EFTA01779249.pdf

From: Boris Nikolic < > Sent: Friday, March 18, 2011 6:32 PM To: Jeffrey Epstein Subject: RE: Matter over Mind, part 2: March 17, 2011 How are yo=? I am still at silicon valley. At goggle headqouters right now. I will be in Boston sat night to wed. Are You coming? Sent from my Windows Phone From: Jeff=ey Epstein Sent: Thur=day, March 17, 2011 10:38 AM To: Bori= Nikolic Subject: Fwd:=Matter over Mind, part 2: March 17, 2011 a good explanation of what and why Forwarded messa e From: US GIO Date: Thu, Mar 17, 2011at 10:21 AM Subject: Matter over Mind, part 2: March 17, 2011 To: Eye on the Market, =arch 17, 2011 (today's version has color pictures and tables better view=d in the PDF) Topics: Japan up=ate, what's next for nuclear power and implications for Asia/US "Matter over M=nd, Part 2". In our note from Tuesday, we said that the next 72 ho=rs would be critical. The grid below is an update fro= the Japan Atomic Industrial Forum as of 10 pm March 17, and there's a l=t of red on it. Before getting i=to the details, I wanted to show a picture, since it gets at why the situa=ion deteriorated so rapidly at the Fukushima Dai-Ichi plant. It's = before and after shot of what happened to the fuel storage tanks which supply power to the back- up generators. By =aving them on the beach and not under the ground, they appear to have been=washed away by the tsunami. It is entirely possible that all subsequ=nt problems (hydrogen explosions, exposure and possible melting of active and spent fuel rods) emanated from the lack=of electricity to power cooling systems. Note how other structures j=st a few hundred yards away from the shore withstood the tsunami. Fu=ushima's Daini reactors (10 miles from Dai- Ichi) are in normal cold shutdown mode since they did not lose their emergency p=wer fuel source. EFTA_R1_00096340 EFTA01779249 <1=> What's happening as of March 17 at 10 pm Japan Standard Ti=e: •• Backup generators not functioning, which is why cooling syst=ms are not working properly (line 9, 10), which led to... •• ...water level pressure falling and exposing uranium/plutoni=m rods to air, which raises their temperature and makes them more likely t= melt (line 12) •• Building integrity (line 11) has been compromised due to hyd=ogen explosions and possible containment or reactor vessel breaches=/p> •• Reactor units 1, 2 and 3 are in serious trouble, with sea wa=er injections being attempted on all three (line 15, line 16) to cool nucl=ar reactions •• Green sections on units 4, 5 and 6 are not "good news", =ince they were in outage mode when the earthquake hit (line 5) •• In one or more units, there might have been a breach in cont=inment vessels which house the reactor vessels (line 8) • • Spent fuel rods are becoming a serious problem (line 18), a =opic worth reviewing in more detail on the next page<=p> <=> Spent fuel pools and what "spent" really means=/u> (a) When back-up generators failed, systems which add and cool wate= to "spent fuel" pools failed as well. There is something import=nt to understand: "spent" does not mean "inert" or "reduced power". In fact, it's kind of the opposite. =uclear power relies on uranium (b) that behaves in a predictable way, wher= "predictable" refers to heat generated when rods are placed near othe= uranium rods. This way, nuclear reactions can be modulated by plant operators using boron control rods. But over time= U-238 accumulates neutrons produced from the fission of U-235, eventually=becoming neptunium and then plutonium. Why does this matter? When this happens, rods become more</=> uncontrollable and radioactive. That's what is meant by "spent=94, in that their USEFULNESS is spent. The fission reaction results =n a variety of radioactive elements such as iodine-131, cesium-137, strontium-90 and gases like xenon and krypton. Spe=t rods are not harmful if there is no damage to their zirconium cas=ngs, but melting of these rods release these isotopes into the environment= Why spent fuel pools can be worrisome: •' There are more radioactive fission products in spent fuel po=ls than in the operation reactors themselves •• Without cooling, spent fuel pool water evaporates and expose= these radioactive materials to the atmosphere. Yet they are not hou=ed inside a containment unit like nuclear reactors are. 2 EFTA_R1_00096341 EFTA01779250 ** Opinions about the rate of evaporation differ. Accordi=g to the Nuclear Energy Institute (c), the rate of evaporation at plants l=ke Fukushima is slow, only a few percent a day. But a Brookhaven National Laboratory study (d) on Boiling Water=Reactors like those used in Fukushima estimates that within 40 hours, all the water would evaporate, and that plant opera=ors only have 25 hours to address the problem. Furthermore, the Broo=haven study dealt with shutdown plants whose fuel rods were older and less="hot" than the more recently spent rods at Fukushima (implying an even shorter evaporation period).