Sorry, this is just the beginning of the Bear Market.

Markets in China are falling apart as the Shanghai index was barely able to open before it was down 7%. In  2007 this index was at 5903, today it is at 3125, with an August low of 2927. It should break its August lows tomorrow. The China Hang Seng index today as at 20,333, and has already broken below its August low along with the China Large cap (FXI  31.95) below the Aug low of 33.22. If August lows are being taken out in in China, will the US markets be next? The Dow Transports index has already broken below its August low. Other markets that have broken below their August lows are The Russell 2000, Russia, Emerging Markets. the Commodity index and Deutsches Bank. Whereas US markets are well above their August lows today, we believe the deterioration of the Chinese markets and lower oil prices will eventually bring our markets down below the August lows. So far, US markets have been able to dodge a bullet with their relationship to a deteriorating China and the effect of  lower oil prices on supporting bonds. Don’t hang on. There is nothing to hang on to. Read last couple of Investment Strategy Letters below and our Lone Bear Letters.

1/5/16 Market Update.Markets throughout the world held up pretty well today considering the volatility of yesterday. The latest news from China is that they will extend their curbs limiting volatility for a little longer. This means that large investors and corporate insiders have not been able to sell their stock for seven months. In my opinion, this doesn’t decrease volatility, but will increase volatility and destabilization. Who knows what’s going on in China’s state owned corporations? Despite destabilization in the Middle East, oil is down eighty cents today at 35.96! If markets can hold above their August lows for the next couple of weeks, markets could once again begin going higher. However, I believe risks for a big drop are higher this year than last year. My forecasts for 2016 call for the Dow Jones Industrial average to be as low as 14,688, the NASDAQ to be as low as 4,506 and the S&P 500 to be as low as 1,560.

1/4/16 Welcome to 2016. US markets down 2%, Shanghai down 7%.Today, US markets were shaken by big drop in the Chinese market and trouble in the Middle East. Chinese trading curbs are scheduled to come off sometime this week. In August steps were taken to curb volatility. These steps included suspended initial public offerings, restricting big investors and corporate insiders from selling and limiting the trading behavior of so-called short-sellers. The decline in the Chinese market may be due to the fear that once these trading curbs are taken off, the Chinese market will once again go into freefall. The Hang Seng index had a low of 20,368 in August and is now at 21,327. If this low is broken, it could once again affect US markets. China has a controlled economy and it is very difficult to tell what is true and untrue. We do know this, the government sanctioned industries (FXI) are inefficient, debt ridden and over employed. Shanghai market was down 7% before the government closed down for the day.

European markets were also down some 4% today. The DAX low in August was 9,325, and it is now 10,283. I continue to believe that the canary in the mine is the Deutsches  Bank stock. It has fallen from fifty-one dollars a share to 23.49 in the last two years, and has broken below its August low by far.

The other canary in the mine is the Dow Jones Transportation index which has fallen below its August low. My worry in the US continues to be bonds that are held by banks worldwide and that depend upon their income and debt payments on higher oil and commodity prices. Once again, as it was with the mortgage bonds,’ the Emperor has no clothes; but everybody’s afraid to say so.

Continued trouble in the Middle East

More than 85% of the world’s 1.5 billion Muslims are Sunni. They live in almost all the countries across the Arab world including Saudi Arabia, Iraq, Turkey, Pakistan, India, Bangladesh, Malaysia and Indonesia. Shiites are largely in Iraq and Bahrain. The Saudi royal family practices austere and conservative Sunni Islam known as Wahhabism and controls Islam’s holiest shrines in Mecca and Medina. The recent flare-up between Saudi Arabia and Iran occurred when a Shiite cleric was executed along with forty-seven others for inciting violence against the state. The terrorist group, The Islamic State are Sunnis. This is really a civil war that has been going on in the area for centuries. Troops on the ground will not help. As during the Iraqi war, the terrorists merely faded back into the population until we were gone. There appears to be no real solution unless the Middle East Muslims decide to solve it themselves. Until then, expect more trouble. In spite of this trouble in the Middle East which theoretically reduce the supply of oil and theoretically therefore increases the price of oil did not happen today. Instead, oil prices once again fell and are at 36.88. To me this indicates that the problem in today’s markets is not the Middle East, but the problem is China.

