The first six days of 2015 have been marked by large triple digit swings and increased volatility. Since January is known as the barometer for the full year we hope this volatility fades quickly and a bullish direction appears.

Market Statistics

There were multiple reasons given for Friday's decline but I think the real reason for the weakness was simply profit taking from the back to back gains totaling more than +500 points in the prior two days and some earnings disappointments.

Other factors being blamed were the terrorist events in France, the drop in wages in the payroll report, the strong job gains possible accelerating the Fed's rate hikes, weak retail earnings and falling oil prices.

Crude prices were actually rather stable for the week at $48 so it would be hard to blame crude for the decline. However, intraday on Friday there was a short dip to $47.16 but the market was already down -150 points well before crude prices began to weaken at 10:30.

The events in France were over by 10:00 as well but the Dow declined another -50 points at 11:00 so those events were probably not the reason for the market decline.

The weakness in retail earnings was a probable cause for the decline because of a flurry of warnings on Thursday evening. For the week there were 13 disappointments in retail earnings or guidance and 14 downgrades of companies in the sector. On Thursday Best Buy, Bed Bath & Beyond, Five Below, Helen of Troy, Macys and The Container Store to name a few all reported/warned about earnings and revenue. Wet Seal (WTSL) is expected to file bankruptcy next week after announcing the closure of 338 stores. Macys is closing 14 and JC Penny is closing 40. Aeropostale is closing 125 stores by the end of January.

Body Central (BODY) said it was closing all 256 stores on Sunday night and terminating more than 2,500 employees. The company wanted to reorganize as a smaller chain but was unable to raise the necessary financing. Deb Stores and Delia's Inc both filed for bankruptcy in recent weeks.

Green Street Advisors said more than 60 malls are near closure after more than 24 have closed in the last 4 years. Store Closings

Those are not the kind of post holiday results that investors want to hear. This is especially true when consumers have a lot of extra cash in their pocket from significantly lower gasoline prices. The Retail Sales report for December will be out this week and expectations have declined to only a +0.1% gain, down from +0.7% in November. The Retail ETF (XRT) fell -2% on Friday.

I beleive this flurry of retail earnings was a major drag on the market because the S&P futures were down more than 8 points before the payroll numbers were released. After the payroll report they spiked back into positive territory for about an hour but as soon as the cash markets opened the selling began. Combining the weakness due to the retail warnings with profit taking from the Wed/Thr gains and we ended up with a market decline.

The big economic report for the day was the Nonfarm Payrolls and another blowout number. The headline job gain for December was +252,000 after +321,000 in November. Everyone was worried that November number would be revised significantly lower or that the big November number was jobs pulled forward from December. Apparently that was not the case.

The November number was revised higher to 353,000 and October was revised up from 243,000 to 261,000. Combining the headline number with the +50,000 in upward revisions made the monthly average for Q4 +289,000 per month and +246,000 for all of 2014. For all of 2014 the U.S. created 2.95 million jobs and the best year since 1999. Unfortunately most of them were part time jobs under the 30 hour limit for Obamacare. Today a lot of workers have to work two jobs to make up for the cut in hours on their primary jobs. The unemployment rate declined from 5.8% to 5.6%. Remember, anyone that has not looked for work in the last 4 weeks is not included as unemployed. They are tallied in the broader U6 unemployment rate which was 11.2% at the end of December. The separate Household Survey that produced the unemployment rate only showed a gain of +111,000 jobs in December compared to the +252,000 in the Establishment Survey.

December extended the 58 month streak of consecutive job gains to 11.2 million and the longest streak on record.

The U.S. created 2.95 million jobs in 2014 but the number of unemployed declined only -1.7 million. That discrepancy is due to workers taking a second job and new workers entering the workforce from graduation and immigration. Those employed part time for economic reasons totaled 6.8 million. Those people want full time work but can't find it.

There were a couple flies in the payroll soup. The labor force participation rate fell from 62.9% to 62.7% and tied for the lowest level since December 1977. We also hit that 62.7% low in September 2014 and also in 1978. More than 273,000 people left the workforce in December. The actual number of people unemployed declined by -383,000 but that was offset by the 273,000 who left the workforce and the seasonal adjustments. The number of people not in the labor force rose by +451,000 in December.

