The Big Picture

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• FDIC Bank Failures
• New Tech Bubble?
• Apprenticed Investor: The Folly of Forecasting
• Bloomberg Game Changers: Twitter
• No, the Amount of Radiation Released from the Japanese Nuclear Reactors is NOT “Safe”
• Abelson on “Immunity to Bad News,” Margin Debt

FDIC Bank Failures Posted: 28 Mar 2011 01:30 AM PDT Hey, I almost forgot these Chart Store specials: >

New Tech Bubble? Posted: 27 Mar 2011 02:19 PM PDT Cool graphic from tomorrow’s NYT: > > Source: Is It a New Tech Bubble? Let's See if It Pops EVELYN M. RUSLI and VERNE G. KOPYTOFF NYT, March 27, 2011 http://www.nytimes.com/2011/03/28/technology/28bubble.html

Apprenticed Investor: The Folly of Forecasting Posted: 27 Mar 2011 08:00 AM PDT Originally published June 2005 > The Folly of Forecasting Barry Ritholtz The Street.com 06/07/05 – 01:05 PM EDT > As a chartered member of the chattering class, I am all too familiar with the “perils of predictions.” Anyone who works in the financial field and speaks to the press eventually gets tagged for a market forecast gone awry. It’s an occupational hazard. Unfortunately, investors all too often give these “predictions” in print or on TV far more weight than they should. It’s very easy for a confident-sounding analyst, fund manager or professor to say something on TV that can throw off the best laid plans of investors. I wish an SEC-mandated disclosure accompanied all pundit forecasts: “The undersigned states that he has no idea what’s going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation.” Don’t hold your breath waiting for that to happen. The bottom line is that I’ve yet to find anyone who can accurately and consistently forecast the market behavior with any degree of accuracy, beyond short-term trend following. That inconvenient factoid never seems to dissuade the prophets — or the press — from their fortune-telling ways. There are a few things that investors should keep in mind when encountering these speculations. Whenever you find yourself reading (or watching) someone who tells you where a stock or the markets are going, consider these factors: No one truly knows what tomorrow will bring. Nobody. Any and all forecasts are, at best, educated guesses. All prognostications are instantly stale, subject to further revision. Conditions change, new data are released, events unfold. Yesterday’s prediction can be undone by tomorrow’s press release. In order to “become right,” some investors will stand by their predictions despite a stock or the market going the opposite way, hoping to be proven correct. Ned Davis called this the curse of “being right rather than making money.”There are only two kinds of predictions that have some value to investors: One is probability-based, and the other is risk-based. As long as you apply the same rules — no one knows the future, they are subject to revision and should not be taken as gospel — then these are sometimes worth considering.Probability assessments are typically based upon historical comparisons of prior markets with similar characteristics: The more variables that align, the higher the likelihood that a given scenario plays out in a similar fashion. They are of this variety: In the past, when X, Y and Z all happened together, then we expect that A is most likely, then B is possible, while C is the least likely.That doesn’t mean A will happen or C cannot — only that there’s a specific probability of these events occurring out of the millions of ways the future might unfold. Whether any particular scenario plays out is determined by how the countless variables interact over time. Looking at the future in terms of various probabilities is a productive way to position assets and manage risk. Why? If your expectations for the future recognize that this is but one possible outcome, then you are more likely to consider and plan for other contingencies. It builds in an expectation that other scenarios can and will occur. For example, one signal I use is to determine when to sell (the subject of a future column) is after a long uptrend is broken. It’s not that stocks cannot go higher after breaking their trend line — they sometimes do. However, most of the time this happens it signals a significant change in institutional behavior towards the stock. Typically, it reflects a shift from fund accumulation to distribution. For those people who have been enjoying the ride in Google (GOOG) — especially the near vertical move since April — this is a high probability strategy. Once that trend line gets broken, say adios muchachos, take your profits and move along. Again, a trend break is not a guarantee that the upside is finished, but it’s a fairly good probability assessment. The second type of good prediction is the risk-based discussion. These forecasts care less about price targets — instead, they are an assessment of danger. In other words, to buyers of stocks under the present conditions, when this, that and the other are happening, you are taking on more (or less risk) than is typical. Saying the markets contain more or less risk at given times is a very different statement than: “I think the Dow is going to go to X.” I engaged in a combination of broader market-based probability this week in Smart Money, along with future risk assessment. Given the change in character the market displayed since the April lows, I noted the high probability of a substantial rally in the second half of the year. My basis for this was part technical — the market regaining its prior trading range — and part anecdotal (all the hedge fund cash on the sidelines). This created a high probability of a move similar to what we saw over the summer of 2003. But I also included a risk-based assessment based upon the age of this bull move, along with the decaying macroeconomic environment; in tandem, they set up an increasing risk environment as the year progresses. That’s how a top can form, and that presents an increased risk of a market correction or even collapse. When you stop to consider all of the unforeseen actions that might occur between now and then, however, it becomes pretty apparent that all forecasting is at best a low probability activity. Chaos Theory Why are the markets so difficult to predict? To borrow a phrase from the physicists, the market demonstrates “unstable aperiodic behavior in deterministic nonlinear dynamism.” This behavior is better known as Chaos Theory. What does that mean in English? The market is called “aperiodic” because it never repeats itself precisely the same way. Weather is also aperiodic — it may be colder in the winter than in the summer, so there is a degree of cyclicality. But the day-to-day changes are never exactly the same year after year. The same dynamic applies to the markets: There are similarities from one era to another, but it’s never identical. In Mark Twain’s words, “History doesn’t repeat, but it rhymes.” The markets also act with a surprising degree of instability. Small forces can create disproportionately large reactions. A surprising economic report, an off-the-cuff comment by a Fed official, a small change in earnings by any one of 1,000 companies; any one of these data points can roil the market. That behavior does not occur in what the scientists call “stable” systems. Given the complexity of both the capital markets and the physical universe, we shouldn’t be that surprised that Chaos Theory is so applicable to the financial markets. Considering how little we know about the totality of market conditions — and how incredibly intricate and complex the system is — it’s no surprise that pundit predictions are so frequently poor.

