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Mark's Market Blog

3-29-15: Saudi Arabia and Iran at war

By Mark Lawrence

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Last week I predicted stock would go up for the rest of March. Almost immediately after I said that a proxy war broke out between Saudi Arabia and Iran in Yemen, sending oil prices up and raising uncertainty in much of the gulf. US markets immediately plummeted, finding yet another way to make me look stupid. Well, that's their job, to make everyone who makes a prediction look stupid, and the markets do it well. Monday, Tuesday and Wednesday the market closed at its low for the day - in the chart below on those three days there's no little tail dropping down. This is called "Three Black Crows" and is considered very bearish, a strong sign that the market will continue to move downwards. We're now moving quickly towards the S&P 2010 level, where sits both this month's 1st support level and the 200 day moving average. If this little downturn drops below both we could easily be looking at a much more significant correction.

S&P 500 October 5 2014 to March 27 2015

A German airplane flying from Spain to Germany crashed in the French Alps near the Italian border killing all 500 on board. During the process of the crash the pilot was locked out of the control room and was pounding on the door with an ax to get in. Weather was clear and good. Investigators now believe the plane was deliberately crashed by the copilot, 28-year-old Andreas Lubitz, who descended from 34,000 feet to 6,000 feet in order to get up close and personal with the mountains. Apparently copilot suicide. Lots of karma here.

Everyone is fighting ISIL. Saudi Arabia is attacking Iranian backed rebels in Yemen, while Iran deplores their incursion. If you're a pro-Iran Shi'ite militia in Iraq, you get US air cover. If you're a pro-Iran Shi'ite militia in Yemen, US helps bomb you. And we're simultaneously negotiating a nuclear treaty with Iran. If you find Obama's middle east strategy confusing you're just part of the majority, which is everyone who doesn't work in the White house. Poland is training to hold off Russia. Estonia is preparing for a Russian incursion and land grab. Greece is doing everything they can to piss off Germany, and the Greeks have 3000 years experience at pissing people off, they must be regarded as experts in this. China is testing anti-satellite and anti-aircraft carrier missiles and being provocative in the south China sea against Viet Nam, the Philippines, Malaysia, Taiwan and Japan. India is building submarines to counter Chinese incursions into the Indian ocean. We live in interesting times.

Rebels backed by Iran have taken over Yemen. Saudi Arabia considers this unacceptable, and is now attacking shi'ite positions in Yemen with air strikes. They have also moved men and tanks to the border. They're backed by a coalition of 9 arab countries. Of course historically we would have backed Saudi Arabia in this, but Obama seems much more supportive of Iran. Meanwhile it seems we are providing "intelligence sharing, targeting assistance, and advisory and logistical support for strikes." The United Arab Emirates, Kuwait, Qatar and Bahrain said they would answer a request from Yemen's president Hadi "to protect Yemen and his dear people from the aggression of the Houthi militias which were and are still a tool in the hands of foreign powers that don't stop meddling with the security and stability of brotherly Yemen." Egypt, Jordan, Pakistan, Morocco and Sudan also announced political and military support, saying they are ready to send ground troops if necessary. Saudi Arabia has a large shi'ite population in their southern borders along Yemen and fears that the Yemen conflict could spread into their country. As I see it Iran is trying to pull a fast one over on Obama this month in the nuclear negotiations, and this provocative incursion into Yemen politics now throws the nuclear negotiations into serious question. I don't see Iran acting in a mature fashion. Obviously oil prices are going up as everyone wonders if this will stay a proxy war or spread into direct Saudi - Iranian conflict. Personally, I'm not a fan of either country and if they start shooting each other up I have no big problem with that. This is one time I'm willing to pay a big more at the pump to get a good international result. In the map below we would be told that the good guys are gray, the Hadis, and the bad guys are in yellow, the al-Houthis. I'm using the word "good guys" very loosely - "least worst" would be a better description imho. As usual these days, we're a big part of this behind the scenes. We had been backing the al-Houthis with arms and training because they were fighting al-queda in Yemen. Obama sees Iran, Hezbollah and even the Syrian government — except for President Bashar al Assad — as partners in the fight against the Islamic State, a development Saudi Arabia finds threatening. Expect Obama to take in a bunch of yemenis as refugee immigrants - just what we need, more militant muslims transplanted to the US.

It appears that Houthis, under direction from Iran, targeted a particular airbase in Yemen with the goal of obtaining US intelligence information. They seem to have succeeded. Iran now has lists of military and intelligence operations and operators across the horn of Africa. Iran is apparently using this information in their negotiations with Obama - the threat is that if he does not make further concessions resulting in a deal favorable to Iran, they will use this information to target US citizens. Let's be honest for just a minute: we're trying to negotiate with terrorists.

