What a difference a week makes when the outlook for Fed action changes dramatically.

Market Statistics

It was a pretty slow Friday with very little news and lackluster volume. It was all about the Fed with the quarterly FOMC meeting next week. The worry is that the Fed will consider dropping the "considerable period" language and that suggests faster rate hikes. This weighed on the market all week and that makes next Wednesday's announcement and Yellen press conference the focal point for the week.

The economic calendar was light as well with Consumer Sentiment the biggest news. Sentiment for September rose from 82.5 to 84.6 and the highest level since July 2013. The gains came almost entirely from increased expectations for the future. The present conditions component declined from 99.8 to 98.5. The expectations component spiked from 71.3 to 75.6 and the highest level since May 2013.

This report suggests the weak payroll numbers were actually in error and will be revised higher. If jobs were worsening the expectations component in this report would not be shooting higher. We also saw a decent retail sales for August and that also suggests consumers are feeling better about the future.

Retail sales for August came in at +0.6% and the strongest month since April. This compared to only a +0.3% rise in July. Sales were a full +5.0% above year ago levels and continue to suggest the consumer is feeling better about the future. Motor vehicles were the biggest contributor at +1.5% with building materials coming in second at +1.4%. Holding sales back were a -0.8% decline at gasoline stations as a result of the lower gasoline prices. This is a big plus for me since it is the equivalent of a tax cut for consumers. Electronics and home furnishings both rose +0.7% and sporting goods +0.8%. General merchandisers like Walmart declined -0.1%. This was a strong report.

Business inventories rose +0.4% for July and in line with expectations. This is a lagging report and was ignored.

Import prices fell -0.9% in August compared to a -0.3% decline in July. Declines in fuel prices were the major drag on the totals. Excluding petroleum prices the decline was only -0.1%. Petroleum prices fell -4.4% and the biggest drop in nearly two years. Export prices fell -0.5% as a result of falling grain prices.

Next week has a lot of reports but they will all be overshadowed by the FOMC announcement and Yellen's press conference. Some believe Yellen will continue to use the "considerable period" language to tell investors there will be no rate hikes until six months after the end of QE. The end to QE is expected at the next FOMC meeting at the end of October. If she sticks with the language she will be quizzed strongly about when it might go away in the press conference after the announcement. The analyst community is about evenly split on whether the Fed will remove that phrase and that has weighed heavily on the market last week. Conversely if that phrase is in the statement we should expect the market to rebound. That assumes they don't change something else unexpectedly.

The housing reports next week will cover the last month of the selling season. From this point forward sales and construction will slow as we move into the winter months.

The Philly Fed Manufacturing Survey is the first look at the September activity. The NY Empire survey is on Monday but the Philly Survey is considered a proxy for the nation while the NY survey is considered state specific. What happens in NY stays in NY.

The PPI and CPI reports are expected to show no inflation for August. The CPI is expected to be flat and could even decline slightly as a result of the drop in energy prices.

On a side note the sharp drop in commodity prices all across the board is going to pressure inflation in the coming months. We have seen sharp drops in grain prices, meat, iron and copper, etc. This will push prices at the producer level lower and it will eventually work its way into consumer prices as well.

The Scottish vote for independence on Thursday is a wildcard. The various surveys show the vote is split about 50:50 but the undecided component is very high. Nearly 97% of Scottish citizens have registered to vote in this landmark decision. Scotland has been part of the U.K. for more than 300 years. If they do vote for independence it is going to cause serious upheaval in Europe. There are numerous companies that have already said they will move. Questions that remain unanswered are what currency they will use? What happens to the government owned buildings? What about government pensions for current government workers since the U.K. government will no longer be their employer? There are hundreds of other questions and there will be an 18-month transfer period where the two governments would work out the details if the vote is for independence.

For instance the Royal Bank of Scotland was bailed out by the U.K. for 45 billion pounds and the government still owns that stock, which accounts for 80% of the outstanding shares. RBS and Lloyds Banking Group would immediately move their headquarters to London in order to remain a U.K. governed entity. Sanford Bernstein said this could cost each of them 1 billion pounds.

