Super Bad Guy Tendrils Reach Into St. Paul

Charts: The S&P 500 closed at 1031, up .28%. Support is at 1018 and resistance is at 1037, so the index is trading in the middle of this range, a sign of consolidation. It plunged after the opening bell on news that China is curbing wasteful excess industrial capacity. It found support where we expected and fought its way up in a healthy manner.

Fundamentals: Professor Roubini says a double-dip or W-shaped recovery is growing more likely and the current upsurge in economic activity is mostly due to global restocking of inventories, which is unsustainable unless consumers start stepping up to the plate. He believes the long term problem is that bank debt has simply been transferred from the private sector to the public sector; which means that meaningful deleveraging hasn’t started yet. Economists agree that deleveraging on the scale needed will take years. His next big concern is that the shadow banking system has disappeared. Shadow banking is mostly based on securitizing debt, which allows banks to pass loans off to investors and then take on more loans. This hole in the financial system is forcing governments to promote excess liquidity. But a lot of that hot money is going straight into commodities like oil and sugar because the tubes of private lending are still clogged. High oil prices are an obvious recovery killer. If oil gets to $100 a barrel he says its curtains for the recovery. Roubinin sees oil prices as central to the big picture. Cheap oil will help the consumer, which will help the banks, and it is our only hope.

Geopolitics: The Long War is all about oil. The good guys winning or losing is not some metaphysical abstraction of right against wrong. If the good guys are winning it is bullish news for oil production. Iraq has the second highest level of proven reserves in the Gulf. But this is extremely deceptive. There has been virtually no exploration in Iraq for over 25 years. What little exploration that has occurred recently reveals if you stick a straw in the ground almost anywhere in Iraq you’ll hit oil. Iraq in reality has way more oil than Saudi Arabia. North/Central Africa also has vast potential for oil production, but it is plagued not only with bad guys but super-bad guys. And even though Afghanistan doesn’t have extensive oil reserves, winning there means everything because it is the heart of the beast. The beast extends its tendrils across the globe. I mentioned the beer drinking woman in Malaysia, there’s a little tendril. In St. Paul, Minnesota, maybe 100 young American born Somali men have left their native land to fight for the super bad guys in Somalia, another little tendril. This is why General McChrystal needs to get a yes from President Obama when he asks for more troops. He needs to chop off the tendrils and stab his Green Beret knife into the heart of the beast so we can have cheap oil and a multi-year bull market. And, oh yeah, that also means the Taliban will stop blowing up and killing little girls in grammar schools.

Specific Stocks: China has thousands of inefficient little steel mills and the news out this morning indicates that many of these little clunkers will get closed. Harsco (HSC) dropped initially on this news since it is levered to Chinese steel mills. But then it rallied strongly as the market realized that it is levered to big modern Chinese mills not the little mills and it will be helped by the little guys getting closed. I bought more HSC on the morning dip.