A new factor: THE BLACK ELEPHANT.
Recent events in Paris, added new uncertainty to the marketplace. We have all heard of the Black Swan. THE BLACK ELEPHANT is similar to the Black Swan, as it is something we had not expected. The differences is that THE BLACK ELEPHANT, was there the whole time right in front of us for all of us to see, but we choose not to see it.( More properly it should have been called  the’ the gorilla in the room’ but the NYT coined  BLACK ELEPHANT). The markets so far have chosen to ignore some really negative factors, that I see so plainly and just goes higher!

The radical Muslim world, has found a new way to terrorize the infidels in the West. Rather than staging huge terrorist acts, such as 9/11, this new activity of random terrorize acts in various places throughout the globe could un-stabilize our Western economies. Events such as the savagery of ISIS, beheadings, the Boston marathon attack, the female genital mutilation’s, the abduction of girls in Nigeria, the execution of the  innocence in Iran, the slaughtering and enslaving of Christians in Egypt and Africa, and various other crimes against humanity committed by those who claim to represent Islam, have so far seem at a distance from most of us. However, the recent events in Paris could happen anywhere: in our local grocery stores or theaters or sporting events. If these kind of events persist or increase, economic disruptions may occur. Then there is the ‘gorilla in the room’ and ultimate BLACK ELEPHANT that everyone one is thinking about, but not talking about and that is the use of a ‘dirty nuclear devise” in a major city. Sorry, but in my opinion, I have to mention the possibility of this occurring is high!

Another BLACK ELEPHANT event that is currently occurring is that Congress is taking the teeth out of the Dodd Frank amendment. I suppose we should have expected this with the Republican dominating Congress, but here again, this was right in front of us for all of us to see, but we didn’t assume that the Republicans would be so bold. A January 10, 2015 article in the New York Times by Gretchen Morgenston is entitled KICKING DODD/FRANK IN THE TEETH. If you recall Gretchen was the first one that saw the weakness in mortgage bonds before the 2008 collapse. Last month in December, Congress reversed part of the Dodd Frank law barring derivatives from being traded in federally insured units of banks.  A new bill has been put forward on the 2nd day of the new Congress, which didn’t allow for debate among members. The process is supposed to be reserved for noncontroversial bills and requires support from two thirds majority to prevail. A central element of the bill chipped away at the VOLKER RULE, which is a regulation intended to reduce speculative trading activities among federally insured banks. The bill would give institutions holding ‘collateralized loan obligations’ (CLO) two additional years to sell those CLO’S. The VOLKER RULE, bars banks from ownership in or relationships with hedge funds or private equity firms, many of which issue and oversee the CLO’s. Like the mortgage pools, that wrecked havoc with the US banks in 2008, CLO’s can pose high risk for banks. The new legislation represents Wall Street’s attempt to end regulation on these instruments. Last spring the Federal Reserve gave banks two more years beyond the initial 2015 deadline, to get rid of them. In 2014 there were $124 billion of new issues of CLO’s. The 2nd part of the bill relates to the lucrative private equity industry, which remains loosely regulated. The bill would exempt some private equity firms from registering as brokerage firms with the SEC. Under securities laws such registration is required of firms that received fees for investment banking activities. Lastly, the bill limits derivatives information that would reduce transparency and increase risk,  allowing Wall Street firms with commercial businesses, like oil and gas or other commodity operations to trade derivatives privately and not through the clearinghouses. Nobody knows how many derivatives are out there. Estimates range OVER hundreds of trillion of dollars. Certainly, there are more derivatives than there is debt. How can this happen? RadioShack for instance has $1.4 billion dollars in debt, with $25 billion in issued derivatives. JCPenney has $8 billion in debt with $20 billion issued in derivatives. If things go wrong, taxpayers may once again be on the hook for bailouts.
Under Dodd Frank rules, the large banks, known as those who are “TO BIG TO FAIL”, are to increase capital requirements. For instance J.P. Morgan Chase Bank, may have to increase their capital requirements by some $20 billion. A recent report by Goldman Sachs issued on January 5 indicated that the best way for J.P. Morgan ( Goldman’s rival) to handle the situation, is to split up the bank. This is exactly what Dodd Frank rules have been designed to do, to decrease the risk to the public. These rules were to go in effect next year, but now Congress wants to give them a couple more years.

I have written previously about the other BLACK ELEPHANT, ‘deflation’. Today oil prices were at $45.22 a barrel. This low price of oil will have a deflationary effect throughout the world. Nations worldwide are trying to stimulate their economies. However Europe is already in a deflationary spiral. Unemployment in Greece and Spain is 25% 10 year German bond prices are 0.44%, and Japan’s 10 year bond is even lower at 0.28%. There appears to be a self-sustaining cycle which may be difficult to stop. Deflation is not good for paying off debt, of which the world is awash. World economies are trapped in a world of high debt, low rates and slow growth. This high level of debt is only sustainable at very low rates. Should rates increase because of financial and economic instability, there could be a financial crisis. Even Saudi Arabia may have trouble with low oil prices, as they need oil at $104 a barrel to balance their budget. Other states in the Oil Cooperative Council such as Omar are already in trouble. State owned oil companies, as I have mentioned in previous reports, are also in trouble.

After reading all the year in periodical I realize that I am one of the few people who are not bullish on the US stock market. In September 1981 I called myself a LONE BULL and predicted that markets would go from 1000 to above 10,000. Now, I may have to call myself the LONE BEAR and I see the markets vulnerable back down to the 12,000-10,750… It certainly isn’t as much fun being bearish, as it was being bullish. Let’s face it, a Bear Market will only help those market traders who can go short. Everyone else including my families, will suffer. Sorry, I just can’t go along with all the hype and year-end cheer. I continue to be worried about 1) the health of the consumer based US economy, when all of the growth is going to the top 1%. 2) the vulnerability of the high-yield bond market and 3) the balance sheets of the banks, if there is a bond crisis and now the effect of increased terrorist attacks on Western economies. I hope I’m wrong, but I just have to speak out when I see troubles ahead. So, in my opinion get ready for a volatile 2015. Happy new year!

Current 20014	Dow	NASDAQ	S&P 500
	17,640	4,664	2,028
Short Term	Down	Down	Down
Int. Term	?	?	?
Long Term	UP	UP	UP
ForecastedTrend	DJIA	NASDAQ	S&P 500
Short Term	Down	Down	Down
Int. Term	?	?	?
Long Term	Sideways?	Sideways?	Sideways?
Breakout Points	DJIA	NASDAQ	S&P 500
Short Term Up (Resistance)	18,086	4,814	2,092
Short Term Down (Support)	17,068/15,855	4547/4,1666	1,972/1,8200
Int. Term Up (Resistance)	18,062 See Fibonacci Projections above	5,002 See Fibonacci Projections above	2,486 See Fibonacci Projections above
Int. Term Down (Support)	15,356/14,688	3,986/3294	1,560
Long Term Up (Resistance)	18,974	5,132	3,044
Long Term Down Fibonacci Support	50%12,00062% 10,750	50%2,958  62% 2,555	50%1,390 62% 1,177

CARL BIRKELBACH 1/12/15