Money is already flowing out of Scotland and the capital flight could lead to a drop of 5% in the GDP. The U.K. pound has been hammered for the last couple weeks because currency traders don't know what to expect after the vote.

Lastly, the Scottish vote has generated a flurry of independence movements all around Europe. Regardless of the outcome in Scotland the news has stimulated interest in a lot of other provinces that would like to be independent countries. For instance in Spain the region of Catalonia has wanted to be independent for a long time. The Scottish vote has energized the independence movement. Catalonia lost its independence on September 11th, 1714 after a yearlong Spanish military siege. Catalonia has 7.5 million residents with their own language and culture.

Spain's prime minister has said on many occasions that a vote for independence "cannot and will not take place." Catalonia represents about one-fifth of Spain's $1.4 trillion economy. It would be a serious blow for Catalonia to split off from Spain. The Catalonian president is seeking to have an independence vote on November 9th. They are using the Scottish vote as a precedent for a Catalonia vote. They can vote all they want but I seriously doubt Spain will give them independence.

Bloomberg said demand for Alibaba shares was so strong the underwriters were going to close the books early and stop accepting orders. This is a decades old way of trying to increase demand for shares. If portfolio managers think they are going to miss out they will panic and the demand for shares rises. This allows the underwriters to raise the price and the number of shares offered for sale if the demand rockets higher.

Dealbook said 40 portfolio managers had requested $1 billion or more each and there were still four more days of roadshow presentations when they made this claim. This is another time honored tradition of asking for more than you can get. If an IPO is in high demand and fund managers know they are not going to get what they ask for then they ask for more. For instance if they want 500,000 shares and they feel the allocations are going to be in the 20% range then they put in a request for 2,500,000 shares. Multiply this by the thousands of portfolio managers putting in requests and you can see how this could be a problem for Alibaba. The company said its "friends and family" plan already has orders for $1.5 billion in shares.

In a high profile IPO like this they want to make sure the stock pops on the first day and they don't face a problem like Facebook did. If every fund manager is putting in for five times the number of shares they really want and Alibaba ups the number of shares being offered to accommodate the phony demand then the stock will drop on the opening day. Every fund manager that gets 2-3 times what they really wanted will immediately try to sell the excess in the market. This pushes the price down and the underwriters or in this case Goldman Sachs has to buy those extra shares to keep the price above the offering price. Goldman was appointed "stabilization agent" to maintain the price.

Obviously all of the eight underwriters understand how the game is played. It is up to them to accurately determine how many shares they think they can actually place and what price they can get without damaging the IPO. Alibaba and its early investors and officers are selling 320 million shares with another 48 million as an overallotment option. The price range is $60-$66. They can add more shares or raise the price or both. The higher the share count and higher the price the more likely we see a post IPO decline.

The underwriters said they would stop taking orders in the U.S. at 4:PM Tuesday. Asian investors have until 4:PM Hong Kong time. European investors have until close of business in London.

At the New York roadshow at the Waldorf-Astoria, the first stop in the tour, there were 500 managers expected and more than 800 showed up with even more turned away for lack of space. Other meetings across the U.S. have been similarly packed.

Retail investors should remember that Facebook (FB) shares were easy to get at the IPO price because the underwriters sold too many shares at too high a price. It was a battle for Morgan Stanley to maintain the offering price on opening day because so many shares were available in the market. However, Twitter (TWTR) and Linkedin (LNKD) were impossible to get and the share price soared. Linkedin soared +137% on opening day. Underwriters were so careful not to repeat the Facebook disaster they were very cautious with the number of shares they distributed.

Nick Colas, chief market strategist at New York brokerage ConvergEx said IPOs are often about showmanship. "Capital markets professionals have a phrase - 'The illusion of scarcity' - that is their mantra for all public market transactions. Even on the largest deals - primary or secondary stock, it matters not - they must hold forth the proposition that demand far exceeds supply."

Alibaba will not be going into any of the U.S. indexes and that will limit the demand from the various funds that benchmark to the U.S. indexes. The Wall Street Journal still believes the initial IPO will exceed $24 billion making the company worth nearly $185 billion in total. Not a bad return on his investment for Jack Ma, an English teacher who failed his college entrance exam twice and started the company in his apartment in 1999.

