H. Mehsud Consolidates Power

Charts: The big week we just finished saw very weak volume. Chart patterns were bullish but the volume was bearish. This means that big institutional investors did not participate in last week’s rally. They are sitting back waiting for earnings season to progress, unconvinced by two days’ worth of good news. This suggests that the big boys (institutional investors) will not tolerate much bad news this earnings season. It’s been good so far and it better stay good.

Fundamentals: The very beginning of the earnings season coincides with the confession season where companies that missed earnings forecasts in a big way come clean and fess up before their scheduled reporting date. The confession season is about over by now and it went better than expected with only a handful of companies tearfully admitting that their quarter was a bloodbath. A positive confession season is a forward looking indicator for the entire earnings season.
The Economist magazine says that the recent weak industrial numbers from America and China are only an “air pocket” and the overall global recovery is still chugging along. The weak industrial data was immediately followed by an upside surprise in American service sector data from ISM. At the same time the government said that American service sector exports increased more than expected, driving down the US trade deficit. The weak dollar is helping these exports and will juice the American and Chinese economies as long as oil continues to find resistance around $75. China’s currency is pegged to the dollar, so the G2 economies are bond together. The Euro zone seems strong enough to give a little business away to the G2. The short term picture is therefore pretty good. The long term outlook continues to be horrible, the FDIC has closed 100 failed banks so far this year with the pace picking up. Souring commercial real estate is the culprit. This is the iceberg the US economy is sailing into. The Fed is using artificially low interest rates to build up bank balance sheets, to strengthen them enough to withstand the inevitable collision. We don’t know yet how well this is going to work. On a practical level for investors these conditions favor mega-banks and therefore their stock prices.

Geopolitics: In Pakistan, Army General Headquarters (AGH=Pentagon of Pakistan) was attacked by elite Taliban commandoes, who controlled much of the facility for about one day until Paki Special Forces regained control. Several bad guys got away and are still loose in Islamabad. This incident combined with the flashy terror attack against India’s Kabul embassy a few days ago indicates the H. Mehsud has consolidated his power over the Paki Taliban and probably has a working alliance with Mullah Omar’s Afghani Taliban. It is bad news if Omar and Mehsud are working together. H. Mehsud is trying to slow down or halt the Paki Army’s impending invasion of South Waziristan. He is in effect saying to the Paki man-in-the-street, “The Army has big problems outside of S. Waziristan and needs to get its house in order before haring off on an adventure in the tribal regions. And besides look how we are killing Hindus. Do you want that to stop?” The Army’s response was to step up its jet fighter-bomber missions in S. Waziristan, killing 13 bad guys Sunday. And it is sending paramilitary police into refugee camps in massive sweeps and scooping up anybody that even resembles a bad guy, an action that suggests the big invasion is getting closer. Finally, the Army made public statements that essentially said H. Mehsud is only pissing it off.

Specific Stocks: Credit Suisse (CS) is best in breed for investment banks and asset management. The small cap Brazil index (BRF) should outperform Brazilian large caps as long as the global bull market remains intact. Baidu (BIDU) is best in breed for Chinese language search.