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Mark's Market Blog

3-9-14: All Russia, All Week.

By Mark Lawrence

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After a blip on Monday due to Putin's invasion of Crimea, the markets continued to shoot up the rest of the week. Apparently unlike everything else in the universe, the markets are completely immune to the laws of gravity. Soon I expect we'll all see an example of what engineers call a snap-back oscillator - exponential rise with increasing acceleration at the end spike, followed by an exponential fall. By the way, for the last several million years the Earth itself has been a snap-back oscillator - ice ages come on suddenly and fiercely. Perhaps Algore can make a new power point presentation "An Inconvenient Cold-Snap" and win another Nobel peace prize. Seems to me lately peace prizes are being handed out like s'mores at a boy scout camp. Maybe I'll get one for being crotchety.


S&P 500 September 12 2013 to March 7 2014

Here's an interesting little chart from ZeroHedge - the stocks most often shorted in the Russell 2000 have outperformed the broad market by nearly 25% over the last 16 months. That is, the fastest rising stocks are the ones judged by hedge funds to be trash. This market is not about fundamentals. The last time this happened, in the late 90s - when fundamentals were considered stupid and anything.com was worth more than Exxon - the result was a pretty epic crash. More and more we're seeing signs that this market is very old and very tired. With enough coffee you can stay up for most of a week, but then. . .

Small investors are entering the market again in droves. Always a bad sign - small investors always get it wrong. Nejat Seyhun, a finance professor at the University of Michigan determined that if you look at executives and directors you get a decent stock price indicator. In the summer of 2007 his adjusted insider sell-to-buy ratio was more bearish than at any time since 1990. True insiders – the executives and directors – were quietly dumping their company’s shares during the last months of the bubble while spouting off hype for public consumption. Seyhun's adjusted sell-to-buy ratio is now once again at the same extreme bearish level as in the summer of 2007, and as in 2011 just before the 20% market plunge. Dallas Federal Reserve President Richard Fisher said, "I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis." Chase Eglund responded, "Among serpents, the rattlesnake is the most honorable because they always warn you before they strike. Mr. Fisher of the Dallas Fed warned you today. It may be the only one you get."

The unemployment rate continues to fall, the labor participation rate has stopped dropping, and economists are talking about how the labor market is tightening up. As you can see in our fave unemployment chart below, we're pretty much recovered from the Great Recession. It's clear there will be talk in the Fed of raising rates soon. Yellin will likely hold off on this a while - she certainly doesn't want to be the person who crushed the recovery - but at some point rates must go up. If it happens this year I expect stock prices will drop precipitously. I don't think it likely this year, but you never know - new Fed chair, new rules, new program.

Putin has been nominated for the Nobel Peace Prize. Apparently for not being Obama, who previously won the award for not being Bush. I never thought this prize meant much of anything, but now it's turned into a cartoon.

Russian inflation is running at about 6%. The ruble has been taking a beating for over a year. The Russian central bank raised rates from 5.5% to 7% in an attempt to defend the ruble. Notice that at 6% inflation and 5.5% interest rate, the bank had been running a negative real interest rate, no doubt to stimulate the economy. Meanwhile Russian businesses are buying less, indicating they're preparing for a recession. The Russian stock market dropped 8% on Monday after the Russian Army's weekend incursion into Ukraine. But then rebounded 4% on Tuesday when Russia announced they were sending no more troops into Ukraine. For now.

The government in Crimea, a Russian dominated peninsula in Ukraine, has voted unanimously to join Russia pending a referendum in 10 days. Crimea historically has been a part of Russia, this only changed after WWII when new boundaries were drawn. There are lots of countries that have completely untenable borders - perhaps the US / Mexican border is one such - and I think a lot of Yugoslavia-type tension in the world could be alleviated by changing a few lines on a map. Czechoslovakia managed to split in a friendly way that suited most everyone involved. Obama of course immediately announced sanctions. Curious, as here we have what seems to be a democratic type action refuting a previously imposed communist decision, and Obama doesn't like that. He liked it just fine in Egypt, Iraq, Libya. I think we have to get past the point of thinking anything that Russia does is inherently evil.

Sergie Glazyev, a Kremlin aid known for making interesting pronouncements, said if the US imposes sanctions on Russia then they will drop the dollar as a reserve currency and refuse to pay their dollar debts. In other words they will put their own companies into default and cripple their own ability to buy and sell on world markets. He further indicated this would end in a crash of the US financial system and the end of the US domination of the global financial system. Russia is 143 million people who produce just a tiny bit more than the 38 million people of California and a little bit less than the 68 million people of France. His statement was greeted with laughter on Wall Street. The key observation was made over 40 years ago by Richard Nixon, responding to why Russia would not completely disarm: "In the absence of nuclear weapons, America would still be a superpower due to her economy. Russia would not." If the Russians had a way to crash our economy and end our domination of global finance they would have used it decades ago. My read on this parallels Wall Street's - this is a guy holding a gun to his head saying, "Don't laugh, you're next."

