Rally keeps rocking

Charts: The S&P 500 closed at 955, up .36%. XLF (financial index) closed at 12.13, down .9%. The broad index is at the top of its trading channel and pushing against resistance. Short sellers are unwinding their positions, which is buoying the index. While technicals are very strong we need to keep an eye on the financial sector because it is fundamentally weaker than the charts indicate (see below).

Fundamentals: The rating agency Moodys warned that US banks are facing massive charge-offs for sour commercial real estate loans. The Wall Street Journal says that these losses might reach $30 billion this year, big enough to tank the financial sector. This is the greatest single threat to the economy that doesn’t come from our free-spending Congress. On that score there was some good news: Congress has decided to stop funding the super wasteful F-22 fighter jet after the President threatened a veto. And the recovery-killing healthcare bill continues to lose momentum. There was bad news also on the debt front: the watchdog committee charged with overseeing the TARP bank bailout program announced that total government liabilities under the program equal about $27 trillion, almost twice the size of America’s GDP (scary). While it is virtually impossible for most of these obligations to go south some of them certainly will and these losses will come on top of the $2 trillion worth of government debt that we will see this year and the over $1 trillion every year afterwards as far as the eye can see. CIT Group (the nearly insolvent lender to small businesses) said that it might still have to file Chapter 11. Right there is a potential loss of $3.4 billion under TARP (ouch). And finally, Bernanke promised that inflation will remain low despite all of the above; the markets believed him, which pushed down treasury yields. It is a good sign when the Chairman of the Fed commands this kind of respect.

Geopolitics: In Iran, Supreme Leader Ayatollah Khamenei gave a speech to counter the one given by the moderate cleric Rafsanjani Friday. The Ayatollah warned that if opposition to his regime continues the government might collapse and chaos would follow. Last week President Ahmadinejad tried to promote a moderate to the position of vice-president, fearfully trying to throw a bone to the opposition. This shows how weak the hard-line regime is in Iran after the contentious election. So far so good, the regime is dying by a thousand cuts, not collapsing outright, which would hurt global stock markets. In a way Iran is to the Long War what the USSR was to the Cold War, the founder of a global revolutionary movement. When the USSR collapsed it was impossible for China and Vietnam to turn back to a Stalinist economy and the sole examples of Stalinism (North Korea and Cuba) were destined to eventually change in the same way that China did. A gradual decay and eventual destruction of radical Islamic theocracy in Iran would have a similar but less pronounced effect (bullish).