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Mark's Market Blog

5-3-15: Iran and Saudi Arabia

By Mark Lawrence

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Last week I noted the market was stuck inside a triangle formation. Well, we broke out to the upside. Then dropped down back in. This market cannot establish any momentum, which makes me think we will have a 5% - 10% correction soonish to clear the air a bit.

S&P 500 October 27 2014 to April 24 2015

China's steel production dropped in Q1. This is the first drop they've experienced in 20 years. You have to take things like this seriously.

General Mohammad Ali Jafari, commander of Iran's Revolutionary Guards, said Saudi Arabia's actions in Yemen were "shamelessly and disgracefully bombing and killing a nation. Saudi Arabia is following in the Zionist (Israel) regime's footsteps in the Islamic world. The house of Saud will be toppled. The House of Saud is on the edge of disintegration. We hope this will happen soon." I assure you, in Riyadh these are fighting words. Meanwhile, Obama has said, "There can be no solution to Yemen without Iran." Immediately after Obama's comments, the Saudi ambassador to the United States, Adel al-Jubeir, said, "Iran is part of the problem in Yemen, not part of the solution." Obama is now negotiating directly with the Iranians over the head of the Saudis. As things stand right now, it appears Obama will return several tens of billions of dollars to the Iranian government immediately after signing an agreement, perhaps in late June. The Saudis believe firmly that that money will be used to destabilize the Sunni / Arab middle east. I find all this extremely curious - it's common knowledge on the right in this country that the Saudis paid for Obama's Columbia and Harvard degrees and were financially supportive of his run for the presidency; if any of that is true, the Saudis must now be thinking they're getting a very poor return on their investment.

On thursday an Iranian warship fired across the bow of a Marshall Islands-flagged container ship, ordered it into Iranian waters, and took control of the ship and its crew of 34 people after accusing the ship of trespassing on its territorial waters. Iran says they have an unresolved claim, but no one else seems to know what this claim is. The Bloomberg report points out, "The incident seems a direct response to President Barack Obama's decision last week to send warships to the Arabian Sea" to prevent Iran from shipping arms to Yemen. Former deputy national security adviser Elliott Abrams tells Right Turn, "Iran is throwing its weight around in a way that expresses contempt for the United States and for President Obama. They know full well that Congress and the nation are weighing the nuclear deal, but that doesn't constrain them because they know the administration will do literally anything to keep the deal alive. So even in these weeks when the deal hangs in the balance they charge Jason Rezaian of The Washington Post with espionage, and now they interfere with freedom of navigation in the Gulf. The U.S. looks like a helpless giant, which is precisely Iran's goal. Our allies and friends in the region are cringing and so should Americans be. Is there any conduct at all that will awaken the administration to the nature and intentions of that vicious regime?"

Japan is considering joining the US in sea patrols in the South China sea. "We have to show China that it doesn't own the sea," said a Japanese source." Provocative Chinese behavior is now leading to provocative Japanese behavior. These patrols would include air patrols, requiring Japanese aircraft to land in the Philippines to refuel. Japan and the Philippines currently have no military cooperation agreement; a left over from WWII when they were antagonists. Now they find themselves on the same side of the chess board. The president of the Philippines is visiting Japan in June; it will be surprising if they don't reach some sort of military exchange agreement. $5 trillion worth of shipping passes through the S.China sea each year, and ceding control to China is not considered an option.

Grexit: will it solve Greece's problems? Merril Lynch held a round table discussion. Their results? There would be an almost 50% effective cut in wages as most products are imported and the Drachma would sink almost instantaneously. There would be a huge recession, perhaps a 15% or even 20% contraction. Most transactions in Greece would continue to be in Euros (I disagree with this one - it's well known in economics that a bad currency drives a good currency out of circulation). There would be years of lawsuits over payments and Greece was likely to lose most of them. And the economy would only turn around if the government made most of the policy changes Europe is requiring. Their final decision was Greece is better off in the Euro where external pressure can help them reform.

Spain had a quarter of growth, their first in about seven years. Will it continue? Will it save the government in the coming elections? Too little too late imho. Unemployment still hovers above 20%.

Apple, which is sitting on about $200 billion in untaxed cash, has announced that this money will go to the shareholders. They've raised their dividend by a small amount; more importantly they're going to borrow $140 billion and use it to buy back shares. Presumably the cash will be used to pay off the loans, in the fullness of time. T.Boone Pickens once said, "I owned a stock once that paid a dividend. I got a check in the mail. It drove me nuts. I sold the stock a few days later." Many think that paying a dividend is an admission that you have no idea how to invest your money for a good return. Or perhaps the APple board just wants to see their stock price soar.

Walmart closed five stores earlier this month for no obvious reason. One was in Pico Rivera, a small area in LA. Pico Rivera suddenly finds themselves with 500 newly unemployed and sales tax revenues down by 10%. The Pico Rivera store has a history of the employees trying to unionize.

Oil - Who makes it? Here's the world's largest oil producers in 2013:

1000 barrels / day
United States13973
Saudi Arabia11624
United Arab Emirates3471
United Kingdom 820

Like Superhero movies? Maybe not. If not, I have bad news for you: as Willie Sutton said about robbing banks, "It's where the money is." Here's the top five movies by opening weekend:

MovieRelease DateOpening WeekendWorldwide Gross
The Avengers5/4/2012 $207.4 million $1.5 billion
Avengers: Age of Ultron5/1/2015 $187.6 million $626 million so far
Iron Man 3 5/3/2013 $174.1 million $1.2 billion
Harry Potter and the Deathly Hallows Part 2 7/15/2011 $169.2 million $1.3 billion
The Dark Knight Rises7/20/2012 $160.9 million $1.1 billion

In the latest survey, 51% of Americans identify themselves as middle class - down from a more normal 60%. 48% identify themselves as working class.

Global Warming Watch: How's that ice doing? We're just past the Arctic ice maximum. How did we do? There was a dip in the ice coverage in March which meant this year had the least coverage ever recorded in the satellite era - about 7% lower than the 1981-2010 average, beating out the previous low set in 2006. Snow over the US west is at extremely low levels, just as I reported based on my travels with Charlie a couple months ago. In the graph below, blacks and blues are bad, bad, bad. But the US east, of course, had record snowfall. Meanwhile the Antarctic had record sea ice last September. All told the portents and signs were in every possible direction, just as they have been for 16 years.

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