Gil Luria at Wedbush initiated coverage of Alibaba with a buy rating and a price target of $80. His call came after James Cordwell of Atlantic Equities started coverage with a buy rating and a $100 price target. Most analysts don't initiate coverage until after the IPO and the post IPO quiet period expires. Apparently these analysts wanted to capture some of the spotlight on the IPO buzz.

With many retail investors fearing they won't be able to get shares of BABA in the IPO the shares of Yahoo (YHOO) have been soaring. Shares rallied to a 14 year high at $42.88 as investors try to get a piece of the action. Yahoo owns 22% of Alibaba and will be selling $8 billion in shares in the IPO. Yahoo investors should thank founder Jerry Yang every morning when they wake up for investing $1 billion in Alibaba in 2005. Yahoo has already sold $5 billion a couple years ago and will still have a 16.3% stake after they sell another $8 billion next Friday. Yahoo traded more than 650,000 options on Friday, second only to Apple. I think it is setting up for a monster sell the news event.

Yahoo also made news on Friday with the details of a government battle for its records. The U.S. government told Yahoo to hand over records of people using their service and Yahoo refused. The government threatened to fine them $250,000 a day if it failed to hand over the records. Yahoo sued the government but eventually had to turn over the records. A federal judge ordered the unsealing of the court records in a victory for Yahoo and 1,500 pages of documents of its battle with the NSA became publicly available.

Edward Snowden revealed the existence of the NSA PRISIM program where the agency collected information from Google, Facebook, Apple, Microsoft and Yahoo. The companies claimed the spying was unconstitutional and claimed the NSA sometimes collects data without the companies consent with pathways into the servers of these companies. Cisco Systems has seen revenue overseas decline after it was leaked that some of their equipment had backdoor access for the NSA. Yahoo wanted users to know they fought to keep the information private and the unsealing of the documents was a win for the company.

I wrote last week that a lot of money was going to be leaving the market as a result of the Alibaba IPO. On the face value the IPO is going to raise about $24 billion. That required portfolio managers to sell enough stocks to raise $24 billion in cash. However, that is not the end of the story. We will probably see 150-200 million BABA shares trade in the market on opening day and 50 million a day for the next week as retail investors try to get a piece of the company.

Those individuals have also been selling stocks and will continue to sell stocks early next week in order to raise cash. Investors will have put in their IPO requests with their brokers but they won't know "if" or "how many" shares they got until Friday. If they put in for 1,000 shares then they have to have that money in cash in their account on Thursday. Very few will actually receive shares even though they requested them and raised cash just in case. Multiply that by a couple million investors and the cash raise over the last week and early next week is probably well over $100 billion. That is a lot of cash leaving the market.

Obviously if those investors don't get any shares in the IPO and they decide not to chase it in the open market then that money will be put back to work in other stocks the week after the IPO.

Exxon Mobil (XOM) fell off a cliff last week after their Russian partner was finally hit with sanctions. Rosneft and Exxon are drilling a $700 million well in the Kara Sea in Russia's Arctic Circle. Originally Exxon was not hampered by the first round of sanctions because they had signed contracts before the effective date of those sanctions. In the current round of sanctions officials removed that loophole and named the Russian energy giants by name. The new sanctions ban the export of goods, services and technology used in exploration and production of Russian deepwater, Arctic offshore and shale projects that have the potential to produce oil. That specifically targeted Exxon because the company said it was providing "services" in its partnership with Rosneft to drill the $700 million well.

BP was also hit because it has a 20% ownership position in Rosneft. Other Russian companies singled out were Gazprom, Gazpromneft, Lukoil and Surgutneftegas. The new sanctions prevent any activity by U.S. and EU companies with those Russian energy companies. Russia currently produces about 10 million barrels a day.

Russia exported $363 billion in oil and gas in 2013 and that accounted for 68% of the Russian budget. If the U.S. and EU can figure out a way to cut into those exports it will force Russia to back off its aggressive behavior. There is clearly a trade war developing that could have serious consequences to the global economy. Russia is expected to announce retaliatory sanctions against the U.S. and EU next week.

