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Mark's Market Blog

2-1-15: Travels with Charlie.

By Mark Lawrence

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Stocks are behaving in a way which I frankly don't understand at all. They are switching about twice a week between bullish levels and bearish levels - there is absolutely no momentum. Volume downwards is clearly larger than volume upwards. What's next? I have absolutely no clue. Our economy seems to be doing well. Europe is doing poorly but just promised $1.4 trillion in new handouts to rich people - Reagan's trickle down economics has become mainstream the world over. Japan is also printing north of $1 trillion, and China doesn't bother to tell me what they're doing but they're printing too. Overall I would think with all this money floating around the markets can't go down, but they most certainly won't go up right now. This situation is unstable and something will happen soon to establish a tread. Looking at volume and RSI I think down is more likely, but that quarter in your pocket might be smarter than me.

S&P 500 August 12 2014 to January 30 2015

I took some time off and went on a road trip with my dog, Charlie. He's now peed in 13 states. We paid an average of about $1.85 for gas. We saw almost no snow, not anywhere. The snow line in the Sierras and Rockies is about 9,000 feet; below that there are only patches. Above 6,500 feet we saw snow in little patches perhaps 20 feet long, 6 feet wide, 3 inches deep. And those only in small shaded spots. The entire west is having a major drought. If you had been with me and I had said, speaking of Wyoming and Colorado, "These are the sources of the Colorado and Missouri rivers. Do you think we'll have them this year?" you would have wondered with no small concern. The California snow pack is at 25% of normal for this date and 15% for the snow year and no rain is scheduled for the next week. San Francisco just went the entire month of January without rain for the first time in recorded history. If I were governor Brown I would certainly schedule at least 40 days and 40 nights of rain. Glendower: "I can call spirits from the vasty deep." Hotspur: "Why, so can I, or so can any man; But will they come when you do call for them?"

Consumer confidence is now 102.9, the highest reading since 2007. Consumers are loving the low gas prices. Washington, not so much: their taxes are now a quarter of the price of gas, and Obama's goal of 55 mpg in ten years is suddenly looking impossible and irrelevant - who wants an expensive hybrid when gas is $1.75? Time for trucks and SUVs. GM and Ford are quietly celebrating.

Canada has had a nice run based on exporting oil from Alberta. That's over for a bit. . . job losses are piling up as the mines lay off, and they've had a nice housing bubble based in part on the easy oil money. That bubble and the banks behind it now look to be at risk.

For the first time in 35 years America is losing more businesses than they're making. I attribute this in no small part to an extremely wrong- headed immigration law that lets in the dirty, unwashed and uneducated and tosses out foreign students who come here and get PhDs and engineering degrees. Liberals firmly believe that all children have the same potential - if those inner city latino kids were just raised right they would all go to Princeton. Whatever you may believe about IQ, environment, culture, family, the statistics are in and those kids are not going to Princeton or MIT or any such place. And the kids that come to this country on student visas and do graduate from our top schools? They gotta leave.

Caterpillar profits are down, and they warn that they see a 10% decline in 2015 sales. Their equipment is important for mining - oil, copper, coal, iron - and they see declines in price for all these commodities resulting in decreased world wide mining activities. Further downstream this implies construction will also slow for 2015.

The ECB met and promised about $70 billion of bond purchases each month, starting in March, continuing until (at least) next September. That totals about $1.4 trillion. European interest rates are extremely low, meaning bonds are about as high as they can go. The ECB has just announced the exit strategy for all the rich investors in Europe: sell the over priced bonds to the ECB. Stocks rallied on the news. For a couple days.

