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Mark's Market Blog

2-2-14: Who will buy T-bills when the Fed won't? you.

By Mark Lawrence

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This week we bounced three times off an S&P support level of about 1770. Is our little correction over? Soon I think, another few days and we should be back to normal. It would be unsurprising to see the S&P drop a bit more, perhaps to 1768 or so, then rebound up from there. Among the market superstitious, January is frequently seen as a proxy for the entire year - if January is up, the year as a whole will be up and vice-versa. If you believe in this brand of tea leaves then the stock market is likely to do very poorly this year - to date January has wiped out all the gains in the market dating back to early November of last year. But meanwhile, US businesses continue to do well, US consumers continue to spend money, profits continue to be good. And Obama may have found a replacement for the Fed in buying government bonds.

S&P 500 August 9 2013 to January 31 2014

The Fed was buying $85 billion of bonds each month. Last December they cut that back to $75b. They announced this week that it's been cut again to $65b for the coming month. Right now we're being slowly weaned off our five year money printing drug habit. In anticipation of US bond rates rising, large funds are pulling major money out of emerging markets. This is causing havoc in several countries - their currencies are collapsing as investors pull out, which means increasing prices for imports and inflation and slashing growth as investment evaporates. Some emerging markets are attempting to defend their currencies by raising rates causing even more economic slowing, others are not and are just trying to weather the storm. And in the midst of this chaos, China continues to try to engineer the world's first "soft-landing."

Argentina and Venezuela are both experiencing increasing inflation, running in the neighborhood of several percent per month; both governments are shutting down businesses who raise prices, so basic goods are getting scarce. Both governments are devaluing their currencies, but too little too late; both governments are regulating how many dollars their citizens can buy to a very low number. And both are nearly out of foreign reserves to continue servicing their debts. Christine Kirchner, the president of Argentina, recently visited Cuba, UAE, Indonesia and Vietnam; she chartered a British plane to take her, as she was concerned that any official Argentine plane would be impounded at the airport to offset her unpaid debts. Last year an Argentine ship was impounded in a port in Ghana due to unpaid debts. It's difficult to see how these two countries will make it through the year without economic collapses; but Argentina does this every 10 years or so, they're expert at it. Venezuela hasn't had a collapse in a few decades, theirs will likely be messier. Neither collapse will do much to the world economy.

MyRA - Obama's new idea. What is it? If you earn less than $191k, your employer can deduct money - as little as $5 per check - from your paycheck and move it into an account that buys treasury bills. If your balance hits $15k it gets rolled over into a Roth IRA. The money invested is after tax; you never pay taxes on the interest earned. This will make low-earners feel like they have a retirement account too, and when the Fed decides to try to unload their $4 trillion or more of bonds, this will give the US a bond buyer of last resort - us. When the Fed decides to unwind, don't be surprised to see WW-II style promotions telling you it's your patriotic duty to buy government bonds. Meaning no one else wants the damned things and the government is desperate to sell them. And when inflation finally starts up - and it will eventually - it will be the MyRA holders and "true patriots" that are the shock troops of the war on savings. $15k? By presumption you're living on social security - $15k won't even buy you a decent Harley, and your prescription drugs will eat up that money in a year, tops. Panem et circenses. And, by the way, this has their foot in the door: when interest rates are rising and threatening to bankrupt the US, that's when you will hear the announcement that MyRA funds have to be invested in treasury bonds, so it's only fair that Roth-IRAs and 401(k)s must also be invested in treasury bonds.

Some on Wall Street are saying that Fannie Mae and Freddie Mac policies are leading to a new housing bubble. I've written many times about how student loans are a already a new bubble. We're all very aware that Obamacare is all the hot topic and it seems everyone is angry about some aspect of it. And shale oil / fracking are changing the US economic and environmental landscape daily. Notice that Obama's State of the Union address didn't speak to any of these issues - instead we got a lot of smoke and mirrors about minimum wage on federal contracts and tiny little retirement accounts meant to pacify the middle classes and sell government bonds to people too unschooled to understand they're being taken for a ride. Apparently true leadership involves a lot of smoke and mirrors and flames and noise and urgings to ignore that little man behind the curtain.

