Muzzle The Media

Charts: The S&P 500 closed at 1033, up .8%. I’ve been saying that resistance is at 1037, but the August intraday high was 1039 so maybe it’s a smidge higher and our trading channel is actually 1018-1039. The mid-point then is 1029 and the index is close to the mid-point. So we are still experiencing healthy consolidation. Within the index industrials beat financials by a small margin, so leadership is good.

Fundamentals: US government bonds have been rallying the past few weeks. This means that bond investors think the economy will weaken or even crash when worldwide government stimulus programs are curtailed. Stocks have been rallying alongside bonds, normally the two move in opposite directions. Stock investors are saying that the global economy will do just fine once stimulus is pulled.
China is grimly and determinedly implementing several different policies that move it away from dependence on the US dollar, even though that decreases the value of its 1.5 trillion dollar stash. This is one of the reasons that the dollar has been falling. We’ll see how far China can go down this path. By weakening the dollar it is causing commodities to soar. And China needs these commodities. China, as America’s banker, is playing a game of chicken with the big spenders on Capitol Hill.

Geopolitics: The war is going better in Pakistan than in Afghanistan. Yesterday a CIA drone killed 10 bad guys and the Paki press immediately informed the nation that there were no civilians among the dead, 100% bad guys killed, don’t worry about it. And while that was going on Paki helicopter gunships killed 24 bad guys, no civilians killed, go to work, shut up, if you say anything it better be reporting suspicious activity to the authorities. Then the Taliban killed 4 children on their way to school and armed villagers attacked and killed the bad guys and even managed to call in an airstrike where Paki jets razed several houses, 100% bad guys killed. This is what happens when the press is on the same side as the Army. It is unlikely that all these airstrikes really only killed bad guys. And it is worth noting that Pakistan is not a true democracy and never has been. The Army holds the ultimate power and considers the civilian government a mere advisor. The most modern and stable Muslim country in the world, Turkey, has a similar structure. With minimal western press scrutiny Iraq is moving in this direction. The US commander of the entire Mid-East (Iraq and Afghanistan), General Petraeus, is a genius at muzzling the press. We need to see that he is working his magic in Afghanistan because as we’ve seen media scrutiny is screwing up the war big time.

Specific Stocks: A sound rule for investing is to buy a company that is best of breed, or truly superior to its competitors. A company like that will often (but not always) have the lion’s share of its market. Caterpillar (CAT) makes better heavy equipment than anybody else. It is coming out with a diesel-electric hybrid bulldozer, nobody else is. Flowserve (FLS) makes better pumps for offshore oil rigs and nuclear power plants than anybody else. Harsco (HSC) is far and away the best steel mill service provider. These are all core holdings for me. On my watch list is Pegasystems (PEGA) the top dog in business process management software. It will automate your business office, replacing people with software programs.