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Mark's Market Blog

7-10-10: Retire in Spain!

By Mark Lawrence

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I predicted the market would go up a bit this week. It went up 5.3%, the best week in over a year, far exceeding any expectations I'd had. The rise was on very low volume, so it's hard to say what it really means. We're now entering earnings season, when companies report profits. I expect profits for the 2nd quarter will generally be good, so I expect the market will go up a bit more. After that - still no clue. I can make a decent argument that the market will continue to go up until something happens - a major European bank fails, Chinese property starts to collapse. I can make another decent argument that this is a bear market rally, we'll bounce off the underside of the 200 day moving average, then drop like a rock. Today I'm lightly leaning towards the market trending up for a while, but at this point nothing would surprise me.

S&P 500 January 16 2010 to July 9 2010

In the chart above you see that this week the 50 day moving average crossed the 200dma, the so-called "Iron cross" or "Death cross." While this is considered highly bearish, a careful look at history tells us it's actually not a good predictor of much of anything. Also you'll note that volume has been very low this past week. Anything under about 300M shares traded in a day ( line) is not to be taken quite so seriously. You can see that for the past couple months or so the down days (red volume bars) are generally well over 300M shares, the up days (gray volume bars) are generally under. Clearly those of the true faith believe the market will continue to go down, and belief is important.

Two prominent Senate Democrats recently told The Hill, a newspaper that covers Congress, that the $250,000 threshold for no tax increases is not necessarily a done deal with Congress. Sen. Byron Dorgan, D-N.D., who chairs the Senate Democratic Policy Committee, said he didn't think there was "any magic" in $250,000. Sen. Dianne Feinstein, D-Calif., noted "you could go lower ... why not $200,000? With the debt and deficit we have, you can't make promises to people." I'm so proud to be a citizen of the People's Republic of California, represented by a person of such high moral and ethical standards. Why is it that we can't make promises to the productive members of our society about how much of their earnings they get to keep, but we have no problem making inviolate promises to the unproductive members about how many goodies they get for free?

Several German law professors are suing in German court, saying the recently engineered $1T EU bailout violates the Maastrict treaty and the German constitution. Their arguments look quite solid to me. Thinking currently is that the German high court justices will string this case out for a while, hoping that the European banking crisis passes before they have to rule. This is not likely to work: the problems in Europe are structural, not temporary, and are not going to go away in any hurry. Consensus is that it's difficult to see how the German high court can rule against the professors, that it's likely the court will order the German government to renegotiate under a tighter set of rules. Some are saying that when this ruling is handed down, the Euro will have a life expectancy of hours.

Europe is currently struggling - several of their countries are in serious fiscal trouble, many of their banks are technically bankrupt, and (who could have predicted it?) the French and Germans are at each other's throats over what's to be done. How did this happen? In the chart below we see that "Club Med," Portugal, Italy, Greece, Spain (aka 'The Pigs') historically had to pay high interest rates to borrow money, and this fact helped keep their government spending under control. However, rates for these governments started dropping after the Maastrict treaty was signed, and bottomed out at a very low rate after the introduction of the Euro, when by treaty their debt had to be treated by banks the same as German debt. Think of giving an unlimited American Express card with a 1% interest rate to your average teenager. This went along great for about a decade. There were some troubling signs: Spain, for example, build as many houses in the last decade as Germany, France, Ireland and the UK combined. But for a brief period, Europe was one big happy family BBQ with pulled pork sandwiches and watermelon for all. Until the markets got spooked in 2008, and people started asking difficult questions about bonds and who likely could and could not pay them off. Since then interest rates for Club Med have risen nearly to their pre-Maastrict level, while governments all over Europe have been screaming about mean spirited nasty markets that are failing to cooperate with their family picnic. The big question now is, who will pay off these bonds? Club Med has no money, but if they default it's French, Swiss and German banks that will take the hit. Germany can perhaps afford to pay them off, but the hard working German voters will trash their government before they allow their money to be spent like this. There is no simple solution. This problem will be with us for the next few years, with repeated crises and likely a bank collapse or two. Consider retiring in Spain - they have a great climate and really cheap housing.

European bond spreads over the German bond

Skin maintenance part 2: Several weeks ago, I mentioned Efudex generic to identify and kill pre-cancerous growths on your skin. I've been using Murad for a couple weeks now to eliminate age spots and discolorations. It doesn't work on everything, but it's working pretty on a few spots on my face. Available at fine EBay and Amazon stores everywhere, about $35.

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