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Mark's Market Blog

6-14-15: Everyone holds their breath for Greece

By Mark Lawrence

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Bonds continue to get beat down. Stocks continue to trend downwards as selling pressure increases, but money keeps pouring into the US from emerging markets, China and Japan. Greece continues to look like a bug in search of a windshield, and I continue to believe that when they find their windshield there will be a period of chaos in the bond markets that will spill over into stocks.

S&P 500 December 15 2014 to June 12 2015

Bond prices continue to tumble, losing $1.2 trillion world wide since April. Long maturities have suffered the most, indicating fears of an end of deflation and a return to inflation. German 10 year bonds, paying .05% interest just a month ago, are up to 1% and rising quickly. Of course this was inevitable: it's simply not possible that long term bond yields could stay at such low rates indefinitely, offering risk without yield instead of yield without risk. Super Mario has bought a total of €254 billion in the last few months with the express intent of driving up stock and bond prices until bond yields were negative. In the last month or so he's actually increased his purchases, but the bond and stock prices keep going down. Is the ECB out of dry powder? Does Mario have nothing left but his golden voice? Of course this will happen someday, but I didn't expect it just yet.

Imports in China are down 17.6% year on year. Exports are down 2.5% Chinese now have margin accounts totaling $348 billion. The stock market is up by $6.5 trillion over the last 12 months, but this is fake money: investors may think they're getting rich, but for every share sold there is that same share bought, so none of this money gets into the real economy. Meanwhile consumers are sinking all their money into stocks, so the infant consumer market is drying up quickly. What's next? It's getting hard to see how China pulls out of this without a major recession.

Earnings per share are holding up well, prompting many to say we're not anywhere close to a recession. Perhaps that's true. But it's worth noting that there have been a record amount of stock buy backs in the last year - companies are borrowing money at nearly 0% and using it to buy back shares and prop up share prices. Of course if your earnings are dropping a bit and you also cause the number of shares to drop, you can make it look like earnings per share are holding up.

Robert Prechter, the high priest of Elliot Wave Theory, says we should all be on high alert for a collapse in the stock market. It's easy enough to describe Elliot waves, which says the market goes up in five waves and down in three. The pattern is fractal: the individual waves themselves show the 5+3 pattern inside. It's frequently straightforward to identify the 5+3 pattern after the fact. It's identifying the waves in advance that has proven tricky, to say the least. Fortunately, we have Mr.Prechter to interpret for us. And he's even right from time to time. Are we headed for a crash? I think we are, but not this year. However I think the dominoes are lining up in China, Japan, Korea, Europe and the US.

Avi Gilburt, a major Elliot Wave guru, says the signs and portents are clear: gold is going to $25,000 per ounce in the next 25 years. Avi called the previous high in gold several months in advance and hit the number within $8 - he called for $1915 and gold topped at $1923. He thinks gold will bottom later this year slightly below $1000. He also thinks the S&P ends 2015 significantly higher than today's price.

The IMF walked out of the Greek bailout talks on Thursday. This is a very bad sign. Today the talks broke up completely in acrimony, with Greece saying they would never cut pensions or pay. Greece has received $270 billion in loans since 2010 but is seemingly no closer to standing on their own. In fairness most of that $270b was to make sure European banks got paid back and never got close to any Greek citizens. In a recent poll 70% of Germans said no more concessions to Greece and 50% said they should be booted out of the Euro. Greek prime minister Tsipras campaigned on promises to reverse pension and wage cuts and he has been true to those promises. Unspoken is that the rest of Europe hopes to force a Greek change of government - democracy is not regarded as important or even useful by top EU bureaucrats in Brussels. Perhaps the EU will find a sleazy way to punt this for another month or three, but I really don't see a happy kumbaya and smores ending here.

Putin is going at Ukraine again. He's used the winter to consolidate his previous gains and reinforce the separatists forces with tanks and heavy artillery. The Russian loyal portion of eastern Ukraine is still about 125 miles from the Russian held Crimean peninsula. I consider it obvious that he would like to link these up. He's not going to give back Crimea, as this is his major warm water port leading to the Mediterranean.

What if Putin really goes nuts? 52% of Europeans would be against military support in the event of a Russian attack on another NATO country. In the US there's a big political split on the response — 69% of Republicans support the statement, but just 47% of people identifying as Democrats agreed. Poland is one of the nations least confident that assistance would come if they were attacked: 49% think it would, and 31% disagree. NATO is all but dead. Perhaps Obama could talk Putin to death.

American Pharoah won the triple crown in convincing fashion - his Belmont time was second only to Secretariat's among triple crown winners, and 6th overall in the history of the race. Since 1928 in years where there has been a triple crown winner, stocks have only managed to pull out a gain for the rest of the year once. The average was -9%. On years where there is not a triple crown winner the average return is 5%.

