Cold War II Forecast

History moves in cycles, the past repeats itself, Hitler made the same mistakes as Napoleon because he was caught in the same historical cycle. Predicting the future is only possible if you know which cycle the big wheel is spinning through. Most historians who have an opinion state that China today is like Germany of the late 19th century and America is like Britain from that same era. A rising power and a declining one.
Wrong. China is like the Persian Empire 2000 years ago and America is like ancient Rome. The great Eastern power and the global superpower. The Romans fought the Persian Empire under its different names for 700 years and never conquered it. The previous model of a single world empire includes an unconquered smaller second empire that coexists uncomfortably alongside the big one. One world government is impossible. It will instead be two world government.
The parallel to Cold War II is the seven centuries of Roman-Persian Wars. And this is my forecast for the length of Cold War II: seven hundred years, the same as the earlier cycle. But wheels turn within wheels. And Cold War II will also resemble Cold War I. And the professors who say China resembles 19th century Germany aren't all wrong either.
Both Rome and Persia were ultimately destroyed by Islamic armies of the caliphate. America and China face a common foe in global jihad. The bad guys have a very strong grasp of history. They see themselves as the second Great Caliphate. Between the two caliphates we have total victories over Rome, Persia and the Soviet Union, three superpowers defeated. This is why they are so cocky.

Cold War II Looks Better

The announcement that six-party talks with North Korea are starting up again puts recent Cold War II events in a better light. All of a sudden it seems pertinent that America told the world that China has deployed the DF-21 aircraft carrier killing missile. Shouldn't China be rattling China's saber, not America? Now it looks kind of phony yesterday when the US defense establishment solemnly told the globe that they were really really afraid of the DF-21. Now I'm recalling how China's Silkworm missile only damaged but didn't sink that British aircraft carrier back in the Falkland War.
The six-party talks make everything look better. Because it is so willing to play hardball, Team Obama kicks ass at diplomacy. Team Obama is going into the six-party talks with Russia fired up and singing Yankee Doodle Dandy because of the new START treaty. Japan has grown a set of cojones; witness the troops and bases it is establishing on contested islands. So Japan is going into the talks fired up. South Korea has also grown a set recently. And China goes into the talks thumping its chest after America praises its new missile.
So these talks should actually bear fruit, unlike the previous six-party talks, which only made the problem worse.
And the stock market is beginning to realize that it has been valuing South Korean stocks incorrectly as KOSPI multiples expand toward the level of other emerging market bourses. In time North Korea is going to take the same path as Vietnam and China, transforming communism into capitalism. At that point North Korea is going to become a tremendous asset to South Korea rather than a deadly foe. It only seems impossible because we are wrapped up in day to day drama. Consider: Vietnam is currently America's de facto ally, and truthfully the most important one in Asia, the only one that China truly fears. It's as if the Vietnam War never happened. Someday we'll say the same thing about the Korean War and North Korea.
Cold War II will take some bad turns in the future and it will hurt stocks when that happens. But for now it doesn't look too bad.

Long War Good. Cold War II, Not So Much

Geopolitics: In the Pak tribal belt, CIA drone strikes are moving north, as the bad guys move north. In Afghanistan, Green Beret night raids targeting Taliban leaders are moving north of Helmand province as the bad guys also move north. The Great Retreat is underway. It is moving at a glacier's pace. The American public is unhappy. Even though the US is winning, they want it to happen much faster. Personally, I want fried chicken to make me skinnier. Reality dictates that the Long War moves at a slow pace and fried chicken is fattening.
Cold War II isn't going as well as the Long War. China has deployed the Dong Feng-21D anti-aircraft carrier missile. The DF-21D can sink US aircraft carriers that are not heavily protected by Aegis-equipped cruisers and destroyers, most of which are parked in the Persian Gulf defending against Iranian missiles. The US has 24 Aegis warships and needs about 100. The US public will not tolerate the construction of new warships, not unless an aircraft carrier is actually sunk by a Chinese missile. Remember, a Chinese Silkworm missile nearly sunk a British aircraft carrier in the Falkland War. China has been working on anti-aircraft carrier missiles for a long time.
Coinciding with the new Chinese missiles is an announcement that China is curbing the exports of rare earth minerals, a move that especially hurts Japan. China controls 97% of all rare earth production and these minerals are vital for the global electronics industry. Ferro Corporation (FOE) is also dependent on Chinese rare earths. It has long term contracts for these minerals. If these contracts are broken it will hurt FOE. If they are not broken, then FOE will have a big competitive advantage.

