have to be tested for radiation. What are your retail sources telling you?
Brian Sozzi: Thus far, the supply chain situation for retailers is not as dire as one would expect amidst all the heart-wrenching headlines and photographs. While the movement of goods and services throughout Japan has taken a hit, sparking sharply lower production from chip suppliers to car producers, the not so detrimental impact to retail reflects where the sector is structural speaking. By that I mean diversification. As the costs of production have climbed appreciably since the economic fallout concluded, retailers have made it a top priority to shift production from a high cost region in Japan, and a creeping inflationary country in China, to the likes of Egypt, Philippines, Vietnam, Nicaragua, and in some instances back to the United States.
Two great examples of the supply chain diversification I speak of are Gap and Abercrombie & Fitch. Gap has a vendor base of some 600 spread throughout 60 countries worldwide, with no vendor accounting for more than 3% of purchases. Abercrombie & Fitch has broadened its supply chain to Central and South America, and no vendor comprises greater than 5% of its purchases. Moreover, many retailers have taken advanced receipt of products that are set to arrive in stores in the next few months, so an immediate disruption in most product classifications is unlikely.
Make no mistake, Japan is a player in the global supply chain, and products produced there could very well be a cog in the supply chain of a plant in China, which in turn supplies a retailer with a finished product for sale. If we learned anything from the leverage bust, it’s that the world is interconnected.
Regarding my discussions with contacts, many have characterized things as being at a temporary standstill. Products are not flowing smoothly, and product out of stocks in food is being noted. Empty shelves are normally music to the ears of retailers as it signals strong demand, but the demand we are seeing in Japan is for basic necessities that may not be replenished quickly. Rolling blackouts, damaged roads and lines of communication are impediments to the supply chain currently.
During my interview with Peter Voser, the CEO of Shell , this morning. I asked him for his oil and gas price targets.
He didn't want to answer the question. "I have given up on predicting oil prices."
But, he finally gave me a little insight. "I think it's about volatility, which has increased quite clearly," Voser said. "For our long-term projects we take a range of $50 to $90. We have seen this in the past it can go to 147 and then down to 37. We are looking at 20, 30-year time horizon and we are using 50 to 90 and on the gas side, for exampling with in the U.S. $4.28."
I guess the CEO of Shell is betting the Middle East won't blow up.
S&P Futures are currently down 2.42 percent. But that number is still less severe than the plunge seen before The Lehman Brothers collapse, when S&P futures declined 3.7%.
The catastrophic declines in equities now seem limited to Japan – where the Nikkei plunged 10.55 percent.
To add perspective to that figure, the Black Monday 1987 selloff saw the Dow Industrials drop 22.61 percent.
The exposures of various insurance companies to the economic devastation of the Tsunami may be dominating the financial discussions in the tragedy's wake – but Japanese banks may be at the most risk.
And that risk may become a tragic test case for an economic conundrum described by Warren Buffett .
Here's the background.
An Australian hedge fund manager named John Hempton has done analysis on a Japanese financial institution called 77 Bank.
The bank is located in Sendai, which is the Japanese city most affected by the tsunami.
Not only is the bank located in the city that sustained the most damage, it also has a near 50 percent market share in that metropolitan area.
Here's the rub. Hempton writes:
"Warren Buffett once said that Fannie Mae had more supercatastrophe risk in it than Berkshire Hathaway. He figured the really really big hurricane or earthquake could do more damage to Fannie than Berkshire even though Berkshire is the largest supercat insurer in the world.
Buffett was – I suspect – right.
We now unfortunately have a gruesome test of Buffett statement on finance and supercatastrophe. There is probably more uninsured damage in the destruction of North East Japan than in any other event in history – and uninsured damage falls sharply on banks.
77 Bank – deeply concentrated in the disaster zone – is the test. It is not a test I would want to repeat. But I think we will – at the end of this – be able to confirm Buffett’s observation that banks don’t like supercats."
World stocks at 2.5 year lows; oil falls nearly 2 percent. [CNBC]
Treasuries prices rise on 'flight from disaster' [Bloomberg]
Impact on Japanese yen. [Business Week]
Hedge funds in both the U.S. and abroad are grabbing at investment opportunities in a distressed energy sector.
Analysts had expected the price to fall within a range of $17 to $19 a share, up from the original forecast of $14 to $16 a share.
Investors should not fear the market, BlackRock President Rob Kapito said. Here's what he'd do.