Ebay (EBAY) saw a huge spike in option activity after a rumor that Google was in talks with Ebay about taking a stake in the company. The rumor suggested Google was interested buying a 40% stake for $85 billion or $68 per share in order to use Paypal to compete with Apple Pay. Since Ebay only has a market cap of $65 billion the stock jumped +4.7% on the news and option volume was more than 4 times its daily average. Ebay denied there were any discussions with Google and shares gave back some of their gains but it still closed up +1.51 in a bad market. Late in the day analysts speculated there may be somebody else in talks with Ebay or the talks were not specifically about a stake. The official quote from Ebay was "We have had no conversations with Google about acquiring a stake in the company." That phrasing leaves a lot of other possibilities but the numbers in the rumor make no sense whatsoever.

Ulta Salon Cosmetics and Fragrance (ULTA) spiked +18% after a monster beat and raise. Earnings of 94 cents were higher than the 83 cent analyst consensus. Revenue rose +22% to $734.2 million also well over the $713 million consensus. For the full year the company now expects earnings to grow by +20% compared to prior guidance of "mid-teens." They are now expecting same store sales to rise 7-8% up from 5%. Citigroup raised their target price from $118 to $130 and Robert Baird raised the target from $110 to $125. Credit Suisse cited the earnings beat, guidance raise and 20% long term earnings growth as a "hat trick" and targeted $115. The company laid out a five-year growth plan and analysts were very pleased.

Bill Ackman submitted requests for a special shareholder meeting to the board of Allergan (AGN). Ackman has been gathering requests from shareholders in an effort to get the required 25% to force the meeting. Reportedly he submitted requests from 35% of shareholders. Allergan has been stalling on the meeting since April but the company now has to follow through and the meeting will be held on December 18th. The special meeting will allow shareholders to vote on replacing most of the current board members in order to force Allergan to allow a takeover by Valeant (VRX).

However, Allergan has asked a U.S. District Court to give them a preliminary injunction against Valeant, Pershing Square and Ackman and prevent them from voting any shares they own. Allergan claims the parties violated securities law prohibiting insider trading, failed to disclose legally required information and engaged in other fraudulent practices. With Ackman tightening the noose around Allergan the share price is rising towards the $172.60 buyout offer as investors begin to decide the deal will get done. Valeant launched an exchange offer in June for $72 in cash and 0.83 shares of Valeant.

Apple's iPhone 6 sales are booming. People that really wanted a new phone stayed up late Thursday night to be the first to place orders at midnight Thursday night. Apple's system was so swamped that buyers could not get on for several hours once the order process began. Buyers during the day on Friday were given delivery times 4-6 weeks away due to the heavy pace of sales.

Apple said it was experiencing "record orders" and a strong customer response. CEO Tim Cook said this could be the mother of all upgrade cycles because of the record order demand. The most owned iPhone today is still the iPhone 4, which is now three generations old.

RBC Capital Markets said Apple could sell 10 million phones in the first weekend. The numbers will be released on Monday. Think about that. If you are Apple you have the cash to manufacture and store those phones but where do you put 10 million phones in preparation for opening weekend? How do you coordinate the sale and shipment of 10 million units in different colors and features in just one weekend? That is an Amazon like effort but Apple only does this 2-3 weeks out of every year.

Apple shares recovered to trade at a post announcement high but stalled at $102. Investors are trying to decide if Apple is going to have a post announcement decline or will the strong sales numbers push them to new highs. Until the stock moves over $103 everyone will have to keep wondering.

The strong retail sales report plus the potential for the Fed to change the language in their statement was a double tap for treasury yields. The yield on the ten-year spiked to close at 2.614% and well off the lows of 2.3% just a couple weeks ago. That is a two-month high. The bond bubble appears to be bursting with bonds selling off like crazy. The only question is where did the money go? It is not going into stocks with about $1 billion in outflows from equity funds over the last week.

The Goldman Sachs Commodity Index ($GCSI) closed at a new two-year low after the dollar shot up to a new ten-month high. Commodities of all types are under pressure.