Obama slapped sanctions on "unspecified individuals" responsible for "undermining stability in Ukraine," and called the crisis in Ukraine an "unusual and extraordinary threat to the national security and foreign policy of the United States." That means Obama effectively slapped sanctions on himself because the US spent over $5 billion to "undermine the stability of Ukraine" by facilitating and supporting the ouster of the Ukraine elected president, which started this whole mess. No TV for a couple months, that should learn him. Meaning, of course, he's not allowed on TV for a couple months. I'm having a lot of trouble seeing how Crimea voting to return to Russia threatens the national security of the US. Sarah Palin said six years ago that Russia was a threat to Ukraine; Biden and democrats laughed at her. Romney said Russia was our "number one geopolitical foe", Obama retorted that "the 80s want their foreign policy back." Asked this week about that, White House Press Secretary Jay Carney said that the ouster of the pro-Russian government in Ukraine is evidence of Russia's weakness. I'm having trouble seeing Russia thumb their nose at the world and grab a major piece of a neighboring country as weakness.

A potential face-saving deal: we and Europe agree to recognize Crimea joining with Russia, and Russia agrees to recognize and respect the new Ukraine government and borders. I expect Kerry and Obama collectively have enough backbone to go for this. I do not expect that Putin will settle for it. I wouldn't if I were him - were I Putin, I would think I have a bit over two more years to do anything I wanted while the US was run by a Limax sea slug. Fun Fact: Limax sea slugs have exactly seven neurons with connections completely identical to every other Limax and perfectly mapped. In a very real sense they're all identical copies of one creature. Including the one in the White House.

It's illegal to export crude oil from the US. However oil exports are soaring anyways. Oil companies build a bare-bones refinery, crack a few of the longer molecules, then the oil is "distilled" and can be exported. In December we exported 4.3 million barrels per day - half what Saudi Arabia exports. Now Obama want to lift the export ban entirely, as it's occurred to him that if we flood Europe with natural gas and oil this will hurt Russian exports and the Russian economy. I'm incensed by this - the one bright spot of the economic legacy we were leaving to our children, in addition to the millions of unschooled and unemployable, the trillions of debt, the crumbling roads and bridges, was we were leaving them a bunch of oil in the ground while we burned up the rest of the world's. Now we're not even doing that; we're selling oil at low prices into a relative oil glut and considering using oil exports as a weapon. For years democrats told us off shore drilling was evil, fracking would cause cancer, burning oil would raise the ocean levels 260 feet; but as soon as someone like Putin makes them look stupid and ineffective suddenly all that's out the window and oil as a weapon makes sense, full speed ahead on the fracking.

Japan continues to print money at a world-record pace in an attempt to get inflation going, thereby bringing customers back to stores. Is it working? So far, sorta. But most of the inflation is in food and energy, not in consumer goods. However, the red line is above zero for pretty much the first time in over a decade. The price? Many think they're destroying their currency.

About a dozen Chinese muslim separatists went into a railway station with knives and killed 29 people, injuring 140 more. Many of the terrorists were killed but it appears several escaped. China is calling this their "9-11". I don't think they really appreciate the difference between a foreign attack that kills several thousand and an internal attack that kills a couple dozen. Western China is heavily muslim and operates with special privileges - for example the one child rule doesn't apply to muslims. None the less the Chinese muslims also hope for self rule and sharia.

China is developing smog-fighting drones. The small unmanned aircraft will spray 1500 pounds of chemicals into the air that freezes pollutants and makes them fall from the sky. I shudder to think what the chemicals are, and what illegal substitutes will be put into the airplanes to raise profit margins. Spraying chemicals in the air to get chemicals out of the air. "I love LA in the fall, when the sky turns colors and the birds drop from the trees."

Concerns about China's mounting debt bubble are growing. Due to the government cutting back on credit to try to rein in the bubble and the poor economies in the US and Europe this winter, China's economy is also slowing. Now this is spilling over to lower prices on metals like copper and iron.

John Kerry has been attempting to broker a deal between Israel and Palestine. He recently told the American Jewish Committee: "We're running out of time. We're running out of possibilities. And let's be clear: If we do not succeed now we may not get another chance." Jews and Arabs have been fighting for 3,000 years, but amazingly the end of days is apparently coming right in the middle of Obama's 2nd term.

Staples will close 225 stores this year, 15% of their total. Office Depot is having similar sales problems but has not yet announced store closures. They're both losing business to Amazon and Walmart. They hope to cut their way back to profitability. This never works.

Radio Shack sales fell 20% year over year, they're closing 20% of their stores, and their stock dropped 20%. No one goes there anymore, they're just another shop selling phones and cheap chinese electronics.