We're coming up fast on Obama's latest deadline for an agreement with Iran - the end of this month. Iran now says all sanctions must stop the day the agreement is signed; then later we'll find out if they deliver on their promises. Much later, as they now say they refuse to allow the International Atomic Energy Agency access to their records and reactors and centrifuges, thus denying the IAEA any idea of how close to a bomb they are. In the last 18 months, Iran exceeded negotiated oil export caps, grew its stockpile of 5% enriched uranium by 11%; fed uranium into an advanced centrifuge in violation of the JPOA's terms, and failed to answer 11 of 12 questions IAEA posed about their nuclear weaponization research. Not the track record of a reliable treaty partner. My favorite part of the "treaty:" it's classified, only people with a government secret clearance will be allowed to read it. It took about eight years to put together the coalition that imposes the sanctions; if we stop them it's unobvious they could be turned back on. An unnamed Iranian diplomat who is in the talks said Saturday, "The fact is that we will conserve a substantial number of centrifuges, that no site will be closed, in particular Fordo. These are the basis of the talks." And all this to allegedly keep Iran six to twelve months away from a working bomb. Of course I believe they already have several bombs, they're just storing them in N.Korea for the duration. Me, I would have pulled the plug on this little charade long ago. In any case, I expect there's a good chance Obama will announce a deal in the next few days, but that deal apparently will have absolutely no teeth - as Netanyahu said, "It doesn't block Iran's path to the bomb; it paves Iran's path to the bomb." It's painfully clear that any such deal will result in Saudi Arabia obtaining the bomb soon, likely followed closely by Egypt, UAE and others.

From 2007 to at least 2010, there was a bi-weekly flight from Caracas, Venezuela to Tehran, Iran that made a stop in Damascus, Syria. Hugo Chavez and Mahmoud Ahmadinejad reportedly called it 'Aeroterror.' According to US government testimony and a report by Brazilian paper Veja, the plane was laden with no civilian passengers; instead it carried a few government officials, drugs, weapons, and cash. Argentine prosecutor Alberto Nisman died mysteriously in January, the day before he planned to testify that the Argentine government had covered up Iran's involvement in a 1994 Buenos Aires terrorist attack. He had spent about a decade investigating Iran and Hezbollah's growing presence in the Western hemisphere. High- level Venezuelan defectors then started talking to Veja journalist Leonardo Coutinho. They told Veja that Aeroterror carried drugs and cash to finance Iran's activities in South America, and that it would stop in Damascus to pick up fake passports and other documents to ensure that Iran's agents could move freely once they arrived in Caracas. "The Venezuelan state-owned airline, Conviasa, operates regular service from Caracas to Damascus and Tehran – providing Iran, Hezbollah, and associated narco-traffickers a surreptitious means to move personnel, weapons, contraband and other materiel," former Assistant Secretary of State for the Western Hemisphere Roger F. Noriega said in Senate testimony back in 2012.

In June 2010 someone, widely believed to be Mossad and the NSA, unleashed a new virus, Struxnet, on Iran, and destroyed thousands of their centrifuges. Stunningly, Iran responded by training 1500 cyber warriors. "Five years ago, I would have never imagined Iran to be where they are today," said cyber security expert David Kennedy, founder of information security firm TrustedSec. "Iran was once considered a D-grade cyber threat. Now it's almost on the same level as Russia or China. Russia has probably helped Iran a lot in stepping up its cyber capabilities in the event of a conflict with NATO," Kennedy said. "If they [the Iranians] want to topple the US' financial sector, or cripple the military's ability to communicate, they can do that. Iran's cyber warriors ask themselves one question: Can I entrench myself in key sensitive areas and take the US down in the event of a conflict?"

Fun fact: that word Hitler used all the time, "Aryan," and the name of the country "Iran:" same word, same roots, same basic meaning. The Semitic people just can't seem to get away from this concept.

World Jewish Congress (WJC) president Ronald Lauder, a billionaire businessman who inherited a fortune from his mother Estee Lauder's cosmetics empire, told a congressional committee in Washington, "Once again, like the 1930s, European Jews live in fear. The United States can and must speak loudly and clearly to condemn this evil for what it is –- the radical Islamic hatred of Jews." Roger Cukierman, a French Jewish leader, added: "This is a war against Western modern civilization. And the Jews are seen by these Jihadists as a privileged target. We Jews are the sentinels at the forefront of this war. But we are not the only victims. Military forces, policemen and women, journalists were also targeted and killed."

The US is training Polish to use Patriot missiles - the anti-missile system favored by Israel. Now, who do you suppose we might think the Poles are likely to have to defend against all the sudden? We also sent the 31st fighter wing (fourteen F-16 fighters) to Estonia for "bilateral training."