Gold has declined -7% since the August high of $1,324 with the majority of the decline due to the spike in the dollar.

WTI crude prices dipped to $90 on Thursday, a level not seen since April 2013. Brent crude is approaching a two year low on slowing demand and rising production. The rising dollar is also pushing oil prices lower.

It is going to be hard for Janet Yellen to raise interest rates when the entire commodity complex is crashing. The weak global economy is weighing on prices and the U.S. is not strong enough to pick up all the slack. Falling commodity prices will depress prices for consumer goods and lower inflation rates. This is the opposite of what the Fed wants even though it is good for consumers. The sharp decline in commodity prices is actually deflationary to some extent and contrary to the Fed's goals.

Yellen is also faced with a sharp drop in the Nonfarm Payrolls and even if you don't believe the numbers we have to take them on face value until they are revised. The Fed is probably going to continue to see a "significant underutilization of labor resources" as in the last FOMC statement.

Yellen is an employment junkie. She has given analysts a list of nine jobs related data points that will guide her in changing monetary policy. Only three of those factors are positive today. The positive factors are a shrinking layoff rate, Nonfarm Payrolls averaging over 200,000 and the job opening rate over 3%. The negative factors include the unemployment rate, quits rate, U6 unemployment rate, hires rate, long term share of unemployment and the labor force participation rate. All of those factors are still well below what is considered full employment.

After giving analysts her employment "dashboard" she is not likely to drive off in a different direction just because several analysts believe the Fed language should be changed. However, when the markets give the Fed an opening they usually take it. The market has given Yellen a perfect opportunity to remove the "considerable period" portion of the guidance and replace it with something that is more data dependent even though her view of the slack labor market has not changed. After considerable analyst chatter on the potential language change the market sold off ahead of the FOMC. The damage is now done; why not take advantage of it?

This is an opportunity for the Fed to inject some volatility in the bond market. The bond market has been in a rally that was unjustified because the rate expectations were dramatically different than reality. Very few investors expected the Fed to raise rates until late in 2015. That allowed the yield on the ten-year yield to drop to 2.3%, which is totally out of line with an economy that may have grown over 4% in Q2.

Merrill Lynch said "We think Yellen and her allies will try to avoid shocking the markets. In the past, when the FOMC has reworked its forward guidance, they have often softened the blow by explicitly noting that their view on the likely timing of the exit has not changed or by downplaying the change in the press conference." Merrill's Ethan Harris moved his date for the first rate hike to June. He is expecting Q2 GDP to be revised up to 4.8% and Q3 will be 3.8% growth. With that kind of growth he believes the Fed will have to raise rates in the first half of 2015.

In another release Merrill said "While we anticipate Yellen will continue to support a patient and gradual normalization process, the risk is that the markets may sell off on the perception of a less dovish Fed. We also expect the statement to note that these changes do not reflect a shift in policy preferences, and for Yellen to reiterate that point at the press conference. Still, the risk is that markets see these revisions as a hawkish move in the timing of liftoff. While we expect Yellen’s overall tone to remain dovish, market perception will be key. The combination of changes to the forward guidance language and any comments seen as potentially hawkish, could lead to a selloff, particularly at the short end of the yield curve."

With comments like that coming from a variety of analysts we are setting up for some volatility. Despite the rise in the VIX from 11.50 to 13.50 over the last three weeks there is still no volatility in the market. This is not expected to last and one trader placed orders for 135,000 October $22 calls on the VIX with Friday's close at $13.31. That is a bet of roughly $6.3 million that the VIX will rise 70% over the next five weeks. I could understand the bet if it was November calls that would take us past the Oct 29th FOMC meeting where QE will end. However, just going out to the October 22nd expiration does not cover that meeting.

This reminds me of the Armageddon trade from a couple years ago where someone placed a multimillion dollar put bet on the S&P that was way out of the money. Obviously this could be a hedge against a portfolio but it would be a really bad hedge since the market could decline significantly without spiking the VIX to 22. The VIX will only move that far if there is an unexpected event in the market or a sudden and dramatic reversal of fortunes leading to something worse than a correction. In the August selloff the VIX only rose to 17. In the last two years the VIX has only exceeded 20 on four occasions and it has not hit 22 since December 2012.