Media Miscalculation

Geopolitics: Newspapers are offering maps of Afghanistan published by the UN which shows Taliban attacks on foreign aid workers in different parts of the country over time. The attacks are up everywhere, but especially in the north as Taliban fighters are driven out of Kandahar. The media is saying these maps are proof that NATO is losing in Afghanistan.
To understand why this is not true we must review the history of the Afghan war. For the last eight years NATO has had a policy in Afghanistan called "mowing the lawn." In theory this policy applied just enough force to the Taliban to prevent their numbers from expanding, buying time for America to win in Iraq, at which point an American surge would be initiated in Afghanistan and a true counter-insurgency war would begin and the bad guys would start losing.
The mowing theory did not coincide with practice and during the past eight years the Taliban have gotten stronger because the mowing operations were merely a light trim, not a good solid weed waking. Much of the fault lies with the British Army, but let's set that aside for now. During the mowing the lawn part of the Afghan war foreign aid workers were basically unmolested. Why should they be molested? Much of the aid was flowing straight to the Taliban.
Now America is taking the wood to the bad guys in Kandahar, the Vatican of the Taliban, their holiest and most sacred ground. The jihadist fighters are retreating north and setting up shop in their new digs. Setting up shop means killing local civilians and foreign aid workers. Yesterday I used the term "jihadist retreat/battle lines." The Great Retreat is a strategic retreat: a carefully planned and executed fighting retreat where innocents, good guys, and bad guys are killed.
The low casualties of the mowing the lawn era were an illusion. Now let's really take a step back. Democracies always start out poorly when they fight dictatorships. Democracies always take a long time to ramp up and mount effective offensives. When these offensives finally get under way they always generate high casualties and the good guys always win eventually.

Specific Stocks: I grade the accuracy of my geopolitical forecasts by movement within financial markets, not words from the New York Times editorial page. Yesterday I suggested that ITT has a leg up in creating a Long War surveillance web. Today NASA awarded ITT a huge contract to tie together all its orbiting assets (like the int'l space station and satellites) into a single web. The work ITT will be doing for NASA will help it with similar work with the Pentagon. So I just got a gold star in my forecasting.
Ferro Corporation (FOE) is down about 2% today. I still believe in this stock but would like to point out how I used charts to build my position. FOE is a super volatile high beta stock that screams up and down. I buy it when it dips to the 50-day moving average and finds support. Most of my industrials and materials are so-called growth at a discount stocks (Harsco, Koppers Holding, DuPont, ITT). I take bigger positions in these lower beta stocks than in ones like FOE.