Bloomberg Game Changers: Twitter Posted: 27 Mar 2011 06:00 AM PDT “Bloomberg Game Changers” profiles Twitter co-founders Jack Dorsey, Evan Williams and Biz Stone. This program features interviews with Twitter Chairman Jack Dorsey; Mike Maples, founder and managing partner of venture capital firm Floodgate; Tim O’Reilly, founder and chief executive officer of O’Reilly Media; Om Malik, founder of GigaOM; Meg Hourihan, co-founder of Blogger.com; Ryan Singel, writer for Wired.com; and Lou Kerner, vice president of Equity Research covering social media and e-commerce, Wedbush Securities. (Source: Bloomberg)

No, the Amount of Radiation Released from the Japanese Nuclear Reactors is NOT “Safe” Posted: 27 Mar 2011 06:00 AM PDT Washington's Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington's Blog – is a busy professional and a former adjunct professor. ~~~ Just as with the Gulf oil spill – where BP, government spokesmen and mainstream talking heads spewed happy talk about how “benign” the dispersants were and how all the oil had disappeared – there is now an avalanche of statements that the radiation is at “safe” doses for everyone outside of the immediate vicinity of Fukushima. For example, Japanese government call-in advice lines are telling people to simply rinse off any produce covered with radioactive dust. Ann Coulter claims that radiation is good for you It is not very confidence-inspiring that: EPA officials, however, refused to answer questions or make staff members available to explain the exact location and number of monitors, or the levels of radiation, if any, being recorded at existing monitors in California. Or that the EPA has pulled 8 of its 18 radiation monitors in California, Oregon and Washington because (by implication) they are giving readings which seem too high. What Levels of Radiation Are Being Released? So what levels of radiation are being released at Fukushima? New Scientist reports that the radioactive fallout from Japan is approaching Chernobyl levels: Japan’s damaged nuclear plant in Fukushima has been emitting radioactive iodine and caesium at levels approaching those seen in the aftermath of the Chernobyl accident in 1986. Austrian researchers have used a worldwide network of radiation detectors – designed to spot clandestine nuclear bomb tests – to show that iodine-131 is being released at daily levels 73 per cent of those seen after the 1986 disaster. The daily amount of caesium-137 released from Fukushima Daiichi is around 60 per cent of the amount released from Chernobyl. Tyler Durden points out that – when you consider the fact that the amount of Caesium-137 released at Fukushima in the first 3-4 days of the crisis amounted to 50% that released by Chernobyl over 10 days – the real run rate of the radiation released at Fukushima is now about 120-150% the figure released by the Chernobyl explosion. There are other signs of high levels radiation. See this and this. And it is important to remember that the amount of radioactive fuel at Fukushima dwarfs Chernobyl. This Could Continue for a While Many experts say that it could take months to contain Fukushima. See this and this. And therefore, high radiation levels might continue to be released for some time. Evidence for the fact that a quick fix is unlikely is widespread. For example, reactors 1, 2, 3 and 4 were all leaking steam yesterday. There was some indication that reactors 5 and 6 are leaking as well. As Kyodo News reports: The firm [Tokyo Electric Power Company] also said it found both iodine-131 and cesium-137 in a sample taken from near the drain outlets of the plant’s No. 5 and No. 6 reactors that stabilized Sunday in so-called ”cold shutdown.” CNN notes today: Authorities in Japan raised the prospect Friday of a likely breach in the all-important containment vessel of the No. 3 reactor at the stricken Fukushima Daiichi nuclear power plant, a potentially ominous development in the race to prevent a large-scale release of radiation. The New York Times reports: A senior nuclear executive who insisted on anonymity but has broad contacts in Japan said that there was a long vertical crack running down the side of the reactor vessel itself. The crack runs down below the water level in the reactor and has been leaking fluids and gases, he said.*** "There is a definite, definite crack in the vessel — it's up and down and it's large," he said. "The problem with cracks is they do not get smaller." The cores of reactors 1 and 3 appear to be leaking as well. This is not to say that there will be a full meltdown which sends radioactive plumes high into the stratosphere. I am assuming that will not happen. But the release of radioactivity is severe and ongoing. But Low Doses of Radiation Are Safe … Aren’t They? While most would dismiss as crackpot ramblings Coulter’s claim that radiation is good for you, what about the pervasive claims that the amount of radiation which has been released is so low that it is “safe” for people outside of the immediate vicinity of Fukushima? Physicians for Social Responsibility notes: According to the National Academy of Sciences, there are no safe doses of radiation. Decades of research show clearly that any dose of radiation increases an individual's risk for the development of cancer. "There is no safe level of radionuclide exposure, whether from food, water or other sources. Period," said Jeff Patterson, DO, immediate past president of Physicians for Social Responsibility. "Exposure to radionuclides, such as iodine-131 and cesium-137, increases the incidence of cancer. For this reason, every effort must be taken to minimize the radionuclide content in food and water." "Consuming food containing radionuclides is particularly dangerous. If an individual ingests or inhales a radioactive particle, it continues to irradiate the body as long as it remains radioactive and stays in the body,"said Alan H. Lockwood, MD, a member of the Board of Physicians for Social Responsibility. *** Radiation can be concentrated many times in the food chain and any consumption adds to the cumulative risk of cancer and other diseases. John LaForge notes: The National Council on Radiation Protection says, "… every increment of radiation exposure produces an incremen­tal increase in the risk of cancer." The Environmental Protection Agency says, "… any exposure to radiation poses some risk, i.e. there is no level below which we can say an exposure poses no risk." The Department of Energy says about "low levels of radiation" that "… the major effect is a very slight increase in cancer risk." The