There are people out there who know of coming events but placing a bet like this would be a serious red flag for regulators after the fact. A month before 9/11 one of our writers received an email saying something like "get short now because every market in the world will crash in September." We talked about it at the time but ignored it. We get hundreds of emails a day and that was just another crackpot or so we assumed. After 9/11 we realized it was somebody with inside knowledge.

I hope that bearish VIX bet does not turn out to be a winner.

It felt like a bad week in the markets but the Dow only declined .9% and the Nasdaq .3%. The S&P lost -1.1% and the Russell 2000 -.8%. The high flying Transports only gave back .6%. Remember, we closed at a new high at 2007 on the S&P the prior Friday. This was not a bad week when you consider all the events weighing on the market. The drop in oil prices crushed the energy sector and that is a large percentage of the S&P. The drop in commodity prices hit all the commodity stocks in both agricultural and mining. The Russian sanctions and the strong dollar weighed on the S&P because those companies get 50% of their revenue from Europe. The Alibaba IPO was sucking huge amounts of money out of the market and Fed fears were killing the bond market and equities alike.

For the S&P to decline only -1.1% amidst all those factors was actually somewhat bullish. For next week the Alibaba selling should abate on Monday because trades to raise cash have to be settled by Thursday night. Selling in front of the Fed should end on Tuesday and bargain hunters hoping for a Fed surprise will be picking up stragglers.

If the Fed does change the language the damage has already been done. There will probably be some volatility but unless they go off the deep end on statement changes it should blow over by Thursday morning. If they don't change the language it should mean a market rebound for a couple more weeks then we will repeat the entire process for the late October meeting.

The S&P dipped to 1980 on Friday before clawing its way back to prior support at 1985. I was really glad to see that 1985 number at the close. If we can trade above that level on Monday the dip buyers should be adding to positions. If we trade below 1980 it could produce a change in market sentiment. The S&P is on the cliff edge and we don't want to take that next step.

If we do move higher the current resistance is 1996 followed by 2000 and then 2005.

The Dow is on shaky ground. The index closed under 17,000 after setting a new four week low at 16,937. The support at 17,000 was broken but only slightly. We could see a rebound from here but it would have to be at the open on Monday. If we go back down and retest that low the odds are good it would not hold. Recently we have been closing at the highs on Friday with the S&P closing at a new high on the two prior weeks. Closing at or near the lows is not confidence building and there is a lot of air under 17,000 before we hit strong support again.

The converging resistance at 17,075-17,150 was rock solid the prior week and it was tested again on Monday and it was still solid. Despite the close at 16,987 we are only about 163 points from the highs. That is just one good day for the Dow. The tight range in the Dow and S&P has made the declines seem worse than they are but the trend here is the key. There was a series of lower highs every day last week. The selling was not brutal but it was persistent and I believe it was related to cash raising for Alibaba and the Fed more than anything else. Both of those problems will be gone in the next couple of days.

Support would be the 50-day at 16,913 and the 100-day at 16,801. However, the Dow is not very reactive to moving averages. The 100-day has the best chance of holding a decline. If that breaks we could be looking at 16,725 again.

The Nasdaq is in a super tight range and the -.3% decline last week was barely even a hiccup. Support at 4550 is strong as is resistance at 4600. That 50 point range is seeing plenty of traffic and actually narrowing somewhat with only a 35 point spread over the last three days. The Nasdaq is consolidating in place and the dip buyers are alive and well. Biotechs, chips, software and solar stocks have been the leaders. When one sector takes a breather another sector steps up.

Let's hope this pattern keeps up until the rest of the market recovers from whatever is ailing it.

I was encouraged by the lack of a material decline in the small caps last week. The .8% decline was all on Friday after a strong rebound on Wed/Thr. There was volatility but no real movement. Fund managers were not running away from the small caps and that suggests the broader market is still healthy.

