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Mark's Market Blog

9-6-15: China Celebrates Anti-Japan day

By Mark Lawrence

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China had a huge celebration last week, so they dumped major money into the markets. They managed to boost the Shanghai composite up to the neighborhood of 3050 - 3200. Ours went up a bit too. That's all over now and next week I predict this week China will resume their ongoing market crash and we'll resume our descent for a while. The People's Bank of China says their stock market drop is almost over. If by that he means they should hit about 2000 within a week or three, I agree. If he means they will stick in the range of 3000-3200 for a bit then start to recover, I think they have not yet learned their lessons about standing in front of freight trains and markets. As you can easily see in the chart below, we have now had the dreaded death cross in the S&P where the 50 day moving average drops below the 200 day. We had that same thing happen to the Dow two weeks ago.


S&P 500 March 14 2014 to September 4 2015

On tuesday the market plunged 2% and once again at the open I saw bid/ask spreads get enormously wide and stay that way for about 40 minutes. There's a huge liquidity crunch out there - people wanna sell, no one has cash to buy. This could result in a flash crash, like in '87 when the markets plunged 25% in one day. If the markets do that again I'm buying everything I can get my hands on. I remember in '87 one news dweeb emoting wildly while interviewing a Berkeley economist: "25%!!! 25%!!! In One DAY!!! 25% IN ONE DAY!!! How Long Can This Go On?!?!!?" The economist calmly answered, "About three more days."

It appears the market found a bottom on Monday around 1860; I'm fairly confident we'll be revisiting that low later this month, perhaps dropping through it as far as 1815, a key support level. Some witch doctors technicians think we may go down another 7% from there to 1700 or the high 1600s; some are even forecasting 1575 as the ultimate low, a 24% drop off recent highs. We've had a prolonged "bearish divergence," where the RSI is trending down while the markets were trending up. All things considered, I don't think right now is the time to buy lotsa stocks.

It's said that the recessions cause stock market crashes, but stock market crashes don't cause recessions. Is it true? If it's true, 1) why did the Fed take on $5 trillion in bonds to pump up the stock market? and 2) how come every time the markets drop my phone quits ringing? The current economic conditions index has been heading down in small uneven increments. Today’s reading dropped another two points to -8, down 13 points from January. But the index for future economic conditions has plummeted 31 points since January, 10 points in the past two weeks alone, to -25, the worst level since July last year. Just 23% of Americans rated the current economy as excellent or good; while 31% rated it as poor. In terms of economic outlook, 37% said the economy is getting better, but 60% said it is getting worse. And my sales are 'way down. And it's not just me, businesses everywhere is slow. Especially China. None the less, I believe the market will recover this year and the US economy will too. China, not so much. . .

Christine Lagarde, the managing director of the IMF, said, "The U.S. Federal Reserve should not rush its decision to raise interest rates and should move only when it is sure the decision is unlikely to be reversed later." Her eyes are on the 3rd world and she apparently sees the same commodity price crash likely leading to financial crisis that I and many others do. The Fed raising rates will only substantially increase pressure on emerging markets. But the Fed isn't charged with caring about emerging markets; they're charged with guaranteeing profits at America's top ten banks and keeping the US economy on track. Labor statistics point to a time to wean ourselves off these ridiculous zero interest rates. Inflation numbers seem to council caution, but inflation is low because of cheap oil and energy and imports. Meanwhile house prices are taking off again, something that these days we all consider a bit worrisome. I have no measure of Ms.Yellen so I'll be as surprised as anyone no matter what she decides.

Korean exports dropped 15% year on year last month. Korea is considered "the canary in the coal mine." Evidence continues to stack up that Asia is going to have a huge recession. China's rail traffic and electricity consumption are collapsing. China has huge overcapacity in cement, steel, autos and manufacturing, and the government won't let anything die - instead they're cutting interest rates and lending more money to zombie companies. This will make the other Asian central banks want to cut interest rates and drop the values of their currencies, and that will be fuel for the coming dollar short squeeze. Brazil is easily the sickest kid in the classroom; when the dominoes start to drop, I expect Brazil will be the first with Mexico hot on their heels. The short squeeze I'm forecasting will not be a single event, it will be a rolling crisis that slowly spreads from country to country. Each time we think we have it contained it will pop up somewhere else. I continue to believe the US is doing fine. I'm not clear how Europe is doing.

