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Mark's Market Blog

7-26-15: Gold!

By Mark Lawrence

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Stocks are dropping. Gold is crashing. Oil is crashing. Why? Why not? This market is starting to look long in the tooth - only about 40% of all stocks are participating in the bull market, the rest are below their 200 day moving averages. The DOW transportation index is down more than 10% from its peak, which is considered a warning of a correction in DOW theory. I've given up looking for a correction; a Merrill Lynch trader said recently, "We all know dozens of people who have predicted 17 of the last zero corrections."


S&P 500 January 26 2014 to July 24 2015

Gold continues to drop towards $1000, hitting $1078. There's no sign of a bottom right now. If you're a believer in gold and the idea that fiat currencies are doomed, it will be time to stock up soon. Oil also continues to drop, but I certainly am not seeing that in lower gasoline prices. This week oil dropped below $50 for the first time in four months. Saudi Arabia continues to pump record amounts; apparently they're very satisfied with lower prices.

Amazon had spectacular results - they announced a quarterly profit! $92 million on $23 billion of sales, 0.4%. But for the first time their quarterly results didn't have a minus sign in front. Their stock rocketed up 15% overnight on Friday. The result? Jeff Bezos is now worth $7 billion more than he was on Thursday, and Amazon is worth more than Walmart. Walmart, by the way, made a bit over $3 billion in the same time frame, 30 times as much as Amazon. Amazon has about 5% as much sales overall as Walmart, but about seven times as much sales on-line. Walmart is spending well north of a billion dollars on their web site, intending to upgrade it to Amazon levels.

Ebay and Paypal are splitting up. Paypal wants to be independent to gain the mobility to compete with ApplePay and Google Wallet and the other coming on-line payment systems. Ebay bought Paypal in 2002 for $1.5 billion; now it's thought to be "worth" about $45 billion. A tidy profit for Ebay shareholders. Does it make sense? We're told that the price of a share reflects the total of discounted future earnings. Paypal does about $235 billion worth of transactions per year; if the money comes from paypal balances or your bank account then Paypal's cut is about 3%. It's about half that if the money comes from a Visa, but I'm going to assume that's not an important part of Paypal's transactions. So Paypal has a gross operating income apparently of about $7 billion. I have no idea what their profits are, but if they're a typical silicon valley company they don't have any. They're in a field which is presumed to be looking at major shakeups in the near future - some wonder if Visa and Mastercard can survive, and it's commonly believed that major banks will not be able to compete in the field of on- line payments. I'm having a lot of trouble seeing how a company that makes perhaps $1 billion to $2 billion per year (optimistically) and is in a field looking forward to a major shakeup is worth $45 billion. Buy and hold the shares at your own peril, imho. But then Amazon will make perhaps $100 million this year and is apparently worth $260 billion.

China's PMI (purchasing managers index) is tanking, lending further credibility to a slowdown, perhaps even a recession in China. However, China's PMI collapses routinely so it's not time to panic or throw a party or anything like that. Electricity consumption is growing at 1.3% year on year, making China's claim of 7% growth hard to believe. The signs and portents are starting to line up for China: massive bad loans hidden in the banks; massive real estate bubble; massive stock market bubble; labor prices rising to uncompetitive levels; new laws causing problems for foreign firms; new laws giving the government massively intrusive powers into people's day to day lives; trouble coexisting with neighbors.

China has a plan to increase the size of Beijing from the current 11.5 million people, making it half again bigger than New York, to 130 million people, making it slightly larger than Japan. They're studying details for how and where to build infrastructure. China currently has no property tax and such a project probably cannot work with their current tax system.

World trade is dropping off quickly. This is especially bad news for the major exporting countries: China, Germany, Japan, and the SE Asia tigers. It's not so great for the US, but we still have a strong internal consumer economy, we don't depend nearly as much on others buying our products.

Obama warned the UK that if they leave the EU they will lose influence in the world. Were I a Brit this would shake me up: Obama is perhaps the leading world expert in a country losing influence in the world.

The USGS says a major earthquake on the Hayward-Fremont fault could happen "any day now." There was a 4.0 a few days ago, perhaps a precursor to something larger. In the past the Fremont fault has produced 6.5 - 6.8 earthquakes every 140 years or so; it's been 147 years since it last went off. The fault runs through Berkeley and Oakland. What would we do without the People's Republic of Berkeley and the Oakland Raiders?

Special Bonus Picture of the Week: Our young men spend all their time playing video games instead of going to college or learning a skill. What are they learning while gaming? Here's a bunch of video heroines, then re-drawn as they would look if they had the same figure as the average 20-something US woman.

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