The second problem was a -0.2% drop in average hourly earnings for all employees and -0.3% for production workers. That is the biggest decline since comparable records began in 2006. Earnings are heading in the wrong direction and this is a problem for the Fed. They want wage growth not wage decline. No rate hikes while wages are declining. Analysts blame the falling wages on a surplus of applicants and Obamacare forcing millions into part time work.

The construction sector gained +48,000 jobs, professional and business services +52,000, education and health services +48,000 and leisure and hospitality (mostly part time) +36,000.

The annual revisions for the Establishment Survey will be announced in the January payroll report on February 6th. Previously reported numbers dating back to January 2010 are subject to revision. For the Household Survey they will use new census data beginning with the February report and that will make comparisons to all prior data impossible. It will begin a new series in February.

The drop in oil prices is beneficial for consumers but it is going to take a huge toll on energy workers. The Dallas Fed projects a loss of -125,000 energy jobs over the next six months and probably another -50,000 jobs in industries that will be hurt by the decline in the energy sector. Ensign Oil laid off 700 workers last week as a result of cancelled contracts for their drilling rigs. U.S. Steel laid off 700 workers and closed two tubing plants because of falling demand from the energy sector. In Mexico more than 10,000 workers in the energy service sector were laid off with the potential of that rising to 50,000 in the coming months. This is just the tip of the iceberg. Baker Hughes reported active rigs declined -61 last week to 1,750 active rigs for the fastest decline in two decades. This is down -181 from a peak of 1,931 on September 26th. That is a drop of -9.3% in three months. The average rig drills 5 wells a quarter to that means a drop of -905 new wells for Q1 and the carnage is just beginning. Enjoy your cheap gasoline while you can because it will not stay this low.

The economic calendar for next week has quite a few reports with the Retail Sales for December, Philly Fed Manufacturing Survey and Fed Beige Book the biggest events. Along with those are the CPI and PPI and the next look at U.S. inflation.

The Philly Fed Manufacturing Survey could be the most troublesome. The headline number is expected to decline to 20.0 from 24.3 in December and 40.2 in November. That is a significant decline and in line with some of the weakness in other regional reports. This is not the right direction for a growth economy.

Retail sales are expected to barely post a gain of +0.1% and this is for the holiday shopping period. With all that extra gasoline cash in consumer pockets we still could not grow sales. This may be more of a factor of online shopping taking market share rather than a simple slowdown in purchasing.

The Fed Beige Book is expected show conditions in the 12 districts are still moderately positive. That is the rut we can't seem to avoid. However, with several of the regional manufacturing reports showing weakness I would not be surprised to see some weakness in the Beige Book comments. That would be the kiss of death for rate hikes. If the Fed districts begin to show weakness the hikes will be off the table for a long time. Since the Fed goes out of its way to paint a rosy picture in this report, any cautious comments means conditions are worse than they actually claim.

I did not highlight in yellow the Consumer Price Index and Producer Price Index because with crude oil and all other commodities still crashing there is almost no way inflation could have risen.

Split Calendar

The big events for next week are on the earnings calendar. JP Morgan and Wells Fargo on Wednesday. Bank of America and Intel report on Thursday and Goldman Sachs and Charles Schwab report on Friday.

While on the economic topics China posted a -3.3% decline in Producer Prices for December and the biggest decline in more than two years. The Consumer Price Index declined -0.2%. These numbers suggest the Chinese government will add additional monetary stimulus to jumpstart the economy.

At the same time the Eurozone economy posted a -0.2% decline in the Consumer Price Index. Mario Draghi is going to be forced to implement additional stimulus measures at the January 22nd meeting. Germany will be pulled kicking and screaming into the fold because the rest of the Euro area is crashing. Everyone may want to say they are trying to head off deflation but they have already lost the battle. The current challenge is to limit its impact and try not to repeat Japan's lost decade. Deflation is actually harder to fight than inflation because it changes the mindset of everyone affected. Deflation makes money more valuable and consumers and businesses realize it is better to hold on to the cash rather than spend it. Sales decline, profits decline, tax revenues decline and there is no immediate fix.

