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Mark's Market Blog

1-18-15: Cars.

By Mark Lawrence

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Volitility continues to dominate the markets, with large bounces happening seemingly every day. I'm at a loss to describe the direction or goal of this market. With lower volatility I might say we're headed down to S&P 1992 or so, but right now I feel like saying that is like saying a drunk hanging on a street lamp at 2am is headed home.

S&P 500 July 28 2014 to January 16 2015

Oil continues to drop, this week to below $45. Goldman Sachs says the bottom will be $39. They run the world so you gotta figure they know. Jim Cramer says if oil drops below $40 we're going to see some companies in serious trouble. I guess that means Warren Buffet and Goldman Sachs are going to get to buy up a bunch of Texas and N.Dakota on the cheap. This economy is starting to look like the last 10 minutes of a monopoly game - you know, where the guy who's inevitably gonna win starts buying up all the properties and putting hotels everywhere. Where is oil headed? History suggests oil trades in one of two ranges: $50-$120 or $20-$50 (current dollars). When OPEC first formed in 1974 they formed a cartel, limited supply, and oil went into a monopoly pricing regime. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today's money. From 1986 to 2004, as North Sea and Alaska oil came online and pricing became competitive, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation). Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis. Now shale oil has moved us into a competitive area again - if Saudi Arabia wants to maintain their market share and their importance to the US as a key player in the middle east, they have to keep shale oil in the ground. Estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50 once again, for a time. Perhaps a somewhat extended time.

The Euro fell below $1.15, below its initial price of $1.175 in 1999 and the lowest its been in 11 years.

For thousands of years - well, ok, thousands of days really - for thousands of days the Swiss Franc has been pegged to the Euro, showing that even though the Swiss stand apart, they still march with the rest of Europe. Well, that's over. Officially the SF was to stay at CHF1.2 to the Euro; in fact it rose to CHF1.35 a couple times, meaning it looked like Switzerland was trying to walk a line of compromise between the Euro and the dollar. Well, the days of compromise are over. The Swiss central bank announced they're no longer defending CHF1.2, and the SF promptly rose 28% to CHF0.87. Later it recovered about half of that to finish at about €1. Visiting Switzerland just got a lot more expensive, as did Swiss chocolate and watches. About a month ago Switzerland had a referendum on effectively putting them back on the gold standard, which failed. What's up? I think the Swiss are seeing yet more Euro crises on the horizon, the immediate threat being Greek elections in a week, and they don't want to be part of that mess. When they look around right now, the dollar seems a lot more stable than the euro. Above all else, the Swiss crave neutrality and stability. What they've done here is export their portion of European instability. All over the world foreign exchange brokers have let clients borrow money to play the markets. After this move in the Swiss franc a lot of those accounts are deeply negative, so negative that if the clients don't pay up to cover their losses the brokers will be bankrupt. New York's FXCM says it is owed $225 million in sudden negative equity by clients. The UK's Alpari says they're bankrupt, and IG group says their clients are $45 million in the red. And Everest Capital's Global Fund bet heavily on the franc going down, they're out of business having lost their entire $830 million in assets.

Russia says they expect 17% inflation this year. Russia's economy minister Alexei Ulyukayev Lenin as he said, "The era of peace is over to be replaced by an era of relatively much more impulsive, spasmodic, disastrous conflict." He further said that $50 oil will cost Russia's government $45 billion this year. Meanwhile this has not particularly slowed Putin down - he's in the process now of annexing South Ossetia and Abkhazia, two territories that used to be part of Georgia. This is the area of the Sochi olympics, on the black sea near Crimea.

The bond insurance on Venezuela indicates that they have an 82% chance of collapse this year. No big deal, no one is stupid enough to be depending on them, but they're likely looking at some tough times ahead. This socialism stuff sounds really, really good until the bill shows up and the entire country has to wash dishes for the next eight years to pay it off.

Copper dropped 30% in the last six months, about 6% this week. Copper is required for wiring up anything electric. No matter what they tell you, if they're not buying copper they're not building anything. China's demand for copper is dropping rapidly. Is China slowing down or crashing? I think they're too clever to crash right now, but the slow down seems obvious. The stock market, which frequently behaves like a group of teenage girls gossiping in the build up to the prom, dropped on speculation that China might disappear off the earth completely.