Detroit has reached an agreement with their unions to limit retiree health care expenses. The $11.5 billion in expenses was about half of Detroit's bankruptcy. The new agreement cuts that to $2b, paid out in the form of a $125/month subsidiary for Obamacare. Some months ago I wrote that Obamacare would turn out to be a huge bailout for cities and states; well, it's starting.

A couple of years ago, Google acquired Motorola for $12.5 billion. This week they announced they were selling it to the Chinese company Lenova for $3 billion. So they lost their shirts, right? Not exactly. When Google bought Motorola, Motorola had $3 billion in cash, which Google grabbed. Google also sold off Motorola's cable box division for $2.3 billion. So what really happened is Motorola was threatening Google with a bunch of patent lawsuits over Android, and Google just bought up a whole slew of Motorola patents for $4 billion, ending that threat to Android and leveling the playing field in their competition with Apple's iPhone. Now, by selling off the remaining Motorola phone business Google is calming their phone partners Samsung and LG by no longer competing with them. And Lenova is getting a phone product line that has not been very well received in the market place - the Moto and Droid lines have been disappointing compared to Samsung's Galaxy. Overall, this was almost certainly a good deal for Google. Lenova, which had previously bought IBMs thinkpad laptop line is also now buying IBMs low-end server business - they get to merge their low cost Chinese manufacturing and Chinese market penetration with the Thinkpad and Motorola brand names.

Iraq says they want to cooperate with Iran and both countries want to challenge Saudi Arabia as the major oil producer in Opec. This is a beautiful sentiment - if this were to happen, oil prices would plummet and the world economy would take off. Much of the world economy's problems in the last decade is due to $100/barrel oil. Unfortunately, in order for this to happen there will have to be multi- billion dollar upgrades in both country's oil pipelines and docking facilities. Iraq does not seem to have the political stability to build such an ambitious project this decade, and Iran's ability depends on reaching an accord with the US on nukes. I personally believe that Obama's sympathies rest with muslims much more than with christians, and that his Harvard education was paid for by Saudis; it's extremely curious to me that all of his actions have had the net effect of destabilizing the middle east and calling into question Saudi Arabia's stability and dominance. I suppose we have to believe that he thinks the Arab nations are products of colonialism, and he hates colonialism more than he loves muslims. Colonialism is mainly an African issue and it just doesn't resonate with me to such a depth.

China is becoming more assertive in the South China Sea. They've spread warships over the region and are claiming small islands 500 miles or more from China, aggravating Japan, Korea, Malaysia and the Philippines by taking over what these countries believe has traditionally been their territory. And they have a new game: chicken. They park a ship in the path of a US warship and demand we turn or crash. So far we've turned. One day perhaps a Japanese ship won't.

It's estimated that between $1 trillion and $4 trillion is now in secret off-shore bank accounts, held by Chinese government officials. Price-Waterhouse and Credit Suisse have been helped at least 400 rich Chinese establish holding companies in such tax havens as the British Virgin Islands, Samoa and the Cook Islands. UBS has helped over 1000 more. These Chinese are all ex-government officials or their close families who have peddled influence and/or privilege to accumulate money, and now wish to keep that money no matter how Chinese politics might change. We'd like to believe China is moving in the direction of a capitalist democracy, but the raw truth is that "president" Xi's official title is "Chairman," the same title Mao used, and this is a thugocracy little different from the kleptocracy that runs Russia. And frankly, I think the ties in this country between Wall Street and Washington mean the only difference from the US is that we're a bit more advanced and subtle in how a very few accumulate enormous wealth at the expense of the rest of us.

On February 2nd 1848 Mexico ceded more than half its territory to the United States - most of Arizona, California, Nevada, New Mexico and Utah. The rebellious state of Tejas, which had declared independence from Mexico in 1836, was recognized as American soil too. How did it end? The Latinos are coming to dominate most of those states, by history, birth, and immigration both legal and illegal. What they could not take by force they're taking with fence-jumping, welfare and breeding.

