Why Markets are Rebounding Despite Continued Crisis

03/17/11 Laguna Beach, California – During the last 24 hours, fear evaporated from the global financial markets as completely as water from a Fukushima reactor. The Nikkei recovered from a 5% plunge to end the day down about 1.4%. Most European markets have rebounded about 2% and the Dow Jones Industrial Average is busy attempting a similar feat.

Today’s gains probably have more to do with mere “selling fatigue” than they do with a genuine conviction that stocks are a “buy.” But, selectively, folks are trying to capitalize on what they perceive to be “oversold” situations. One group of astute investors known to your editor reached the following conclusions yesterday:

1) Japanese stocks may well represent a solid contrarian opportunity after the recent panic-driven selling. The problem is that any gains for American investors will likely be offset by an appreciation in the yen versus the dollar over the short term.

2) It’s too early to tell, but uranium-linked stocks may also be a “buy” following their recent rout. Nuclear power produces about 13% of the world’s energy. That’s not easy to replace. Depending on the outcome at Fukushima Daiichi, uranium producers could recover to their pre-Japan quake highs.

3) The world faces an energy crunch as nuclear and oil become problems. Natural gas will be a big winner. It is a relatively clean way of producing electricity.

4) Gold should do well when the margin selling ends. Japan’s rebuilding efforts will increase its already yawning deficits, pile on more public debt and lead to a new flood of paper money from the Bank of Japan.

“Rare earths” are also back in vogue. But the hottest “rare earth” investment of the moment has nothing to do with iridium, scandium, yttrium or any of the other “-ium” metals. The hottest rare earth investment today is element #53: Iodine.

Iodine is not particularly rare from a geological standpoint. But that doesn’t mean it’s easy to find on a pharmacy shelf. Geologically, iodine represents 450 parts per billion of the earth’s crust, which means its about ten times more abundant than gold. Based on parts per billion, therefore, Iodine is not so rare. But based on pills per pharmacy, good luck.

Never mind that Japan’s nuclear crisis is more than 5,000 miles away from California, the crisis is close enough to trigger an “iodine rush” in the Golden State.

Yesterday morning, your editor strolled into the Laguna Beach CVS store and asked to buy iodine tablets. The pharmacist laughed, “Can’t get it.”

“Really?”

“Yep,” the pharmacist replied. “It’s impossible to get.”

This anecdote provides context for a little game we’ll call, “Who’s holding the bag?”

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

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