Japan melts down

 We're seeing firsthand what happens when a world power is crippled. Japan is the world's third-largest economy. After the initial shock of the tsunami, today's headlines are dominated by radiation leaks at four Japanese nuclear reactors. The Japanese government ordered 140,000 citizens to seal themselves indoors. Radiation levels reached dangerous levels, but are retreating. The news rocked the Japanese markets... The Nikkei closed down 10.5%.

 Japan is also the world's third-largest oil consumer. Reflecting the upheaval, oil fell 3.3% to less than $98 a barrel (despite news of Libya halting oil exports).

Gold is down about 2.3%. Silver is down about 3.9%. The only green (positive) number on my screen is... the U.S. dollar. That's what happens to the world's reserve currency when assets are sold in a panic. What's in your account when you sell stocks? Dollars. What do you get when you sell bonds? Dollars. Sell gold? Dollars. Sell silver? Dollars again.

Ask yourself: Is the U.S. dollar stronger than anyone thinks? Or is everyone finally realizing asset prices were too high (again)? If the dollar continues to decline in the wake of Federal Reserve money-printing, can it function as a safe haven forever? Or will a day of reckoning occur, after which safe haven money flows primarily into gold and silver? It's a good question. Keep asking, "Then what?" That'll get you to a better place than simply asking, "What now?"

 Japan consumes about 12% of the world's uranium. All but a handful of its 55 nuclear plants are still operating. But analysts fear the loss of confidence in the safety of nuclear power will hurt the industry's high-growth expectations. This sounds familiar... like when they said deepwater drilling was done during the BP disaster. Deepwater drilling around the world is in full force today. BP just got a permit to drill in 13,000 foot-deep water off the coast of Australia.

Still, uranium stocks are selling off big time today. Cameco, the ExxonMobil of uranium, is down about 6%, after dropping 12.7% yesterday. Vancouver-based Uranium One is down about 14% today, after dropping 28% yesterday. Smaller uranium mining stocks are getting hit even harder.

You can't tell what new restrictions governments might place on the nuclear power industry. Ignorant, hysterical kooks keep their jobs by placating other ignorant, hysterical kooks.

 But think about this... This earthquake was the fifth-worst ever recorded. It's the worst Japanese earthquake on record. If it doesn't result in an all-out nuclear meltdown, it'll confirm the relative safety of nuclear reactors. If you can't cause a meltdown with an 8.9 earthquake, they must be pretty safe.

I doubt the world can live without nuclear power. It supplies 20% of the electricity in the United States. You can only build so many natural gas-fired power plants. We're going to need nuclear power in the U.S... and around the world.

As for when to buy uranium stocks... I can't tell you where the bottom will be. But I think we'll eventually see a great buying opportunity. Our natural resources expert and resident geologist, Matt Badiali, has some ideas today about this topic in Growth Stock Wire.

 The reinsurance sector is getting pounded, too. Berkshire Hathaway is down 2%. Montpelier Re is down 4.5%. And Flagstone Reinsurance is down 4%.

Most reinsurance companies use the Tokyo area to model their exposure to events like this, which they believe occur once every 100 years. The models include the fact that Japan's government offers some coverage in that area for residential and nuclear risk. But this quake didn't happen in Tokyo. It happened in a region where insurers might be exposed to damage in rural areas not covered by the government. Consequently, investment bank Keefe, Bruyette, and Woods says Friday's earthquake could cost European insurance companies almost one-third of their pretax profits this year.

Prices for catastrophe insurance have been falling for two years. This event might turn that around. Fabrizio Croce, a Zurich-based analyst with Kepler Capital Markets, says, "The Japanese quake finally exhausts the natural catastrophe budget for 2011 of a majority of reinsurance companies. All the ingredients for market hardening are now perfect." Market hardening means higher prices, usually due to a smaller supply of reinsurance capacity caused by a major catastrophe.

 Uranium and reinsurance are obvious sources of possible opportunity now. Some might think stocks are cheap now, too. Stocks are trading just over 15 times earnings, based on the 2010 S&P 500 earnings estimate of $83.79. They're certainly cheap relative to 10 years ago. Back then, price-to-earnings ratios were twice as high as today. They're even cheaper if you compare their forward (2011) earnings yield of 7.3% to the 10-year Treasury yield of 3.40%.

But – as our friend Vitaliy Katsenelson writes on the value investing blog, ContrarianEdge – all the relative analysis has one big problem. It's kind of like saying housing was still affordable in 2006 without acknowledging the role of no-money-down, adjustable-rate mortgages… the ones that started with a lowball teaser interest rate... and end up requiring an arm and a leg every month when that rate resets. Reality has a way of correcting excesses in the financial world.

So yes, stocks are cheap... but pretax profit margins are hovering close to an all-time high of 13.3% (the all-time high was 13.9% in 2007), almost 58% above their average of 8.4% since 1980. Once profit margins revert to their historical mean – the way housing prices have – earnings will decline. If the market made no price change in response, a reversion to the historical mean would raise the market's P/E ratio from 15.7 to 24.9 times trailing earnings.

