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Mark's Market Blog

10-26-14: Europe sliding down.

By Mark Lawrence

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Last week I said that Jim Cramer apparently had better eyesight than I do, as he was calling a bottom and I thought we had further down to go. It's now obvious he has better eyesight than I do. If you're looking for stock tips, Mad Money is apparently much better than me. Anyway the almost correction is clearly over for the moment and stocks are back on their way up. I still look to 2150 as a target. So does Goldman Sachs.

S&P 500 May 3 2014 to October 24 2014

Much of Toronto was on lock down this week as authorities reacted to Michael Zehaf-Bibeau, who walked up to a war memorial, fatally shot a soldier in the back who was guarding it, then rushed into Canada's Parliament and opened fire. He was shot and killed in the parliament building before he hurt anyone. He was born Michael Joseph Hall in Quebec in 1982, worked as a miner and a laborer at various points in his life, and at some point he changed his name to Zehaf-Bibeau and converted to Islam. However even the muslims were scared of him: Zehaf-Bibeau was asked to stop attending prayers at mosque because elders found his behavior "erratic." He wanted to travel to the middle east to "study" but Canadian officials had confiscated his passport. I don't understand this part, I'd have been thrilled to ship him off to ISIL.

More than half of US manufacturers are interested in moving production from China back to the US. They cite rising Chinese wages, higher US productivity, better access to skilled labor in the US, shorter supply chains, reduced shipping costs and higher quality and yield. Cutbacks in Chinese production are expected to be about 11%. Declines were also predicted for Mexico (-5.0%), Western Europe (-19%) and the rest of Asia (-22%). Jim Rogers continues to say this will be the century of China. I'm not so sure - they have a long way to go in improving the lot of their people and making a stable government and society, and they have to do it in a world with high energy costs and a shortage of fresh water. It's easier for me to see a Chinese government collapse than a dominant China.

Elections are still a week away, but Nate Silver of says it's 63% that republicans take the senate. After likely runoff elections in Louisiana and Georgia. I'd be excited about this if I thought republicans were likely to do anything useful. Of course they won't, because 1) republicans are no better than democrats, and 2) getting anything done with Obama would be an implicit vote for split government and Hillary. At least they'll keep Obama a little bit honest.

New York Fed president William Dudley said to Wall Street this week, "The inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively." Now we'll see if the Fed follows through.

Sears, the dominant retailer of my youth, said in their 3rd quarter earnings report, "We disclosed that we would be closing unprofitable stores as leases expire and in some cases will accelerate closings when it is economically prudent." Seeking Alpha reported that Sears would be closing more than 100 stores and laying off 5,500 workers. A Sears spokesman noted that it had 200,000 workers between its namesake and Kmart brands, working in 800 Sears stores and 1100 KMart stores. The department store has been bleeding cash, posting its ninth straight quarterly loss in August. Former Sears executive Steven Dennis said, "The uncomfortable and sad reality is this: Sears has zero chance of transforming itself into a viable retail entity."

Sears is dying in part due to Amazon, who simply has a better business model for growth: give stuff away. The chart below seems pretty self-explanitory to me. The basic curves are pretty smooth, with a blip each and every christmas. I love shopping at Amazon and getting my purchases subsidized by the Amazon shareholders. Just lately the shareholders are starting to question this: Amazon stock took a big hit when the latest quarterly results came out Thursday night.

Europe's numbers continue to show deterioration - it looks more and more like they're headed for recession, their third since the 2008 crash. France's PMI came in awful at 47, showing a contraction in manufacturing. Tesco, Britain's grocery store chain that's second in sales only to Walmart, seems to be collapsing, with sales off almost 5% and profits off over 90%. Share price has plunged over 50% and world-famous investor Warren Buffet has said his confidence in the retailer was a "huge mistake." George Soros, my favorite sociopath billionaire, says "Europe is facing a challenge from Russia to its very existence."

