Heart Of Darkness Pierced

Charts: We have had 11 days of consolidation with the broad index bouncing between 1080 and 1100. With the market about 40% overvalued from the 100 year average and pricey even for the Great Moderation era, consolidation is healthy and needed for the bull market to have legs.

Fundamentals: 78% of S&P 500 earnings reports so far have beaten expectations. The historical average is 60%. The beats have been meaty, some (like Apple and Amazon) spectacular. And we are finally getting revenue beats, not just cost-cutting surprises. The average company is still showing a profit decline, but somewhere around 18% instead of the expected 25%. So this earnings season is coming in fairly strong, good but not great. Things are getting less bad, not way better. Does this improvement justify the strongest rally in stock market history? Part of market gains is due to asset inflation (bubble-mentality) and part is due to improving fundamentals. Even though the bubble has sprung a few leaks it is still there. Britain unexpectedly reported a negative Q3 GDP number Friday. It is still mired in the Great Recession when it was expected to have shown some growth like Germany and France. The country’s stock market should have tanked. Instead, it rallied, blowing away Germany and France. British investors rejoiced because supposedly the Bank of England will have to step up Quantitative Easing to fight the ongoing recession, which will cause liquidity driven asset inflation. This incident is one sign that bubble mentality is still in place.

Geopolitics: The Pak Army has recaptured Kotkai. After a bloody seven day siege, the birthplace of H. Mehsud is under Army control. The heart of darkness has been pierced, a big psychological blow to the Taliban. But the war rages on. The beast is still alive and fighting fiercely. Pak Army body counts have become unreliable which means that both sides are experiencing very high casualties. A better idea of the size of the conflict can be gleaned from media interviews of civilians streaming out of the combat zone. These refugees say that Taliban reinforcements are flowing in from Afghanistan in a big way. At the beginning of the campaign, the Pak Army gave some pretty low numbers for the size of the bad guy army, a few thousand fighters. A good guess now is that there are 15,000 Taliban fighters in S. Waziristan, the greatest concentration of bad guys on Earth.
A series of key towns have to be captured and held before the Taliban capital city of Makeen can be effectively seized and controlled. These towns are empty of civilians and are protected by heavily fortified bad guy positions in the surrounding mountains. The bad guys move from mountaintop to mountaintop via a complex network of mountainous trails and have the ability to rearm and re-provision themselves now and in the winter. S. Waziristan strategic towns and adjacent roads are riddled with booby-traps and bombs. The combat is the most hazardous that the Army has seen so far, much tougher than the Swat Valley. There is a long-standing tradition throughout the region to not fight in winter. There are reports that Pak soldiers are being issued winter gear so the campaign is probably designed to run through winter, despite the local belief that winter warfare is impossible. Probably the same is true of the fighting in Afghanistan.
The Saturday Wall Street Journal ran an article saying that President Obama has made up his mind and now favors the McChrystal Plan. According to the Journal this will be made public in a couple weeks. Secretary Gates says that he has troop commitments from most NATO countries. The commitments are said to be small but it might signify an eventual willingness to allow existing continental European troops to actually fight rather than just hand out food packets and hide if any bad guys show up. Allowing these troops to fight would be like adding 20,000 American soldiers