Good Guys Clobber Bad Guys

Charts: The S&P 500 closed at 1026, up a scorching 1.9%. The index blew past resistance of 1010, crushing our hopes for now of healthy consolidation and forcing us to start thinking about selling some of our big winners to lock in profits. Technical indicators are positive as strength begets strength, except for volume which is very light for this entire multi-month rally. Before we start cashing in our chips we must consider the parallel to the successful 1982 V-shaped rally that was based on geopolitical forces.

Fundamentals: According to Moody’s commercial office buildings showed a price increase in June and commercial real estate as a whole declined by only 1%, as opposed to the 7% monthly declines that the market had been registering. This indicates the freefall in commercial real estate is abating, which helps the heavily exposed financial industry. The government is backstopping commercial real estate with massive guarantees through the TALF program so we shouldn’t get too excited, nevertheless at least the propping up is working. And the same thing can be said about residential real estate, where existing home sales data surprised to the upside today. This was the reason for the monster rally. As the attention of American liberals is focused on the healthcare debate Team Obama is making a few interesting jinks to the right; it has okayed the building of a gigantic oil pipeline connecting Canadian tar sands producers to energy hungry America. Environmentalists hate tar sand oil for its high greenhouse gas emissions. But Team Obama told the tree-huggers tough luck.

Geopolitics: Follow the chain of events: Israel freezes West Bank building. Russia responds by saying it won’t sell air defense systems to Iran, making it easier for Israel to bomb Iran. Yesterday Iran meekly said it will allow increased inspection of some parts of its nuclear program by the UN.
In Somalia, government troops (armed and trained by the CIA) mounted a major attack against an Al Shabab stronghold and killed about two dozen super-bad guys while probably suffering a similar number of casualties. There are also reports of Ethiopian troops entering Somalia and engaging the Hizbul Islam militia, an ally of Al Shabab. And finally several pro-government Somali Islamic militias (good-bad-guys) are also joining the fight. This means that low level fighting has become a full-fledged war. Unfortunately, it is important that the mini-war in the horn of Africa get a lot hotter because Al Shabab and its allies run the world’s only functioning Taliban nation-state and they need to be destroyed. Thank goodness DMU followers own stock in ITT and HRS.
When America promotes third world Islamic democracy is that good or bad for stocks? Let’s open our Cold War history book and see how it worked back in the bad old days. In the early 70s, as North Vietnam was rolling up South Vietnam, the USSR turned its attention to South America. A KGB-linked Marxist politician, Salvador Allende, was freely and honestly elected president of Chile. The CIA assassinated Allende in 1973 and replaced him with a right wing anti-communist dictator, Pinochet, who ran death squads that brutally purged the country of communists plus he built a strong free market economy. This went a long way to stopping Soviet expansion in South America. Today Chile is a liberal democracy with the strongest economy in the region although people there still hate Pinochet for his brutality. Now consider the following: The North African radical Islamic group AQIM got its start 18 years ago when hardcore Islamists won an honest election in Algeria that was then clumsily overturned. The region hasn’t recovered yet and there should never have been an election in the first place. Most experts agree that if there were a free election in Egypt, the Muslim Brotherhood would win; this organization is the forerunner to Al Qaeda. Egypt is the cultural center of the Arab world. Team Obama is opposed to promoting democracy in the Long War and rightfully so. The real lesson from Vietnam and the Cold War is that whole kit and caboodle should have been left to the CIA, with no Congressional oversight.
In Pakistan, in the Swat Valley, 60 bad guys including 2 Taliban chieftains surrendered to the Paki Army.
The Yemen government denies that the Saudi Air Force bombed and strafed bad guys along the Saudi/Yemen border this past week. In Fact Yemen is angry that people are even talking about the Saudi Air Force’s sorties because it is so not true. And anyway, the Saudi jets are gone now so there is no proof one way or the other.