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Mark's Market Blog

10-5-14: BS in Dental Hygiene.

By Mark Lawrence

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Markets are down this week; the S&P is below its 50 day moving average and the Dow is flirting with it. The Russell 2000 is below its 50 day and 200 day moving average and the 50 day is below the 200 day in what is called a "death cross." The dollar is going up fast, indicating that Boeing and other large exporters will have more trouble selling in the future. The tea leaves all point to a correction - 10% or more drop in the S&P - or even perhaps something worse. I still don't believe it. There's still too much money looking for a home, I don't think we've seen the top of this market yet.

S&P 500 April 12 2014 to October 3 2014

Russell 2000 Death Cross

The dollar hit a four year high this week against a basket of currencies. This is good for consumers as imports get cheaper. It's bad for jobs, as we will make less here and import more. It's bad for the trade deficit. It's bad for US business - nearly half US corporate profits are from international sales, and a rising dollar means rising prices and lower profits. It's bad if you believe the solution to our debt problems is inflation. And if US interest rates rise next year, it's going to get worse - the dollar will be worth more. How long will the Fed allow Europe, China and Japan to lower their currencies against the dollar? And, interestingly, is it obvious the Fed can do anything about it?

Germany just sold $5 billion worth of 10 years bonds with an interest rates of 0.93%. Twenty years ago these bonds would have sold at 5%; until the 2008 crisis they never dipped below 3%. Unschooled German politicians perhaps think this is wonderful, as it means their interest payments are really low and they can afford more debt in an emergency. Some of us think this is a clear bet by the bond buyers that Germany will experience some serious deflation and they'll make their money on the increase in value of their principle, not on the interest. 0.93% means these bonds are only slightly better than just holding cash. The ECB thinks Germany should sell a whole bunch of bonds and build a whole bunch of infrastructure, perhaps employing a bunch of young Spanish and Greeks to hammer nails and pour concrete. The Bundestag thinks the ECB should take a quick dip in the Rhine river.

The UN's ebola chief Anthony Branbury has warned that the Ebola virus could mutate and go airborne. This is unconscionable scare tactics - evolution happens to losers. Sharks haven't changed in 100 million years. Ebola is winning, it would be ridiculous for it to mutate. Mr. Branbury wants something, and it's not hard to see what: he wants the west scared and putting major resources into west Africa. Meanwhile flu, pneumonia and diarrhea are each killing people more than a hundred times as quickly as ebola.

The jobs report came out, and unemployment dropped to 5.9% as we added 248,000 jobs in September. Meanwhile the labor participation rate dropped to 62.7%, the lowest level since 1978. In the 50s the participation rate was about 59% as nearly all women got married and stayed home. Today we're told that this was evil, women should have the choice and right to work. Now all women work and more and more young men are staying home, playing XBox instead of caring for kids. Perhaps we're heading for a 59% labor participation rate again, except this time it will be the men who don't have jobs. I'm having a lot of trouble seeing how this constitutes liberation for the women, who work 8 hours, commute another hour or two, pick up their kids, feed and bathe them, get them in bed, do a bit of housework, then collapse for a few hours before doing it again. On the other hand, I'm having no trouble at all seeing how the young men are liberated - they work just enough hours to make the payment on their Mustang and to save up for the next XBox game.

Consumer debt has reached an all-time high - the total outstanding of credit card debt, student loans and auto loans have never been higher. However mortgage debt is down 20% from the peak and continuing to drop, so overall consumers are continuing to unwind their loans. These are totals, of course, so what's really true is the middle and upper classes who have the mortgages continue to unwind, and the lower classes are building up debt to buy cars and get bachelor's degrees in auto mechanics and dental hygiene.

Italy continues to sink. Their youth unemployment is up for 45% from 40% a year ago, and they now have .25% deflation - no businessman wants to hire when consumers are holding their cash waiting for a better deal. As I see it, so long as southern Europe continues to share the Euro with northern Europe, the south will continue to have dysfunctional economies. I just don't see the Euro as long term viable.

Elizabeth Warren - the Massachusetts liberal senator whom I like - is continuing to take on the Fed. Last week I talked about how Carmen Segarra has tapes showing that the Fed is pretty cozy with Goldman Sachs. Elizabeth Warren is all over this, saying in a recent interview, "ultimately this report tells us exactly what we already knew — that the relationship between regulators and the financial institutions they oversee is too cozy to provide the kind of tough oversight that's really needed. You know, the regulators seemed to think that it was a victory just to raise an issue, even if they took absolutely no action to address the issue," Warren said. "And that's the kind of approach that allowed banks to take on massive risks before the financial crisis. You know, think about that: The regulators seemed to think that fussing at banks behind closed doors was their toughest sanction. Does anyone believe that Goldman Sachs is gonna give up a deal that would yield millions of dollars because someone fussed at them behind closed doors?" Elizabeth continued, "You know, the game out there is rigged, and people across this country really get it. And the Goldman Sachs tapes just show it one more time. Little banks have to follow the rules, regular families have to follow the rules, but big financial institutions? Somehow they can manage just to push their regulators aside and go forward. There's a — there's a fundamental question about who this country works for. It can't just work for those who already have lots of money and lots of power. We've got to have a country that works for everybody else." By no means do I agree with all her positions, but for taking on Wall Street I'm willing to forgive and forget a pretty large number of other issues. I see Wall Street as the #1 issue for our economy and our democracy. They need to be taken down.