Detroit is talking about cutting pensions by 35%. However, if bondholders agree to take a bath, those cuts would change to 4% for police and fire and 26% for everyone else. I have no clue why police and fire would get different treatment, nor have I a clue how this motivates bondholders to take a bath. Chicago's pension payments are set to double next year to over $1 billion, which will nearly bankrupt the city. Pensioners argue that income and property taxes must increase. Chicago aims to raise the retirement age, raise employee contributions, and cap pension benefits for the highest earners. Their unionized workers aim to have nothing change. If the stock market drops substantially California will be the poster child for this problem, as California's pension funds Calpers and CalStrs are both highly invested in the markets, and California's tax base is highly dependent on Silicon Valley capital gains. In his latest shareholders letter, Warren Buffet warned that the next ten years would see an ever increasing number of states and cities finding themselves more or less bankrupt due to excessive pension promises.

Obamacare is now generally recognized as likely the single biggest issue in mid term elections, and a lead brick around the democrats necks in this marathon. A recent gallop poll shows 23% of Americans say they've been hurt by the law, and only 10% say they've been helped. The Urban Institute published some graphs based on polls taken last September - before the meltdown of healthcare.gov. Who likes Obamacare? PhDs and minorities. Who dislikes it? Pretty much everyone else ranges from neutral at best to striking dislike. One can only believe these numbers are worse today as this drama unfolds. And how do the doctors like it? Turns out Obamacare was a "be careful what you wish for" thing. Healthcare organizations, which averaged 30,000 new jobs per month in 2013, hired 1,000 new workers in December and January due to financial uncertainties about Obamacare. I find this unsurprising - the point of Obamacare was to milk the top 20% for the benefit of the bottom 40%. Did doctors somehow think they weren't in the top 20%?

Corvette sales peaked in the 70's and 80's at over 50,000 cars per year. The C4 Corvette almost killed off the car due to lousy sales in a booming 90s economy; the C5 resurrected it from the nearly dead. The 2005 C6 Corvette was a good car, but had the misfortune to be an expensive toy with the Great Recession right in the middle of its product life. Sales dropped to about 13,000 cars per year for several years and there was again talk of killing off the car. Now we have the C7, a serious object of lust with world class performance and comfort. Sales for January (2261) and February (2438) have been very good and project to 30,000+ Corvettes sold this year. The C7 has been on sale for five months and 14,160 have been sold. Chevy is so happy with these results that as of March 1 the Corvette price is up $2000 and the very popular Z51 performance option is up another $1200. Is the Corvette back? Sales would have to double from here to really drop jaws, but the initial reaction from buyers is very positive.

What do Millennials, the age bracket who is 20-something right now, think of the new America? PEW just did a comprehensive poll. Half of them consider themselves political independents, compared to about a third of previous generations. A third of them say there is no big difference between republicans and democrats. A third of them are non-religious, compared with a sixth of previous generations. Atheism has doubled. Only a quarter of them are married by age 32, compared to half for previous generations. Nearly half their births are out of wedlock, but 60% of them say single parenting is bad for society. Less than one in five of them thinks people can generally be trusted. A third of them have college degrees; those with college degrees carry an average of $27,000 in debt. Half of them think social security will be broke when they retire; another 40% say they will receive highly reduced benefits. More than half support gay rights; less than half consider themselves patriotic; less than a third consider themselves environmentalist. 42% of them are non-white. Only a third of the white millennials approve of Obama; two thirds of the non-whites do. More than half of them say they want a bigger, more activist government. The long term outlook for small government conservatives like me is grim.

I was asked by a Latina recently, "Why do all you white guys hate Obama?" I answered, "We're mostly WASPs - White Anglo-Saxon Protestants - and we were raised with the protestant work ethic - finish school, get a skill or a degree, work hard. Get married before your kids are born. Don't drink or gamble excessively and don't beat your wife or kids, be honest in your dealings with others and it will all work out for you, you'll own a nice little home, retire, and have grandchildren to spoil. Now this is not to say we're somehow morally superior - it's well known among WASPs that in her youth and enthusiasm a young bride can accomplish in four months what takes everyone else nine. But now Obama comes along and his message is, "15, pregnant, unmarried, uneducated? No problem, the government will be your husband and pay for everything - go ahead and have five kids. Dropped out of school, wear your pants down around your knees, talk and look like a drug gang member? No problem, apply for disability and the government will pay you to lay around. Crossed the border illegally with no education, no skills, no English? No problem, free section 8 housing, free medical care, food stamps, free bi-lingual education." This is a direct refutation of what we believe is the core of our culture. And this is becoming our new culture - all of these observations span all racial lines, there's plenty of blame to go around. Of course we hate the guy, his message is that our entire lives and belief systems are a lie and a mistake. We also believe that our children will be bankrupt by his empty promises and by a growing population that votes for a living instead of works for a living. And the most troubling part of this: Obama is not the problem, he's a symptom. The problem is the 53% of our population who thinks this is the new deal and the money will flow forever.

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