The EU presidency rotates among the member countries each year, and now it's Luxemburg's turn. The new President is Jean-Claude Juncker, a man who as prime minister of Luxembourg for close to two decades is largely credited with reinventing the tiny landlocked principality into one of Europe's largest tax havens and dirty money channels (just behind Switzerland and the City of London). What does this unelected EU president have for a cabinet? An ex-petroleum company president as climate commissioner (Miguel Arias Cañete); an ex-corporate lobbyist in charge of financial services (Jonathan Hill); a former vice-president of the industry lobby group Le Cercle de l’Industrie in charge of economic policy (Pierre Moscovici); an ex-Goldman Sachs financier as research commissioner (Carlos Moedas); and the former political no.2 to a Czech multi- billionaire as consumer commissioner (Vera Jourova). How can the European man on the street possibly question the dedication of this unelected and unaudited bunch of EU bureaucrats in Brussels?

As signs of Europe slipping into recession intensify, talk from politicians is heating up. Orwell would be proud of these guys. EU president Jean-Claude Juncker said that he would present his 300-billion-euro plan for investment to bolster growth and jobs by the end of this year. He stressed, however, that much of the 300 billion euros should come from private investors and that governments should continue to contain their budget deficits. The EU has an "inflexible" rule that member countries may not run deficits of more than 3%; France and Italy have said they need to run larger deficits. Juncker said, "The rules will not be changed, But they can be implemented with a degree flexibility." I know what all these means, I've learned to interpret politicianese. The first means the ECB will be told to go ahead with their plan to have banks loan to businesses then the ECB will buy up those loans - the roughly $400 billion dollars of private investment will be made with the ECB and finally the taxpayers taking the risk, but first there will be an Ozian curtain hiding the little banker man making all the money. European businessmen say for each dollar in payroll they must send off two dollars in taxes - why would any rational person hire under those conditions? What does the second mean? The US has a budget deficit of $483 billion, just under 3% of GDP; but we had to borrow $1.086 trillion dollars to cover the $483 billion deficit, meaning we're borrowing and spending 6% of GDP but have flashy numbers that claim we're only over-spending by 3%. This same thing will be encouraged in Europe. This is good 'cause even though France, Italy, Spain, Portugal, Greece have generated absolutely no job growth in 20 years or so, they will be returning to growth in the next year or two as politicians borrow and spend far more wisely than their predecessors. Generationally sclerotic European businesses that are not trusted to fire or lay off employees will suddenly be trusted to borrow hundreds of billions of dollars and dramatically increase their hiring. Yup. That will work. And the Wicked Witch of Deflation will melt when an ECB bucket of water is thrown on her. What's the take away here? Just like in the US, the only thing that matters is propping up huge established businesses and guaranteeing the banks huge risk-free profits, while holding hands and chanting to the voters "We Care! We Care! We Care!" Juncker also announced that he has a plan to make the EU bureaucracy more efficient by adding a new management layer of vice-presidents to help the commissioners coordinate. This word "efficient," I do not think it means what he thinks it means. . . "Citizens are losing faith," Juncker said. "Extremists on the left and right are nipping at our heels. Either we succeed in reducing unemployment, or we will have failed." Bad news, Jean-Claude: you're failing. Badly.

Rumors fly fast and furious that Super Mario will start up a European QE program in December, essentially replacing the money that the Fed is withdrawing from the markets. European markets jumped 1% - 2% on the idea. Germans think this is a violation of the EU charter and are likely to challenge it, so we'll just see what happens. . . David Tepper, yet another hedge fund billionaire, said this week that he's short the euro as he believes the ECB has no choice but to print. He also thinks 2 and 3 year EU bonds are a great investment as they will appreciate in this environment. Curious this: he thinks the ECB will print massive money and the result will be interest rates go down, indicating that the consensus is for yet more deflation. I agree with this: deflation is the problem, printing money is not the solution.

The ECB conducted "stress tests" of 130 European banks. 25 of the banks failed the tests; 13 of them are considered in severe danger of bankruptcy in the event of another financial crisis. The worst shortfalls in capital were in Italian, Greek and Cypriot banks. Deutsche, Santander, BNP Paribas, HSBC are salivating at the prospect buying up these under capitalized banks cheap and getting even too-bigger-to-fail. Then with their new plethora of branches and ECB backing they'll make huge numbers of dodgy loans, bundle them up, and sell them for a tidy profit to the ECB. How can this possibly fail to stimulate the economy and job creation? A year ago Europe looked like they were going to get back on track. Now again they're looking like a bug in search of a windshield.

