The Big Picture

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• Il Castello di Venere
• Crude oil got crushed today
• How a magnet can turn off speech
• Inflight Reads
• Japan Considers Raising Nuclear Disaster from Level 5 to 7 Based on Extremely High Radiation Readings
• Profile of a Twitter User
• FOMC Minutes Word Cloud
• Always Have a Plan “B”
• What’s Driving Gold?
• Disrupting the Higher Education Bubble

Il Castello di Venere Posted: 11 Apr 2011 11:30 PM PDT Il Castello di Venere April 11, 2011 David R. Kotok www.cumber.com > From the top of Il Castello di Venere at Erice, we are 96 miles from Tunisia. The Trapani-Birgi airbase in Sicily has now become the staging area for NATO operations against Gaddafi. AWACS planes and fighter jets on missions to Libya are frequently visible. The roar of their engines resonates for miles and transforms Sicily’s otherwise tranquil countryside. Thirty thousand North African refugees have made their way to Italy. Since Italy has given permission for admission, refugees from Libya, Tunisia, and surrounding countries seek to secure passage and cross the Mediterranean. When they reach Italian soil, at times by the hundreds, these refugees have gained access to the entire European Union, and eventually disperse throughout its 27 countries. Needless to say, this controversy has its own political implications within the European Union. Sicily is a crossroads in the center of the Mediterranean. In antiquity, it was the center of the world. Oil made from olives moved around the Mediterranean as part of a dense web of commercial activity. In those days, the interest rate was 50%. The late Sidney Homer's famous work, A History of Interest Rates, describes how investors would finance the ship and the olive crop for half the result, after recovering their initial capital. Risk was high in those days, long before the advent of subprime mortgages. A storm or band of pirates could wipe out the entire investment. We are now dealing with a different type of oil. The impact in Europe is clear, as the price of gasoline in Sicily is the equivalent of $9 USD per gallon. The euro is very strong, and tourism is down. The unemployment rate in Sicily – officially – is logged at nearly 40%. However, there is an underground economy in Sicily, so the true unemployment rate is probably something less. With the Mediterranean as the backdrop, I sit for lunch with Joe Mason, fellow member of the GIC, Professor of Finance at Louisiana State University, and personal friend. We talk about oil, gasoline, and where this is all going to lead. Joe suspects that $5 USD per gallon of gas will be the sticker-shock price. We may not reach it; no one can be certain. However, he believes such a price would be temporary, because it would alter behaviors. I ask Joe if $4 USD per gallon was in the cards, and he responded with, "I expect $4 plus, or even plus-plus." Our discussion moves on to the regulatory issues involving energy in the United States. The results are mixed at best. We are still not drilling in the Gulf of Mexico. We still do not encourage the infrastructure needed to capture domestic self-sufficiency in natural gas. For this to be possible, Washington has a long road to travel. Why? The regulatory morass and bureaucracy is what bogs us all down. During GIC meetings and conversations I had in Rome, we explored sovereign debt and energy impacts. We also talked about the need to restructure the indebtedness of countries and other entities that must reorganize and balance their revenues versus their expenses. How can political systems change and adapt without crisis? The outlook is mixed to bleak. From seven hundred meters above sea level, we gaze down at the plain of Sicily and the ancient walls of Erice, which were built by the Esuli Trojans 2700 years ago. We think about Africa, less than one hundred miles from where we stand. We consider what the next oil-price and energy shock might bring. We have had discussions about the evolution of political instability, political change, and energy shock from Sub-Saharan Africa. Elections are underway; turmoil is becoming more evident in places like Nigeria, Cameroon, and the Ivory Coast. As we have written many times, this is not over. Will there be resiliency in the face of a second oil-price shock coming out of Nigeria? We think the answer is likely to be no, at the present price level. At Cumberland, we remain overweight in energy. We remain vigilant about oil and oil-price shocks. We are observing the world firsthand, secondhand, and through data. The outlook suggests $5 USD per gallon gasoline is possible. David R. Kotok, Chairman and Chief Investment Officer

