Vigilantes Most Powerful Force On Earth

Charts: The S&P 500 closed at 1108, down .6%. The broad index failed to hold above resistance at 1110, which it had pierced on Monday in good volume. The Nasdaq broke through 2200 on Monday and barely held above that level today. It had tried 6 times recently to break above 2200 and needs to keep holding above this key support level. Financials have long since given up leadership, which is okay because they are fundamentally horrible, but the financial index (XLF) has traded below its 50-day line for 26 days and is so weak that red flags are being raised. Charts for the government bond market don’t look very good. A steepening yield curve is bullish and a flattening yield curve is bearish for bonds. Up until a few days ago the yield curve had been getting steeper; in fact reaching record levels of steepness. But it is now flattening, as bond vigilante’s drive up interest rates on the short end faster than the long end.

Fundamentals: Wholesale inflation data came in hotter than expected today. Inflation has been tame so far in the recovery and one data point doesn’t make a new trend, but with the entire recovery and bull market based on low interest rates/low inflation, this single data point is scary.
On Monday, oil rich Abu Dhabi bailed out its sister country Dubai with a $10 billion injection. Bond vigilantes forced this move by hammering Abu Dubai’s credit market. UAE bond yields have since come down. The Greek Prime Minister gave a tearful speech in front of his parliament and government unions, ineffectively begging them to lower spending. Vigilantes jacked up Greek bond spreads on this pitiful display. Greece will eventually cut spending whether it wants to or not. In the US, Blue Dogs are watering down the healthcare bill, but not derailing it. Because of this vigilantes are remorselessly pushing up US government bond yields every day. Other than US government spending cuts, the only power on Earth that can stop bond vigilantes from jacking up US interest rates is the Fed’s hammer of Quantitative Easing. The Fed cannot swing this hammer if inflation is rising. Therefore, global bond investors are stronger than the Fed or Congress or anybody and could kill the bull market.

Geopolitics: One way to score the Pentagon and CIA in the Long War is oil production increases/decreases in countries torn by Islamic insurgencies. In the last couple years Iraq has gone from 1.7 million barrels a day to over 2.5 million. Over the weekend Iraq signed a dozen contracts with outside energy companies that will eventually increase production to 12 million barrels a day. Nigeria is ramping up oil production at an even faster pace. Nigeria’s Islamic insurgency has been crushed for now and its non-Islamic insurgency is also being rapidly unwound. Yemen’s oil production is flat despite the ongoing war. So the Pentagon and CIA get an A on their report card. Speaking of Yemen, 50% of Gitmo detainees are Yemenis, an indicator of how important this theater is in the global war.