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Mark's Market Blog

3-17-13: The EU plays with fire...

By Mark Lawrence

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The single largest correlation for the S&P 500 is now the Fed balance sheet, at 87%. This dwarves the correlation of the S&P 500 and corporate earnings. This is not a market in any sense that I understand - it's not trying to discount for future earnings, it's not trying to predict future recessions, it's almost solely interested in Bernanke's check book and savings account. This correlation, like all things, will end, and the end will not be pretty. A recent poll of 48 economists estimated the probability of a recession this year at less than 30%. I disagree, I think we're on the edge of one right this instant. My UPS drivers and other local businessmen agree with me. Want to do a simple test yourself? Go to a restaurant, see how crowded it is. You'll have a quiet and enjoyable meal. And late breaking: Runs on European banks? News at 11.

S&P 500 September 17 2012 to March 15 2013

The EU put together a bailout for Cyprus, which was on the edge of complete financial collapse. Cyprus is a small island run by avowed communists, and their banking system primarily exists as a money laundering operation for Russian mobsters. Germany took the lead in the bailout package which includes a 7% to 10% tax on all savings accounts, applied over the weekend while the banks were closed. Monday is a holiday in Cyprus, and the legislature will vote soon on this package. While they're considering their votes, they declared Tuesday a banking holiday too. When depositors check their balance on Wednesday, it will be down by 10%. ATMs were closed over the weekend, and new Cyprus laws prevent transferring money out of the country. Cyprus was told "take it or leave the Euro." Cypriot President Nicos Anastasiades said in an announcement without this deal there would be total financial collapse and a nasty exit from the Euro. Banks have a few different ways to raise money: they can sell stock, they can sell bonds, they can borrow money from a central bank, or they can take deposits. Who took it on the chin in this bailout? The shareholders are untouched. The bond holders took no haircuts. No central bank was involved. The depositors took it all. Who are these mysterious untouchable stock and bond holders? I can only tell you they apparently have a stronger voice in Brussels and Berlin than the depositors do. Now here's the really interesting question: will depositors in Greek, Spanish, Portuguese, Irish, Italian banks wake up Monday morning and start withdrawing money? A major component of the Great Depression was banks closing and depositors losing their savings, leading to runs on other banks and more banks closing. In my opinion, EU bureaucrats are standing in a puddle of financial gasoline and they just tossed a match. We'll see, perhaps very soon, how that works out. . . This I can tell you: if I had money in a Spanish, Greek or Italian bank I would be withdrawing it Monday.

Markets are just opening in Europe as I type this. The various European and US stock markets and the Euro are all taking a rather large hit on the idea that the stability of the Euro area has just come back into question. I have to admit that personally I'm quite bearish - I really don't see the economy in the US as all that robust, and I think Europe is coming apart at the seams. This is not the currently popular viewpoint; all over the US economists and stock brokers are telling us the economy is doing great, house prices are skyrocketing, consumer debt is substantially paid down, and we're poised for a really great year for stocks. Maybe I'm wrong. Certainly mine is a minority opinion. But there it is, I really don't feel the world economy is on a solid foundation, nor do I think the US economy is about to take off and fly.

Japan continues to print money like mad; their stock market continues to rocket upwards and the Yen is dropping like a rock. We should see 100 yen to the dollar later this month, and perhaps as much as 200 yen to the dollar in the next year or two. Hold off on buying that new Japanese car, it's likely to be cheaper in a while.

S.Korea now has several politicians and journalists calling for the development of their own bomb. This was easy to predict, and is seriously bad news for China who really doesn't want more nuclear powers living next to them.

A couple years ago N.Korea shelled some S.Korean islands, killing several civilians and wounding a couple dozen others. They just warned residents on these islands to "Flee for safety a bit earlier" this time, and to "run far away" to avoid being "struck by fiery lightning." Psycho government, qu'est que c'est? Better run, run, run, run away...

7500 dead pigs have been found floating in the river that's Shanghai's main water supply. No one is sure how they got there - it seems in the next county upstream there is perhaps a disease running through the pig farms and this is how they disposed of dead sick pigs. This being China, the country that brought us doctored up dry mile that killed infants, one wonders how many dead sick pigs made it into the food supply.

Italy continues to operate with no government as their last election resulted in three way complicated tie between parties who vow to have nothing to do with each other. As time goes by it's more likely that another election will be held in late summer. Meanwhile polls show the nominal winner of the last election is sinking into 3rd place, and the comedian's protest party now has a significant lead. The EU bureaucrats in Brussels should be very scared - we're having a show down between those appointed to power and those who vote. The current plan - austerity, depression, unemployment - is failing to win converts at the voting booth. Germany is also in their election cycle, and will also vote in late summer. This is getting interesting. I'm pleased to be able to watch it from an ocean and a continent away, instead of living it.