The New York Times' David Sanger reported Monday that if Iran and the six world powers agree to a deal on its nuclear program by a Nov. 24 deadline, Obama would do "everything in his power to avoid letting Congress vote on it." I've taught my kids from a very early age that the big lie is always out in the open, front and center. "People's Democratic Republic of China:" It's not a republic, it has no democracy, and it is not at all for the people. Our "Democratic Party" is similarly highly mistrustful of democracy and voters.

Ebola watch: The death toll is now 5,000. N.Korea has closed their borders to tourists to keep ebola out. Dozens of tourists world wide are devastated. The WHO has declared Senegal and Nigeria free of ebola, showing that if you have few cases, a somewhat educated population and a better economy, you can contain this problem. Guinea, Sierra Leone and Liberia fail all three of those prerequisites. The first case has popped up in Mali next to Ivory coast, the world's major producer of cocoa, so now this epidemic is threatening chocolate - it just got serious. The two nurses in Dallas who got ebola are cured - Nina Pham and Amber Vinson are free of the virus. However, now we have an ebola- positive doctor, Craig Spencer, in NYC who just returned from volunteering in Guinea. He flew home to the largest metropolitan area in the US, one of the top 12 in the world. Wednesday went jogging, then traveled on the A, L and 1 subway lines that night, visited a bowling alley in Williamsburg, and then took an uber taxi back to Manhattan with his girlfriend, whom he apparently slept with. The next morning with a fever of 103 and diarrhea, he and his girlfriend called for an ambulance. Four more people - his girlfriend, two other friends and the taxi driver - are in isolation in NYC and the CDC is looking for several others. He had no right to do all that. There will now be completely justifiable fears about ebola spreading in New York. The NYC mayor immediately held a press conference and said there was no risk of ebola spreading in the city, then posted half a dozen police officers outside of Dr.Spencer's apartment and closed the bowling alley. Spencer is going to get sued and he deserves it. New York, New Jersey and Illinois now require 21 days of isolation for people returning from ebola areas. Obama is working over the three governors to get them to reverse this decision. A New Jersey nurse, Kaci Hickox, who flew home from west Africa Friday, is the first traveler subject to the new rules. Ms.Hickox wrote an editorial decrying the unfairness of her quarantine and how she fears it will deter others from traveling to West Africa to help. If Craig Spencer's girlfriend or taxi driver wind up positive for ebola, I wonder if they'll think a manditory quarantine is unfair. Governments in India and south east Asia are watching this with dread - they have dense, poor, poorly educated populations, and an ebola case in Asia could take off quickly to a major crisis.

Researchers at Harvard have announced a new invention for fighting viruses, including ebola: an artificial spleen. They have created nano particles that are magnetic and have protean bonds. They pull blood from your body, add the nano particles that bond with a specific virus, use magnets to remove those particles, and send the cleaned blood back to your body. They don't get every virus, but they reduce the number to something your immune system can handle. It's been tested on pigs and rats; human trials are still a bit in the future. I think this will revolutionize medicine, doing to viruses what antibiotics did to bacteria.

Laurence J. Kotlikoff, an economics professor at Boston University, co-authored the 2012 book "The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy." Kotlikoff, 63, recently said, "We're waging a war against our own children. And the worst of it is that we're winning. It's not being waged with tanks and howitzers, of course. It's a war of funding shortfalls and ever increasing consumption by older people at the expense of coming generations. We've turned retirement into a well-paid, long-term occupation. It's extremely unfair to our children, grandchildren and great-grandchildren. We're burdening them with massive government debt in order to pay for that generosity. These unfunded bills will stretch into eternity, and our children won't be able to pay them." Read the entire interview here.

Immigration Services put out a request for bids for up to 34,000,000 new green cards, including the ability to deliver 9,000,000 quickly in a "surge." Obama of course has promised to address immigration, without congress, after the November elections. There are roughly 14,000,000 illegals in the US right now. You do the math. . .

Americans drive fewer total miles today than we did nine years ago, and fewer per person than we did at the end of Bill Clinton's first term. The unique combination of conditions that fueled the Driving Boom — from cheap gas prices to the rapid expansion of the workforce during the Baby Boom generation — no longer exists. Meanwhile, a new generation — the Millennials — sees a new American Dream that is more about iPhones and less dependent on driving.