Nuclear Regulatory Commission says, "any amount of radiation may pose some risk for causing cancer … any increase in dose, no matter how small, results in an incremental increase in risk." The National Academy of Sciences, in its "Biological Effects of Ionizing Radiation VII," says, "… it is unlikely that a threshold exists for the induction of cancers …." Long story short, "One can no longer speak of a 'safe' dose level," as Dr. Ian Fairlie and Dr. Marvin Resnikoff said in their report "No dose too low," in the Bulletin of the Atomic Scientists. And Brian Moench, MD, writes: Administration spokespeople continuously claim “no threat” from the radiation reaching the US from Japan, just as they did with oil hemorrhaging into the Gulf. Perhaps we should all whistle “Don’t worry, be happy” in unison. A thorough review of the science, however, begs a second opinion. That the radiation is being released 5,000 miles away isn’t as comforting as it seems…. Every day, the jet stream carries pollution from Asian smoke stacks and dust from the Gobi Desert to our West Coast, contributing 10 to 60 percent of the total pollution breathed by Californians, depending on the time of year. Mercury is probably the second most toxic substance known after plutonium. Half the mercury in the atmosphere over the entire US originates in China. It, too, is 5,000 miles away. A week after a nuclear weapons test in China, iodine 131 could be detected in the thyroid glands of deer in Colorado, although it could not be detected in the air or in nearby vegetation. The idea that a threshold exists or there is a safe level of radiation for human exposure began unraveling in the 1950s when research showed one pelvic x-ray in a pregnant woman could double the rate of childhood leukemia in an exposed baby. Furthermore, the risk was ten times higher if it occurred in the first three months of pregnancy than near the end. This became the stepping-stone to the understanding that the timing of exposure was even more critical than the dose. The earlier in embryonic development it occurred, the greater the risk. A new medical concept has emerged, increasingly supported by the latest research, called “fetal origins of disease,” that centers on the evidence that a multitude of chronic diseases, including cancer, often have their origins in the first few weeks after conception by environmental insults disturbing normal embryonic development. It is now established medical advice that pregnant women should avoid any exposure to x-rays, medicines or chemicals when not absolutely necessary, no matter how small the dose, especially in the first three months. “Epigenetics” is a term integral to fetal origins of disease, referring to chemical attachments to genes that turn them on or off inappropriately and have impacts functionally similar to broken genetic bonds. Epigenetic changes can be caused by unimaginably small doses – parts per trillion – be it chemicals, air pollution, cigarette smoke or radiation. Furthermore, these epigenetic changes can occur within minutes after exposure and may be passed on to subsequent generations. The Endocrine Society, 14,000 researchers and medical specialists in more than 100 countries, warned that “even infinitesimally low levels of exposure to endocrine-disrupting chemicals, indeed, any level of exposure at all, may cause endocrine or reproductive abnormalities, particularly if exposure occurs during a critical developmental window. Surprisingly, low doses may even exert more potent effects than higher doses.” If hormone-mimicking chemicals at any level are not safe for a fetus, then the concept is likely to be equally true of the even more intensely toxic radioactive elements drifting over from Japan, some of which may also act as endocrine disruptors. Many epidemiologic studies show that extremely low doses of radiation increase the incidence of childhood cancers, low birth-weight babies, premature births, infant mortality, birth defects and even diminished intelligence. Just two abdominal x-rays delivered to a male can slightly increase the chance of his future children developing leukemia. By damaging proteins anywhere in a living cell, radiation can accelerate the aging process and diminish the function of any organ. Cells can repair themselves, but the rapidly growing cells in a fetus may divide before repair can occur, negating the body’s defense mechanism and replicating the damage. Comforting statements about the safety of low radiation are not even accurate for adults. Small increases in risk per individual have immense consequences in the aggregate. When low risk is accepted for billions of people, there will still be millions of victims. New research on risks of x-rays illustrate the point. Radiation from CT coronary scans is considered low, but, statistically, it causes cancer in one of every 270 40-year-old women who receive the scan. Twenty year olds will have double that rate. Annually, 29,000 cancers are caused by the 70 million CT scans done in the US. Common, low-dose dental x-rays more than double the rate of thyroid cancer. Those exposed to repeated dental x-rays have an even higher risk of thyroid cancer. *** Beginning with Madam Curie, the story of nuclear power is one where key players have consistently miscalculated or misrepresented the risks of radiation. The victims include many of those who worked on the original Manhattan Project, the 200,000 soldiers who were assigned to eye witness our nuclear tests, the residents of the Western US who absorbed the lion’s share of fallout from our nuclear testing in Nevada, the thousands of forgotten victims of Three Mile Island or the likely hundreds of thousands of casualties of Chernobyl. This could be the latest chapter in that long and tragic story when, once again, we were told not to worry. Note: People who rationally discuss the hazards from nuclear accidents are dismissed as “anti-nuclear”. However, that is like saying that people who are against pilots drinking tequila during flights are anti-flying. As Bloomberg points out, the operator of the Fukushima reactors faked safety tests and results and cut every corner in the books for decades, just as BP cut every safety corner prior to the Gulf oil spill. Moreover, the Fukushima reactors were not designed to withstand an earthquake or a tsunami, and their peculiar design makes the spent fuel rods an even greater danger than the reactors themselves. Demanding a safer design – e.g. thorium reactors – and ongoing maintenance and safety tests doesn’t mean one is anti-nuclear.