China spent nearly $100 billion last month propping up their stock markets, banks, zombie companies and currency. That's double the July burn rate of $50 billion. At this rate their $3.6 trillion in foreign reserves will last about 3 years. In fact that math is flawed - much of those foreign reserves are illiquid. As China spends their foreign reserves, much of which are held in US t-bills, t-bill prices will drop and our interest rates will increase. Perhaps the Fed will choose to let China raise our interest rates instead of them doing it. China's foreign reserves have been shrinking for two years now. While many continue to say this is the Chinese century, I've always had my doubts about the sustainability of their model of central planning and control and massive pollution of their land, water and air. Now with their economy faltering, their working age population peaked and dropping, 60% of their ground water polluted, I find it hard to be rosy about their future prospects. Japan did this and grew at an unprecedented rate from 1960 to 1990, but has had zero net growth since; and the meticulous Japanese made a name for themselves for high quality long lasting products. The Chinese are still low cost / low quality producers and have absolutely no brands in the category of Lexus or Honda or Sony.

China is serious about bucking up their stock markets. The big four stock brokerages have been "asked" to contribute $16 billion to a stock bailout fund. They've also agreed not to sell their own holdings until the market hits 4,500. I can't imagine this market hitting 4,500 anytime this decade, and not very likely next decade. Since the government is the largest single stockholder in the brokerages it's all but certain this will happen. Every day this week the markets plummeted at the open, and were revived in the last half hour or so, obviously due to state intervention. The markets drifted sideways, closing around 3150, until Wednesday, then they closed for the week in observance of China's biggest holiday, the celebration of the end of WW II and kicking out the Japanese. This week there will be far less intervention and we'll resume our normal programming: a continuation of the crash to 2000. Monday saw the program of last week reversed: we had been dropping at the opening then rising at the end of each session; today we opened high and spent the rest of the day dropping. Goldman Sachs, unofficial apologist for the Chinese Communists, disagrees with me: they say soon, very soon good growth numbers will come out and stocks will shoot up, so they're a great buy right now. I hope Goldman gets themselves into a class action suit for this advice.

CalPERS, the P.R. of California's Public Employee Retirement System which is charged with the fantastically important job of making sure our hard working and diligent public servants have the retirement that, if not what they deserve is at least what they dream of, is running at a loss. Last year they put out $5 billion more than they took in from employees and taxes. They have $300 billion under management so they're not going broke anytime soon, but they're concerned about another stock downturn. They're working on a new plan to improve their financial stability. You'll be shocked, shocked to hear that the plan involves high taxes on the rest of us. Well, not so much me: my last kid just graduated from college and I'm outta here soon. Anyway, they've always maintained that the system is sound because they're going to make 7.5% per year on their investments; never mind that no one alive does that well, and last year Calpers only made 2.4%. But now they've decided they need to get more conservative, invest more in bonds and less in stocks. Now we're talking like 2% return. And of course the contributions of public employees hired before 2013 won't be touched, 'cause, well, that just wouldn't be right. Cities and local governments are cutting back on street repairs and other services to keep up with their ever-increasing Calpers contributions, which are expected to rise by 50% over the next six years. Some cities are already paying 40% of their employees wages in retirement contributions. The most expensive employees are, of course, police, firemen and prison guards, who retire around age 50 at nearly full pay. Question: when's the last time you saw a house on fire? My firemen spend all their time inspecting businesses and raising business fees, and attending car crashes. The employee unions are all for the plan; in my estimation that's all you need to know. Last year Calpers spent $18 billion on retirements. Employee contributions covered $3.8 billion; taxpayers chipped in $8.8 billion; and $5 billion was drawn down from assets. Now you know why California loves illegals: more democrat voters and taxpayers, most uneducated.

We've all seen the heart breaking pictures of Syrian and Iraqi refugees. When I listen to the news it seems the conversation is about how many of these refugees Europe and the US must accept. I think this insanity. For two generations the arabs have been having six children per woman. Now their over population is straining food, water, jobs, politics, and is, imho, the proximate cause of most of their wars. So the answer to their over population is for the west to take in hundreds of thousands of their semi-illiterate unskilled religious fanatic breeders? Why on earth would we wish to make their problem our problem? The solution to the world's over population problem is not wholesale movement of people, it's for most women to have one kid, two max, until the Earth starts to recover.

This year 46 weaned elephant seal children have washed up dead on the beaches around San Francisco between April 20 and August 1. A bit over a third of them died of leukemia. I continue to have serious concerns about Fukushima and the Pacific. Also in August this year radiation from Fukushima was detected on S.California beaches - 7bq to 8.5bq per square meter of cesium 137. Cesium 137 has a half life of 30 years and simply cannot exist in measurable quantities without some kind of nuclear accident. Woods Hole scientist Ken Buesseler said, "As the plume begins to arrive along the West Coast [it] will actually increase in concentration. . . no public agency in the US is monitoring the activities in the Pacific. Without careful, extensive, consistent monitoring, we'll have no way of knowing how much radiation from Fukushima is reaching our shores, and how it could affect life in the ocean."