Governments have discovered a new trick. Everyone - tout le monde - is doing it. Japan is leading the way with this. They spend a bunch of money, more than they have. They create and sell ten year bonds to banks to raise the money. They have their central bank buy the bonds from the banks and then put them on account for the banks, which authorizes the banks to create and loan more money. This is called Quantitative Easing, QE. As a result, the more bonds the government sells to pay for their deficits, the lower their bond interest rate goes and the lower their interest payments go. Exactly the opposite of what you learned in Econ 101. Isn't that kewl? Plus most countries have a rule that the central bank has to return profits to the government, so those bonds are effectively almost zero interest - the government sends interest payments to their central bank, and the bank sends them right back as profits. Japan is currently paying about 0.22% 'cause they've been playing this game for a while. The US is a relative newcomer to this - we only started in 2009 - so we're paying about 1.9%. That means Japan can borrow ten times as much money as the US for the same interest rate cost. Europe is jealous so now they've started playing the game too. German and French ten year bonds are 0.36% and 0.54% respectively. Does this mean the markets see Japan, Germany and France as safer bets than the US? Not a chance, these numbers have nothing to do with market discovery and market pricing. Since governments and politicians come and go this is basically a game of musical chairs - everyone is laughing, dancing around, sipping their drinks, spending free money. Until the music stops and interest rates go up and some politicians find they have no where to sit or hide. But that hasn't happened yet. When will it? I wish I knew, I could make tens of millions of dollars shorting bonds. Meanwhile, the lesson here is that right now, today, deficits and money are free. I wish I had me one of those central bank thingies. What's next? I predict that things will get sticky, and then some clever country, perhaps Japan, will simply announce that the bonds held by their central bank no longer exist - that's it, several trillion dollars of debt simply disappear and no one notices 'cause the government lent it to itself. This is called monetizing the debt, but the central bank thing is a new feature. Will that work? Sure, for a while. Mr.Toad's Wild Ride is not near the end yet, imho.

There's a hamburger joint in New York, Shake Shack, that apparently has pretty good hamburgers. They have 63 locations and take in about $4 million per year per location. They have plans to add another 10 franchises per year. They just had a stock offering and their stock price values the company at $1.6 billion - $25 million per location, a bit over 6 times yearly revenue. McDonalds has 35,429 locations and is opening about 800 new locations per year. McDonalds has a market cap of $90 billion - $2.5 million per location. They take in about $2.5 million per location per year, so they're valued at about 1 times yearly revenue. Good chance you never heard of Shake Shack until you read about it here. There's pretty much no one in the world that hasn't heard of McDonalds. This market is not rational.

Greece had their elections and the top party was indeed Syriza, the socialists who promise to reverse austerity. Right now their plan is completely unworkable - they promise to negotiate a write down of half of Greece's debt and to issue yet more debt to fund hiring more government workers and give people raises. The EU will never agree to this. Right now 70% of Greeks say they want to remain in the Euro; they just want a better deal. Well, as Alex Tsipras, their new prime minister, fails to get them that deal from the EU perhaps that number will drop and soon he'll be able to exit the Euro, very much to the benefit of all Greeks. The EU thinks they're unconcerned as most of the Greek debt has been moved off the books of European banks and into the ECB, and they're taking a hard line, warning Tsipras that there will be no write down on Greek debt and no new bailout funding if they reverse austerity. Some, including your intrepid writer, think they're very close right now to Portugal, Spain and Italy seeing that electing a far left or far right government can get them out of their life-choking EU imposed austerity plans. I think the EU is entering uncharted and very dangerous territory. Stocks dropped on the news. For a couple days.

Greeks are withdrawing their money from banks in record amounts. Apparently they remember well what happened to savers in Cyprus, where capital controls meant you had to keep your money in Cyprus and depositors had their deposits frozen then, in some cases, confiscated. All four of Greece's major banks have had to ask the ECB for emergency cash infusions to cover the withdrawals. The banks are getting crushed on the stock market, their share price falling by 50% in the week. Much of the money is leaving Greece for banks outside the country. Meanwhile their new PM, Alex Tsipras, started out his job by visiting a war memorial where 200 Greeks were slaughtered by Nazis, then welcoming the Russian ambassador, appointed a new finance minister who called the EU reforms "fiscal waterboarding," and criticized the EU's latest threat of new sanctions against Russia. Germany is, and should be, shaken up - the first cracks in their austerity coalition are showing. Merkel apparently believes that in time Tsipras will moderate and change course. I don't.