Abelson on “Immunity to Bad News,” Margin Debt Posted: 27 Mar 2011 02:48 AM PDT Alan Abelson in this weekend’s Barron’s: “THE BULLS SEEMINGLY HAVE DEVELOPED an immunity to bad news. We’re admittedly jealous, since we’d love to glom onto the potion that makes everything, no matter how dire, come up smelling like a rose. It isn’t that we’re oblivious to good news; frankly, we hunger for it. Thus, when Bloomberg reports, citing data from Paychex, Intuit, Insperity and the National Federation of Independent Business, that small businesses, which have been down in the dumps forever, suddenly are energized by a surge of optimism and have started to actually hire people, we feel like emitting a discreet cheer. But we somehow can’t blithely ignore disturbing bulletins out of Japan on the troubles besetting its effort to fix its damaged nuclear facilities. Or, the recurring financial woes in Europe. Or, closer to home, the mercurial rise in food and gas prices that threatens to effectively wipe out the bounty awarded the consumer via a temporary tax cut. Nor can we turn a blind eye to less cosmic stuff like the decline in February durable-goods orders and, most notably, the drop in orders for nondefense capital goods excluding aircraft, which were off 1.3% versus an anticipated gain of 4.3%, a persuasive indication that businesses are still wary and keeping a tight grip on spending. But our concerns about Wall Street’s pervasive bullishness go beyond the market’s lack of interest in, much less reaction to, unfavorable events, large and small. It’s also the not-unimportant matter of sentiment: pure and simple optimism among investment pros reigns supreme (apart from the usual scattering of cranky pessimists)—usually an early warning signal. In the latest Investors Intelligence survey, 50.6% of the advisors were bullish, a meager 22.4% bearish.” Other factors Abelson cites: Margin debt is ballooning — $350 billion, equivalent to 2.2% of total market cap — one of the highest percentages ever. This last happened back in 2007 and 2008. > Source: No Exit, No Entry ALAN ABELSON Barron’s March 26, 2011  http://online.barrons.com/article/SB50001424052970204582404576214762215231664.html

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