I was bullish last week but the sudden change in outlook for the Fed statement and the Alibaba cash raising killed that idea. This week is a coin toss. Once we get past the Fed and the Alibaba IPO we should see a lot of that cash coming back into the market. This is also option expiration week so there could be a lot of volatility related to expiration. The following week should begin the ramp into earnings and that gives investors a reason to be in the market.

If the Fed statement does change you can bet Janet Yellen will be backpedaling as fast as she can in the press conference to assure investors that "nothing" really changed and rate hikes are still a long way off. The Fed does not want to see 3% yields on the ten-year before they even finish with QE. Expect a lot of explaining why we should see the change as a good thing.

Lastly, September can still happen. This is normally the worst month of the year and bad things routinely happen. It has a better record when it comes after gains in August but nothing is guaranteed. According to the Stock Trader's Almanac September dips are the best time to load up on bargains ahead of the "best six months" of the year which starts on November 1st.

Random Thoughts

Now that your kids are back in school and whining about the teachers, food and long days you can show them this link. For kids around the world just getting to school is the toughest part of the day. Parents Worst Nightmares

The president is struggling to form a broad coalition but the most critical ally in this ISIS fight is refusing to join. Turkey, the country with the border right on the edge of ISIS territory has refused to let a U.S. led coalition use its airbases for combat operations, refueling and resupply. Turkey will only allow its bases to be used for humanitarian operations.

There is some discussion that this pronouncement is for public consumption. Secretly they may allow the coalition to use the bases. By publicly denying it they are trying to avoid a direct attack by ISIS as a coalition partner. Turkey is a NATO member and should take part in NATO operations. Turkey blamed the 49 Turkish hostages held by ISIS, which include women and children, as the reason they cannot take part in military operations. They were abducted from the Mosul consulate in June.

ISIS smuggles gasoline and diesel into Turkey and sells it for prices well under retail. In Turkey gasoline sells for 5 lira a liter ($2.30). ISIS is selling gas from trucks on the side of the road for 1-1.5 lira per liter. Turkish entrepreneurs resell it on the black market for 3 lira. ISIS controls about 60% of Syria's oil production and several oil wells in Iraq. They smuggle this oil into southern Turkey. The proceeds from the oil and fuel sales are used to fund their army. Some estimates put their daily take at roughly $2 million. The hostages keep Turkey from interfering with the smuggling process.

The CIA said last week that ISIS fighters may have tripled as a result of their success in Iraq and their social media campaign. The CIA now believes ISIS can field from 20,000 to 31,500 fighters across Iraq and Syria. That is up from the prior assessment of up to 10,000 fighters. Apparently poking the U.S. in the eye with a couple of beheading videos is good for recruiting. The CIA believes more than 15,000 foreign fighters from 80 countries of whom 2,000 are Westerners have traveled to Syria to join ISIS.

The planned air strikes in Syria have already been condemned by Syria, Russia and Iran. That should be no surprise. Russia said it was planning on complaining to the UN Security Council to prevent the strikes.

Funds are under a lot of pressure to add to gains before year end. This could cause a significant rally from any future dip. More than 80% of funds are lagging their benchmarks for 2014 and their bonuses and clients are at risk.

David Tepper's fund earned 42% in 2013. Through July it is up only 2.3% when the broader market is up +8%. That is a serious shortfall.

Perry Partners was up +22% in 2013 but up only +1.3% for 2014 as of August 22nd.

Leon Cooperman gained 30% in 2013 and is up only 2.25% through July.

Nelson Peltz of Trian partners gained +40% in 2013 and they are up only 6.6% through August.

Jeff Altman's Owl creek fund gained +48.6% in 2013 and they are down -3% for 2014 with 2% of the loss in August.

Paul Tudor Jones and Louis Bacon are down for the month. Bacon's main fund was down -5.5% through August. Jones is down -3% through August.

Wells Fargo analyst Gina Martin reaffirmed her 1850 year end forecast for the S&P on July 28th. On Tuesday she capitulated and raised it to 2100. She said she has spent most of the year expecting a "trade off" for stocks, with earnings growth improving but time ticking down on the Fed's monetary policy. While that is still the case she said earnings are starting to take over and turning Fed volatility into buying opportunities.