Crude oil got crushed today Posted: 11 Apr 2011 06:29 PM PDT A friend on an institutional desk writes tonight: Crude oil got crushed today with the May '11 WTI contract trading below $109 per barrel as the stock market closed – and this after it traded above $113 for several hours Sunday evening. The IMF came out and slashed its 2011 GDP projections for the U.S. and Japan, citing a lack of job creation in the former and the natural disaster in the latter, and Goldman announced that it had taken off it's 'long CCCP' trade (long copper, cotton, crude oil and platinum). The Libya cease-fire speculation also sparked some downside pressure. These "reasons" for crude's sharp sell-off seem as good as any other to me. There was unconfirmed chatter about an imminent hike to margin requirements for COMEX-traded gold and silver (the latter reversed -5.1% intraday from highs to lows), and it occurred to me that perhaps we were looking at a commodities liquidation event, but the charts make it clear that the move started in crude. Despite the damage suffered by the energy stocks today as a result of crude's tumble (S&P 500, 400 and 600 Energy indexes down -1.9%, -2.4% and -2.3%, respectively), I couldn't help but notice that the transports and consumer discretionary stocks held up pretty well. I've pasted intraday charts of the Dow Jones Transportation Average (left) and the S&P 500 Consumer Discretionary Index (right) below that go back ten days. Both groups of stocks experienced an "inside day" today, meaning that their intraday lows were higher than yesterday's lows while their intraday highs were lower than yesterday's highs (see the green wedges in the charts). I take the reluctance to push these stocks higher as a sign that traders believe the sell off in crude was a transitory event. "Too early to buy 'em on crude's weakness – WTI could be up $3 again tomorrow and you don't want to be left holding the bag." Or something to that effect. After all, if the Libya cease-fire turns out to be a pile of malarkey, as it appears to be, why wouldn't today's sell off be reversed? Maybe because there's no one left to buy the stuff. The chart below on the left shows speculator long contracts minus speculator short contracts in WTI crude, and the record net bullishness confirms that the hot money is hugely bullish on crude oil (the CFTC data is current to April 5th). In this context, the reluctance to buy transports and consumer discretionary names makes perfect sense. Why put on a trade that goes against your core view (that oil is going up)? I actually think that a contrarian approach makes a lot of sense here. Look at the above left chart and ask yourself how many people you know to be bearish on crude oil. I know of very few – actually, I know of one high profile hedge fund manager who claimed to be bearish on crude at a recent dinner, but he's a stock picker! Now take a look at gasoline deliveries by refiners to U.S. wholesalers in the chart above on the right: demand stinks, probably because the price has gone up so much in recent months and because the average U.S. consumer has well-documented cash flow issues. There's more. I have been accumulating against-the-grain articles on China in recent weeks and I invite you to take a gander at the following snippets: • "A copper shortage forecast for this year may be in doubt because of a buildup of stockpiles in China, Standard Bank Plc said. Shanghai warehouses hold some 600,000 metric tons of refined metal, with another 100,000 tons in southern ports, analyst Leon Westgate in London said in a report e-mailed today. That equates to about 40% of China's net refined copper demand, he said. Some warehouses are running out of room to store metal, according to the report. (from "Copper Shortage May Be in Doubt in 2011, Standard Bank Says," by Claudia Carpenter and Agnieszka Troszkiewicz of Bloomberg News on March 28th, 2011) • "China will soon order a halt of all planned electrolytic aluminum projects because of overcapacity in the industry, the China Securities Journal reported today, citing Su Bo, Vice Minister of Industry and Information Technology. The order was previously scheduled to be issued in March and has been delayed, the newspaper reported, citing an unidentified person. The Ministry of Industry and Information Technology, the National Development and Reform Commission, and six other agencies will issue the order soon, according to the report." (from "China to Soon Halt Planned Aluminum Projects, Securities Says," by Bloomberg News on April 10th, 2011) • "China's Ministry of Finance is considering a reduction of export rebates for some aluminum and stainless steel products, the China Securities Journal reported today, without citing anyone. Export rebates for some aluminum products may be reduced to 9% from 13%, the newspaper reported. The entire 5% export rebate for stainless steel products may be removed, according to the report." (from "China May Reduce Export Rebates for Some Metals, Securities Says," by Bloomberg News on April 11th, 2011) Calling an end to the Chinese capex boom is not something to be done whimsically, but it does appear as though they're ratcheting back a bit, doesn't it? (As I write, I see this headline scroll down my Bloomberg screen: *CHINA ECONOMIC GROWTH SLOWDOWN IS `MAJOR RISK,’ NOMURA SAYS…for what it's worth.) Only marginal demand moves prices, which means that China only has to reduce the rate at which its consumption of raw materials is growing for there to be a downside impact on price. To be sure, the unrest and violence in MENA is an issue that has not gone away, but all of a sudden I'm wondering if traders' focus may shift away from supply at some point and toward demand. If so, there's a teed up trade that can be expressed either long or short – depending on whether you're bullish or bearish on the market as a whole. Bulls might take a look at the transports (IYT is the ETF) or the consumer discretionary stocks (XLY), while bears might focus on energy (XLE etc.).

