Productivity Saves The Day

Charts: The S&P 500 closed at 1067, up 1.9%, punching through 3 resistance levels. Stocks were up, the dollar was up, and oil dropped, all good. For today at least the toxic inverse correlation between the dollar and stocks was broken. So the dollar carry trade unwound to some degree but stocks rallied anyway. Action today was bullish but the market needs a follow through day for a technical rally to resume. The market is in a rally attempt.

Fundamentals: The fundie news today was entirely positive. Retailers posted a 2.2% increase in October, good but not great, better than expected. Work force productivity numbers came in much better than expected. Sky high productivity makes runaway inflation virtually impossible, which mitigates the danger of the vast monetary expansion engineered by the Fed, which in turn lessens the problems that Professor Roubini has been warning on dollar carry trade short covering. Cisco reported good earnings, but more importantly it gave an upbeat forecast. Cisco started the bear market a year and a half ago with a downbeat forecast so its current forecast carries a lot of weight. First time jobless claims came in better than expected today. Maybe the biggest news of all is Senate majority leader Reed saying the healthcare bill can’t pass this year. After the 2 Republican off-year election victories on Tuesday, moderate Demos are scared to push healthcare reform and it could be dead (bullish).

Geopolitics: The Iraqi government is at last signing contracts with outside oil companies to develop some of its gargantuan oil fields. The bulk of the development is going to be done by Chinese firms. This is a sign of a successful end game in the Iraq war. If Iraq’s energy industry were to become as developed as Saudi Arabia’s, then Bush was absolutely correct in starting and prosecuting the Iraq war. An unambiguous American victory in a major war equates with a bull market.
This might be the only clear US victory for a while. And that’s okay because the Long War is shifting away from the US Army and Marines. The Iraqi Army and security forces have over half a million troops and are a well-oiled machine. The Pak Army is even bigger and better. The Long War is more dependent on America’s Islamic allies than the Cold War was dependent on our weak-kneed European NATO allies (who never helped at all). Progress in the Long War is best measured by success or defeat of good guy Islamic armies like Pakistan’s, rather than focusing solely on the US Army.
The major news item for the day proves my point. The Saudi Army is currently massing on its border with Yemen, readying an attack against the Iranian sponsored northern rebels that are tearing Yemen apart. Saudi Special Forces are already inside Yemen. The Saudi Air Force is making massive bombing raids against the northern rebels, firing 100 missiles into a single rebel position. The success or defeat of the Saudi offensive in northern Yemen is more important than Obama dithering on the troop request or the fact that 1 US Soldier was killed in Afghanistan the other day. Unfortunately after decades of studying the Cold War we have reflexively ingrained US-centric thinking into our analysis of the Long War. That kind of thinking ends today.