The EU continues to sink ever deeper into recession, depression, whatever word you prefer. Car sales in Europe continue to decline. In the US the result would be massive layoffs and plant closures, but in Europe such things are more or less illegal. What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature. -- Edouard Balladur, Prime Minister of France 1993 to 1995.

Luxembourg Prime Minister Jean-Claude Juncker, a highly regarded politician / statesman in Europe, had some chilling things to say this week. "For my generation, the common currency has always been a policy of peace. Those who believe that the eternal question of war and peace in Europe would never reappear could be seriously mistaken. The demons aren't gone; they're only sleeping, as the wars in Bosnia and Kosovo have shown." Juncker said he was struck by how much the European conditions resembled those of 1913, on the eve of World War I. On the topic of Italians, who have just shown with their votes a remarkable lack of enthusiasm for the EU imposed austerity program, Juncker said, "Abandoning the austerity policies would be a big mistake. Politicians shouldn't promote the wrong policies just because they were afraid they'd lose the next election. If you want to govern, you must take responsibility for your country and Europe overall. And that means you must implement the correct policies even if many voters find them wrong." As you see, Juncker isn't a big fan of democracy, but apparently he is comfortable that he and his buddies know the "correct policies.".

Consumer sentiment dropped to its lowest reading in a year. Restaurant sales are down for both January and February - restaurants are the canary in our economic coal mine. Auto sales are slowing, in February it took 64 days on average to sell a new vehicle, a number not seen since the depths of the recession in 2009. Brands hit the hardest were Chrysler, Chevrolet, GMC, and Lincoln. In response, automakers have jacked up their incentives in January and February, and now they amount to 7.8% of the price of the vehicle, the highest since 2011. Fordís sales were up 9.3% and GMís 7.2%, but Honda, Nissan, Mazda, and BMW actually suffered year-over-year declines.

Dueling budgets: Congressman Paul Ryan announced a republican budget that threw out Obamacare, cut lots of other services, and balanced the budget in ten years. DOA. Senator Patty Murray announced a democrat budget that raised taxes by a trillion dollars, restored much of the sequester cuts, and didn't balance. DOA. Obama announced he wasn't interested in balancing the budget for its own sake, and he thought the republicans and democrats were too far apart to pass a budget. Budgets by law originate in the House, not the Senate, so it's curious that the democrats chose a senator to show off their attempt. There's been no budget passed since 2009, and I can't see how there will be one before the next elections in 2014. If the house swings to democrat in the next election it's clear that a budget will pass: it will raise taxes a bunch and government will continue to grow.

The SEC is suing the State of Illinois for selling bonds without disclosing that their pension funds would, by statute, be significantly under funded. Illinois Governor Pat Quinn announced a new approach for reforming pensions: New laws? New union deal? New benefits plan? New contribution tables? Nope, none of that. His contribution was to announce "Squeezy, The Pension Python," which he says will help raise Illinois consciousness on this issue. Perhaps Squeezy will one day get his own Pixar movie.

Fisker car company appears to be dead. They received a $550 million loan from Obama, but that loan was frozen last December after they had spent only $200m of it. Their battery supplier, A123, has gone bankrupt, and because of this Fisker has halted production of all cars. Last year Consumer Reports tested a Fisker and gave it a failing grade due to repeated problems that sent it multiple times back to the dealership on a flat bed trailer. And Henrick Fisker, the chief designer and founder, has resigned. The Fisker board is talking to Chinese companies about being bought out. This is a very sad ending to one of the sexiest cars ever built, but it appears Fisker simply bit off more technology than they could chew. GM's Volt also used A123 batteries at one time, but GM made sure they had other sources. Fisker didn't. By contrast, the much simpler Tesla is doing ok and Tesla promises they will be making a profit later this year. Tesla chose Panasonic as their battery supplier.

An 83 year old gay woman will be heard before the Supreme court. Her partner died and she had to pay $363,000 in estate taxes, taxes which would not have been levied if the US recognized their Canadian marriage. Legal experts consider this an extremely powerful assault on the Defense of Marriage Act.

Health: in a new study of 137 mummies, if was found over a third of them had hardening of the arteries. It's been thought by the medical community that heart disease is caused by smoking and processed foods, but these mummies predated both. It's getting more and more unclear what causes heart disease. However, it remains clear that exercise and no smoking help keep it away.

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