Draghi is expected to launch some form of QE but his options are limited. The amount of sovereign bonds in the market is much smaller and spread over two dozen countries. Which bonds does he buy and in what quantity. Does he buy the bonds of the weak countries and really tick Germany off or does he buy the bonds of the rich countries and thereby limit the effectiveness of the program. He has a tough job ahead and based on his history of strong talk instead of strong action almost nobody expects him to succeed in the short term.

Chicago Fed President Charles Evans was credited with sparking the midweek rally. He said it would be a catastrophe to raise rates too early and he was in no hurry. On Friday he reiterated that position saying he did not expect the Fed to raise rates until 2016. That is far from the party line that suggests a June hike and I even heard the possibility of April as a date from one commentator.

On Friday Atlanta Fed President Dennis Lockhart said the strong jobs report was no reason to speed up the timing of rate hikes that he sees as happening later in the year. "If the committee is to err on the side of being a little late as viewed by history writers or maybe a little early, I would prefer to take the risk of being a little bit late." Lockhart said a lack of wage growth suggests significant slack remains in the labor market. "We are still waiting to see the kind of strengthening in the wage numbers that would be consistent with what we expect" in a strengthening job market. In other words, no hikes until all the numbers show strength and that could be a long time.

In stock news Friday was the eighth anniversary of the announcement of the iPhone. The app store debuted just six years ago in 2008. Last week Apple said the app store generated $10 billion in revenue for developers in 2014 and has produced over $25 billion in cumulative revenue for developers. The company said app store revenue rose +50% over 2013 levels to $15 billion in 2014. Apple keeps 30% of revenue for managing the app store. JP Morgan said Apple likely earned $2.1 billion in app revenue in the second half of 2014 alone and that was less than previously expected.

Apple said the first week of 2015 saw customers spend half a billion dollars in the app store with New Years day the single biggest revenue day on record. The app store now offers more than 1.4 million apps for iPhones, iPod Touch and iPads. I think it is safe to say that as the leader in the field Apple has changed the way the world communicates and they did it in only 8 years. Apple is expected to produce $183 billion in total sales for 2014.

Apple said on Friday they were raising app prices for Canada and Europe in response to the currency swings and the rise in the U.S. dollar. The starting price for Canadian apps rose to $1.19 and apps priced in euros rose from .89 to .99 euros. The Canadian dollar has declined -10.1% since July and the euro has declined -13%.

The record breaking app sales last week suggests Apple sold a lot of iPhones in December. Quantum Trading expects Apple to report sales of 63.7 million phones with a lot of them the Plus size models. The bigger phones people buy the more apps they buy. The analyst said he may be high on his estimate but anything over 62-63 million is a "jaw-dropping number." UBS is predicting 69.3 million, up from 51 million in Q4-2013.

Quantum is not alone. Analysts are revising their numbers higher almost every day as Apple stores continue to sport lines of people waiting to buy iPhones. With 80% of the banks and credit unions now supporting Apple Pay there is an even bigger reason to own an iPhone rather than a Samsung or Motorola.

Apple shares continue to struggle since their November highs. Despite higher price targets almost every week the stock continues to wander between $105-$115. I think everyone is afraid of a sell the news event when they announce those earnings on January 27th. Expectations are so high it would be tough for Apple to beat the estimates.

Regeneron (REGN) gained nearly $8 on a bad market day after a study found the cholesterol drug they are developing with Sanofi was effective in fighting "bad" cholesterol even when taken once a month rather than every two weeks as tested in prior trials. The drug Allrocumab is an injectable PCSK9 inhibitor that blocks the formation of LDL cholesterol. This is the type of cholesterol that leads to heart disease. This drug could come to market early because Regeneron bought an "accelerated review voucher" from BioMarin (BMRN) for $67.5 million. The vouchers are tradable and essentially buy you a spot in the FDA approval process. More than 71 million Americans have high cholesterol and only 1 in 3 have it under control. Amgen has a similar drug called Evolocumab, which is expected to hit the market about the same time. Both are expected to be billion dollar blockbuster drugs.