China has been disgusted for some time with the IMF, which frequently dictates economic policy to 3rd world nations in trouble but which is heavily dominated by the US and a couple European countries. So China has announced the creation of their own international bank, the Asian Infrastructure Investment Bank (AIIB). They've been lobbying hard to get other nations to join them, and now basically all of the EU has signed up. At this point the only major countries that are holding out are the US and Japan. Obama has expressed concern the new bank will allow looser lending standards for the environment, labor rights and financial transparency, undercutting the World Bank, where the U.S. has the most clout, and the Asian Development Bank, where it is the second-largest shareholder after Japan. Now, however, with Britain, France, Germany, Italy, Switzerland and Australia joining mostly we look like a petulant child that mad about someone else's birthday party. China's state newspaper accused the U.S. of "sour grapes" and hypocrisy, noting that President Barack Obama has urged a rising China to shoulder more international obligations.

Greece is quickly running out of cash. Depending on who you believe, they have about two to four weeks left. Greece continues to be unwilling to make the severe reforms that would lead to further EU loans - cutting pensions, laying off government workers, selling off assets, raising taxes. Everyone is now denying a Grexit seemingly on a daily basis, leading the Telegraph to invent a new word, "Grexident." Negotiations seem to consist of Greece calling Germany names and insisting on war reparations, while Germany continues to say no, grow up and pay your bills. What's next? That's pretty easy to predict: a default on payments to the IMF, coming up in a days. Perhaps a default on Greek T-bills, also coming up in a few days. Remember, Greeks invented theatre 3,000 years ago and their new prime minister Tripras and finance minister Varoufakis have shown great talent in this area.

Russia is proposing a new multi-trillion dollar trans-siberia highway that would make it possible to drive from New York to London. I don't know if it will happen, but if it does I'll definitely ride it on my Harley.

The Senate and House have each passed a budget with about $5 trillion in savings over the next ten years, balancing the budget by 2025 without raising taxes. Each budget raises defense spending incrementally while making deep cuts to welfare spending. Each budget also changes the parliamentary rules on Obamacare so that it can be modified or reversed by a simple majority vote instead of a 60% vote. The two budgets still need to be reconciled and then the compromise bill passed again by both the house and the senate, but the two budgets are very close and no one expects any difficulties. In six years under democratic rule we have not had a single budget passed. The new budget will not be a law, but will be a strong guideline to individual appropriations bills for various departments.

The vice-president race in heating up. Bobby Jindal, governor of Lousiana, and Carly Fiorina, ex-CEO of HP have both declared for the presidency. Neither has a realistic chance of being the republican nominee, but both are extremely intelligent and excellent speakers, one's a minority and the other a woman. Both are, imho, extremely strong candidates for vice president - just what you want as your designated attack dog. On the Democrat side currently no one is willing to challenge Hillary.

James Carville said: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody." Corporations are selling bonds like crazy - they can't believe how cheap it is to borrow billions of dollars. Apple has sold $39 billion in the last two years at about 3.5% interest. Two years ago Verizon sold $49 billion. Activas just sold $21 billion. Corporate bonds are going out a bit faster than $400 billion per quarter, well north of $1.5 trillion per year. Corporations obviously think interest rates are going up, so the time to lock in long term money is now. Hedge and pension funds obviously think interest rates will stay low for the rest of my life. Who's right? If it's the corporations, this could all unravel quickly. If bonds go up in interest quickly funds will be losing money and need to raise cash for investors who want to bail. They start selling bonds into a slow market, prices drop further, more investors bail. Liquidity dries up and prices for everything start to drop, bonds, stocks, cars, everything. After six years of global QE and interest rate repression, absurdly inflated valuations – from government bonds with negative yields to junk bonds with ultra-low yields – have become the norm. But liquidity has become, to use the Bank of England's expression, 'more fragile." Last week the Bank for International Settlements (BIS) rang the alarm bells on liquidity, fretting that bond markets have become vulnerable to these sorts of shocks. And yesterday, the Bank of England Financial Policy Committee released the statement of its March 24 meeting that was jam-packed with warnings about "market liquidity risks" and potential "sharp adjustments in financial markets." Who's right? Can central banks buy bonds in every increasing amounts for all eternity, or is there an actual limit? We'll see. But I'd put my dollar on the BIS, the secret lords of all creation.

