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Mark's Market Blog

3-12-10: Bomb, Bomb, Bomb... Bomb Bomb Iran.

By Mark Lawrence

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We have a different S&P 500 chart today, as I want to make a different point. The line at the top of the chart is called the 2-day RSI. It's a way to measure if a stock is overbought and due for a correction, or oversold and due for a price rise. The green areas on this line represent overbought times when you expect a correction soon; the kidney-bean colored areas represent oversold times when you expect the stock to go up. At the end of the chart you see where for 10 straight days this number was over 99. This is a new record. Markets just don't go up like this for this long without taking a breather for a day or two.

S&P 500 September 19 2009 to March 12 2010

Looking at the bars on the bottom of the chart, you can see this rise was on relatively light trading volume - the big traders have stayed on the sidelines during this run-up. Much of the rise was due to a few stocks - on one day this week, 25% of all the stocks traded were Citibank shares. The market was driven by a run-up in Citi, AIG, Fannie Mae and Fredie Mac - four failed financial institutions. Citi was exciting because they announced they would be making $20B someday which represents a bit more than half of the $36B they owe in Tarp loans. AIG was exciting because they sold off their China operations for $50B; unfortunately, that money will go to pay off part of their $180B Tarp loans, and their China operations were the last profitable thing they owned. Fannie and Freddie, I dunno, I think their stock is junk. But junk is big this week. This, in my opinion, is not healthy stock market behavior. The serious traders on the sidelines are obviously equally skeptical. I think this behavior is a sign of another correction coming soon, like the one we had from mid-January to mid-February. Many agree with me, many others disagree and point to particular signs that the bulls are running free and loose. Time will tell.

In January, China's banks lent out about 19% of their 2010 loan quota. China cracked down on lending in late January, helping send the stock market down. This week the February inflation numbers came in for China - 2.7% on the month, a yearly rate of over 30%. Another crack down on the money supply seems imminent and obvious. China has a huge real estate bubble inflating, but if they turn off the money they'll have a recession and businesses will lay off people, which their government thinks will lead to another Tiananmen Square. They have a very narrow path to walk, a path that to my knowledge no one in history has successfully walked before. The Chinese stock market has been dropping for several days in anticipation; the US stocks tied to the Chinese market have mostly gone up in the same period. Did I mention that I don't think the US market is healthy right now?

Toyota Watch: At last count, Toyota faces 8 million cars recalled, 109 class actions and 32 individual court cases filed in the U.S. and Canada. Speculation is that settlement will be about $1000 per recalled car, about $20M per death, plausibly to hit a total of $10B.

The securities and banking industries have doled out a combined $37.56 million, or about 10% of the $370 million contributed to congressional races this cycle, according to the Center for Responsive Politics' analysis of Federal Election Commission data. After adding in lawyers and real-estate professionals, the figure swells to $117.2 million through Feb. 21, or about a third of all campaign contributions. But don't worry, you still get a vote.

How close is Iran to a bomb? Uranium comes in two flavors, U235 and U238. You need about 5% U235 to make a reactor work. You need almost pure U235 for a bomb. The U238 is only good for making "depleted uranium" shells to throw at tanks. Raw uranium ore has about 140 atoms of U238 for each atom of U235, so the challenge is to lose the U238. Enrichment numbers are usually shown in percent, but this masks what's really going on. The jump from 5% (reactor grade) to 90% (bomb grade) sounds like a big jump, but it's actually the easy part.

You start with 140 atoms U238 for each U235. At 1% enrichment, you've thrown out 41 atoms of U238 - almost 30% of the bomb problem. At 2% enrichment you've thrown out 91 U238 atoms, almost 2/3 of the bomb problem. At 5% enrichment, reactor grade, a seemingly innocuous sounding number, you've thrown out 121 of the U238 atoms, 86% of the problem. To get to 25% you only need to throw out 15 more atoms of U238, and to get to bomb grade from there you only need to throw out 4 more atoms of U238. So we see the step to 2% enrichment is the big step: a country that masters that can get to a bomb in no time. To get to 2%, you remove 91 atoms; to get to a bomb, you remove 49 more. Iran is almost certainly already at 2%.

Israel is livid, of course - they see an Iranian bomb as an existential threat. Saudi Arabia is not far behind, they consider that an Iran with a bomb dominates the middle east and renders the Saudi Royal Family about as relevant as the British Royal Family - mostly good for selling gossip papers. The US, meanwhile, is not actually directly threatened by this: Iran cannot realistically attack the US, whereas we can turn them into a 400 million acre glow-in-the-dark glass factory anytime with about 4 hours notice. So our strategy is to make a bit of noise but mostly sit and wait until people are more welcoming of our stance - much like when Saddam invaded Kuwait and overnight we were seriously popular with Arabs. We consider that time only improves our position. Besides, if our economy doesn't recover on its own and we decide we need a war like Roosevelt used, Iran will turn out to be most helpful to us. Already more than half of all Americans are in favor of, as the Beach Boys [al]most eloquently put it, "Bomb, Bomb, Bomb... Bomb Bomb Iran." WW I was well under way before we got "Over There," and we had to lose Pearl Harbor before we got "Boogie Woogie Bugle Boy." By contrast, the Iran war theme song has already been around for almost 50 years. Speaking as a guy who has three sons under 20, two of whom are already registered with the "selective service," I don't like any of this. My children will not die in that hell-hole.

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