DuPont (DD) has been attacked by activist investor Nelson Peltz and his Trian Fund Management. The fund owns about a 2.7% stake in the $67 billion market cap DuPont. Peltz has been chasing DuPont for several years. The board met with him 17 times, considered his recommendations and said no. Peltz is now trying to gain 4 seats on the board in an effort to split the company into two parts. One would be the growth businesses and the other the stable cyclical businesses. DuPont has already agreed to spin off its chemicals business but that did not satisfy Peltz. He claims the company is not moving fast enough and not evolving. The company pointed out that $10 billion in revenue for 2014 cane from products that are less than 4 years old. Most companies would kill for growth like that. The battle lines are drawn and this could take a long time to play out. The stock declined $1 today and that is abnormal. Normally stocks go up when activists appear.

Polaris Industries (PII) was downgraded by BMO Capital from buy to hold. BMO thought Polaris could be hurt by the stronger dollar and lower spending by farmers and energy companies. The decline in oil prices means lower capital spending on everything from new wells to new utility vehicles for moving around the oil fields. Shares declined -5% (-$8) on the news.

I would not be surprised to see similar downgrades on companies like Caterpillar, Cummins, Deere, U.S. Steel, Alcoa, etc. Energy companies can't cut $250 billion a year in spending and not impact these firms.

Crocs (CROX) was cut from buy to hold by Piper Jaffray with a price target of $13. Shares declined -5%. Starwood Hotels (HOT) was cut from buy to hold by JP Morgan. Shares declined -4%. Foot Locker (FL) was cut from outperform to neutral by Credit Suisse on valuation reasons. The analyst still liked the stock but said after the 2014 gains investors should look for a better entry point. Shares fell -2%. Ralph Lauren fell -$2.50 after Janney Capital Markets cut them from buy to hold citing intensifying global headwinds.

I am afraid we are going to see a lot more downgrades in the weeks ahead. The recession/depression in Europe, continued weakness in China and Japan, increased terrorist activities that change consumer shopping habits, the strong dollar and countries like Russia, Brazil, Mexico, Nigeria and all the OPEC nations where sharp drops in export revenue lead to a shortage of dollars and sharply reduced spending, will all weigh on U.S. corporate earnings.

The U.S. may be the best house on a bad block but the other houses are on fire and the flames are getting close. This is eventually going to impact U.S. earnings. Back in November analysts were predicting S&P earnings from $130-$138 for 2015. That number is closer to $120 today and still dropping. The energy sector alone is expected to report a -23.4% decline in earnings. We need to watch for future earnings downgrades, which will begin to flow in quantity as companies begin reporting earnings. Next week has an abbreviated calendar of mostly banks with Intel the lone tech stock. Intel is in the sweet spot today in its various chip efforts so I doubt there will be any trouble there.

Somebody made a monster bet against Intel's competitor AMD last week. They paid $3.5 million to buy 100,000 contracts of the July $2.50 puts at 35 cents each. AMD was trading at $2.65 at the time. Because of the magnitude of the bet and the fact that AMD would have to trade at or under $2 to make that bet worthwhile I wondered to myself if Intel was the purchaser. Intel knows what is happening in the chip market and what new technology they are about to drop on the market. If Intel has some new process that extends Moore's Law it could really hurt AMD. Intel does not want to put them out of business because that would make Intel a monopoly but that does not mean they can't capitalize on their own success.

On April 19th, 1965, Gordon Moore, co-founder of Intel, predicted that the number of transistors per square inch on an integrated circuit would double every year for the foreseeable future. Today the vastly more complex technology is doubling every two years. In 1971 Intel invented the 4004 microchip with 2,300 transistors. Today's processors have more than 1 billion transistors on a 2 inch square chip. There is more computing power in your smartphone today than on the Apollo missions to the moon. Intel said the price of a transistor on a chip had fallen to the same cost as one letter on a printed newspaper page. Today's transistors can switch on and off more than 1.5 trillion times each second. Along the way AMD has been content to feed off Intel's scraps by offering technology that was slightly behind the times at a reduced cost. AMD no longer has the money required to continue competing with Intel. Are they about to become extinct?