How a magnet can turn off speech Posted: 11 Apr 2011 02:38 PM PDT How a magnet can turn off speech: Hold an electromagnet close to your skull and you can enhance or suppress the activity of neurons just beneath it, thanks to a technique called transcranial magnetic stimulation (TMS). In this video, our brave editor Roger Highfield was zapped by Vincent Walsh from the Institute of Cognitive Neuroscience at UCL to show how it can turn off speech. The process was tricky to film as the magnetic fields also interfered with the camera, adding a psychedelic touch to the video. Walsh and his team are looking at how the technique can be used to treat migraine and stroke. >

Inflight Reads Posted: 11 Apr 2011 02:21 PM PDT Some inflight reads from today: • How to fail (Seth Godin) • Ray Dalio of Bridgewater Associates ($92B) on Pursuing Self-Interest in Harmony With the Laws of the Universe and Contributing to Evolution Is Universally Rewarded (NY Mag) • Portfolios-To-Go May Become Wall Street's Next Thundering Herd (Bloomberg) • If the banks forsake London, where might they go? (Guardian) • Bernanke, Trichet Display Their Respective DNA (BusinessWeek) • What Is Really Killing Pharma (Open Eye) • Microsoft's Odd Couple (Vanity Fair) • Fukushima: What happened – and what needs to be done (BBC) What are you reading?

