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Mark's Market Blog

12-9-12: The Fiscal Cliff Still Looms...

By Mark Lawrence

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Markets traded in a narrow range this week on fears about the fiscal cliff. Early negotiations involve lots of lines in the sand, and Boehmer throwing all the hard line conservatives out of his group. Taxes are going up, that's a done deal. Now the question is about cuts going along with the tax increases. The market will continue to trade mostly sideways until something more definitive happens, which won't be this coming week.

S&P 500 June 16 2012 to December 7 2012

Mario Monte, the unelected prime minister of Italy, says he will resign after the new budget is passed, forcing new elections. The EU didn't like the previous PM, Berlusconi, so he was forced out and replace with Monte. So much for democracy. Berlusconi announced today he will run, which means he has a good chance of winning. Berlusconi is perceived by non-italians as corrupt and favoring close friends - it was a newspaper owned by Berlusconi that published the telephoto pictures of Princess Kate sunbathing topless. This is perhaps a good sign for democracy, the idea that a people should choose their own government, but not such a good thing for the EU, as Berlusconi's previous policies led Italy to the edge of a financial crisis.

What do Chinese think of their own country? 27% of Chinese entrepreneurs with a net worth over $16m have already emigrated to other countries and renounced their Chinese citizenship; another 50% say they're considering doing the same. Why? Better educations for their children, and taking their money to a country with a stable rule of law. Of the 5000 investment visas granted by the US each year, Chinese accounted for 2/3. This is real life Atlas Shrugged, expect instead of building a secret compound in their own country, they're just leaving. Many of these people are China's best and brightest businessmen: imagine if we lost half the people who founded Intel, Apple, Google, Tesla and other US elite companies.

Fighting continues in Egypt as the Islamic-dominated government has declared itself immune to judicial review and is about to release a new, presumably heavily islamic constitution. Should we worry about this? Israel certainly should, but I have no idea what they may be able to do about it. Islam, "the religion of peace," has just passed a numeric threshold: since 911 there have now been just over 20,000 acts of islamic inspired violence that have resulted in deaths. One of the latest episodes, which didn't make the 20,000 list: a couple of pakistanis kidnapped an 14 year old pakistani christian girl, raped and tortured her for 11 days, then declared they had converted her to islam. The local imam immediately issued an edict that as a muslim she must be removed from her parent's christian house. He added that the eight christian families living in the village should leave before their houses were burned down. The local police were uninterested in the case. There will come a time when islamic teachings and/or the koran are legally declared hate speech.

Apple traded just above $700 per share just a couple months ago. Now it's at $533, almost 25% lower. Why? Competition for the iPad from Google and Amazon and for the iPhone from Samsung are rattling some; with Steve Jobs gone there's concern that Apple has lost their creative edge; or maybe investors are just pocketing their profits before taxes go up in the new year. Will Apple stock return to the 700s? I think phones and tablets are quickly becoming commodities, and commodities don't sell at the 35% profit margin Apple is used to.

Carlos Slim is the world's richest man. He's a Lebanese transplant who lives in Mexico and owns cell phone companies all over Mexico, central and south America. His biggest company is Telcel in Mexico; now he's expanding TelCel into the US with a plan aimed at US illegals: $60/month for unlimited everything, including unlimited calls to Mexico. Carlos already owns several US cell phone companies including Tracfone, Safelink, Net10 and Straight Talk.

Polls continue to show that the public wants higher taxes on the rich (65%-31%), no changes in medicare (70-25), no changes in social security (49-30) and they don't trust republicans in the house of representatives compared to Obama (23-57). This is why Boehmer has been tossing hard core conservatives out of his tent: basic survival. There will be a deal on the Fiscal Cliff, probably sometime between Christmas and about January 20th, and it's going to get votes from about 40 house republicans.

Harvard - the #1 school in the world, right? Harvard has an endowment of over $30b, and a set of Wall Street managers who look after it. The top five money managers of Harvard made $78m last year - $16m each. The 450 full professors at Harvard made $85b last year - $188,000 each. Follow the money: Harvard is now a Wall Street hedge fund that has a school as their primary charity work.

As Student debt reaches $1t, we wonder who owes this debt. It turns out to be quite widely spread - a bit less than one third is held by people 20-29 years old. A bit more than one third is help by 30-39 year olds; and the remaining third by people 40+. We see that this debt is not being paid down in any hurry, because if it were the older people would have paid down a lot of theirs and have lower numbers.

We'll recover from this economic malaise when good paying jobs come back, like the manufacturing jobs of the 50's - 70's. But those jobs are gone forever, they're now done by robots. Even China is starting to replace workers with robots. The auto industry has invested most heavily in multipurpose robots; however most machining is now done by computer guided mills, lathes, lasers; printed circuit boards are stuffed and soldered by machines; and 3-d printers are starting to make their presence felt in the job market. The outlook is bleak for people without college degrees.

As governments continue their austerity measures and cutting expenses, alternative energy systems are taking a big hit. Most solar, wind, tide, thermal systems are only cost effective if they have massive government subsidies. Accordingly, Siemens, the 800 pound gorilla in the green energy room, announced this week they were taking massive write off and exiting the solar energy market.

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