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Mark's Market Blog

5-27-12: The Biggest (Government) Loser

By Mark Lawrence

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On news that the markets had gone down almost three straight weeks, and the world hadn't ended yet, markets rebounded a bit. Is this it? Have we passed the bottom in this little correction? Nah. Greek elections yet to come. Spanish and Italian banks still hemorrhaging deposits. France and Germany quarreling. And China announcing their growth has significantly slowed. The fat lady hasn't sung yet.


S&P 500 December 1 2011 to May 25 2012

In 2000 Al Gore won the popular vote but George Bush won the electoral vote. This week we're told that the way things are lining up, that could happen again, but the other way: Romney wins the popular vote, but Obama wins the election. You think the country is polarized now?

We haven't heard much about Iran lately. That doesn't mean it's cooled off - to the contrary, things are coming to a boil quickly. There's a pretty major financial squeeze being put on Iran by the US and Europe. Iran continues to claim innocence, but won't allow detailed inspections. Israel is chomping at the bit to attack soon, and Obama's ability to hold them back is going to end soon. Inspectors have found evidence of 27% enriched uranium. Reactors need 5% enriched. Bombs need about 90% enriched. Obama, a famous nuclear expert, says the 27% enriched particles found were probably accidentally made during centrifuge calibration and don't indicate a push to make bomb grade uranium. This is the second site at which inspectors have found such particles. Apparently Iran has a shortage of janitors. Iran has produced about 6 tons of 3.5% enriched uranium, and has a stockpile of 20% enriched uranium which has grown in the last year from 242 pounds to 319 pounds. That's enough to make about four bombs after further enrichment. It's also enough to cause about ten to fifteen Chernobyls. Four bombs would be enough to wipe Israel off the map - something which has not escaped the Israelis attention. Personally I think this has gone on far too long, it's time for some decisive action. Like spend a week or two wiping out Iran's air defenses and military aircraft and airports, establish unquestioned air superiority over Iran, then ask, "Wanna talk?" But then I'm a redneck. When I see someone saying they would like to wipe out six million Jews and trying to build nuclear bombs, I figure they mean to build some bombs and wipe out six million Jews. I don't see this as a cultural misunderstanding, I see it as a group of nutcases getting ready to commit genocide part II. By the way, that word Hitler used all the time, "Aryan," as in Aryan race, and the word "Iran" - same word. Genetically speaking, same nutcases. Chamberlain was a big proponent that Germany was misunderstood and it would all get talked out. It didn't then and it won't now. It's my clear opinion that this has gone to the point where people are going to die. The question in my mind is are we talking a couple thousand military people dying, or ten million plus civilians dying.

CNBC reported that former Greek prime minister Papademos said preparations were being considered by Greece to leave the Euro. Markets immediately turned negative. Several hours later Papademos called CNBC to deny the story. What's the truth? Greece would have to be brain damaged not to consider preparations, and I don't think the culture that gave us law, democracy, literature and geometry is brain damaged. Will Greece exit the Euro? I believe they will sooner or later, but I doubt it will happen this summer. However, when it does happen, first there will be weeks of denials all around. Meanwhile, Eurozone ministers have told member countries to make contingency plans for a Greek exit, and Germany's Fed, the Bundesbank, said in their monthly report that a Greek exit was manageable. Greece has suspended payments to hospitals and drug companies, and will run out of money by mid- June, putting salaries and pensions at stake. No one in Greece is willing to pay any sort of taxes or utility bills or keep any money in banks, preferring to stash Euros under their matresses.

And what's Greece doing through this? Raising the VAT (sales) tax to 23%, raising property taxes, and making pretty much no government spending cuts. Greece's government went from 49.6% of GDP to 49.7% as they continue to employ hoards of people and pay pensions to perhaps half their adults. Can a government actually shrink? No one in this country has ever managed to do it and at least 40% of our voters desperately want it. What will happen when it's time for Italy's or Spain's government to shrink? Frances? Ours? One thing we're learning here is that a government is like a living creature: it will fight to survive and grow. Who is it fighting? The 30% of the population who are actual taxpayers, of course. Maybe a TV broadcaster should start up a new reality show, "The Biggest (Government) Loser," and invite the world's most bloated governments to compete.

Germany sold $4.5 billion of zero coupon bonds last week, which means they take your money and give it back sometime later, no interest payments. This is a strong indication of how much European investors are looking for a safe place to hold their money, and banks aren't cutting it. There's talk that Europe needs something like the FDIC, guaranteeing bank deposits. Germany and the Scandinavian countries oppose this, as they think it's one more way for irresponsible governments to get money from them.

Jim Cramer is a TV personality, so he makes some of his money by being provocative. However I still think he makes sense a lot of the time. He's calling for a run on Spanish and Italian banks in the next couple of weeks. I think this is likely. This will paint the ECB into a corner where they have to print serious money, and it will put more pressure on Germany to allow Eurobonds, bonds backed not by one country but by the entire EU so that Germany is responsible for Italy and Spain's debt.

The dust hasn't settled on the Facebook IPO and already the accusations and investigations are flying fast and furious. It seems the Facebook people told a few insiders that their 2nd quarter results would be not so great, but this information was not made public. The price was supported the first day by a few big companies, like Morgan Stanley, but since then the stock has been in free fall. The stock initially opened at $38, jumped up almost immediately to $45, then closed the first day at $38. Since then it's dropped steadily, ending the week at $31.34, 17% off the opening price of $38 and 30% off the high of $45. Meanwhile, Robbins Geller, the firm that won $7 billion from Enron, has filed a class action suit against Morgan Stanley and Facebook over information sharing. If you didn't have reason to mistrust Wall Street before, you certainly do now. And if you're one who was suckered into buying this scrap, well, sorry. What's FB really worth? If you assume FB gets the same PE as Google or Apple, their stock price should be around $7. Of course Apple sells actual devices and Google sells a lot of advertising space; FB mostly seems to sell stock.

The War on Boys: Colorado's Aurora Public School board suspended 6 year old D'Avonte Meadows for three days for singing "I'm sexy and I know it" to a girl while they were standing in a lunch line. His crime? Sexual harassment. Several years ago many states instituted zero-tolerance policies for weapons at schools; then these programs were expanded to include sexual harassment and bullying. The result: a 6-year-old Delaware boy who faced reform school for bringing his Cub Scout camping utensil that included a knife to school; a 9-year-old North Carolina boy suspended for sexual harassment after being overheard saying his teacher was "cute;" an 8th grader in South Dakota who was suspended for 10 days because he gave a fellow student athlete a fish oil supplement - a violation of their no-drugs policy. Our boys are dropping out of school in record numbers, male college enrollment is at an all time low, and this is the focus of our schools: stomping out singing by 6 year olds. In my generation young women wanted to be wooed and pursued; in the youngest generation it seems clear it will have to be the girls pursuing, and apparently mostly pursuing suspended boys. Maybe that will be the new valentine: "He got suspended for me!"

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