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Mark's Market Blog

5-17-15: Iran in the news.

By Mark Lawrence

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Market volatility continued as money pours into US markets from overseas, spending the S&P to a new all-time high on Friday; meanwhile US investors are drawing money out of the markets as they eye a looming Greek default, recessions perhaps starting in Asia and the US dollar dropping. And bond markets are showing some serious unrest, with yields going up a bit dramatically in the last couple of weeks, with 30 year yields up by half a percent. There is significant worry about a major problem with the junk bond market as rates rise in anticipation of a Fed action.

S&P 500 November 17 2014 to May 15 2015

Iran is sending a ship carrying "humanitarian aid" to Yemen, escorted by Iranian military vessels. They have refused the Saudis permission to inspect the ship. Of course we all expect "humanitarian aid" includes AK-47s, missiles, anti-tank weapons, etc. Obama convened a conference on the middle east at Camp David, and the Saudi king refused to attend in a rather public snub. Things in the middle east are definitely heating up. And the Saudis find their best friend is the Israelis and their least dependable friend is us.

The Czech republic stopped a $61m deal a couple months ago that would have sent a large quantity of nuclear enrichment equipment to Iran. The 2013 interim deal says they won't do this sort of thing, and Obama has assured us repeatedly that Iran is sticking by the terms of that deal. We're to have a new deal by the end of June with these guys which limits their enrichment capabilities and mothballs two-thirds of their existing enrichment equipment. Will we get a deal? Will Obama turn off the sanctions? Will Iran honor their promises? Will Israel bomb the crap out of them this summer? I believe I already know all these answers, but against the remote possibility that I'm completely wrong, stay tuned. (spoiler alert, don't read the rest of this paragraph) IMHO, Iran wants a bomb so bad they can taste it and they're going to have one if at all possible, deal or no deal, sanctions or no sanctions.

Greece is due to pay the IMF a total of a bit more than $1.5 billion between June 5th and June 19th. This is not happening. We should expect a technical default within weeks, and a declared default a month later. Germany would have us believe this is no big deal. I'm less sanguine.

Cubans sense that a deal with the US is coming. If it does the Cuban Refugee Act of 1966 will be over, which means that Cubans who reach the US have automatic refugee status and the right to apply for residency. No other nationality has this. Illegal Cuban immigration has doubled so far this year.

As expected the US 1st quarter results were pretty poor, almost certainly due to the long cold winter over much of the country. Europe grew faster than the US for the 1st quarter, led by Spain and France. Germany also didn't do so well. I don't take these numbers very seriously; I'm more interest in yearly growth, not winterly growth.

As China moves towards recession their economy is starting to have affects on the rest of the world. There were 23.5m vehicles sold in China last year compared to 16.5m in the US. China sales account for 59% of net profits at Volkswagen, 45% at BMW, and 37% at GM. China accounted for 39% of GM’s global vehicles sales, the US for 28.5%. But it seems that's all over. Sedan sales are down 10%. Car sales are off. Dealerships are massively overstocked with cars as manufacturers continue building into the downturn. Expect poor results from car companies later this year as Chinese results filter back to headquarters.

China is carrying out naval exercises in the Mediterranean with Russia. The Chinese have made major investments in several Mediterranean ports which they say they want to protect; also it's clear they want to learn to project force to the middle east.

The leader of ISIL, Abu Bakr al-Baghdadi, said in a radio address last week, "We call upon every Muslim in every place to perform hijrah (emigration) to the Islamic State or fight in his land wherever that may be. Has the time not come for you to know that there is no might nor honor nor safety nor rights for you except in the shade of the Caliphate? O Muslims, Islam was never for a day the religion of peace. Islam is the religion of war."

Standard and Poors lowered Chicago's bond rating to junk, which could force the city to immediately come up with $2.2 billion. Illinois, which has the lowest credit rating of any state in the nation, says it can't help. The downgrade follows a Friday decision by the Illinois Supreme Court which invalidated state limits on cost-of-living adjustments to state pensioners. In 2003 Illinois borrowed $10 billion – the biggest bond issue in its history – on the premise that investing the proceeds would earn more than the interest on the bonds. Unfortunately for Illinois taxpayers, the investments, hurt badly by the financial market meltdown of 2008–2009, earned less than expected. The net effect: The funds are worse off as a result of the pension bonds. Unfunded liabilities swelled from $43 billion when the bonds were sold to $86 billion by 2010. In 2010 Illinois borrowed another $7.2 billion for pensions. Now the state has unfunded liabilities of nearly $100 billion – about $7,500 per resident. How does this happen? The unions got the democrats to put a clause in the Illinois constitution that government pensions can't be touched, ever. Well, they're gonna be touched - eventually by a bankruptcy judge, who will weight this claim against the Supreme Court decision that states first priority is to supply basic services to residents. What's the rational for this? It's that police and firemen have such difficult and deadly jobs, so they deserve special treatment. Is it true? See the chart below. Unions, imho, are like a virus that multiplies until it kills its host.

There were two 7.0+ earthquakes in Nepal, a mountainous country in the Himalayas just north of India. The result of these earthquakes is the mountains near Nepal are now about 5 feet higher than they were previously.

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