Charts: The S&P 500 closed at 1038, down a painful 2.8%. The market is in a correction. Based on long term cyclically adjusted PE ratios the market is 40% over valued at current prices.
Fundamentals: Today professional economists did the calculations that I roughed out yesterday, stripping out the government’s Home Buyer Tax Credit and Clunker boost from the GDP numbers. They said the 3.5% increase would have been 2% without the government programs. If we also strip out the inventory distortion, then the Q3 GDP increase was 1%, which is about 1/3 of average for this stage in a recovery. Investors are beginning to ask themselves if 1% growth is worth permanently tripling the annual federal deficit as a percent of GDP.
Geopolitics: The Pak media was allowed into S. Waziristan today. The media received the impression that the war is much larger than the Army has been saying, with 80 bad guys getting killed every day rather than 30 or so, which dovetails with what refugees streaming out of S. Waziristan have been saying. This means that the Taliban in Afghanistan are probably much stronger than is generally supposed and it is more important than ever for President Obama to listen to his generals and grant McChrystal’s troop request and policy changes. Obama is meeting with his top generals today, by tomorrow there will be leaks concerning this meeting and we can analyze these leaks.
India says that it is going to remove 15,000 soldiers off the Pak/India frontier and engage in peace talks with various separatist factions within Pakistan over the Kashmir conflict. This will allow the Pak Army to move one more division off the militarized frontier and into the fight against bad guys.
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