Poppy Production Not Super Profitable

Charts: The S&P 500 closed at 1109, up .1%, failing to break resistance at 1110. The Nasdaq held above the key 2200 support level. Since late last week small caps and tech have outperformed big cap and defensive sectors, improving leadership that has been very bad for about 2 months. When bull markets have come as far as this one resistance hardens on Fibonacci ratios. Nobody knows why natural systems from plants to spiral galaxies fall into Fibonacci number sequences but they do and the stock market is no exception. We are a heartbeat away from the 50% Fibonacci retracement of 1120 for the broad index. The next Fibonacci retracement is 61.8%, which is about 1250. Conquering 1120 will be a major milestone.

Fundamentals: Consumer inflation came in today slightly cooler than expected, easing some of the fears from yesterday’s hot wholesale inflation numbers. In response government bond yields inched down a smidge. The Fed ended its big policy meeting and made its statement, which contained no surprises, although it did repeat an earlier message that Quantitative Easing measures are slated to end in a few months and the economy will have to stand on its own two feet at that point. Like a baby whose security blanket has been stolen, the market sold off on fears of QE someday going away, turning a big gain into a tiny one. The dollar turned up for the same reason: fear that the so-called “new normal” of super loose monetary policy will someday go away.

Geopolitics: The Pentagon is spelling out exactly how the surge strategy will unfold. Pockets of stability have already emerged in certain cities and farmlands in Afghanistan. These pockets will be strung together by securing roads. Safe roads are vital to beefing up the non-opium agricultural sector. Today the Taliban goes directly to a farmer’s house and pays him for poppies. Regular crops actually fetch about as much profit as poppies but farmers can’t get through Taliban controlled roads to markets and sell produce. Therefore securing roads deals a big blow to Taliban drug profits. Also, the Pentagon is not going to expand the Afghan national police, but instead will weed out the Taliban sympathizers, improve training, give them heavy weapons and armored humvees. This is also smart policy. In Iraq the war went south as the Army tried to rush local security forces too fast and too hard. Counterinsurgency takes a long time and can’t be rushed.