Pentagon Gut-Punches Obama

Charts: The S&P 500 closed at 1072, up .7%. Short term and long term technicals are positive. Resistance is at 1100 and it should be very stiff.

Fundamentals: The government reported today that home prices are rising more than expected, re-inflating the housing bubble. 80% of US mortgages are backed by the government and its debt machine. Heaven and Earth are being moved to support housing. It is a dangerous game but at least it’s working. Today commodity prices roared up. Inflation is stirring like an ugly giant. Inflation exacerbates negative interest rates, turbo-charging this liquidity fueled bull market. M&A also turbo-charges stocks. Dell just made a big acquisition. The biggest miner in the world, BHP, says it is ready to make a big acquisition and that it must do so before China’s strong recovery pushes up commodities and the share prices of all the other mining companies. Therefore, BHP is very bullish. The fundamentals are good but not great. Is the biggest rally in 70 years justified by these fundamentals? Bonds, commodities, and stocks are all still moving in the same direction—a sign of a liquidity driven market.

Geopolitics: Obama is essentially telling the Pentagon that they won’t get extra troops in Afghanistan until after healthcare reform is passed (could take months or years). Don’t panic, this is the new savvy and sophisticated Pentagon. It responded by leaking McChrystal’s report to super reporter Bob Woodward in such a way that Obama knew the leak was deliberate and came from the very upper level of the military, a stunningly bold declaration of war against the White House. The report itself was written to shape public opinion by saying that without extra troops the war will be lost in Afghanistan. While all this was going on the FBI busted a fully functioning Al-Qaeda cell in Colorado that was just about ready to bomb mass transit hubs. The FBI bust was good timing for the Pentagon’s leak. We are seeing a new front in the Long War—a political battle for the hearts and minds of American voters.
Team Obama sitting on the troop request is disappointing; however, let’s not assume that the Team has gone from hero to zero on foreign policy. Consider: Under American pressure Pakistan is slowly crushing the good-bad-guy terrorist group LET (it committed the Mumbai terror attack last year under ISI direction). By crushing LET, Pakistan is beginning to heal a major wound with India. Pakistan has several hundred thousand troops on the Indian frontier, more troops than the entire US Marine Corp. If Pakistan really clobbers its own pet terrorist group (LET), India will reward Pakistan by moving Indian troops off the frontier. This could free up massive numbers of good guys for the war against the Taliban. Afghanistan and Pakistan are one theater in the Long War and elite Paki troops are nearly as good as US Marines and potentially much more plentiful.

Specific Stocks: South Korea (EWY) is being upgraded from an emerging market to a developed market. This forces FTSE funds to buy Korean shares. Goldman Sachs issued a report that says when South and North Korea merge an economic giant will emerge that eventually will be bigger than Germany. Team Obama is determined to force so-called net neutrality rules on the web. This helps Google (GOOG) and Microsoft (MSFT) and it hurts AT&T (ATT).