China is getting backed into a corner. Growth came out at 7.4% - the lowest number in 25 years. The IMF says it expects China's growth to slow further to 7.0% in 2015 and 6.3% in 2016. Normally the Chinese would just print a bunch of money and build a bunch of things, but now they have a banking crisis starting at the same time and printing money looks like a bad idea. Copper and iron prices are crashing, indicating strongly that the Chinese building boom is over, and so is the Australian mining boom. China is facing price and quality competition on a number of fronts while much of the rest of the world slips towards recession. Really, the only thing they have going for them right now is lower energy costs.

Oil seems to have settled in the low to mid forties, at least for now. What does this mean? There are a lot of oil projects in the US and Canada, mostly fracking and shale oil, that are uneconomic. In fact a majority of the world's projects are uneconomic. If the price stays below $50, expect a lot of projects to get shut down, a lot of workers to get laid off, and a lot of energy bonds to default. I expect the price to stay low for an extended time, and I expect that this is going to get very interesting.

S&P cut Russia's bond rating to junk. The last time they did this the hedge fund LTCM failed a little while later and for a short while it looked like the end of western banking. Economically speaking, we're taking the Russians down. How will they react? I dunno, but I doubt they go quietly into that long night. . .

Obama has frozen Iran's foreign assets as part of the sanctions. However, as an inducement to keep talking he's now freeing up $13 billion of their money. I'd talk to him for $5 million. This has reached the stage of being a parody - Iran will obviously have nukes and missiles by the time Obama leaves office. Will they forego using them? Are they stable enough at the top to live in a mutually assured destruction relationship with Israel? Personally, I don't think so. I think this will end as badly as you can imagine. Shalohim yazor ly Israel.

The climate change nuts have a new map based on their computer projections - you know, the same projections that cannot account for the complete lack of temperature change for the last 15 years. Currently they think the oceans are soaking up all the heat - according to the The National Oceanic and Atmospheric Administration ocean temperatures have risen an average of 0.036°c. I'm not sure I believe that ocean water can be measured in situ to anything like that precision. Well, anyway, now their truth is out: Europe, the US, Canada and China are to all but destroy our economies so that Africa, India, Pacifica and Brazil can continue breeding irresponsibly, polluting air and water, over fishing the oceans and burning down rain forests and jungles. I'm agin' it. Even if I did believe in climate change, I have to admit I also believe limiting the population in those areas - by far the fastest growing segments of human population - will help save the planet more than reducing carbon emissions.

We haven't heard anything about Ebola since Obama sent the army to "help out." Apparently the help is to make sure that nothing gets out - no virus, no news, no people, nothing. There have been 8829 certified ebola deaths to date, and we're told the epidemic is winding down. The actual deaths are likely 12,000 to 16,000 as a lot of people don't go to the hospital - "My brother went and he died there." In any case the epidemic has seemingly been completely contained in the original three countries - Guinea, Sierra Leone and Liberia.

We all know politics is very polarized in this country, and we all know not only is there no talking to people on the other side of the isle, but in fact we all, both sides of the spectrum, believe that the policies of the other side will destroy the country. Now we have almost completely sorted ourselves out by states: in the opinion of pollsters and both parties, there are only nine states that are swing and contested for presidential elections. If you chart money spent in the last election and candidate campaign visits, it looks almost exactly like the map below. If you're not in one of those nine states, your vote is considered irrelevant: the state is basically already locked up before the candidates are even chosen. If you're in one of the nine, your vote and activism actually matters; making the wild presumption that our true ruling class, the bankers and top .001% actually care who gets elected.

These 80 people have as much wealth as the bottom half of the world's population, 3.6 billion people. This is an "improvement" since 2009, when it took the top 388 to equal the wealth of the bottom half. 30 of them made their money the old fashioned way, as Warren Buffet puts it, by winning the Lucky Sperm Lottery. On present trends, by the end of the year the top 1% of the world will have half the world's total wealth, 99% will share the remaining half. If I were the emperor of the US I would put a 10% yearly tax on wealth over $100 million, proceeds from the tax going directly to Social Security and increasing the retirement plans of everyone (except for the police, prison guards and firemen who are already bankrupting their state pension systems.)