End Of Year Super Blog

The Long War is entering a new decade and its time for long range forecasting. Imagine a map of central Asia. Draw a line from Kandahar in southern Afghanistan up into northern Afghanistan. This is an active retreat line for the Taliban that is seeing heavy traffic as I write. Now extend the line up into Uzbekistan. This probably is also an active retreat line and is seeing very light traffic. Obviously the Great Jihadist Strategic Retreat or Great Retreat has begun.
Fast forward several years and I forecast the jihadist retreat line snakes through half of Uzbekistan and all of Kazakhstan to terminate in the Caspian Sea. By this time Afghanistan will be essentially pacified.
On the other side of the Caspian Sea another battle line is drawn from Russia's Dagestan province and into the Caucasus region. Like a candle burning at both ends there is a drone air campaign and a small ground war at either end of this line. The southernmost part of Uzbekistan is the American end and Chechnya is Russia's end. So there are two mirror image wars with drones ranging hundreds of miles out from the ground fighting. Probably American and Russian drones will overlap to some degree or maybe the sea in the middle will mark a boundary for either country's drones.
The picture I am painting is similar to what we see today except now there is only one small land war (in Afghanistan) and one drone campaign (in tribal Pakistan). In the future there will be two. Let's call these land and drone campaigns LAD campaigns or LADs. While one LAD is run by the Russian government and the other by the US government, there will be an integrated global surveillance web run by the US that Russia has access to. As they win battles and push bad guys into further retreat the two LADs move closer together along the jihadist battle line that connects them just as Russian and American armies moved toward a central point (Berlin) in WW II. Russo-American LAD co-operation will be better than WW II.
While all this is happening there will be Long War activity on the Arabian peninsula and North Africa. Combat there will produce higher casualties and actually be much hotter than in central Asia. The African theater will, however, generate much fewer headlines than the other one, a situation true today. The African theater will be structured like central Asia with two LADs moving together along a jihadist battle/retreat axis. At its longest the African line reaches from Yemen to the fringes of the Sahara Desert. There will be a separate integrated surveillance web over Africa and the Arabian peninsula. It will link information into a single web from every satellite and drone in the theater and any good guy can instantly gain access.
Assuming my forecast is accurate, there are stock market implications in all this. Example: ITT just bought a small surveillance company with the express purpose of getting a leg up in the architecture of the Long War web.
One final point, I've written blogs suggesting that the Long War could last hundreds of years. The above scenario would call for a shorter timeframe, maybe 50-100 years.

Geopolitics

On the ground in Afghanistan the situation is better than the Pentagon lets on. They really learned their lesson in Vietnam and now under count enemy casualties and tell the American public things are going along somewhere between poorly and okay when in fact the progress is terrific. No, the Pentagon says, Progress is fragile, but there is progress, just barely. American military brass don't crow about victories or do high fives. That's smart, good management of public opinion.
Here are the facts on the ground. The Battle of Marja is over. The three step process is complete. Clear. Hold. Build. The Battle of Kandahar is half over and is predictably following the same victorious path carved by the earlier battle. Kandahar is larger than Marja and will take longer. In WW II there were many battles larger than Stalingrad and some of them took place after Stalingrad. Despite it not being the largest, Stalingrad was the turning point of WW II. And so it is with Marja. The Marines have a formula for winning.
And of course that formula, known as COIN, also has a successful track record in Iraq. The IMF forecast Iraq's GDP will grow by 11% in 2011. This might be the highest GDP growth of any country on Earth. Small wonder, the US Army left Iraq with a free market economy similar to Singapore's. Too bad the US Army doesn't design the US economy. In any case, over the next few years Iraq is going to take oil production from 2 million barells a day to 13 million, thereby saving the planet from a double-dip recession.
There are stock market implications in all this. Consider Ferro Corp (FOE). It just bought a tile factory in Egypt to go after the building booms in North Africa and the Mideast. High end homes in Somalia have loads of ceramic tile in them. And lots of luxury homes are getting built outside Mogadishu and in Southern Iraq.

Long War to Last 450 Years

Geopolitics: In reference to the Afghan war Gen. Petraeus often tells reporters that it is "The longest campaign in the Long War." The last two words of the quote are always printed in newspapers in small letters and the overall impression given by the media is that the general is using the term "long war" in a poetic manner. No, he is saying the Afghan war is not a war at all but a campaign within a global war and the Afghan campaign will probably last longer than the ones to follow.

There are already two separate campaigns in the Af/Pak region: the Afghan ground war and the CIA's drone campaign in the tribal belt of Pakistan. When and if the proposed reorganization of the CIA occurs (where it is given its own army in the form of US Special Forces soldiers), then there will be a dramatic escalation in the CIA's campaign in the tribal belt as it ramps up a ground war that will exist alongside its current air war for a long time. How long will the Afghan campaign last? If we scour media pronouncements from top US Army or Marine officers when they are asked this question a figure of 14 years tends to pop up.

Fourteen years is not only a number we hear from military officers, it is also the average length of a counter-insurgency campaign. So let's say that each one of the many campaigns in the Long War will last 14 years from the point where a full-fledged counter-insurgency campaign (COIN) is launched.