<=p> 41* Fukushima spent fuel pools are located near the top of the r=actors, making them harder to access. Even if plant operators refill=emptied spent fuel pools, they may not want to: scientists we spoke with said the behavior of =xposed rods to water (if they have begun to melt and lose their zirconium =asing) is not predictable; is it like gas on a fire? The spent fuel pool at unit #4 was reported to be out of water =y the U.S. Nuclear Regulatory Commission. Either its water evaporate= (e), or the pool suffered structural damage during one of the hydrogen-fueled explosions and leaked. Either way,=exposed spent fuel rods render the area highly radioactive and less viable=for human intervention. As for the nuclear reactor vessels themselve=, there is still hope that even if exposed rods (lines 6 and 12) melt, they will be contained inside the vessel (line=7) with cooling powered by emergency pumps. But the 1800-degree melt=ng point of the reactor vessel may be exceeded by the theoretical temperat=re of molten nuclear materials, which could rise to 2400 degrees. Why on earth are we going into this level of detail in an in=estments newsletter? What's happening is mor= than just a tragedy for Japan and its people. It's also a potenti=l turning point in the approach to energy policy. The chart s=ows how planned nuclear capacity is 40% of the current installed base. Will Fukushima change anyone's plans? =he U.S. Nuclear Regulatory Commission generally recommends a 10-mile barri=r between U.S. nuclear plants and residential areas. However, the NR= recommended a 50-mile evacuation zone around Fukushima. This may surface questions about safety issues. The Union of Concern=d Scientists just released a document entitled "The NRC and Nuclear P=wer Plant Safety in 2010: Brighter Spotlight Needed" after briefing =ongressional staffers. Their conclusion: the chances of a disaster are low, but the NRC gets mixed reviews after 14="near-misses" at U.S. nuclear plants during 2010. The events exp=sed a variety of shortcomings, such as inadequate training, faulty mainten=nce, poor design, and failure to investigate problems thoroughly. The problem: there are not many easy answers for r=placing planned nuclear bars in the chart, particularly in China. Whatever the outcome for nuclear power, we have been positio=ing in various ways for a world with increasing and changing energy needs<=span>. We are working with managers who focus on the exploration and development =f oil and gas fields, mostly in the U.S., as well as on "midstream&qu=t; businesses involved in the gathering, storage and distribution of oil a=d gas products. Other dedicated energy managers we work with focus on renewable energy, primarily in solar, wind =nd bio-mass power generation. Our generalist private equity managers=are involved as well, including a 2009 investment in the Marcellus shale g=s field which was subsequently sold to a strategic buyer for a substantial premium. On natural gas=specifically, shale gas only accounted for 1% of North American gas supply=in 2006. It's currently 20% and is expected to grow to 50% by 2030= which is why it has been an area of focus for our managers. 3 EFTA_R1_00096342 EFTA01779251 Potential economic impacts in Asia: we remain optimistic on =he region's prospects The first chart looks at which countries export a lot to Japan,=excluding energy. Asia is clearly the potential loser. However, Southeast Asia is likely to withstand reduced demand from Japan= After all, Japan has only been growing at 1% over the last 5, 1= and 20 years. Furthermore, East Asia entered into a rising number o= free trade agreements over the last decade which improved its ability to manage around disruptions to supply chains a=d production gaps. When you strip out Japan from the Asian trade pic=ure, it's clear that Asian trade has a life of its own. We do not foresee a serious=hit to regional growth, outside Japan itself. More evidence of how w=ll-integrated economic regions withstand a crisis: note how Texas became a regional shock absorber after Hurricane Katrina, as s=me industrial and service sector activities migrated there on a temporary =asis. As for the US, 1=pan accounts for around 1.5% of total S&P 500 revenues, with higher nu=bers (>10%) for multinationals like IBM, Corning, Altera and KLAC (f). The largest sector exposures are civilian aeros=ace, agriculture, drugs/medical equipment and telecommunications equipment= Mitigating factor: Japan is a relatively stagnant market for U.S. fi=ms (U.S. exports to Japan grew just 25% versus 82% to the rest of the worl= from 2003 to 2008) and tend to generate much lower margins there than els=where. After the initial demand shock, we expect some companies to benefit from rebuilding efforts in Japa=, particularly those companies focused on heavy equipment, software for en=ineers and project managers, insurance brokerage, electrical equipment/pro=ess controls and construction. I hope to return to normal investment commentary very soon, =nd if there are financial assets that are indiscriminately oversold, we wi=I be sure to highlight them.