When president of the Fed, Paul Volcker single handedly whipped inflation in one quick recession in 1982 (ok, maybe he had a little help from a collapse in oil prices. . .). He's now running the Volcker Alliance which is developing a scorecard for state budgets. Their initial report focuses on three states, CA, NJ and VA. They spoke well of Virginia, and had harsh words for California's 250b unfunded pension debt and New Jersey's budget shenanigans. In principle this job is already being done by S&P when they rate state bonds; in practice I think we all know what sycophants S&P are. I can't wait to see what Volcker has to say about Illinois and Kentucky.

Is there a bubble in tech? The median home in San Francisco, which is a 2 bedroom apartment with no view and terrible parking, now goes for $1,275,000.

Last week I mentioned that the Chinese government is inflating their stock markets. Now executives of large companies are taking advantage of it with something called "pump and dump." Imagine you and I are major stock holders in some company where the stock is trading for $100. I put 100 shares up for sale for $101 in the last 15 minutes of the day. You buy them. Tomorrow you like the shares for $102, I buy them. In a market like China's this gets everyone's attention and pretty soon lots of people are buying at our artificial price, thinking they sense some secret that other people are betting. You can see this happening sometimes when a stock price goes up a bit every single day in the last 15 minutes of the day. With a bit of luck and help from the central bank, we can perhaps double our stock price in a few months. That's the "pump" half. Then we sell all our shares at the inflated price. That's the "dump" half. In May company insiders - senior executives or their relatives - sold a combined 1.68 billion shares, a tripling from April, and much more than in each of the previous months of this year, according to data compiled by Reuters. That gives you a good idea of how executives think their stock should, and likely soon will, be valued.

Colt firearms is going to file for bankruptcy. It seems their highly lucrative army contracts were not renewed in 2013 and they failed to adapt. It turns out Obama was a two edged sword - he single handedly drove private sales of guns to all-time highs with his repeated calls for checks and controls, but his cutting funding for the army has more than offset that. I once had a gun shop owner say to me, "If I knew that SOB was going to be this good for business, I would have voted for him myself."

Canada had their big bank scare 15 years ago, so they did relatively well in the 2008 crash. How's that working out now? During to the run up in oil prices they inflated several very large bubbles in housing, but now that oil has dropped 50% Canada appears to be in real trouble. Housing prices seem unsustainably high - the bank of Canada says houses are overpriced by 30%. In Vancouver and Toronto housing prices continue to rise - apparently they haven't gotten the memo. Consumer debt is extremely high. So far they're holding up with no big scares, but I don't think that can last.

MERS - Middle East Respiratory Syndrome - has taken hold in S.Korea. The MERS outbreak in South Korea has 64 confirmed cases and 6 deaths, and has prompted mass closures of nearly 2,000 schools and put 2,900 people under quarantine. S.Korea is a curious country of 50m people where half of them live in and about Seoul. Shown below is a popular photo illustrating what S.Koreans think of MERS. Now there are fears that fear of MERS could result in Korean consumers staying home and causing a recession.

In my life there have been several revolutions in selling music: 78s to 33s and hifi; then 8-track, cassette, CDs, MP3 downloads, and now streaming. Quality went up from 78s to 33s, then has been in a downhill spiral ever since: tape is noisy, CDs have digital artifacts, and MP3s and streaming use compressed files that don't even pretend to be high fidelity. No one seems to care, supporting my view as a grouchy old man that they stopped making music somewhere around 1985 or so. ok, I like a few of the modern women like Taylor Swift, Ariana, Gwen Stefani, Kelly Clarkson. But men stopped making actual music about 15 years ago, imho. About the same time they quit going to college or getting jobs. Anyway, CD sales are dead and have been for some time, and downloads are about to be surpassed by streaming. Now the challenge is to get a bunch of people to sign up for $10/month subscriptions to streaming services like Spotify, Apple, Amazon, Tidal, Rdio, Google Music, and Rhapsody. And Classical is completely dead. Say "Classical" to anyone under 35 and they think you're talking about Pink Floyd or the Beatles.

Cocaine was king for several decades, but that's apparently over now. The new drug is flakka - likely from the spanish word flaca for an attractive young woman. This drug is legal in China and you can get it mail order for about $1500 / kilo. It's very popular among latinos, taking over in the Miami area and spreading quickly through Houston, Chicago and New York on its way west. You snort it or vape it. It's easy to overdose which leads to bizarre and violent psychotic episodes, fevers as high as 105 or 106, and permanent damage to your kidneys. $3-$5 per dose and considered more addictive than meth, police in Florida are terrified by this stuff. My take: think of it as evolution in action.

NASA has a satellite, Dawn, which is orbiting Ceres. Ceres is the largest asteroid in the belt between Mars and Jupiter; it's about 600 miles across, roughly a quarter the diameter of the moon. Dawn is now about 2700 miles away from Ceres taking pictures. Mostly Ceres looks a lot like the moon: gray, craters, no Hilton or decent restaurants. Except there are a couple bright white areas in one of the craters. What are they? Ice? Mineral deposits? LGMs? (Little Green Men). Transformers? No one has a clue.

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