Currently only Afghanistan is experiencing a full-fledged COIN. The next one to go from a partial campaign to a COIN will be Pakistan's tribal belt, a few years from now. These partial campaigns are waiting in the wings to become full-fledged COINs: Yemen, Somalia, Philippines, and Russia's Caucasus region. And new campaigns will emerge over time. Eritrea will certainly join the queue at some point. So how long will the Long War last? An easy calculation will provide the answer.

It took two years for the term Cold War to gain popular usage from its first appearance in print. So all we have to do is measure the time it takes for the word Long War to gain popular usage and then put that number in front of the number two and create a ratio then multiply that by 45 years (the length of the Cold War). For instance if it takes 20 years for the word Long War to gain popular usage then the actual Long War will last 450 years, ten times longer than the Cold War because it took ten times longer for the war to acquire a name.

Democratic War

Geopolitics: Chairman of the Joint Chief's, Adm. Mike Mullen, tells us that he was up all night monitoring the South Korean Navy's recent artillery test. Which is to say that the US Navy was ready to shove nine yards of aircraft carrier flight deck up Kim Il Sung's gungus pung if the North had responded to the test fire.
This brings us to the broader issue of democracies and warfare. In all of history there has never been an example of two mature democracies going to war with each other. There have been wars between democratic components of a large democracy fractured by civil war. The American Civil War and several British colonial wars appeared to be wars between democracies but in truth were examples of big democracies breaking up or almost breaking up. What this tells us is that democracies hate war. Not only do democracies never attack other democracies, they have never started any of history's countless democracy vs. dictatorship wars.
Throughout the long march of time dictatorships always mistake democratic pacifism for military incompetence. Once roused, however, the bad guys always learn that the opposite is true.
The US Navy has been holding joint military exercises with the navies of Vietnam, Japan, South Korea, and India (all democracies except Vietnam). These exercises are not just for show. The US Navy is taking the first steps in welding these five navies into an alliance that will contain China's military ambitions like NATO did to the USSR.
If the US is successful in its containment strategy there will be enormous pressure on China to undergo democratic reform. The pressure will come from within China (students and intellectuals) and from democratic Taiwan as reunification moves closer and closer. There are stock market implications in all this. For instance, stock markets in democracies tend to have higher valuations than ones in dictatorships.

North Korea Backs Down

Geopolitics: South Korea has just finished its artillery drill. The drill was massive and the shells were not directed away from North Korean positions in any way. Right before the drill the South Korean Navy destroyed a Chinese fishing boat while engaging a Chinese fishing flotilla that was in its waters illegally. This comes on top of a complete leadership change and a new overall posture for the South Korean military. In other words, South Korea has been acting super aggressive and targeting China directly, striking at the puppet master not the puppet.
After the artillery drill North Korea issued a statement saying that the South's military exercise was a childish display of fire and that the North won't dignify the South's infantile temper tantrum with a response. It is beneath the North's dignity to do so. And then the North asked for disarmament talks to start up again.
As we have seen so many times over the past two years Team Obama and its allies are completely on top of foreign affairs and there is now talk of Obama being awarded a Golden Bull award.

Obama Turns Hard Right

Charts: For over 120 years the strongest time of the year for stocks (on average) has been from Christmas through January. When this strength is manifest traders say we are in a Santa Claus Rally (SCR). Historical data shows that a true SCR does not start until after Christmas. Some people attribute the SCR to America's tax code, but this cannot be the case because the modern tax code of the late 20th century neither strengthened nor weakened the SCR. What then is the cause of this seasonal strength? Since it has existed for so long and is seemingly immune to outside historical factors like the tax code, the SCR must be like Fibonacci retracement levels, i.e. something that taps into the fundamental fabric of the stock market. As such it is an important technical indicator.

