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Mark's Market Blog

3-22-15: Of course yes, death to America.

By Mark Lawrence

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Stocks went up pretty much all week. I expect that to continue for the coming week, and I expect the S&P to hit the first resistance level at about 2155 by about the end of the month. I'm feeling very bullish right now.

S&P 500 September 28 2014 to March 20 2015

For those who care about my stock charts: The vertical bars represent the price action in a single day. The up and down spikes represent the highest and lowest price for the stock on that day. For the white bars, the bottom of the rectangle is the price at open (9:30 am EST) and the top of the rectangle is the price on the close (4pm est). For the red bars the open is the top and the close is the bottom, the price went down that day. The gray and red bars at the bottom represent volume, the number of shares traded that day. When the volume bars are short the market is likely hitting a turning point. The red line is the 200 day moving average - when the price dips below the red line we have to be concerned we're in a bear market and the price will continue to drop for a while. The blue line is the 13 day moving average, if you look you'll see that this is frequently a key price level, either the highest or the lowest price of the day. The graph above is the 2 day RSI - Relative Strength Indicator. Most often you will see this as a 14 day RSI, but I prefer the 2 day. In a bull market, as we're in right now, it's unusual for the 2 day RSI to be below 30 for more than two days, this is an imperfect indicator of turns. In a bear market it's unusual for the 2 day RSI to be above 70 for more than 2 days. Finally, for each month we see a pivot line P, 1st and 2nd support levels S1 and S2, and 1st and 2nd resistance levels R1 and R2. So far this year we've been in a bull market and we have not dropped below S1 - when we hit S1 this is a good time to buy. I'm expecting this current market to go up to R1, hover around there for a few days, then drop to P or S1, then recover to perhaps new highs.

Last week I reported Iran's Supreme leader Ali Khamenei was on his death bed. Apparently I spoke a bit too soon. Yesterday he gave a speech. When the crowd started shouting, "Death to America," the ayatollah responded: "Of course yes, death to America." Several decades ago someone asked Henry Kissinger, "Why does Israel refuse to negotiate in good faith with the Palestinians?" Kissinger replied, "When there is a group whose expressed goal is to kill you, it is not difficult to believe they are also willing to lie to you." Obama has, by his own deadlines, one more week to reach a nuclear understanding with these people. Try to imagine my confidence in Obama, his negotiating team, and any possible agreement he might conclude.

Obama's director of national intelligence, James Clapper, just delivered his yearly report to the senate. Iran and Hezbollah have been dropped from the list of terrorist threats. Apparently because they're fighting ISIL. Or maybe because of trying to negotiate a nuclear deal - freebies first, deal later. Or maybe because Obama's #1 advisor, Valerie Jerrett, is an Iranian.

Putin is back with, as you might imagine, no explanation for his ten days off. He did take time out of his busy schedule to warn Denmark that their warships could become nuclear targets. Putin is no idiot, you have to believe he's setting the stage for something. Lithuania thinks they're next. Russia has taken territory from Georgia and Ukraine, and now the thinking is they would like a land connection to Kaliningrad. The Lithuania government has released a pamphlet to citizens, "how to deal with a Russian invasion," they're backing up all their computer systems outside the country, and they don't believe that NATO will go to war with Russia to defend them. They think Putin believes he can invade a NATO country with impunity, knowing that Germany, France, the UK and the US have no stomach for armed confrontation. I think I agree.

Lake Baikal in Siberia, the largest fresh water lake in the world containing about 20% of the world's fresh water, is dropping to extremely low levels. 27,000 wells nearby that supply water to small cities and residents have dried up. This drying up of Siberia is consistent with the jet stream patterns that dominate during an ice age, including the pattern that seems to be drying up California.

The dollar is up 22% in the last twelve months. Our trade deficit is increasing rapidly, of course, as imports get cheaper and exports get far more dear. Merrill Lynch calculates that there's a 40% correlation between the dollar and corporate earnings, so this 22% rise means a nearly 10% drop in earnings. They're forecasting an earnings recession - two successive quarters of declining earnings - starting almost immediately. In normal conditions this would cause a significant and substantial stock market correction, but I don't think so this time: the carry trade will overwhelm it. However, I believe we're now seeing the end game for the Fed: if they every find a need to drive the dollar down the reversal of the carry trade will crash bond prices, send interest rates through the roof - perhaps as high as 6% - and drive us into a serious recession. Since most oil is priced in dollars the increasing value of the dollar will be one more pressure downwards on oil prices, one more pressure down on the economies of Texas and the Dakotas.

What is the rising dollar doing overseas? In 2010 a Turkish firm borrowing US$10m via a ten-year bond with a 5% coupon could expect to pay 22.5m lira ($15m) over the life of the bond. But the lira is down 43% against the dollar since then; the payments are now over 39m lira. Economists looked at the accounts of 762 firms across Asia. The findings were reassuring: on average 22% of their debt is dollar-denominated, but so are 21% of earnings. However, China's firms have built up a nasty currency mismatch. Almost 25% of corporate debt is dollar-denominated, but only 8.5% of corporate earnings are. Chinese property developers are the most obviously vulnerable. Companies like Evergrande, China Vanke and Wanda build and sell offices and houses, so most of their earnings are in yuan. Banned from borrowing directly from banks, they have been active issuers of dollar bonds. In Russia and Brazil the rise of the dollar has lead to massive government bailouts of firms, blurring the lines between government, banks and corporations.

US companies are legally parking $2 trillion in cash tax-free overseas. At some point this money has to be repatriated. I expect a secret negotiation with the top few companies resulting in some sort of tax break or tax holiday. When that happens and the money comes pouring in, that will be a big quarter for the stock market - a lot of that money will go to share buy-backs. I don't expect this to happen under Obama. However, I do expect current candidates will be making promises in return for support.

The Euro is now fluctuating, hitting $1.045 on Monday but finishing the week up at $1.085. It was thought the Fed would raise rates soon, leading to a stronger dollar, but not it appears perhaps that is not so imminent.

Target joins Walmart in paying $9 per hour.

Want to buy some 3,000 year old relics from the start of human civilization? Watch EBay. ISIL is selling. 3,000 year old coins for about $100.

California's snow pack is at 12% of normal. It's a good thing this is a single party state so we can address these issues in a timely fashion without the inefficiencies of debate and disagreement. Yup. Venezuela, Cuba, N.Korea, California - these are the places with good government. New proposed water rules for the PR of Ca. Unless you ask for it, restaurants won't be serving customers water, and hotels won't change your sheets and towels daily. Outdoor lawn watering rules are expected to drop to two days a week or less depending on where people live. Meanwhile, Nestle's bottling plant draws water from a drought-stricken area for its Arrowhead and Pure Life brand water. Because the plant is located on the Morongo Band of Mission Indians’ reservation, it's exempt from oversight by local water agencies and is able to keep confidential information — such as the amount of groundwater it's pumping and water levels in its wells — that other plants would be required to disclose. As a result it's impossible to know just how much of the limited resource the plant is extracting to ship outside the state.

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