Can I just skip the market section today? After the wild swings in the market last week I hesitate to make any predictions for the first week of the earnings cycle. There are so many factors at play this time around that anything is possible. Whenever confusion reigns we have to go back to the charts and take on faith what they are telling us. Unfortunately they are as confused as we are.

In my Tuesday commentary I said I expected a bounce from the oversold conditions. That became a significant bounce of more than 500 Dow points.

The number one thing that sticks out on all the charts is a failed lower high after two days of very strong gains. Personally I can talk myself into accepting that lower high as two steps forward, one step back. Unfortunately that may not be the case. The magnitude and velocity of the moves last week suggests a lot of indecision on the part of both buyers and sellers. There are conflicting reasons for buying and selling in the first week of the year. One very experienced trader called it "amateur week" and said he rarely trades in the first week of the year because the animal spirits are at work.

Investors wait until the calendar turns over for a variety of reasons and then they trade all at once to restructure their portfolio for the new year. They saved up their trades for whatever reason known only to them and then drop them on the market all at once.

One positive point for Friday was that the decline occurred on the lowest volume of the week at 6.2 billion shares. Throughout the week we had higher than normal volume on both the declines and the rallies. Tuesday's decline was the highest at 8.3 billion shares but Wed/Thr still averaged a very decent 7.1 billion shares.

Next week is option expiration week. Because the first day of the month was on a Friday the expiration week comes early this month. Typically the volatility associated with option expiration comes the week before expiration and then again at expiration. Because January options and LEAPS cross over the tax year break there is additional volume and volatility attached.

I believe we have already experienced the January option volatility and next week should be rather tame "as a result of option expiration" but that leaves numerous other problems. The weakness in Europe is starting to spread to the USA. Everyone hoped it would not be contagious but when even Apple is changing prices on items that cost $1 you know it really is becoming a problem.

When treasury yields are near two year lows and volume in bond funds is at 52-week highs despite Fedspeak suggesting rate hikes are coming you know something else is at work. Unfortunately we don't know what is driving the markets but it is probably a combination of things related to Europe and the drop in energy prices. Both are going to have a lasting impact on the markets.

I personally don't believe Mario Draghi is going to pull a rabbit or in this case a bazooka out of his hat on January 22nd. I think a lot of investors feel the same way because he has a habit of talking a big game but failing to take action. Even if he did make some significant move it is not going to impact the European economy for months. The current economic direction is down and because they are a collection of individual countries he has a much harder job turning them around than the U.S. Fed. The European contagion may be the main factor weighing on our markets and it may not get better in the near future.

I don't want this to turn into a gloom and doom warning. I simply think treasuries are warnings us there is something else in play besides the drop in oil prices.

Despite the volatility in December and last week the S&P is still near the top of its long term channel. We have only returned to test the bottom of the channel once in the last two years and that was in October. In any rational market we should test it a couple times a year. Since October 2011 the market has moved almost straight up. We are due a rest but it could be next week or next quarter. Nobody has an infallible crystal ball.

Friday's decline could have been a failure at a lower high or just profit taking ahead of the weekend with a lot of negative headlines flowing. I am leaning to the bigger picture of investors finally becoming wary of the European impact on the U.S. economy. That impact is reduced profits from the stronger dollar and slowing sales overseas. We have been talking about it in passing for months but the market kept making higher highs.

We need to listen to the charts BUT three days is not a trend. While I would like to tell you Friday's drop was just profit taking ahead of the weekend and a new buying opportunity I can't. While that may be the case the charts don't show it. The charts show a lower high and that is a caution flag. Even worse, if we were to decline from here and make a lower low under 2,000 it could trigger even harsher selling.

Up until now every 4-5% sell off has been cheerfully met by the dip buyers. October was the exception but then December reinforced the original pattern. The drop last week from 2,093 to 1,992 was another -4.8% drop on the S&P. Dip buyers showed up and a short squeeze was born.

