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Mark's Market Blog

1-11-15: Nous sommes tous Charlie.

By Mark Lawrence

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In 2014 the market never dropped more then three days in a row; the first time the S&P had done that since 1928. It took 2015 less than a week to destroy that record. Oil keeps dropping, Europe continues to look like a recession is here, and Greece is perhaps heading in the direction of leaving the Euro. It was all too much for our little Santa rally. The ECB meeting where European QE will almost certainly start comes up on Jan.22 and the Greek vote comes up on Jan.25, so there's a better than decent chance that the market will not bottom before late January. There's an old Wall Street adage, that the first couple trading days of the year forecast the entire year. Sorry - since 1928 the S&P 500 has started the year with three straight losing days eight times. And only once has the S&P 500 finished one of those years in the red.


S&P 500 July 21 2014 to January 9 2015

The jobs report came out and unemployment is down to 5.6%. Average labor pay is also down, the new McJobs don't pay so well. Glassdoor.com did a survey and found 35% of workers - mostly those under 35 making less than $50,000 - say if they don't get a raise soon they'll quit. Personally I doubt that most of them will get a raise and I doubt in this labor market they'll get a better offer.

Investor confidence that the US will avoid a stock-market crash in the next six months has dropped dramatically in the last two years. The Yale School of Management publishes a monthly Crash Confidence Index. The index shows the proportion of investors who believe we will avoid a stock-market crash in the next six months. A low reading means fear of a crash is high, and a high reading means fear of a crash is low. There's a growing amount of fear out there.

Here's how JPMorgan sees things:

As the market drops money is moving into bonds for safety, driving prices up and interest rates down. Japan 10 year bonds are at 0.29%, Germany at 0.48%, France at 0.77% and the US just below 2%. I'm not sure how to interpret this, but I'm pretty clear that Japanese and French bonds are not safer than US bonds. I'm also clear that if these interest rates ever normalize, going to 3% - 4%, the results will be blood in the streets for government deficits.

It's 2015. Argentina can now go back to paying on their bonds. In 2005 Argentina defaulted and offered creditors $0.30 on the dollar. 93% of creditors accepted, new bonds were issued, and Argentina made regular payments. Some hedge funds bought up the remaining 7% and sued for full payment. The other 93% had a clause that if anyone got paid, everyone got paid, so Argentina could not pay up. But that clause expired on Jan,1. They can pay up now, but refuse: president Cristina has made a career out of "protecting" Argentina from the "vulture funds," and now simply refuses to pay. If they make any payments to the 93% a US judge has ruled that the banks must divert those payments to the hedge funds. Argentina is now in default and to many they no longer have the high ground. Meanwhile many businesses are pulling out of Argentina because of their currency controls and inflation. BMW is exporting Argentine rice to Europe to get paid for their cars. Other businesses are cutting back and waiting for elections later this year on the theory that the next president simply has to be better than Ms.Kirchner. Looking at Argentine history I'm not sure where they get their certainty. Argentines think an economic crash and default every 10 years or so is simply to be expected. It's time for another.

The Euro fell below $1.19, a nine year low. Europe inflation numbers came in at -0.2%; Europe as a whole is now experiencing deflation. Spain is leading the way with 1.1% deflation year on year. The euro is falling in anticipation of Super Mario's shiny new QE program. I expect the reality will be unveiled later this month on Jan.22 and will disappoint many as too little too late. Mr.Draghi has to walk a thin line between the money printers and Germany. Germany will note that core inflation in Europe, which strips out oil prices, is 0.8%, hardly warranting a panic response. UBS says we should expect the Euro to hit $1.15 in the next few months. Draghi wants more inflation - Poland, France, Portugal, Ireland, Greece and Denmark all have inflation below 1%. Switzerland and Sweden, neither of which are Mr.Draghi's responsibility, are both in outright deflation.

Oil dropped below $48, down nearly 20% in the last two weeks. Where's the bottom? That's the big question and no one seems to have an answer. David Rosenberg observed in his Friday morning research note: "Well, with perfect hindsight, oil was in a classic bubble: parabolic price moves, tremendous excitement, widespread participation by the investing public, a ton of leverage." Rosenberg noted that when bubbles in the past have burst and then led to further problems in the financial markets, there was a delay of at least a few months. If the bursting of the oil bubble has secondary effects, they may hit later this year.