I manufacture and sell motorcycle windshields for a living. But not so much this month. It's pretty hard to move a lot of windshields when the entire country, save a bit of California and a few counties in Florida, are all experiencing freezing temperatures. No big deal, this just means that I'll have a really big March and April, when all the wives tell their husbands, "Yes. Go somewhere on your motorcycle. Anywhere."

I got interested in solar power. I learned some things. Of course I looked into California; other areas would have different details. Here's a basic primer. There are two basic types of systems, "off-grid" and "on-grid." Off grid means you power your own home your own way. Solar systems only generate power for about 5-6 hours per day - 9am to 3pm best case. To live off-grid you need massive batteries for the rest of the day. Big, expensive lead-acid batteries that die in a few years. On-grid means you generate power and sell it back to the power company, then use power company power. In California the power company must buy your power at the same price it sells it, but only up to your usage, you can't make money selling power to the power company. Residential electric rates are insane. You have a "baseline" usage that lets you turn on a light a couple times a day for a few minutes, your baseline rates are relatively low. After you've used up your baseline rates, the cost of power doubles or triples. Check your power bill for details at your house. Most likely you don't want a home solar system that generates all your power, you want to generate only the expensive portion of your power and continue to buy the cheap portion. In N.California the wholesale price of power is about 10¢ per kwh; you buy it from PG&E for 13¢ for your baseline rate and 35¢ after that. I use about 28kwh / day at my house; I would want about a 3.5kw system generating power about 5 hours per day. The 16kwh / day I would generate would just about exactly cancel out the 35¢ power, cutting my power bill by about 70%. Careful: a solar system actually generates more like 85% to 90% of rated power. At a business you buy your power at a fixed rate, about 17¢ per kwh. When you buy a solar system you get a federal tax credit for 30% of the cost, and there are state incentives but they're nowhere near that 30% federal tax credit. A home system where you act as your own general contractor has a payback in about 4 years, after that the power is free. A business system takes about 8 years to pay off, 'cause the power company is charging you half the rate. The solar systems last about 25 years. If you call a solar company and let them do everything the system cost will double or triple and so will the payback time. Acting as your own general contractor you should be able to buy, permit and install a 3.5kw system for a bit under $10k; a solar power company will do everything for you and charge you more like $20k for the same system. It used to be you would also consider a solar water heating system; these no longer make so much sense unless you're retired and a DIY guy. Otherwise it's cheaper to get a solar electric system and just heat the water normally. Does solar power make sense for you? You'll have to do a bit of math to be sure, but here's a map that will help: if you're in a green to blue area, maybe not so much. North is not so good, cloudy is not so good, snow is not so good. Portland, Seattle, Detroit, Cleveland, Pittsburgh, New England forget it. In the southwest a system will almost certainly save you one or two thousand dollars a year, more if you have a hot tub and a koi pond. Between my house and my business I spend about $5000 per year on power, so a system likely makes a lot of sense for me.

Before you invest serious money in a solar system there are a few things you should look into: double your attic insulation. Install an automatic attic fan. Get a couple cheap 20" window fans - open up your east facing (downstairs) windows at about 9pm, and use the fans in west facing (upstairs) windows blowing outwards until about 7am. Then shut your house closing all windows. Simple rule: if it's hotter outside than inside, don't open windows. Using just these tricks I only run my air conditioner about 4 weeks out of the year when the temperature exceeds 95 degrees, and my house maxes out at about 75-78 degrees in the summer, dropping to 65-68 at night. I must admit that as a California boy I don't know much about heating houses in the winter.