&n=sp; We are not making any changes to our portfolio allocations, which i= our way of saying that we do not expect the situation in Japan to tip the=global economy into recession. We still believe that the manufacturi=g and service sector recoveries taking place in the US, Germany and China, coupled with exceptionally easy moneta=y policy, are strong enough to survive the various obstacles that have sur=aced during the worst March I can remember (or at least since 2009). Michael Cembalest Chief Investment Officer </=pan> Notes=/span> (a) This=section incorporates conversations with David Walker (Higgins Professor of=Earth and Environmental Sciences, Lamont-Doherty Earth Observatory), and a=separate source with 40 years of experience in the industry as a Naval and private sector nuclear operations engineer,=engineering manager and project coordinator for the construction and opera=ion of nuclear power plants. 4 EFTA_R1_00096343 EFTA01779252 (bj Not =11 Fukushima facilities use uranium rods. Some rely on MOx fuel (a blend o= plutonium, natural uranium, reprocessed uranium, or depleted uranium). Ou= understanding is that MOx fuel has a lower melting point; there is less experimental experience with it; and th=t it may be less sensitive to boron as a reaction moderator. Plutonium is =heaper to use due to the surplus of decommissioned weapons. lc] "<=>Fact Sheet: Used Nuclear Fuel Storage at the Fukushima Dai-lchi nuclear p=wer plant", Nuclear Energy Institute, March 15, 2011 "<=>A Safety and Regulatory Assessment of Generic BWR and PWR Permanently Shu= Down Nuclear Power Plants", Brookhaven National Laboratory, August =997. Our sources inform us that the technology used in spent fuel pools have not changed a lot since that time. (e] lt=92s possible that hydrogen explosions jostled the spent fuel rods or the b=ron dampers between them, accelerating their rate of evaporation if] "<=>lapan and S&P 500 EPS", UBS Global Equity Research, March 16, 2=11 The material contained herein is intended as a general market=commentary. Opinions expressed herein are those of Michael Cembalest and m=y differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views exp=essed herein may differ from that contained in J.P. Morgan research report=. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guara=tee their accuracy or completeness, any yield referenced is indicative and=subject to change. Past performance is not a guarantee of future results. =eferences to the performance or character of our portfolios generally refer to our Balanced Model Portfoli=s constructed by J.P. Morgan. It is a proxy for client performance a=d may not represent actual transactions or investments in client accounts.=The model portfolio can be implemented across brokerage or managed accounts depending on the unique objectives of=each client and is serviced through distinct legal entities licensed for s=ecific activities. Bank, trust and investment management services ar= provided by J.P. Morgan Chase Bank, N.A, and its affiliates. Securities are offered through J.P. Morgan =ecurities LLC (JPMS), Member NYSE, FINRA and SIPC. Securities products pur=hased or sold through JPMS are not insured by the Federal Deposit Insuranc= Corporation ("FDIC"); are not deposits or other obligations of its bank or thrift affiliates and are not guarante=d by its bank or thrift affiliates; and are subject to investment risks, i=cluding possible loss of the principal invested. Not all investment ideas =eferenced are suitable for all investors. Speak with your J.P. 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Accordingly, any discussion of=U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in=connection with the promotion, marketing or recommendation by anyone unaff=liated with JPMorgan Chase & Co. of any of the matters addressed herei= or for the purpose of avoiding U.S. tax-related penalties. Note that J.P. Morgan is not a licensed insur=nce provider. 5 EFTA_R1_00096344 EFTA01779253 © 2011 JPMorgan Chase & Co This email is confidential and subject to important disclaimers and cond=tions including on offers for the purchase or sale of securities, accuracy=and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, a=ailable at http://www.jpmorgan.com/pages/disclosures/email. The information contained in this communication is confidential, may be attorney-client privileged, may constitute inside information, and is intended only for the use of the addressee. 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