Fundamentals: Because of Tea Party Republicans and remarkable support from Pres. Obama, Congress for the first time in decades refused to pass a budget filled with pork laden earmarks. Yields on US government debt had been spiking before the pork got skewered. But yields came down after the porky omnibus spending bill failed, a train wreck averted. Obama has shifted harder to the right after the mid term election losses than Clinton did under similar circumstances. This is what we learned from the Clinton Presidency: A liberal Democrat in the White House that shifts to the right can get things done that a conservative Republican never could. Clinton examples: NAFTA and welfare reform. Think about the Bush tax cut extension that Obama shoved through. It contains the most aggressive accelerated deprecation schedule ever. History shows that accelerated deprecation is the only stimulus program that actually works in America.

Geopolitics: The Long War is looking good. A few months ago Al-Shabab controlled 60% of Mogadishu (Capital of Somalia). Now the super bad guys control only 40%. The African Union Army and the CIA supported Islamic militia Ahlu Sunnah are slowly dismantling the super bad guys. This helps the situation in Yemen and all of North Africa and puts the CIA in the running for an unprecedented 3rd Golden Bull Award!
The Pentagon just gave its big review of the Afghan war to Obama and it basically said progress is being made everywhere except in the Pak tribal lands. Obama responded with a new policy calling for US Special Forces to get more involved in the tribal lands and even greater emphasis on drone strikes.
There has been a lot of noise about the Pak ISI supposedly unmasking the CIA Pak station chief. But the day after this supposedly happened one of the biggest and juiciest drone strikes ever occurred in a part of the tribal lands where the drones had been forbidden to fly. Obviously the ISI gave up a huge number of Taliban leaders to the CIA. Pretend for a moment that you are a midlevel Taliban commander and you are informed that every one of your superiors has been blasted away by CIA drones and your next, but oh wait there is good news: the CIA station chief has been outed and is flying back to America for a little R&R. Are you happy? I didn't think so.
The Long War is going swimmingly but Cold War II is off to a bumpy start. Cold War II is what I am calling the nascent conflict between China/N. Korea and America with all its Asian allies. South Korea is conducting artillery drills from the island that North Korea shelled a few weeks ago on Monday. The North says that these drills mean war and yet the South is carrying them out anyway, which it absolutely must do. Cold War II started with China's attempt to wrest an island away from Japan a couple months ago. While the media portrays the Long War in defeatist terms it does the opposite with Cold War II, downplaying it. For instance, the Chinese fishing trawler that rammed two steel hulled Japanese warships a while back was itself a warship with a steel reinforced ramming hull. In other words, there has already been a minor naval engagement between Japan and China. Obama's response to Cold War II has been spot on so far. Just because he is doing the right stuff doesn't mean CW II won't get hairy. Once again the world has two antagonistic nuclear superpowers (scary).
All foreign policy events must be seen through the twin lenses of the Long War and Cold War II. Take the new START treaty limiting Russian and American nuclear weapons. Without looking through our two lenses you might (truthfully) say that Russia has ten times more tactical nuclear weapons in Europe than America and this yawning disparity is not addressed in START and so it is a bad treaty. But look through the twin lenses and you would say, "So what? We need Russia to defeat Iran, China, and Al-Qaeda. The USSR doean't exist anymore. Get with the program and ratify START."

Specific Stocks

As a bull market matures growth stocks begin to outperform value stocks. This bull market is 21 months old, middle-aged and ripe for what the pros call "growth at a discount," or growth stocks that are undervalued. Two weeks ago I mentioned a core positon of mine, Koppers Holdings (KOP), which is a railroad/steel mill supplier and it trades at a discount to most railroad and steel stocks. Since I mentioned it KOP exploded and is up by double-digits. Growth stocks should be bought when they are in basing patterns. KOP is roaring well beyond its basing pattern so I am not adding to my position but sitting back and enjoying the ride.
Of more interest is ITT Corporation (ITT). It operates in three spaces: 1) Defense. 2) Giant water pumps for mines, sewage treatment plants, and municipal water supply. 3) Engineered products for railroad rolling stock and cars. ITT has a P/E ratio of 12, as if it were a pure defense company. For the past year analysts have been warning investors to stay away from defense companies like ITT. But a few days ago the analysts have been waking up and saying, "Wait a minute, ITT is levered to mining, railroads, and the coming expansion of emerging market water delivery and treatment facilities, it is undervalued!" What they haven't been saying but should is, "Not all defense companies suck, ITT is the leader in night vision goggles and other Long War gear, not main battle tanks designed to counter a non-existent Soviet threat." In other words all of ITT's businesses are pretty good.