Every time you walk through Home Depot you'll be accosted by kids selling Solar City leases. They put solar panels on your house for free, you agree to buy the power at a fixed price for 25 years, then you own the panels. Since current solar panels have a useful life of about 25 years this is of questionable value. Now it turns out if you go to sell you home during the lease you could be in trouble. Buyers are routinely backing out of offers due to the leases, or requiring home owners to exercise the buyout clause for $20,000 to $30,000 before they will close escrow. It turns out what you may think is a great thing during the sales pitch is not as widely appreciated. To work properly solar panels must face south, where they can have unfettered access to the sun from 9am to 3pm. A neighbor of mine just put in a 9kw installation. About 3kw faces east, another 4kw faces west, and 2kw faces south, which means he paid for 9kw but is actually getting more like 5kw. There's simply no way I would buy his house and agree to 20+ years of payments for this dog.

California's snow pack is at 8% of normal. To an excellent approximation California doesn't have a snow pack this year. What is the government doing about it? Restaurants are to serve water only when asked and motels aren't to change sheets for repeat customers. And we're not to water our lawns more than twice a week. There are $500 fines in Los Angeles for taking too many showers. Personal water use in California is 4% of all usage, so these measures just by themselves may solve perhaps almost 1% of the problem while annoying pretty much everyone - a bureaucrat's dream, make sure the pain is spread around so that everyone knows you're doing something, especially if you're not. Where does the water go? Agriculture takes over 80%. All by themselves almond groves take 10%, and alfalfa for cattle feed takes 20%.

Why is Illinois in trouble? David Piccioli is a retired Illinois Federation of Teachers lobbyist who spent 25 years wining and dining state legislators, but for one magical day worked as a substitute teacher at a Springfield school. He's getting a $30,000 per year pension for the years he worked on the union's legislative staff. He's also getting a $31,483 per year pension due to a 2007 Illinois law that entitles union members to receive teacher's retirement benefits regardless of the tenure they served as a teacher. And he's suing Illinois, claiming that their teacher pension calculations are unconstitutional for him and he's owed an additional $36,000 per year pension for his one day of work. He says he has 25 years of union membership so he's owed a teacher's pension for 25 years of service - based on his one single day of work. He has a very decent chance of winning $67,000+ per year for life for one day of work.

Gilead Sciences has a new "miracle" drug, Sovaldi, which purportedly cures hepatitis C. They're selling the pills for $1000 each - a 12 week course of treatment costs $84,000. Firms in Bangladesh and India have already made copies of the drug, and India, along with many other countries, refuses to grant Gilead a patent. So Gilead negotiated with the Indian government and granted a license to India's Natco Pharma to make a generic. In India Sovaldi generic costs $10 per pill, $840 for a course of treatment. And it's available now in 91 countries. Less for a twelve week supply than a single pill costs here. Why don't we just buy the pills from India? Medicare and Medicaid rules forbid negotiating drug prices or importing generics.

We were told Obamacare would result in $2,400 per year savings for the average family. How's that working out, five years on? The National Bureau of Economic Research studied the numbers and issued a report. The average insurance bill for people outside the Obamacare exchanges has gone up by 24.4% more than trend line. And for those using the exchanges? Taxpayer contributions are up 24% on average. What a stunning result: you give nearly free insurance to a several million people and the result is that someone else has to pay.

Representatives from Citigroup, JPMorgan, Goldman Sachs and Bank of America have met to discuss ways to urge Democrats, including Senator Elizabeth Warren and Ohio Senator Sherrod Brown, to soften their party's tone toward Wall Street. Big Wall Street banks are so upset with Senator Warren's call for them to be broken up that some have discussed withholding campaign donations to Senate Democrats in symbolic protest. Although I'm quite conservative, I was a big fan of Daniel Patrick Moynihan and Sam Nunn, and now I find myself really liking Elizabeth Warren. Let's be honest: Wall Street isn't capitalism, it's a bunch of really smart psychopaths gone wild and they desperately need some serious limits.

Kraft is merging with Heinz, forming the 3rd biggest food and beverage company in N.America and the 9th largest in the world. Kraft shareholders get 49% of the new company, Kraft-Heinz, and $16.50 per share cash payment. Heinz shareholders get the remaining 51%. Warren Buffet is financing the deal with $10b in cash to fund the payout. Buffett and 3G capital bought Heinz for $23b in 2013, and Buffett also already owned 193,000 shares of Kraft. Kraft has recently been doing poorly with several of their brands losing market share. Since Buffett bought Heinz they have fired hundreds and closed several factories; we can assume that Kraft will experience a similar result, which has already started since they fired their president a few months ago. Wall Street is very upset about this deal: you're not supposed to be able to do a merger or aquisition without paying them a ton of money and giving them a piece of the action. Since Buffet was self financing none of the big Wall Street houses got anything.

A twelve year old girl in Colorado has been arrested and charged with attempted murder. She put bleach in her mother's smoothies and drinking water in an attempt to kill her for taking away her iPhone.

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