Japan Considers Raising Nuclear Disaster from Level 5 to 7 Based on Extremely High Radiation Readings Posted: 11 Apr 2011 02:10 PM 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. ~~~ As I wrote on March 29th, radioactive cesium levels from Fukushima already rival Chernobyl, and a study conducted by a team of experts from Kyoto University and Hiroshima University found extremely high levels of cesium outside of the 30 kilometer evacuation zone: [A] study was conducted by a team of experts from Kyoto University and Hiroshima University … found cesium-137 at levels between about 590,000 and 2.19 million becquerels per cubic meter [outside the 30 kilometer evacuation zone]. After the Chernobyl nuclear accident in the former Soviet Union in 1986, residents who lived in areas where cesium-137 levels exceeded 555,000 becquerels were forced to move elsewhere. After the Chernobyl nuclear accident in the former Soviet Union in 1986, residents who lived in areas where cesium-137 levels exceeded 555,000 becquerels were forced to move elsewhere. *** The amounts of cesium-137 found in Iitate were at most four times the figure from Chernobyl. If more radioactive materials are emitted from the crippled Fukushima plant, the level of cesium-137 could rise even further. If more radioactive materials are emitted from the crippled Fukushima plant, the level of cesium-137 could rise even further. Today, In the department of the obvious, Kyodo News is reporting that – due to extremely high radiation levels – the Japanese government is considering raising the nuclear crisis from a 5 to a 7 – the highest possible level of disaster: The Nuclear Safety Commission of Japan released a preliminary calculation Monday saying that the crippled Fukushima Daiichi nuclear plant had been releasing up to 10,000 terabecquerels of radioactive materials per hour at some point after a massive quake and tsunami hit northeastern Japan on March 11. The disclosure prompted the government to consider raising the accident’s severity level to 7, the worst on an international scale, from the current 5, government sources said. The level 7 on the International Nuclear Event Scale has only been applied to the 1986 Chernobyl catastrophe. *** According to an evaluation by the INES, level 7 accidents correspond with a release into the external environment radioactive materials equal to more than tens of thousands terabecquerels of radioactive iodine 131. One terabecquerel equals 1 trillion becquerels. Haruki Madarame, chairman of the commission, which is a government panel, said it has estimated that the release of 10,000 terabecquerels of radioactive materials per hour continued for several hours. The commission says the release has since come down to under 1 terabecquerel per hour and said that it is still examining the total amount of radioactive materials released. As I noted yesterday: The Japanese government reports radiation levels in the number 1 reactor of at least 100 sieverts per hour: In contrast, radiation levels were apparently about 300 sieverts per hour – 3 times higher – right after Chernobyl exploded. As MIT explains, the reason that different units for measuring radiation are so confusing is that the U.S. uses a different system from metric countries and different units measure different things: There are a number of reasons for the confusion. In part, it's the usual disparity between standard metric units and the less-standard units favored in the United States, added to the general confusion of reporters dealing with a fast-changing situation (for example, some early reports mixed up microsieverts with millisieverts — a thousandfold difference in dose). Others are more subtle: The difference between the raw physical units describing radiation emitted by a radioactive material (measured in units like curies and becquerels), versus measurements designed to reflect the different amounts of radiation energy absorbed by a mass of material (measured in rad or gray), and those that measure the relative biological damage in the human body (using rem and sieverts), which depends on the type of radiation. (Rem, rad and gray are all used as the plural as well as the singular form for those units). In other words, becquerels measure radiation emitted while sieverts measure biologic damage to the human body. That is why one measure can’t be converted into the other … they measure different things. Figures on Chernobyl radiation are a little harder to come by in becquerels. But New Scientist noted last month: In the 10 days it burned, Chernobyl put out 1.76 × 1018 becquerels of iodine-131, which amounts to only 50 per cent more per day than has been calculated for Fukushima Daiichi…. Similarly, says [Gerhard Wotawa of Austria's Central Institute for Meteorology and Geodynamics in Vienna], caesium-137 emissions are on the same order of magnitude as at Chernobyl. The Sacramento readings suggest it has emitted 5 × 1015 becquerels of caesium-137 per day; Chernobyl put out 8.5 × 1016 in total – around 70 per cent more per day. 1.76 × 1018 becquerels of radioactive iodine over 10 days equals 7.33 × 1015 becquerels per hour during the fire at Chernobyl. Similarly, 8.5 × 1016 becquerels of radioactive cesium over 10 days equals 3.54 × 1014 becquerels per hour during the fire at Chernobyl. 7.33 × 1015 plus 3.54 × 1014 equals 7684000000000000. In other words, Chernyobyl put out an average of 7.684 times 1015 becquerels per hour of radioactive iodine and cesium during the fire. In contrast, Fukushima put out 10,000 terabecquerels per hour of radioactivity for at least a couple of hours. 10,000 terabecquerels equals 1 x 1016 becquerels. Granted, there were other types of radioactivity emitted by Chernobyl – such as radioactive strontium – just as there are other types being released from Fukushima. So the above back-of-the-envelope calculation is not complete. But the bottom line is that – as even the Japanese government is now reluctantly being forced to admit – the amount of radioactivity being released from Fukushima appears to rival those Chernobyl.