Capitalism Is Winning

Charts: The S&P 500 has traded above the key 1227 Fibonacci long term indicator for 6 days in a row, which is bullish. Volume patterns are bearish as is the advance/decline line; a mixed bag. Yield on the 10-year treasury note has also pushed up above a key Fibonacci level. This speaks to higher interest rates, if that trend continues it will destroy the US housing market, very bad.

Fundamentals: China just raised its inflation target from 3% to 4%, an admission of defeat. Actual Chinese inflation is running at 5% and has increased by one full percentage point for each of the last two months. China cannot tame inflation by raising interest rates because it will then be flooded by foreign capital despite whatever capital controls it might dream up. A flood of foreign capital would drive Chinese inflation even higher. Global equity markets are beginning to wake up to the fact that China cannot step on the brakes and are tentatively happy. China is the locomotive for world growth, so this is maybe good news, and maybe not. Imagine you are a passenger on a train and want to zoom forward to your destination. The conductor tells you that the locomotive is running at full throttle. Okay, sounds good. Then the conductor tells you that the train doesn't have any brakes. Uhh, a bit worrisome. Then the conductor tells you that there are obstacles on the track that the train may smash through (the obstacles are the Euro-Zone debt crisis and maybe the budding US sovereign debt crisis) or the train may hit these obstacles and derail.
This all sounds very scary and will probably end badly unless the world economy gets a second locomotive, i.e. the US economy needs to start growing at about 5%. There is so much idle productive capacity in the US economy that if it were to start growing, then inflation would actually slacken on the jump in global output. This brings us to Obama's big shift to the right: Extending the Bush tax cuts, freezing Federal workers pay for two years, free trade deal with South Korea, and the wonderfully harsh report from Obama's deficit cutting commission. All this represents a massive shift to the right. After shifting Obama blasted the liberals, actually hurting their feelings. He is talking to the Republicans. They speak the same language on foreign policy. He likes hanging out with them. Furious, the liberals talk of supporting a total left wing idiot like Ralph Nader in the next Presidential primary. If this were to happen it would be incredibly good because it would consign the hard left liberals into Purgatory for years.

Geopolitics: Iraq is forming a unity government. It is game over for Al-Qaeda in Iraq. This paves the way for Iraqi oil production to roar. This will go a long way to putting a cork in Chinese inflation. Also, consider that Iraq has the freest economy of any Arab state, except perhaps Yemen, which has no real central government: forcing a kind of free market economy through default. Yemen and Iraq are both growing at about 8%. We have to step back and remember that the Long War is not radical Islam vs. Christianity or radical Islam vs. democracy. No, it is radical Islam vs. capitalism. At 8% GDP growth capitalism is winning and Al-Qaeda is losing.

CIA vs Iran

Over the past few months the CIA has assassinated four top Iranian nuclear scientists. The most recent was last week; not only was the Islamic Republic's number one A-bomb expert snuffed, the number two guy was severely injured. Since the Agency only waxes the top talent in Iran's nuclear weapons program all an Iranian scientist has to do to survive is produce substandard work. Do a crap job and you will not be targetted. Think of a class of bright physics students, but all of them are competing to get "F's."
But even if he were willing to risk his life by working hard, an Iranian nuclear scientist would still have to face the NSA generated viruses tearing his centrifuges apart. And on top of all that, the CIA has been successful in placing cracked valves in Iranian centrifuges. So there are two ways to blow them apart: bad valves and bad software.
On Monday Iranian nuclear disarmament talks began. In the morning, the Iranian negotiator bitterly complained that the world is turning a blind eye to the numerous sins routinely committed by the CIA and NSA. He was obviously depressed and not up to the job of getting a good deal out of his American adversaries.
Small wonder. Right before the talks Iran announced that it can produce yellowcake uranium from raw uranium. Which is to say that it can hammer uranium ore out of rock, which any African country with uranium deposits is capable of doing. If Iran is spending money on developing yellowcake refining capacity, then it is probably unable to make even token progress on weapons grade enrichment.
But wait a minute, the CIA says Iran is only months away from having working nuclear weapons. Here is how we know if a CIA spokesman is lying, his lips are moving. The CIA knows more about lying than any other organization or individual.
AS far as individual stocks, this is bad news for Raytheon.