The Saudis are worried about instability in Iraq and Syria leaking into their country - a curious parallel to how many here worry about Mexico's influence in the US. We talk about building a wall, but after a decade of talk there's no wall. The Saudis are a kingdom, they're building a wall. I suppose there was some talk for a few weeks between some princes, but that was never public and it's all over now. The Great Wall of Saudi Arabia is under construction. They're going to build one on their southern border with Yemen too - Yemen is the country where the Charlie Hebdo terrorists trained with Al Qaeda. I'd like one of these fences for the US.

Target announced this week they're leaving Canada. They have apparently been losing money in Canada for some years. I have traveled extensively through Canada and I have never seen a Target or a grocery store. Every little village has a beautiful 200 y/o Catholic church, a Petro Canada station, and a Tim Hortons coffee shop, and that's about it. As far as I can tell, Canadians live on Tim Hortons scones and coffee. With all that sugar and caffeine you would think they would be more excitable people. 90% of Canadians live within 100 miles of the US border, and many of them prefer to come to the US to shop where prices are lower and selection higher.

Best Buy is looking like they're on life support and nearing bankruptcy. Radio Shack too - they're expected to file next month, after first perhaps selling a bunch of stores to Sprint. No one drives, no one goes to the mall. If you're not online, you don't exist.

We're halfway through January, normally California's wettest month, and it's just not happening. Snow pack levels are at 35% of normal for this date and 17% of normal for an entire rainy season. Scratch almonds and olives off your snack list. But wines do better in a drought. Ann Landers famously said "People who drink to drown their sorrow should be told that sorrow knows how to swim." There's gonna be no swimming in California this year, so prepare to stock up on some nice wines.

Obama's legacy: Siegfried S. Hecker, a senior fellow at Stanford University's Center for International Security and Cooperation, has visited North Korea several times over the past decade. Hecker says, "Pyongyang likely has roughly 12 nuclear weapons with an annual manufacturing capacity of possibly four to six bombs." He believes the arsenal is primed for even greater growth in the next couple of years: "By the time the president leaves office, North Korea may conduct another nuclear test and have an arsenal of 20."

Five years ago, China's Geely Auto bought Volvo from Ford. Geely moved some production to China. Their hope was to learn how to make cars that could sell in Europe and the US, and to leverage this to become China's first auto exporter. Now they're ready for their next step. In China most businessmen have chauffeurs so large and elaborate back seats are important. Accordingly Geely made a long wheelbase version of Volvo's S60 sedan, the S60L. Volvo is a small company that can only afford one engine, so it uses Volvo's 238hp turbo charged 2 liter four cylinder - not a positive in an American luxury market that expects a 350+ hp V8. There will also be a hybrid version, but the hybrid has a surprisingly inefficient design - unlike the Prius and all other hybrids, the starter/generator attached to the engine is not used to drive the wheels, only to charge the batteries which then drive a separate rear electric motor. Their Swedish spokesman David Ibison said, "The S60L offers class- leading rear space, something that has been consistently demanded by U.S. customers." I don't think Mr.Ibison has been paying attention, we Americans are perfectly happy to shoehorn our friends into the vestigial back seat of our new Mustang as long as the car looks hot and has that uniquely American V8 rumble. At least their time with Ford resulted in the new Volvos being attractive cars instead of square white boxes.

Buick has a 14% market share in China and is GM's best selling brand in China - a fact that almost certainly kept it alive when Oldsmobile, Saturn and Pontiac bit the dust in GM's bankruptcy. Last year GM sold 2.9 million cars in the US and 3.5 million cars in China. The Avenir is a new concept vehicle which seems destined for production - it's a long wheelbase boat shown with two bucket seats in the back, exactly the configuration rich and powerful Chinese like when they're being chauffeured around. China obviously has no history of drive-in theaters and teenage rear seat passion. Volvo may make the S60L in China, but when the Avenir hits Chinese showrooms it will outsell the Volvo 50 to 1.

The Chevy Volt is being updated with slightly better range. GM loses money on each Volt they sell. They sold 18,805 last year, about half as many as Corvette sales at 34,839. Why keep making them? The Feds and California effectively require it. Saudi Prince Alwaleed bin Talal said this week, "The price of oil above $100 is artificial. It's not correct." Cheap oil is not good for Volt profits. Also this week Chevy announced the Bolt, a new all-electric car with a 200 mile range. The $30,000 Bolt will be available in 2017, just in time to challenge the $35,000 Tesla model 3.