Profile of a Twitter User Posted: 11 Apr 2011 12:37 PM PDT Amusing overview, via Daily Inforgraphic >

FOMC Minutes Word Cloud Posted: 11 Apr 2011 12:00 PM PDT http://www.wordle.net/show/wrdl/3436152/03_2011_Participants_Views

Always Have a Plan “B” Posted: 11 Apr 2011 10:03 AM PDT I am off to a conference tomorrow in Charlotte, NC. A minor auto disaster could have sidelined the trip, but thanks to a well-prepared driver and some excellent customer service (US Air), the trip was alvaged. A snafu meant a 45 minute car delay heading to the airport. Once we are on the way to JFK, its apparent that we ain’t making the flight. The substitute driver carries with him all of the contact info for every airline’s customer service departments. (Great driver!) I get a hold of Mike at US Air, he offers to roll me into the 6:30 from JFK for free (apparently, Airlines have something called the”flat tire rule”). But that gets me in too late for the welcoming dinner, and Mike suggests a 1pm flight from LaGuardia (but it costs appreciably more $$). I don’t care, I HAVE to get to Charlotte, I’ll bill it to the company (hey, at least its pre-tax dollars). US Air Mike does this, I get to LaGuardia with oodles of time, and grab the last First Class upgrade for $75. All told, what could have been a conference nightmare turned out to be salvaged. Always have a plan B . . . ~~~ UPDATE : April 11 2011 12:45 My 1:05 flight is delayed 30 minutes! (Nothing’s perfect)

What’s Driving Gold? Posted: 11 Apr 2011 08:30 AM PDT Interesting interactive graphic from US Funds: > click for interactive graphic

Disrupting the Higher Education Bubble Posted: 11 Apr 2011 07:30 AM PDT Sarah Lacy has a post on TechCrunch that’s supposed to be terribly outrageous and upsetting because Libertarian ideologue Peter Thiel thinks higher education is a bubble. The only problem with thinking behind the post is that it focuses on Thiel’s misguided reality-show style experiment of choosing a group of young people and paying them not to go to college, but instead start businesses. Putting that aside, there’s a real issue behind Thiel’s thinking which is summarized by Lacy here: “He thinks it's fundamentally wrong for a society to pin people's best hope for a better life on  something that is by definition exclusionary. "If Harvard were really the best education, if it makes that much of a difference, why not franchise it so more people can attend? Why not create 100 Harvard affiliates?" he says. "It's something about the scarcity and the status. In education your value depends on other people failing. Whenever Darwinism is invoked it's usually a justification for doing something mean. It's a way to ignore that people are falling through the cracks, because you pretend that if they could just go to Harvard, they'd be fine. Maybe that's not true." The question is, why doesn’t Thiel make it possible for anyone who wants to go to Harvard to be able to do it? After all, Thiel has made his fortune disrupting other hidebound institutions. Making it possible for motivated individuals to get the same quality of education that exists at the nation’s best universities without having to attend them would be the kind of disruption that would fit into Thiel’s social views and his economic ones. We know from past history that highly motivated persons exposed to a quality education system will self-select for success. New York’s fabled City College is only one example. Wouldn’t it be possible given the backing of the right kind of successful and smart people to make a superb education both more affordable and effective? Even if there isn’t a whopping business opportunity here (and I’m pretty sure there actually is one,) wouldn’t gathering the best lectures, course materials, testing protocols and turning them into a cloud-based learning platform that focused on educating individuals and being able to measure their progress be a profound alternative to traditional schools? ~~~ Source: Peter Thiel: We’re in a Bubble but It’s Not the Internet. It’s Higher Education by Sarah Lacy TechCrunch.com; April 11, 2011 http://techcrunch.com/2011/04/10/peter-thiel-were-in-a-bubble-and-its-not-the-internet-its-higher-education/

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