Forecasts for 2016 and why I am negative! Goldman Sachs is forecasting 2015 S&P 500 earnings at $109 down 3% from 2014 $113. Original forecasts in December of last year called for an 8% increase. They were wrong!  2016 S&P 500 earnings are forecasted at $130 down from $231 a year earlier. 2017 are forecast at $129 down from $241 a year earlier. I believe earnings for 2016 and 2017 will be lower than forecasts from Goldman Sachs. My forecasts call for the Dow Jones Industrial average to be as low as 14,688, the NASDAQ to be as low as 4,506 and the S&P 500 to be as low as 1,560. Goldman Sachs calls for markets to be up approximately 8%. I disagree

I am not a negative person. I understand, however, that there are two sides to everything. The hubris and the hype that has made America a very positive force in the world, can sometimes ignore the very obvious, as was done in 2008. One of the reasons I have become The Lone Bear is because I don’t see anybody else talking about caution or concerns. Believe me; I would rather be talking about how wonderful Americans are, how great our market economy is and how kind our people are to one another. However, there is a lot we have to worry about and somebody has to talk about it.

Additional Dangers in 2016 The dangers of 2016 are as I have stated in the Lone Bear Letter and the market letters. However, there are some additional things that I’m concerned about that are non-economic issues, but which could have a devastating effect on our economy. They are as follows: 1) Since the attacks in Paris, US citizens are frightened of terrorists attacks in public places. The Republican debate tonight, talked about unlimited war in the Middle East and even confrontation with Russia, without considering the repercussions. The radical terrorists, of the Islamic state, have put themselves in a position to radicalize the US voting public. If there is a major terrorist act, like 9/11 or worse, they could affect who becomes the next president of the United States. Remember, it was the burning down of the German Parliament building that brought Hitler to power. Of course,. In my opinion, a Trump nomination, and possible election could skew all economic and political forecasts into a reckless future. 2) There is also the possibility of a mass cyber attack on US that could come from other than the Islamic state, but which could paralyze our economy. I heard a statement from Ted Koppel, on Sunday mornings NBC Meet the Press that struck a chord with me. He said, “There are two kinds of companies, those that have had cyber attacks and those who do not know they have had a cyber attacks.” With banking online as common, a cyber attack into our checking accounts could paralyze the economy.

One more thing: Happy New Year!

Current	Dow	NASDAQ	S&P 500
	16,514	4,689	1,943
Short Term	DOWN	DOWN	DOWN
Int. Term	DOWN	DOWN	DOWN
Long Term	SIDEWAYS?	SIDEWAYS?	SIDEWAYS?
Foretasted Trend	DJIA	NASDAQ	S&P 500
Short Term	Down	Down	Down
Int. Term	Down	Down	Down
Long Term	Bear Market?	Bear Market?	Bear Market?
Breakout Points	DJIA	NASDAQ	S&P 500
Short Term Up (Resistance)	16,912	5,057	2,062
Short Term Down (Support)	15,881/ 15,666	4487//4506	1879/1867
Int. Term Up (Resistance)	18,352	5,231	2,134
Int. Term Down (Support)	15,651/ /15,370 /14,688/ 13,377	4,506//4,116/ 3,986/3294	1,867/ /1,560
Long Term Up (Resistance)	18,352	5,231	2,134
Long Term Down Fibonacci Support	50%12,000  62% 10,750	50%2,958  62% 2,555	50%1,390 62% 1,177
10 Treasury 2.15%	Gold 1,108	Oil 33.26