The other bear, David Bianco, with Deutsche Bank upgraded his 1850 forecast to 2050 on Monday and added a 2300 target for 2016.

The bottom of the ladder is still held by Brian Belski at BMO Capital. He reaffirmed his 1900 target last week saying "Despite the market's strength, we still remain comfortable with our now more cautious stance."

The pink entries have been recently revised. The number after their name is their prior forecast. Note the average forecast has risen from 2000 just four weeks ago to a robust 2027 today.

With all the bears turning bullish you have to wonder if it is time to be a contrarian. The low volatility in September is either lulling analysts to sleep or a ticking time bomb. The "fear index" is not showing any fear and that is sometimes a good reason to worry.

With oil prices plunging can gas prices be far behind? The national average on Friday was $3.41, down from $3.70 in June. Prices never fall as fast as they go up but cheap oil produces cheap gasoline and competition will eventually push prices lower. Some analysts expect $3.15 by Halloween and $3 is entirely possible according to Andy Lipow of the consulting firm of Lipow Oil Associates. Some southern states are already under $3.20. Baton Rouge and Kansas City are flirting with $3 already.

Nasdaq 5000 here we come. That is the belief of Ron Meisels a technical analyst in Montreal. He said the Nasdaq has fewer stocks and bigger companies that are more stable than in prior years. Many of these stocks now pay dividends, a sharp change from the Nasdaq bubble in 2000. The Nasdaq has only about half as many stocks as it had during the bubble and the components are about twice as large. There were 4,715 stocks in 1999 and about 2,500 now. Valuations are much lower and technology is rapidly improving, which will lead to new innovations and more M&A.

One thing every investor should continue watching is the interest on the Federal debt. The CBO has projected the U.S. interest on its debt to soar to $880 billion a year by 2024 compared to $411 billion in 2014. Currently the U.S. pays a blended 2.4% on its debt. The CBO is expecting that to climb to 3.1% by 2020. Personally I think it will break $1 trillion before then because once inflation begins to kick in the Fed will be forced to raise rates and the debt the government sells to pay the interest on its existing debt will be at those higher rates. If interest rates return to normal the interest on the debt could rise to 4.5% to 5%. This is the 800 pound gorilla that is not going away and everyone reading this newsletter should be preparing for it. Taxes are going through the roof and the economy is going to crash when that happens.

More than 53% of Chinese respondents expect war with Japan by 2020. About 29% of Japanese respondents also expected war. In the same survey 93% of Japanese have a negative impression of China and 87% of Chinese have a negative opinion of Japan. Apparently the governments of those countries are doing a good job painting the other in a bad light. With China's navy growing to be larger than the U.S. navy by 2020 the odds are good China will continue to grow into its bully role.

Journalist David Rothkopf was told by one of America's most dependable Middle Eastern allies in July, "You are still a superpower, but you no longer know how to act like one."

The current Ebola epidemic has infected more people than all the prior Ebola epidemics in the last 1,000 years. Of the 4,300 "reported" cases more than 2,300 have died. Unfortunately that is the good news. The bad news is that we are only one mutation away from having it transmitted by air instead of physical contact and that will cause a massive explosion of the disease. This article is well worth reading and it will scare the heck out of any intelligent person. What We Are Afraid to Say About Ebola

The Pope said on Saturday World War III had started on a piecemeal basis and he condemned the arms traders and "plotters of terrorism" for sowing death and destruction.

Over the Labor Day weekend President Obama applied to play golf at the Winged Foot, Willow Ridge and Trump National Golf Clubs in the New York area. Each club rejected his request saying they did not want to "shut down their clubs" so the president could play a round of golf. Labor Day is considered one of the busiest golfing weekends of the year. Should the president actually ask clubs like these to shutdown on a holiday weekend just so he can play? I think not.

The $2 billion Revel Casino in New Jersey is up for sale in a bankruptcy auction. Glenn Straub, a Florida developer, offered $90 million in cash. That is a heck of a discount and other parties have until Sept 23rd to place their bids.

Enter passively and exit aggressively!

Jim Brown

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"An economist is someone who sees something happen and then wonders if it would work in theory."

Ronald Reagan