BMW is now delivering their new i8. A turbocharged 1.5 liter 3-cylinder engine plus batteries and two electric motors combine for 375hp, 0-60 in 3.8 seconds, a 155 mph top speed and Prius efficiency. If you plug it in overnight and run in eco-mode - front electric motor only - you can go 22 miles without using any gas. In sport mode everything is running and you have some rather serious performance. Deliveries are starting now, but dealers are asking for a premium over the $147,000 sticker price - one dealer getting an extra $100,000 in "Market Adjustment." I want one.

In 1966 Ford built the Ford GT40 as a Ferrari killer, with the sole purpose of winning the 24 Hours of LeMans. The GT won LeMans in '66, '67, '68, '69. Ferrari has not won since. The "40" was because the car was 40" high - extremely low. It was powered by the Mustang 4.7 liter 289 engine. The racing version used a 7.4 liter 427. 107 of these were made and we're still talking about them 50 years later. In 1995 and '96 they made some more called the Ford GT, powered by a super charged version of their 5.4 liter 327 engine. It was 43" tall, so the 40 was dropped. They built 4,038 of them for $125,000 each. Now Ford has announced that the GT is baa-aaack. The 2016 version will make over 600hp from a dual turbocharged 3.5 liter EcoBoost V6. Sorry, no pricing or performance numbers have been released. But I want one.

Honda is showing their 2016 NSX. In 1990 they released the original, a light weight supercar with a 270hp 3 liter V6 engine. They produced them until 2005 and sold 18,000 over the 16 year period. Now there's a new one. Powered by a mid-engine twin-turbo V6 and twin electric motors on the front wheels, the car has a total of 550 hp. $150,000. I want one of these too. And I already want a Corvette Z06. I'm gonna need a bigger garage.

Ok, those are all seriously sexy cars, but here's the car that really portends the future - not some 600hp 200mph gas guzzler that says "I have a damaged ego and money to try to salve it," but rather a real game changer: Google's self-driving car. You call one up on your phone, it comes to you, takes you where you want to go, then leaves. When the batteries are low it drives itself to a charging station. You won't cross Nevada in one of these anytime soon, but in cities the world over car ownership is obviously going to decline and manufacturers may well have to turn themselves into driverless taxi services. Car leases will change from 60 months to 25 minutes. It's unlikely you'll call for a GM or a Ford auto-box, you'll more likely take whatever is next up. Branding is going to take a huge hit. You may personally disagree with me, but those under 25 think this makes perfect sense. "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it." -- Max Planck

As young people turn away from driving and more of our youth comes from fatherless homes and turns to gangs, gun deaths are rising while auto deaths are falling. They're crossing right now. In the future more people under 26 will be killed by guns than by cars. The new safety features in cars - lane following, automatic braking - will only accelerate this trend.

Saudi Arabia is effectively ruled by a coalition - the royal family, backed up by the wahabi imams. In the 1950s, the Saudis wished to install phone lines in the kingdom; the imams forbid it, saying that carrying voice over wire was obviously the work of the devil. An AT&T employee came up with a solution. Under the watchful eyes of the imams, using Saudi labor, they installed one single phone line from mecca to medina. The logic was, the devil could never appear in medina, and he most certainly could never appear in mecca, islam's two most holy cities. The imams agreed with this. Furthermore, the devil could never faithfully transmit the holy words of the holy koran without distorting them. Again the imams agreed. They then put an imam on each end of the phone line and the two imams read the koran back and forth to each other for eight hours to see if they could catch the devil screwing up. They didn't. Phone lines were approved. This week saudi sheikh Mohammed Saleh al-Munajjid was asked if it was permissible for fathers to build snowmen for their children after a snowstorm in the country's north. He replied: "It is not permitted to make a statue out of snow, even by way of play and fun." Supporters used twitter to add, "It (building snowmen) is imitating the infidels, it promotes lustiness and eroticism," and "May God preserve the scholars, for they enjoy sharp vision and recognize matters that even Satan does not think about."

A couple muslims in Germany firebombed a newspaper that reprinted Charlie Hebdo's cartoons. No one was hurt. Is it over? The NSA has warned Europe that recently intercepted communications from muslim countries to Europe indicate that the terrorism is just getting started.

Recent work by Rice university indicates that the fall of the Mayan civilization was due to a shift in wind patterns leading to a 100 year long drought in the Yucatan. The Mayans rose in about 300AD and fell between 800AD and 900AD, the time of the drought. Their report concluded "When you have major droughts, you start to get famines and unrest." California, which appears to be heading into a fourth year of drought, has nothing to fear: this state's civilization fell a couple decades ago.

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