The Top 80

1Bill Gates $76 USA Tech  41Mukesh Ambani $19 India Extractives
2Carlos Slim Helu $72 Mexico Telecom  42Masayoshi Son $18 Japan Telecom
3Amancio Ortega $64 Spain Retail  43Michael Otto $18 Germany Retail
4Warren Buffett $58 USA Finance  44Phil Knight $18 USA Retail
5Larry Ellison $48 USA Tech  45Tadashi Yanai $18 Japan Retail
6Charles Koch $40 USA Diversified  46Gina Rinehart $18 Australia Extractives
7David Koch $40 USA Diversified  47Mikhail Fridman $18 Russia Extractives
8Sheldon Adelson $38 USA Entertainment  48Michael Dell $18 USA Tech
9Christy Walton $37 USA Retail  49Susanne Klatten $17 Germany Cars
10Jim Walton $35 USA Retail  50Abigail Johnson $17 USA Finance
11Liliane Bettencourt $35 France Product  51Viktor Vekselberg $17 Russia Metals
12Stefan Persson $34 Sweden Retail  52Lakshmi Mittal $17 India Metals
13Alice Walton $34 USA Retail  53Vladimir Lisin $17 Russia Transport
14S. Robson Walton $34 USA Retail  54Cheng Yu-tung $16 Hong Kong Diversified
15Bernard Arnault $34 France Luxury  55Joseph Safra $16 Brazil Finance
16Michael Bloomberg $33 USA Finance  56Paul Allen $16 USA Tech
17Larry Page $32 USA Tech  57Leonid Mikhelson $16 Russia Extractives
18Jeff Bezos $32 USA Retail  58Anne Cox Chambers $16 USA Media
19Sergey Brin $32 USA Tech  59Francois Pinault $16 France Retail
20Li Ka-shing $31 Hong Kong Diversified  60Iris Fontbona $16 Chile Extractives
21Mark Zuckerberg $29 USA Tech  61Azim Premji $15 India Tech
22Michele Ferrero $27 Italy Food  62Mohammed Al Amoudi $15 Saudi Arabia Extractives
23Aliko Dangote $25 Nigeria Commodities  63Gennady Timchenko $15 Russia Extractives
24Karl Albrecht $25 Germany Retail  64Wang Jianlin $15 China Real Estate
25Carl Icahn $25 USA Finance  65Charles Ergen $15 USA Telecom
26George Soros $23 USA Finance  66Stefan Quandt $15 Germany Cars
27David Thomson $23 Canada Media  67Germán Larrea Mota Velasco $15 Mexico Extractives
28Lui Che Woo $22 Hong Kong Entertainment  68Harold Hamm $15 USA Extractives
29Dieter Schwarz $21 Germany Retail  69Ray Dalio $14 USA Finance
30Alwaleed Bin Talal Alsaud $20 Saudi Arabia Finance  70Donald Bren $14 USA Real Estate
31Forrest Mars Jr. $20 USA Food  71Georg Schaeffler $14 Germany Product
32Jacqueline Mars $20 USA Food  72Luis Carlos Sarmiento $14 Colombia Finance
33John Mars $20 USA Food  73Ronald Perelman $14 USA Finance
34Jorge Paulo Lemann $20 Brazil Drinks  74Laurene Powell Jobs $14 USA Entertainment
35Lee Shau Kee $20 Hong Kong Diversified  75Serge Dassault $14 France Aviation
36Steve Ballmer $19 USA Tech  76John Fredriksen $14 Cyprus Transport
37Theo Albrecht Jr. $19 Germany Retail  77Vagit Alekperov $14 Russia Extractives
38Leonardo Del Vecchio $19 Italy Luxury  78John Paulson $14 USA Finance
39Len Blavatnik $19 USA Diversified  79Rupert Murdoch $14 USA Media
40Alisher Usmanov $19 Russia Extractives  80Ma Huateng $13 China Tech

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