We say all the time in the newsletter things like "The trend is your friend until it ends." Every trend ends and normally there is little warning. I am normally bullish. I always buy the dips early and pay the price for a lack of patience. On indexes I typically sell the rallies too soon. On this bounce I am worried the Friday dip is a preview of coming attractions. If the market does move higher I am also worried that the prior high at 2,093 is going to be solid resistance and that assumes we don't get a head and shoulders top at 2,077.

I know the vast majority of analysts are calling for significantly higher highs by the end of 2015. I hope we get there. Even if we were to reach the highest estimate to date at 2,375 those are year-end forecasts. Anything is possible between now and December.

For next week I would continue to advise caution on new positions. It never hurts to be careful and even if we miss an entry point as long as you have capital there is always another trading day. I hope I am wrong and my worries prove to be unfounded. January is normally the second best month of the year but there is never a guarantee.

Look for resistance at 2060, 2077, 2093. Support should be 2006, 2000, 1985 and 1972.

The Dow chart is the same pattern as the S&P and Nasdaq with Friday's loss suggesting a failed rally. I am not going to repeat everything I said above other than three days does not make a trend. We need to remain cautious for next week and see what the market gives us.

Support is 17,285 and resistance 17,900, 17,960 and 18,085. I know that is a huge range but the Dow has moved in triple digit swings every day this year. Monday could easily be another 200 point day in either direction.

The Nasdaq chart is similar to the other indexes but the rebound was less and the resistance is stronger. In its favor it did rebound from the 100-day average twice in the last three weeks. Unfortunately the third short term retest of any support point is prone to failure. The Nasdaq has a lower high and it came to rest about 100 points below serious resistance at 4,800.

If I were betting on the Nasdaq I would be buying puts on the QQQ because the Nasdaq 100 ($NDX) is weaker than the Nasdaq Composite and the big caps tend to lead. On the NDX we have downtrend resistance from the November highs that intersects prior uptrend support at about 4,300. That is 47 points over the high on Friday. This is the index to watch for next week. If it declines to a new low under support at 4,100 I would be significantly bearish.

The Russell 2000 is struggling like the other indexes but the key point is that it is not outperforming the big caps. This is January and the Russell is supposed to be leading us higher. That is not happening despite closing only -35 points from its recent high. The decline of almost 70 points was brutal and it has only recovered half of that loss. It is not too late for the Russell to take a leadership position but I am focused on the Nasdaq 100 as our market leader for next week. If the Russell returns to take a leadership position then I will switch horses.

The chart of the NYSE Composite is ugly. It is in a longer term declining pattern and working on its fourth lower low. The rebound here was lackluster probably because there are a lot of energy stocks on the NYSE. There are also a lot of financials and next week the financial blue chips will report earnings and the outlook is not good. I think the NYSE is another leading indicator suggesting the market is not that healthy.

The Dow Transports ($TRAN) are also weakening. There was almost no rebound on the transports and the index failed to even test the 9,000 level again. Friday's decline of -103 points with oil prices dipping to $47 intraday suggests the gains based solely on oil prices are over. There are valid concerns we will begin to see declines in shipments and as a result of the oil crash and the next test of the 100-day average may fail.

To summarize my thoughts I think the majority of the rebound was a short squeeze from severely oversold conditions in the short term. Everyone piled on in the decline to start the year and they were rewarded with a short squeeze for their trouble. Friday's rebound probably equalized the buy/sell pressures but Monday starts an entirely new week. I suspect there will be more negativity coming out of Europe and oil prices may dip even lower after comments from OPEC nations this weekend.

For the last two weeks I have advised caution in early January with the potential for a post expiration drop. I have not changed my view. I hope I am wrong but in any case remain cautious until we get past expiration.


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Random Thoughts

Britain's MI5 chief warned on Saturday that al Qaeda in Syria is planning mass casualty attacks on the West including the USA. He said they would likely attack transport systems and "iconic targets." Chief Andrew Parker has not spoken in public since October 2013 so this rare public speech should be taken seriously. He said militants from Pakistan have appeared in Syria in what analysts say could be part of a plot to mount a major attack against the west. He said about 600 British extremists had traveled to Syria to join Islamic State. He said, "We face a very serious level of threat that is complex to combat and unlikely to abate significantly for some time."