China's growth slipped to 7.2%, their lowest number in five years and noticeably below their minimum target of 7.5%. Factory prices are deflating by nearly 7%, meaning it's unlikely there will be a lot of manufacturing hiring. The Bank of China will almost certainly continue to lower interest rates and loosen loan restrictions. As the Japanese yen drops in value there will be increased pressure on the Chinese government to match this with a drop in the value of the yuan. As I've already noted, for employment expect to hear about new Chinese construction projects in neighboring countries. And S.America and Africa. China is going to try to leverage their investments to lock up resources.

Russia appears to be headed for collapse. Fitch dropped Russia's ratings, saying their economic outlook "has deteriorated significantly" in just six months. Gross Domestic Product will shrink 4% this year, far worse than the 1.5% contraction it previously expected. "Growth may not return until 2017. Commodity dependence is high: energy products account for almost 70% of merchandise exports and 50% of federal government revenue." Fitch expects Russian inflation, currently 11.4%, to remain in double-digits through this year before falling to 8.5% next year. Somehow it seems we're supposed to be happy about this. I'm not. We're backing Russia into a corner and we should expect a response. Former Soviet leader Mikhail Gorbachev warned that tensions between Russia and European powers over the Ukraine crisis could result in a major conflict. "A war of this kind would unavoidably lead to a nuclear war," Gorbachev told Der Spiegel news magazine. "We won't survive the coming years if someone loses their nerve."

Three masked gunmen carrying automatic weapons and shouting "We have avenged the prophet!" in broken French swarmed the Paris offices of the French satirical magazine Charlie Hebdo, killing 12 including two policemen and wounding another 20. Charlie Hebdo has printed cartoons of Mohammed in the past and in 2013 published what it called a "halal" comic book on the life of Islamic prophet Mohammad. Pictures of Mohammad are forbidden in islam and satirical pictures are even less welcome. French police have already identified the three shooters (they left an ID card in their stolen getaway car) and one has turned himself in. The other two drove north and took some hostages, were tracked down and killed by French security. Then a couple of their friends, 32 year old Amedy Coulibaly and his 26 year old wife Hayat Boumeddiene killed a policewoman on Thursday and took five hostages in a Paris kosher supermarket, which French security raided; Coulibaly got dead, as did four hostages. Boumeddiene drove to Spain, flew to Turkey, crossed into Syria and is now gone. Manuel Valls, Prime Minister of France, declared war against radical Islam. "It is a war against terrorism, against jihadism, against radical Islam, against everything that is aimed at breaking fraternity, freedom, solidarity." A bit over 10% of France's population is now muslim, they have a serious problem.

The director of Britain's MI5 warned on Friday that Syrian and Iraqi Al Qaeda elements are planning attacks to inflict mass casualties in the West, possibly against transport systems or "iconic targets." "The number of crude but potentially deadly plots has gone up," he said, warning that small-scale plots carried out by volatile individuals are "inherently harder for intelligence agencies to detect." The US has issued a world-wide travel alert.

A popular street magician in Syria beloved by children for making coins and cell phones disappear was arrested, tried in secret and then publicly beheaded for insulting God with "illusions and falsehood." They also said the Koran forbid the tricks because the time people spent captivated by them could have been better used by going to a mosque. Well, the boys anyway. . . women are mostly forbidden in mosques.

We hear all the time in this country about "moderate muslims," and how we should not condemn a billion people over the actions of a few thousand. Of course there are moderate muslims - these are just the muslims who are near average. Two-thirds of all muslims are moderate by statistical definition. The question is, what is a moderate muslim? Here are some answers: moderate muslims do not believe in free speech or democracy - they believe in sharia, the law handed down by allah, which cannot be superceded by a vote, a demonstration, a rational argument, a judgement. They believe that disparaging Mohammed or islam is a crime, as are all religious idols/pictures/statues. They believe that leaving the muslim faith is a capital offense. They believe that non-muslims owe them a payment for being allowed to live, "jizya." They most certainly do not agree that we were all endowed by our Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. So these moderates, they will never fit in with a western liberal democracy - we are their satan (originally "shaytan," an arabic word), their adversary, their antagonist, the very thing against which they must struggle in order to implement allah's commandments in sharia. To clarify the pictures below, Buddha is no more considered a god or a prophet by Buddhists than Einstein is by physicists. Buddha would have been offended at the very notion - as would Einstein.


Two 1700 year old Buddhist statues.

The US has very few meth labs these days due to police enforcement, unavailability of reagents, and price. Mexican meth labs are flooding S.California with meth for distribution across the US, producing about 90% of the meth in the US. Prices are down from $10,000 / pound a few years ago to about $3,000 / pound.