Perhaps you disagree that profit margins will revert to the mean. After all, who says it has to happen? Why can't margins remain high... and go even higher? Jeremy Grantham of Grantham, Mayo & Van Otterloo, supplies the answer. It's something he's been saying for years:

Asking why profit margins must revert is like asking why the sun has to set. After all, from dawn to noon, the sun gets higher and higher in the sky. By noon, the "trend" of a relentlessly rising sun is firmly in place. Why can't it just keep going?

 New 52-week highs (as of 2/14/11): None.

 The mailbag today reminds me of an old song by Morrissey, called, "We Hate It When Our Friends Become Successful." For today's entertainment, read on... And as always, feel free to write us at feedback@stansberryresearch.com.

 "I want so say unequivocally (with only a slight caveat I shall mention later), that you guys have the most impressive advisory and trading service I have ever encountered. After perusing the various doomsday 'prophets' out there (who share that disability or affectation known as 'broken clock syndrome'), I looked closely at the Stansberry materials for several weeks before signing on initially with the 12 % Letter, and – after that – several others, and counting.

"Whether we are talking Porter's weekly wrap-up, or Steve's insights on market cycles, or Matt's resources picks (and there are many other features I could reference as well), the level of detail and service is peerless.

"Today's True Wealth update is a case in point – While not in the least bit coming across as crass or mercenary, the fact of Steve Sjuggerud's taking the time to provide an update on his assessment of Japan shows the level of commitment your company/services consistently exhibit to your subscribers.

"As a recruiter in the pharmaceutical and biotech field, I cannot recommend Stansberry & Associates highly enough to my colleagues and friends both in, and outside, the business. Keep going, and do not allow the naysayers to distract you from this vital work. You guys rock!" – Paid-up subscriber Brian Harrington

 "How do I get recommendations from S&A sources on shorting stocks?" – Paid-up subscriber Robert Rutland

Ferris comment: Several of our analysts give short-selling advice. Porter and Braden have been adamant about the need to sell stocks short in their advisory, Stansberry's Investment Advisory. Steve Sjuggerud also makes short recommendations in True Wealth. And I make them in Extreme Value. And in his S&A Short Report, Jeff Clark uses options to play down movements in stock prices.

 "I hope you people die a slow terrible death someday. I hope someone forces money down your god damned throats at your funeral. Sh*t... I hope they also shove money up your asses in your coffin. That would be a perfect picture of the life you led.

"Saying it is ok for a business to start up outside of the US to save 'a billion dollars'. Go f**k yourselves you anti-united states pieces of dog sh*t. When this all comes crumbling to our feet I hope I get your address." – Anonymous

Ferris comment: "Anonymous"… That says it all.

 "I recommend stopping the hype and discreetness of your endoftheworld video. It has very valid points and well researched opinions, but you are dissuading the listener by hyping the facts and asking for them to pay a 'heavily discounted price' for your newsletter. If you actually care about helping our economic crisis, which is obviously getting very fragile, then stop charging people for your products out of your own greed. Stop trying to sell a newsletter, how can anyone believe an opportunist?

"What your newsletters say make sense... but the way your trying to sell them is wrong, and I'm sure you know it, which is in turn making you kind of a hypocrite… funny how that works.

"If this is customer service I'd appreciate it if you forwarded it to Porter Stansberry, if not then I may just have wasted my time. Whoever you are working for that company, maybe you should stop and think about what your doing yourself." – Paid-up subscriber "Monster 1234"

Porter comment: Hello, "Monster 1234." How do you recommend we pay for the roughly $1 million per month we're spending to advertise what we believe is a critical financial warning? And how do you propose we pay the 50 or so folks who make up our core research, writing, and marketing staff? How do you propose we pay the dividends to our partners, who put up millions of dollars in capital for our operations this year? And where do you propose we find the money we need to cover our variable costs, like paper, ink, postage, computer services, accountants, lawyers, etc.?

Do you think the hundreds of people who are involved in some way with our business are all greedy? Or is it only the man whose name is on the building you suspect of moral turpitude?

In our experience, we've found most people are willing to pay a reasonable price for information that helps them protect their wealth... or even grow it. Said another way, if selling something for $100 helps you make $1,000, most people would consider it a bargain. Perhaps that's why most people consider the $49.50, "half-off" introductory price for our newsletter to be laughably cheap.

But... I'm eager to learn how you'd operate this business. Perhaps there's a way to get things done in this world that completely ignores everyone's natural, healthy self-interest.

Eagerly awaiting your reply,

The "greedy hypocrite," Porter Stansberry

Regards,

Dan Ferris, Sean Goldsmith, and Porter Stansberry

Medford, Oregon and Baltimore, Maryland

March 15, 2011

Japan melts down... World markets down... Short selling looks pretty good now... Uranium stocks pounded... Reinsurance stocks pounded... Are profit margins too high?... Mailbag: Is S&A too greedy?