I fear we are a very soft target in the USA. We come and go at will with no restrictions on movement and very little police presence. Of course if they attack in New York there will be an immediate police response. However, attacking a mall, theater or sporting event in Atlanta, Denver, Minneapolis, etc will find little resistance and the potential for great loss of life. Most malls have only rent-a-cops with little training and minimum weaponry to defend against automatic weapons. If planned correctly a van full of terrorists could be dropped off at one end of a mall. They run through the mall shooting everyone in sight and then out on the opposite side and back in the van for a quick getaway. The entire process would take less than 3 minutes. The chance of a police pursuit would be minimal and they are then free to do it at another mall in another city a week later. I fear America's turn in the spotlight is coming.

Russia's credit rating was cut to BBB- with a negative outlook and the lowest investment grade rating by Fitch Ratings. Fitch said the rise in interest rates to 16.5%, the drop in export revenue of more than 50%, which makes up 65% of Russia's budget, the sharp decline in the ruble, rampant inflation and the current economic sanctions over the Ukraine were driving Russia into a deep recession. Russian corporations can no longer access the public debt markets and the government has to dig deep into its reserves to support government entities like Rosneft. The major credit agencies expect Russia's rating to be cut to junk status within the next three months. S&P expects to conclude its review by the end of January.

The ECB is considering a 500 billion euro QE program for action on January 22nd. The governing council was given a presentation with various options for buying bonds from AAA- to BBB- that would take the ECB half way to its goal of 1 trillion in new stimulus. The ECB balance sheet, now 2.2 trillion euros would rise to more than 3 trillion if the full plan was enacted. Banks have to repay 200 billion in short term loans over the next several months unless the LTRO program is extended. By focusing only on investment grade bonds it would avoid the problem of buying Greek bonds, which are rated junk by all three ratings agencies. Germany is opposed to QE programs claiming they involve unwarranted risks and undermine the incentive of governments to make economic reforms.

In the U.S. the Federal Reserve paid a record $98.7 billion of its 2014 net income into the U.S. Treasury as part of an annual dividend it remits after covering its own expenses from interest on its balance sheet and other sources of revenue. The Fed estimated it earned $115.9 billion from interest on treasuries and mortgage backed securities it currently holds. The Fed's balance sheet is roughly $4.5 trillion today as a result of multiple QE programs. After operating expenses the Fed's net income for 2014 was estimated at $101.5 billion.

So here is the real kicker to the Fed buying treasuries. Not only does the Federal government get a rock bottom interest rate on its debt as a result of the Fed buying the majority of the treasuries in the market but the Fed then refunds the interest paid in the form of the annual dividend so that further reduces the interest expense the government is paying on those treasuries.

When it comes time for the Fed to liquidate those treasuries it will be because interest rates are rising and the economy is improving. The interest rate the government pays will likely triple or quadruple plus the Fed will no longer be refunding earned interest to the government. Depending on who is reporting the government currently pays between $250 to $350 billion a year for interest on the debt. By 2020 that is expected to rise to $650 billion and by 2025 to $1.2 trillion a year. The debt balloon will be bursting as we enter the next decade and it will not be pretty.

Carmine Grigoli at Mizuho Securities offered some very interesting statistics last week. He pointed out that treasuries had risen more than 20% over the last year. Whenever that has happened in the past in 9 out of 10 occurrences the equity market rose an average of +20% over the next 12 months. Whenever oil prices have declined more than 40% in a six month period the equity market rallied an average of 27% over the next 12 months 95% of the time. His price target on the S&P for 2015 is 2,300. Let's hope he is right and history repeats itself.

Another analyst, David Darst, pointed out that when oil prices had declined -50% in 6 months, which has only happened 5 times in recent history, prices rebounded +52% over the next six months.

Another analyst whose name I can't remember pointed out that gasoline prices have only declined more than 50% ten times in history. Six were recessions, two were terrorist events and one was Hurricane Sandy. We are in the tenth one today, which is the result of global economy weakness reducing demand. Whenever this has happened the economy was significantly stronger 12 months later.