Newspapers are dying. 25 years ago they employed 60,000 journalists. Now that's down to 36,000. US population since then is up by 25%, but the number of journalists is down by 40%. (I have to admit, I don't miss them.) Back in 2010 Google's ad revenues passed up the total ad revenues of all newspapers in the country and now they take in double what the newspapers do. This will only get worse, as the next generation doesn't even read books, much less newspapers. Go to any college class and the kids have all downloaded a torrent of their textbook onto a nook or a nexus or an iPad. Paper is over, just like CDs are over.

Marc Andreessen, the author of first web browser and the core code used to make all web browsers today, says the middle class is an accident of history. His claim is that after WWII the US was the only manufacturing nation that wasn't bombed out, so we could afford the unions wages and sick leave and vacations and pensions that defined the middle class. When Japan and Germany started to rebuild their economies in the 70s, the wage pressure started and the middle class started evaporating. Personally, I'm becoming convinced that the middle class is a singular event in history and will be pretty much gone by the end of my life. We'll have a population that's about 40% poor, 40% working class, 19% business and professional class and 1% rich, with .01% filthy rich and effectively in charge of all laws. Currently in the US even the poor drive SUVs and have huge flat screen TVs. That will be changing as we move towards renting driverless taxis instead of owning cars. The flat screens will continue to be ubiquitous. I'd best get my Corvette soon, in 15 more years everyone will be in a driverless plug- in Prius. I wonder if I'll even be able to buy gas for my Harley.

Washington State is considering a new law - I-594 - to require background checks on all gun purchases. We already have this in the P.R. of California. Bill Gates, Paul Allen, Steve Ballmer and Michael Bloomberg are among contributors who have donated nearly $10m to support the initiative. The backers admit freely that background checks require registration data, and this is just a step towards gun registration. Here's the interesting part: the Supreme Court has already found in Haynes v. US that felons need not register their guns, as forcing a felon to register a gun that they cannot legally own amounts to self-incrimination, a violation of his 5th amendment rights. So what we're going to get is a huge database of gun owners who are law abiding citizens, and a bunch of unregistered guns spread among felons. By the way, Gates and Bloomberg routinely travel with multiple armed guards. There's an alternative solution - a national database of felons who are not allowed to own guns, and the background check consists of checking against that database, but no one in the ruling / moneyed class seems interested in that solution.

We - well, I anyway - think ISIL is evil. However muslims world wide are rushing to Turkey, crossing into Iraq and signing up. Just this week three teenage US girls, all muslims, were intercepted in Munich by police on their way to ISIL. Hundreds of French, 3,000 Tunisians, 2,500 Saudis, a couple thousand Jordanians, lots of Libyans, Egyptians etc are all traveling to Syria to sign up. Obviously for each person who travels there are lots more who are sympathetic. The FBI reports that ISIL is uniquely competent with a high-profile on-line social media presence, telling a story about how your (muslim) people are being oppressed and killed in Syria by a despot, why don't you come out and join the fight, become a hero, do something important with your life, be a part of something great. They're preying on younger and younger women with Disney-like versions of what it is like to live in the caliphate, complete with promises of husbands and homes. Those who think Islam is a religion of peace filled with normal average people just trying to live their lives in peace will have trouble explaining this. ISIL is uniquely well funded, making about $1 million per day on oil revenue plus $20 million to date on ransom payments. They're also doing quite well robbing banks in cities they take over.

Thinking of getting a flu shot? Don't. A recent report from Johns Hopkins shows that people who get flu shots 3 to 5 years in a row have a ten-fold increase in getting alzheimers. The shots are known to be completely ineffective in children under five and have a 1% chance of causing convulsions in such children. The mercury in the flu shot depresses your immune system for several weeks and can cause you to get the flu. Why isn't someone sued? Vaccines are protected under law. This is like printing money for big pharma.

Science: Are you a Vegan? Don't read this. Recent work at the University of Missouri show that plants know when they're being eaten and don't like it. In experiments on the Broccoli / Kale family of plants, scientists made very high resolution audio recordings of caterpillars eating their leaves. When these recordings were played back to new plants, the plants released mustard oils in an attempt to discourage the caterpillars. When other sounds like wind or music were played, the plants did not react.

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