Oil has been especially volatile lately, down below $50, back up to $60, back down below $50. Some are predicting $80 oil by the end of the year. Some are predicting $25 oil within 18 months or so. I dunno, but $80 oil just doesn't square with Saudi Arabia pumping like mad and Iran coming back on line and the US getting highly efficient at fracking and China slowing down and the other emerging markets seemingly on the edge of crashing.

Alberta, the center of Canada's oil boom / oil bust, is really taking it on the chin. Home sales are down almost 30%, prices are down 8%. Car sales are dropping. Employment is plummeting. Business optimism and consumer confidence are down to levels last seen during the 2008 crisis. Saskatchewan and Manitoba aren't doing so great either. Canada is entering a major recession that could easily lead to a housing bust and a financial crisis.

Unemployment is down to 5.1%. The US labor market is tightening. Generally the number of days it takes to fill a job opening ranges between about 24 days in good economic times to 15 days in deep recessions. It's at 27 right now. We're at about 1.5 workers per job opening, down from 6 in 2009. Construction companies report that they have a labor shortage at the highest rate this century. The Fed is in a tight stop: labor is telling them it's time to raise rates; commodities and emerging world markets are telling them we're on the edge of a historic deflation; world markets warn of impending recession and market chaos. What's a non-elected academic bank shill to do? I don't think we've seen Yellen under pressure, so for the next several months we're going to get a measure of her.

Illinois continues to have no budget, so winners of the Illinois state lottery are getting IOUs instead of checks. The state lottery is run by the government and the state comptroller has no authority to release funds in the absence of a budget.

Intel has announced a new family of processor chips, "Skylake." We've been stuck for the last dozen years or so around 2 gigahertz clock rate - they can't go much faster without radiating too much power. So now Intel is reducing power while enhancing add on compute like graphics processing. With these new chips PCs should get as thin and light as tablets and laptops quickly - the line between PCs and laptops and large tablets is going to blur and then disappear in the next few years. But that's just temporary - there are already prototype phones that accept add-on keyboards and external monitors and run Windows 10, so they can run Office.

Windows 10 has Continuum, a piece of software that lets a smartphone transform into a Windows 10 PC when connected to a monitor. Windows 10 runs on phones, tablets and PCs and Microsoft is making their apps run on all of them. Acer is leading the charge with the Jade Primo, a 5.5-inch device that the company is unofficially calling a "PC Phone." The Jade Primo comes with a docking station, wireless mouse and keyboard. Later on in October, Microsoft is expected to announce the Lumia 950 and 950XL. Google will obviously have to respond to this, so expect android phones to merge with the Nexus notepads and chromebooks. Soon your phone will be your computer.

The Birmingham library has what is considered the oldest copy of the koran. They just carbon dated it: it's from between 545 and 568. The Koran was handed down by God directly to Mohammed. . . except Mohammed was born in 570, and muslims tell us no one produced a written copy until 653. Some, no doubt heretics who will burn in hell fire, claim the Koran was existing writings assembled by Mohammed for his own purposes.

Typical phones have camera with about 8 megapixels. Typical DSLR cameras these days have around 20 megapixels. Cannon has just released a new chip with 250 megapixels. They say with their chip and a good lens you can resolve the writing on the side of a commercial airplane at 11 miles. The NSA and CIA are going to have a field day with this. And perhaps your neighbors: think seriously about keeping your curtains closed in the evenings.

A great quote: "Crime is generated by a lack of values that has gone largely unaddressed in our nation as a whole and in the black community in particular. Soaring unwed birthrates, absentee fathers, an aversion to work, an unwillingness to embrace societal standards and time-honored discipline -- all these factors have contributed to the problems we must now confront." Obama's legacy is a huge spike in the murder rate in America's cities. Anyone who thinks that a democrat has the answers for this problem hasn't been paying attention. For the record: pandering to civil servant unions is not the same as supporting the police. Oh, and our great quote? From a speech given in 1994 by Eric Holder. The Attorney General who presided over the huge metropolitan killing spree of the last six years.

I got an email from a Chinese supplier this week: "Dear Customer, Because of 2015.9.3 is China people's Anti Japanese War and the 70 anniversary of the victory of the world anti fascist war memorial day. September 3 to 5 is China National holiday, a total of three days, the logistics company will also rest three days, Logistics may be extended, please be patient." Next time you're wondering why there's tension between Japan and other Asian countries, there's a big hint.

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