Our thoughts and prayers go out to the people of Japan as they deal with the devastating effects of this natural disaster. We would like to share a few thoughts about the economic impact of the earthquake and tsunami. Credit Suisse estimates that the economic impact of the earthquake and damage will exceed $175 billion which is 3% of Japan’s GDP.

Japan: The Basics

• Third largest economy: GDP is approximately $4.3 trillion
• Population is 127 million which is the 10th largest in the world
• Median age is 44.8 years which is an older population
• Unemployment rate is 5.1%
• Inflation rate was -.7% in 2010
• Major industries: Motor vehicles, electronic equipment (flash memory), machine tools, steel, ships, chemicals
• Major imports: Machinery, equipment, oil

Financial Markets Effects
Japan’s equity market (Nikkei) fell over 10% on Tuesday and the worst performing industries included mining, finance companies, and nuclear power companies. After the decline on Tuesday, the Nikkei had lost 16% since the start of the earthquake. At one point on Tuesday, the Nikkei was down over 15% for the day. From a historical perspective, the Nikkei fell approximately 20% after the Kobe earthquake in 1995. Barring a complete nuclear meltdown, we don’t foresee a major decline below Tuesday’s intraday market low. On Wednesday, the Nikkei had a strong rally with gains of close to 6%.

Equity markets fell all over the world on Tuesday in sympathy with the Japanese sell off. The major US equity markets fell a little over 1%, but earlier in the day the losses were closer to 3%. We were encouraged by the rally at the end of the day. The markets had an orderly sell off and there were not any signs of panic from investors like we saw during the height of the financial crisis.

Conclusions
We don’t believe this is the start of a bear market.

In our opinion, the global economic recovery remains intact. Economic data continues to improve and the United States is even starting to show signs of job growth. We don’t expect this to change as a result of the events in Japan.

We continue to remain positive on the equity markets. Minor corrections are a part of all bull markets. Valuations are reasonable and attractive compared to bonds.

Several industries should see increasing order flow when the reconstruction process begins in Japan. These include basic materials, engineering and construction, and machinery. We have several companies in these industries in your portfolios. These include Plum Creek (timber), Fluor (engineering and constructions), and Emerson Electric (machinery). We are currently researching additional companies to add to portfolios that will benefit from the reconstruction.