Hedge funds lost a major court case. Fannie Mae and Freddie Mac, the two subsidized government corporations that keep mortgages cheap, deliver their profits to the treasury - the same treasury that bailed them out a few years ago at great expense and now wants our money back. Hedge fund guys had bought a lot of stock and argued in court that this was unfair, they should get the $33 billion in profits. The courts disagreed. Fannie and Freddie stock are down 40% on the news. I believe this is the first time I've written about hedge fund guys losing one.

Pimco funds lost Mohamed El-Erian about 6 months ago; we all secretly knew it was because he had lost all respect for Pimco's resident genius, Bill Gross. Now last week the board of directors told Bill to take a long walk. Bill promptly surfaced at the Janus fund, a bond hedge fund. These guys never miss a meal. Meanwhile, Pimco, who used to be the elephant in the bond market, has lost $23 billion in assets under management in the last month - a bit more than 10% of their total assets. This number is almost certain to increase. They've hired six guys to replace Mohamed and Bill, but the bond market is full of investors like Calpers who want to deal only with known quantities; anything new scares them. The Fed is likely to raise rates in the next six months or so, and perhaps raise them a second time a month or three after that. This will stir up the bond hive, scaring everyone. This was not a good time for Pimco to lose their two best guys. Although word is that Bill has marched right up to the edge of mental stability, then taken a bold step forward. Over the course of his career Bill has made a bit over $2 billion and is 70 years old now, begging the question why he doesn't just retire. His answer: "Managing money is in my blood. I like to get up at 5:30 in the morning and make money for clients and compete against other money managers. That's something that doesn't go away. I am obsessed with delivering value to investors and winning the game from a personal standpoint. Retiring at this point in my career just doesn't suit me." There's some quote about camels and needle eyes, but I can't remember it.

Sears is having enough cash flow problems that vendors now routinely buy insurance against Sears defaulting on payment. That's been going on for a few years; however recently the cost of that insurance has risen to the point where it's now 35% of the cost of the goods on an annual basis. Sears is very close to needing corporate CPR.

JP Morgan was attacked and lost personal information on 76 million customers and 7 million small businesses. Nine other financial institutions were broken into at the same time, but we haven't heard about them. US officials are quietly saying this was a Russian attack in retribution for Ukraine sanctions. Congress is considering passing a set of laws, 'cause that's what they do. Apparently they think in the absence of laws banks have no interest in cyber security. If you had a JP Morgan account, don't, do not, respond to any emails that ask you to log into your account.

Jerry "Moonbeam" Brown signed a law enabling a pilot program to allow the P.R. of California community colleges to offer bachelor's degrees in auto mechanics and dental hygiene. These words, "Bachelor's degree," I do not think they mean what he thinks they mean. The community colleges were given no new funding for these or any other programs - already severely under funded and over populated, you spend your first couple of years at community colleges taking junk classes and building up enough seniority to take the classes you really need. Brown also used his line-item veto to eliminate $100 million in new funding for the states existing universities. Brown also announced new scholarships particularly for illegals, but no new money. When I was a kid Berkeley was just a quarter notch behind Harvard and Stanford, and UCLA another quarter notch behind them. These flagship schools are now dropping fast as Sacramento is more interested in social engineering than in education; in the latest US News ranking they're now both in the 20s, not even close to Ivy League quality. On current trends USC, the historically unloved step child of California education, will soon be ranked higher than either. I predict that one day some other state like Washington will offer some serious money to Caltech, Stanford, USC to pack up and move. That's going to look very tempting. . .

Everyone is pulling out of the bidding for the 2022 Winter Olympics. History is clear, cities that win spend billions on one-time-use facilities and never get their money back. The TV contracts pay billions to the Olympic committee but they aren't very interested in sharing. The Olympic committee desperately wanted Oslo, but the Norwegians are too smart to fall for it, they pulled out of the bidding refusing to spend an estimated $5.5 billion on single use facilities. Russia spent $51 billion building Sochi, now a ghost town. At this time only Beijing and Almaty Kazakhstan are in the running for the games - centrally planned governments don't have to answer for poor economic decisions. If the Olympic committee doesn't change their policies soon you're going to see a lot of ex-communist Olympics. Will the winter games wind up in Beijing? Possibly, but it seems clear the Olympic committee is going to have to revise their policies.

