Gates Wants More Troops (Bullish).

Charts: The S&P 500 closed at 1016, up 1.3% and close to the trading channel that might signal healthy consolidation (please, please, please). CAF (proxy for the Shanghai index) closed at 32.07, above the 31 support level and above its 200-day moving average, which was briefly violated this week. CAF was up 5% on the week. If CAF had continued to trade below the 200-day line, then a bear market in China would be likely, which could tear apart world indexes. Leadership within the S&P 500 was much better Friday with tech and industrials in the forefront. XLF (financial index) was up today but lagged other sectors; good—It should lag not lead.

Fundamentals: The jobs report was mixed. The August Payroll Survey showed 216,000 jobs lost, better than expected by 14,000, but revisions to the previous two months took away 49,000 jobs. The market is short-sighted and only cares about the headline number. The Household Survey showed that 392,000 jobs were lost and unemployment jumped to 9.7%, both worse than expected.
Retail spending yesterday in Europe and America came in better than expected Thursday. Recent ISM surveys from around the globe are surprising to the upside and the global recession is probably over. Worldwide private sector fundamentals are good but not great. The public sector, especially in America, is very bad.
The US government owned mortgage company, FHA, is massively and stupidly engaging in subprime lending, a self-inflicted wound. Wall Street is beginning to get concerned. The FHA’s loan loss reserves are nearly depleted. It is currently levered worse than Bear Stearns was at the height of the credit crunch and will need a huge taxpayer bailout, which is to say more debt sold to China. Floating even more government debt requires strength in the dollar, which requires America to retain its superpower status and make progress in the Long War. So once again geopolitics is everything.

Geopolitics: China’s Islamic insurgency is flaring up again with street demonstrations, some bloodshed, but no deaths yet. In a way this is good news because China cannot fight global Islamic radicalism, only America can and China must keep buying treasuries to maintain the current world order. This begs the question: Is America getting the job done against the bad guys? Global investors are worried that the answer is no. As uncertainty swirled around General McChrystal’s troop request recently the price of gold skyrocketed and the dollar slumped; indicating that the dollar is losing its safe haven status because of American military weakness. Yesterday Defense Secretary Gates said that he wants more troops in Afghanistan. The price of gold fell in response but the dollar remained weak. The White House will strongly support McChrystal’s call for more troops but getting them won’t be a cakewalk. The troops request and the fate of Obama-Care are inextricably linked. Liberals will be enraged beyond belief if Obama-Care fails and the troop request goes through; completely losing liberal support is more than the White House can stomach. The President will try to jumpstart Obama-Care by offering a less costly version (Obama-Care-Light or OCL) and if that effort gains traction, he will then move ahead on the troop request. Yes, OCL will cause a soaring fiscal deficit to get even worse, which is bad for the stock market, however, it is nothing compared to the savage bear mauling that will follow from losing the Afghan war. This puts us in the odd position of holding our noses and hoping that OCL does well in the polls.
By now DMU readers are scratching their heads and wondering, “Does simply getting the troops request mean that America will win the Afghan war?” Actually that is probably the case. The request going through will be as much a symbolic victory as anything and it will demonstrate the superpower’s commitment to win and stay there for the long haul, bucking up the average Afghani. Western polling companies tell us that something like 4% of the Afghan population support the Taliban. There is not a popular uprising in the country. There is not sectarian violence (Sunni vs. Shiite) either. There is not a civil war. The Afghani Taliban only number about 30,000. It will take 3 years and about 2,000 American combat deaths to win. If the public can accept that, we will win. And what happens in 3 years? We will then have to send troops to Somalia.