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Nuclear Meltdown In Japan Would Have Worldwide Implications (NLR, XLE, VTI, SCHB)

March 14th, 2011

The concerns continue to mount after Japan’s devastating earthquake and subsequent tsunami, which may further heighten recent anxiety in the financial markets. An explosion near the No. 1 reactor at the Fukushima Dai-Ichi nuclear power station has industry experts talking about the possibility of a meltdown. According to Bloomberg:

“If the fuel rods are melting and this continues, a reactor meltdown is possible,” Kakizaki said. A meltdown refers to a heat buildup in the core of such intensity it melts the floor of the reactor containment housing. “If they cannot get the nuclear reactor back under control during the day, this may end up being the biggest problem of all,” said Ken Courtis, former vice chairman of Goldman Sachs Group Inc. in Asia. “A meltdown, which would cause massive immediate damage, would also set the nuclear industry back decades. This would have vast implications for the global energy equation and perforce the world economy.”

Japanese Chief Cabinet Secretary Yukio Edano said at a press conference that the blast didn’t damage the reactor container, only the structure outside it, and that there was no major radiation leakage with the explosion. The nuclear reactors are about 150 miles north of Tokyo. New reports in Japan have indicated the radioactivity at the site was rising to 20 times normal levels.


Defensive Game Plan

We would expect the Market Vectors Uranium+Nuclear Energy ETF (NYSE:NLR) to struggle next week. From an investment perspective, we would avoid NLR in the short-term due to the uncertainties in Japan. If we owned NLR (we do not), we would consider selling some of the position with a close below 24.74, and cutting back even further with a close below 23.18.

“If the water level remains at this level, the reactor core might be damaged, but we are now pouring water into the reactor to prevent it from happening,” Dow Jones Newswires quoted a Tepco spokesman as saying.

According to Wikipedia, a nuclear meltdown:

  • Occurs when a severe failure of a nuclear power plant system prevents proper cooling of the reactor core, to the extent that the nuclear fuel assemblies overheat and melt. A meltdown is considered very serious because of the potential that radioactive materials could be released into the environment. A core meltdown will also render the reactor unusable until and unless it is repaired.
  • Within the former Soviet Union several nuclear meltdowns of differing severity have occurred. In the most serious example, the Chernobyl disaster, design flaws and operator negligence led to a power excursion that subsequently caused a meltdown.
  • A core damage accident is caused by the loss of sufficient cooling for the nuclear fuel within the reactor core. The reason may be one of several factors, including a loss of pressure control accident, a loss of coolant accident (LOCA), an uncontrolled power excursion, or in some types, a fire within the reactor core.

Hopefully over the coming days, the people of Japan can get some good news in the form of the odds being reduced relative to the possibility of a meltdown. From an investment perspective, it may contribute to an already fragile state of the markets. As we head into Monday’s open, we will continue to monitor the situation as well as the relative performance of defensive assets.

In terms of specific strategy next week:

  • We will be patient with our cash until the news from Japan calms down a little and the technical picture in the U.S. improves.
  • Since we have been raising cash for a few weeks, we are happy to hold our longs and see how the S&P 500 acts near key levels, including 1,294, 1,275, and 1,270.
  • If the market can find its footing soon, or near the levels above, we are willing to consider some minimal redeployment of cash, possibly using a broad market approach (Vanguard Total Stock Market ETF (NYSE:VTI) or Schwab U.S. Broad Market ETF (NYSE:SCHB)).
  • A close below the levels mentioned above would have us consider raising some additional cash using the incremental approach. Since we have profits in energy (NYSE:XLE), we may cut back further in that area should the bears continue to control the market.

Written By Chris Ciovacco From Ciovacco Capital Management, LLC

Chris Ciovacco began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the globe in all asset classes. If you are looking for an independent money manager or financial advisor, Ciovacco Capital is worth a look. Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990. His experience in the professional ranks began in 1985 as he began working as a co-op for IBM in Atlanta.

Ciovacco Capital Management, LLC (CCM) is an independent money management firm serving clients nationwide. By utilizing extensive research, disciplined risk management techniques, and a globally diversified approach, CCM prudently manages investments for individuals and business owners. Our focus is on principal protection and purchasing power preservation in an ever-changing global investment climate.


NYSE:NLR, NYSE:SCHB, NYSE:VTI, NYSE:XLE


 

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