I don't like Islam. I take some flak for this from friends who assure me that the average muslim is just like me and I'm condemning a billion decent average people over the insanities of a small fraction. I don't believe it. I have customers in Indonesia and Malaysia who ride motorcycles with my windshields and tell me they want Israel wiped off the map and Jews dead. There are videos of UC San Diego co-eds saying they agree with the Hezbollah president when he says he'd like all Jews to move to Israel so that he doesn't have to hunt them down one at a time around the globe. All over the Arab world people marry their 1st cousin because Mohammed, the famous pedophile, did. A bit over 2/3 of all Pakistani marriages are between 1st cousins, with the result that their birth defect rate is ten times the world average and their average IQ is a full standard deviation below normal. That last means 5 out of 6 Pakistanis is below world average, and 1 out of 3 has an IQ below 70, the basic threshold for literacy. Muslims are taught that their part of God's quest to dominate the world is to have six children, and all too many of them do: the countries with the fastest growth rates in the world are all either in sub-saharan Africa or are muslim. The CIA lists the top ten as Lebanon, Zimbabwe, South Sudan, Jordan, Qatar, Malawi, Niger, Burundi, Uganda, Libya. Five of those are muslim. Only in muslim countries can you be killed for being something other than muslim, and certainly will be killed if you convert from muslim to anything else. Muslims have been active in, one may even say central to the world's slave trade for the last 500 years. In fact Obama is not descended from black slaves, he's descended from muslim slave traders. In muslim countries rape victims are killed, rapists go free. Although muslims brought the idea of community property to the world - the idea that wives own half what is acquired in marriage - today muslim women are property. Below is a picture of ISIL attracting members by auctioning off 2500 women as young as 13 for $10 each. The christian or yazidi women who won't convert are given as sex slaves first to groups of 10 or so warriors, then sold as slaves. Those who will convert to muslim are sold as brides for somewhat higher prices. Women: if you're captured by ISIL, convert to islam. Immediately. Tell them you always wanted to. Trust me on this. Notice nowhere have I spoken of muslim religious beliefs. It's not their beliefs, it's their suffocating culture / politics / laws.

It's been known for some time that prolonged sitting, a nearly ubiquitous feature of our culture, does damage to the arteries of your legs. In fact it's becoming clear that sitting all day is roughly as bad as smoking a pack a day. Walking for 5 minutes each hour reverses the damage.

Is marriage dead? In the lower classes, yes. Women want a man with a job who is interested in kids. Those men don't exist in the lower half of our society. So the women are married to ADFC and section 8 instead. In the upper classes, marriage is being delayed until the people are in their 30s, but it continues. However the divorce rate among those people continues to rise. Women without children apparently have no incentive to marry at all and mostly don't. Women with college degrees and kids nearly always get married. Perhaps granting a BS in dental hygiene will lower the number of kids on welfare. . .

Sign of the apocalypse? I've noted here before that the younger generation prefers a good phone to driving. And they love their designer jeans. Now that Apple has released the iPhone 6+ with a 5" screen, Samsung is already selling a 6" screen and Google is getting one ready for release, designer jeans manufacturers are announcing they're increasing the size of their pockets to fit the new larger phones.

Thinking of buying a car and driving it into the ground? The longevity winner is the Ford F250 super duty pickup - 4.2% of them make it to 200,000 miles. Various trucks and truck based SUVs like the Sierra and Suburban are next on the list, 3% or so of them make it to 200k. The best cars - Hondas, Toyotas, Subarus - about 1.5% of them make it. Basically don't count on making it to 200k miles, it's quite unlikely.

The FAA just ordered airlines to replace Honeywell built cockpit screens on 1300 Boeing aircraft that are subject to interference from WiFi devices and mobile phones. The screens can black out if you use a cell phone or net book near them.

In the last 50 years human population has doubled. In that time 39% of Earth's species have disappeared; freshwater fish populations are hardest hit at 76% die off. Currently humans are consuming Earth's resources 50% faster than they can be restored, cutting down trees faster than they grow, taking fish faster than they breed. The tropics are getting hit worst with a 56% decline in wildlife; Latin America leads with an 83% decline. With population scheduled to grow by better than 50% this century these numbers will only get worse.

The 2015 Corvette Z06 specs have been released. 650hp. 0-60 in 2.95 seconds. Quarter mile in 10.95 @ 127. 60-0 in 99 feet, the best number GM has ever tested in any production car. 1.2 lateral gs. $79,000. The 8 speed automatic is faster than the 7 speed manual - sorry, all you purists are going to be a quarter second behind. I'd really like one of these. I have no idea what I would do with it, and I suppose I would tire of it in a few weeks, but I still really want one.

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