University of California fall 2014 undergraduate admissions: 36.2% Asians, 28.8% Latino, 26.8% white, 4.2% black. Speaking as a California resident, the future of this state is easy to see. If you don't like the government styles of central or south america, you're not going to like California's in a decade or two. By the way: it's well known that hispanic gangs generally despise blacks. Once hispanics move into a low income neighborhood in Los Angeles, the gangs go down the street and warn young black males to be out of that neighborhood, ASAP - move, run away, whatever, but just don't be seen here next week.

"Press 2 for Spanish." Next time you hear this, press 2. Then press 0. You will almost always immediately get a bilingual person who is in the US. India call centers usually can't handle spanish, the line for spanish speakers is almost always shorter and you won't be asked for a social security number. I've been told this is unethical. I can't see how it is: I think I have the same rights to decent service as anyone else in this country, emphatically including those here illegally.

It's relationship month. January sees 30% higher divorce filings than other months, as people waiting until the holidays are over are done waiting. And Match.com says they see a 38% increase in subscribers in January as people look for a new relationship to start the new year.

A new survey by the Urban Inst. says that 62% of Americans have less than $1000 in emergency savings to cover, for example, car repair or medical problems. The net worth of American families fell to $81,400 in 2013, down slightly from $82,300 in 2010, but a long way off the $135,700 in 2007, according to a report released last month by the nonprofit think tank Pew Research Center in Washington, D.C. It's actually worse in Canada. Canadians avoided the 2007 banking crisis because they already required their banks to have large reserves, but to avoid the 2008 recession they increased loans dramatically. Now the average Canadian household is deeply in debt and it's starting to look worrisome.

India is launching a get-tough reform of their civil servants. For example, the Central Public Works Department had an employee, engineer Shri Verma, hired in 1980, who stopped showing up for work in 1990. An investigation was launched in 1992 but Mr.Verma refused to cooperate so the investigation was shelved in 1995. In 2005 he was investigated again and charges were submitted in 2007. Well, this week he got fired. No more paychecks. 25 years of unexplained absences will no longer be tolerated.

Obama announced a new idea - free community college for those who work at it. Under his proposal, students who attend at least half-time, maintain a 2.5 GPA while in college, and make steady progress toward completing their programs would have their tuition eliminated. Generally I'm in favor of this - more education for our youth is better for everyone, and I'm in favor of a level playing field where everyone hits 21 years old with as much education as we can give them and they can absorb. My own kids flunked out of high school to get their mother's attention; I used community colleges to get them back on track, so I have a very positive attitude about community college. However, I can't help but feel this program is yet another way to try to make up for the fact that no one has a father pushing them to improve themselves anymore, and government grants will not prove a great substitute for a father. Immediately conservatives jumped on this as a stupid waste of money - if Obama proposes it, it must be bad. I distrust Obama about as much as anyone, but this is still a good idea - even a stopped clock is right twice a day. It's claimed that this will cost $34 billion a year. My answer to that is, 1) colleges have gotten fat and inefficient and that's a separate problem, and 2) if we're teaching real classes in medicine, business, technology, engineering, manufacturing, design, the money will have been easily worth it. If we're teaching minority studies, comparative religion, art appreciation, forget it.

Health stuff: Researchers discovered that nerve cells die because other cells which are supposed to clear the brain of bacteria, viruses and dangerous deposits stop working. These cells, called 'microglia,' function well when people are young, but when they age a single protein called EP2 stops them operating efficiently. Now scientists have shown that blocking the protein allows the microglia to function normally again so they can vacuum up the dangerous sticky amyloid-beta plaques which damage nerve cells in Alzheimer's disease. The researchers found that, in mice, blocking EP2 with a drug reversed memory loss and myriad other Alzheimer's-like features in the animals. Perhaps a cure for Alzheimer's is on the way. Alzheimer's is America's sixth leading cause of death. 36 million people have Alzheimer's worldwide. Ten percent of Americans over 65 have it, and a third of Americans over 85. Two-thirds of Alzheimer's patients are women, and the disease is twice as prevalent in blacks and Hispanics.

Is Western Civilization decadent? In the last 200 years we have lowered the average working week from about 72 hours to 37 hours - an improvement of 35 hours per week. Liberals tell us that if we lower the working week further it will unlock human creativity. What did we do with our extra 5 hours per day? We spend more than 4 of them watching TV.

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