Despite the rough start to January the overall outlook for the equity markets is still strong. Assuming Europe and China do not implode and drag the rest of the world down with them we should end the year a lot higher in equities.

There is a new Amazon competitor coming. It is called and it will function like Costco as a membership site. For $49.99 a year they claim you can buy items 10-15% cheaper than anywhere else online. The man behind the new shopping site owned before he sold it to Amazon for $550 million. He worked at Amazon for two years before coming up with his new idea. Marc Lore is the entrepreneur behind the effort. He believes people will shop on because of the customer service and the cheaper prices. Unlike Amazon where everything is pushed towards two-day delivery for prime customers, will offer normal delivery of 3-5 days and save the freight. Lore said everything Amazon sells to prime members is marked up to compensate for the freight costs. He is hoping middle class consumers will be fine with normal freight if they can get the items for 10-15% less. He has already collected $80 million in seed money and plans to raise hundreds of millions more. will not actually sell the products like Amazon, which requires inventory, warehouses and shipping. They will function like Alibaba and just take a fee from sellers for arranging the transaction. This reduces their overhead significantly compared to Amazon. On you get an additional discount for purchasing multiple items at the same time. Costco has over 100 million paying members in the USA and customers still have to go to the store to shop. Lore believes he can beat their prices and save the customer the hassle of going to shop. If you use a debit card instead of a credit card Jet will give you a 1.5% credit on the order. Everything counts in Jet's plan to be the absolute lowest cost online shopping site. The site will begin operation in February for people that are preregistered and go live in March. Click here to preregister

Nice work if you can get it. In India it is practically impossible to be fired from your job for other than criminal reasons. Worker A.K. Verma managed to retain his job and get paid for 24 years without ever going to work. He last appeared for work in December 1990. He applied for temporary leave and when that leave was up he continually applied for an "extension of leave" which was never granted but he never returned to work. In 1992 an inquiry found him guilty of "willful absence from duty" but it took another 22 years and the intervention of a cabinet minister to eventually terminate him. He was paid for the entire 24 years and never worked a day. This has gotten to be such a common scam that Prime Minister Modi has cracked down on rampant absenteeism by making New Delhi bureaucrats sign in at work by using a fingerprint scanner with the results available online in real time.

In Venezuela the inflation is so high and price controls so bad that food stores have military guards. The government put food stores under military supervision because of fighting for available products. Now lines of shoppers stretch for blocks with some shoppers waiting in different lines for days just to find products like soap or chicken. Shoppers complain they wait for hours in line only to find the store shelves nearly empty when they are let inside. They are also limited to only two bags of items. Any imported products are impossible to get. That includes toilet paper, batteries, soap, etc. The official exchange rate for the Bolivar is 6.3 to the dollar. The black market exchange rate is 187 per dollar. Companies will not ship products into Venezuela because they can't get paid. For those firms making products inside Venezuela the government controlled prices are so low they can't make a profit so they either halt production or smuggle their products out of the country. Another currency devaluation is imminent and the government is living on borrowed time.

More than 10,000 people working at Mexican oil service companies were laid off last week due to the drop in oil prices. The government dipped into the bank accounts of Pemex and took out $3.5 billion to keep the government running. Without that money Pemex can't pay its bills and exploration expenses. Pemex was forced to cancel contracts with more than 100 service companies. The company posted a net loss of $4.4 billion for Q3. That was the eighth consecutive quarter of losses due to falling oil production and falling oil prices. Job losses could rise to 50,000 over the next several months.

Pemex drilled only 19 wells in the first 10 months of 2014 and less than 25% of their target number. U.S. companies doing business with Pemex are having their contracts cancelled. Helmerich & Payne, the largest U.S. contract driller said it had received termination notices on 4 rigs. Pioneer Energy Services received termination notices on 4 rigs as well. Saudi Arabia is getting its wish for slowing oil production. Unfortunately the fallout from this decline may end up damaging workers, companies and countries for a very long time.

Enter passively and exit aggressively!

Jim Brown

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"Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote."

Benjamin Franklin