Trade War? Probably Not.

Charts: The S&P 500 closed at 1049, up .6%. Global markets tanked overnight on fears of a trade war between China and America. The US market held its ground and even rallied. If world markets respond in kind it shows leadership is still with the US, which is bullish. Within the S&P 500 today financials led, which is iffy but its only one day.

Fundamentals: The most bearish thing that can happen to the stock market is a trade war. Unfortunately, Team Obama slapped tariffs on Chinese tires Friday evening. Over the weekend China retaliated by threatening to put tariffs on American chicken and auto parts. China’s reaction is subdued because it already restricts chicken and auto parts; clearly China doesn’t want to escalate the situation and the ball is now in America’s court. If the two global giants fire any more trade salvos at each other, the damage will be immense. Team Obama started this potential trade war as a way of getting unions onboard the healthcare package. In a way this is good news, Team Obama isn’t really hell-bent on protectionism, it just wants to pass Obama-Care. As we’ve seen, the healthcare package has already held up McChrystal’s request for new troops. Healthcare is wreaking havoc with the fundies and geopolitics. If it continues to fester more damage is in store. Team Obama can only push it through by coming down hard in favor of radically curbing malpractice lawsuits, which will infuriate trial attorneys. Team Obama is slowly coming to this realization but is afraid of what trial attorneys can do in retaliation.

Geopolitics: The Paki Army captured 5 top Taliban commanders by tricking them into attending peace talks. The top bad guys showed up for the conference and the good guys threw them in jail (sneaky and unfair). Enraged, the Taliban stupidly announced it will never negotiate peace again with either the military or the civilian government. The Army is thus preventing the civilian government from backing away from the offensive, forcing them to have some backbone. This is obviously good news. In Afghanistan, about 16 good guys were killed over the weekend. Frustrated with McChrystal’s policy of refusing to give a bad guy body count, the Afghan government announced that 50 bad guys were also killed. The refusal to give a bad guy body count is damaging American support for the war because it gives the illusion that the Taliban is winning. Overhanging everything is the issue of McChrystal’s troop request. Liberal Democrats are lining up against it and (insanely) floating proposals for withdrawal of existing forces. Conservative Democrats and Republicans are bravely fighting back, supporting the President and the Pentagon. The lengthy delay and linkage to healthcare reform is not good.

Specific Stocks: Siemens (SI) is the best large cap industrial conglomerate, although the weak US dollar helps its rival GE. Baidu (BIDU) is hands down the best search provider in China. With Boeing making positive noise about its dreamliner, titanium has been rallying. Titanium Metals (TIE) is the number one producer of titanium. To be bullish on TIE we must be bullish on the dreamliner, probably a good bet but it requires specialized knowledge and expertise. The dreamliner has not had its first test flight yet.