Japan and Bahrain. Oh, My!

Japan and Bahrain. Oh, My!
David R. Kotok
March 14, 2011


Risk management means sell now and then hope you are wrong.

This morning we took Japan to zero weight. This is a huge step in view of the fact that the weight of Japan in global indices is 21%. We rarely go to an extreme like this.

As Bill Witherell wrote this morning, the Kobe quake high to low was about 25%. That was our guide.

We totally disagree with those who said hold. (Sorry, Jim Cramer, we like you, but we are on opposite sides on this one.) It is a mistake to hold when there is an uncertain and developing negative risk. We have that in Japan. Note: measure risk by the size of the evacuation zones around the reactors. That is official feet moving not official mouths talking.

We mourn for the many thousands there who are not safe and for the loss of those who are innocents. We are thankful that our adopted family is alive, notwithstanding their pain for their countrymen.

Now to this other issue in a very complicated and fast-moving world. The Saudis have moved troops into Bahrain. They are hoping to suppress the latest chapter in the Shia-Sunni war. This is a contest between Tehran and Riyadh. Iran vs. Saudi Arabia. Shia vs. Sunni. It is nothing less.

See it any other way and you miss the “big picture” (as Barry Ritholtz calls it).

Risk management has you in cash and in conventional energy like oil and gas. Half your portfolio needs to be in defense. Ours are.

The world is in terrible shape because the developed nations are debt-hamstrung and cannot easily respond to crisis. They can only talk (no fly); they cannot act. “Walk softly and carry a big stick” has morphed into speak loudly and be disbelieved.

We mourn for our friends and their neighbors in Japan. We worry for our grandchildren in America. We believe that the Congress of the United States rivals scorpions in popularity. They gave us our national policy impotence. We also believe that the true freedom fighters in MENA are being slaughtered.

45 years in this business, and we cannot remember a mess like this.

We are in our highest cash since Lehman-AIG and overweight energy and raising defensive positions in our US stock market accounts. Bill Gross may be wrong; Treasuries may rally a lot. They are the least worst in a crisis.

The public statement of the Bahrain Ministry of Foreign Affairs in regards to the GCC forces arriving in the Kingdom of Bahrain is below.

“The GCC Peninsula Shield coalition forces arrived in the Kingdom of Bahrain today following recent events, to help protect the safety of citizens, residents and critical infrastructure. The forces’ involvement follows the principle of unity and the interdependence of the security of the GCC and the common responsibility of the GCC countries in maintaining security and stability. At their recent meeting, GCC foreign ministers confirmed the unity of purpose of the Gulf Cooperation Council in the face of any danger to any of its countries, and to consider the security and stability of the GCC countries as integral and inseparable. Joint defense agreements among the GCC stress the importance of security and stability to achieve the prosperity of the region and maintain achievements. These were established to deter anyone from violating the security and stability of GCC and or seek to raise discord among citizens. The Bahrain Defense Force General Command calls on all citizens and residents to cooperate fully and to welcome the GCC Peninsula Shield Force.”

You figure out the rest. I am going to try to get a few hours sleep.


David R. Kotok, Chairman and Chief Investment Officer

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