Well, the Superbowl is over. Here's an interesting trend: in 2011, Packers v. Steelers, the tickets available a week before the SB went for an average of $3513. In 2012, Giants v. Patriots, the average ticket price at the same time was $3127. 2013, Ravens v. 49ers, $2512. And this year, Seahawks v. Broncos, a week early the remaining tickets were averaging $2065. Why? I can only guess, but here's a few reasons: 1) Airports near the big game were overbooked, it was nearly impossible to find a parking space for your G5 in the last week. 2) TV coverage is very good, one wonders how $15,000 per seat tickets + hotel + transportation etc beats a couple hundred to invite your 20 closest friends over to watch it on your big screen. 3) We all saw The Sum of All Fears and we have to wonder, is this it? Is this the game that gets the big hit? This last year we saw several teams have uncharacteristic trouble selling out their stadiums. It's possible we're seeing an NFL that has pushed their customers a bit too hard too fast. If I wanted to take my three kids to an NFL game, it would be about $1500 + transportation. Today at the superbowl we had $12 for a bottle of beer, $11 for a hot chocolate, $16 for a cheesesteak sandwich, and $13 for a hot dog. That $1500 gets us relatively cheap seats, certainly not 50 yard line a few rows up. We would wind up watching about half the game on the stadium big screen. That's quite a wallet hit for 4 hours of entertainment - well beyond the budget of at least half of all Americans. Next up: the Olympics, which is also having trouble selling out tickets, and also running short of parking spaces for G5s. Perhaps we're seeing the collapse of the middle class at work here: there just aren't as many consumers as there used to be.

Must-See TV: Canada is putting 2.1 giga pixel cameras in public squares. This is like 300 times more resolution than your camera. And of course the cameras are hooked up to face recognition software. Have a look at this picture. Pick any face - like one 'way in the rear - and zoom in on it. And remember, next time you're out in public, when you least expect it - you're elected! You're the star today! Smile! You're on candid camera!

Stem cell research is heating up. Stem cells are special magic cells in your body that can turn into anything - a liver cell is just a liver cell, but a stem cell can turn into a liver cell, a heart cell, a skin cell, whatever. We now know two techniques for turning normal cells into stem cells - we can turn skin cells or blood cells into stem cells. In both cases the telomeres are lengthened back to the original too, meaning they're young cells, not old cells. The promise is that, for example, after a heart attack, they will soon be able to take some cell samples from you, convert them to stem cells, then inject them into your heart resulting in new heart muscle replacing the damaged muscle. This research also holds promise for treatments for diabetes or severed spinal chords. The danger is that it's now believed that most cancer is a disease of our stem cells, so messing with this stuff too much might lead to cancer. We'll see. . .

Barbie hit 55 and no one wants her anymore. Sales of the doll were off 13% last quarter, as little girls and their gift-giving mommies turn their backs on the ageing ABS and PVC clothes horse. It used to be all about collecting Barbie's stuff - her Corvette, her ranch, her beach house, her boyfriend. I'm afraid it's time for Barbie to trade that all in on a Florida retirement condo. Replacing her in the sales are "Monster High," a series of vampire dolls, and "Disney Princesses," Cinderella, Sleeping Beauty, etc. Apparently next christmas you can plan on getting your granddaughter either a tiara or some cloths and face paint that would look right at home on the seedier parts of Hollywood Bl.

Plan B: and are the new "dating" web site - this is where women go to find a sperm donor with all the right attributes - co-parenting or not, have contact or not, "willing to contribute," height, eyes, zodiac sign, etc. Some are lesbian couples, some are single women who can't find a man. Anyways, looking for another kid? Here's your chance. Keep in mind that in most states women can sue for child support, retroactively, dating back decades, and contracts on child support will not be honored by judges. Men are routinely found liable for 15 years * 12 months * $1000 = $180,000. If you do this, I advise: 1) flowers and regular gifts (keep her happy); and 2) put everything you own into a trust first.

Retraction: Last week I said it was now UCLA policy to no longer correct spelling and grammar for students of color. I misinterpreted a statement by Marcelo Suarez-Orozco, dean of UCLA’s Graduate School of Education and Information Studies, who issued a letter to students and professors stating that he takes the protestors' complaints very seriously and is intent on creating lasting solutions "as a community."

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