Smokes and Railroads in Asia

The head of South Korean intelligence says that the recent North Korean attacks are a result of Kim Il Un's ongoing efforts to takeover the North's leadership. The younger Kim has been purging the N. Korean Army of disloyal generals. It is very difficult to go into any large and powerful military organization and start killing top generals. So the N. Korean generals who survived the purge were given a cookie: the wanton slaughter South Korean civilians (Karl Marx would have been proud). This all makes sense but I have a different take on recent events.
Thanks to WikiLeaks we know that China has an open air corridor running from North Korea to Iran and through Beijing. This air route is used to funnel North Korean military technology to Iran and thereby guaranteeing China a ready supply of Iranian oil. Yes North Korea is paid for the military technology but this is vastly outweighed by economic loss from US sponsored sanctions. In other words, North Korea is China's puppet. Also, consider that China's big bone of contention with the rest of Asia is a group of islands in the South China sea that it is trying to steal from Japan, plus other islands that it wants to steal from other Asian countries. Consider the symbolism of the North Koreans shelling a S. Korean island in contested waters. Long story short: America has a China problem not a Korean problem.
Happily within days of the North Korean shelling the USS George Washington aircraft carrier battle group had surrounded the S. Korean island in question. It is difficult to overstate how powerful the battle group actually is. It could shred the People's Liberation Army Air Force into confetti. China is building its own aircraft carrier fleet and designing huge anti-carrier missile batteries that will eventually line its coast. But all this is in the distant future, so for now the US Navy has control over the Pacific. Any major conflict with China will be fought at sea, not on land, and the sea is not China's friend. It is important to ignore the hysteria of the popular press, i.e. China will rule the world the day after tomorrow, the sky is falling. The bottom line: Asia is still where its at for investing.
Which brings us to specific stocks. Kopper Holdings (KOP) is the largest supplier of railroad cross-ties to Asia. Phillip Morris International (PM) is the largest supplier of cigarettes. It is impossible to run an Asian country without plenty of cigarettes and expanding railroads. Both pay big dividends and when the US Congress extends the Bush era capital gains tax cut it should help dividend paying stocks.

Great Jihadist Retreat

Charts: The Fibonacci number sequence describes an outwardly expanding spiral. Divide two Fibonacci numbers and you are describing a retracement along part of that spiral. Both the sequence itself and retracement numbers are found throughout nature because this is how natural systems grow, in a cyclical or circular manner. The stock market is a natural system just like a spiral galaxy. Since we are so close to the next Fibonacci number, 1227, it makes sense to wait and see if the index can conquer this level before making new stock purchases. 1227 has been tested once and the index retreated in big volume.

Fundamentals: The market is reacting badly to Cisco's forecast. But all the technology majors are playing in each others' backyards now. They are all into hardware and software. Oracle and Hewlett Packard are starting to eat Cisco's lunch. There are bigger problems out there than Cisco. The last jobs report showed the payroll survey gaining 150,000 jobs but the household survey showed 300,000 jobs destroyed. Irish and Greek debt yields are soaring because Germany has suddenly become brain dead. If Ireland has to tap the special Euro-debt bail out fund it will be very bad. The big picture is that the global recovery is uneven. Emerging Asia is growing at almost 9%, America at 2%, Europe at 1.7%.

Geopolitics: Obama gave a speech in India where he essentially said that his July timeline for pulling out of Afghanistan was window dressing and America is in there to stay. Since he is likely to win a second term the jihadis will be driven out of Af/Pak in time. This will mark the beginning of a gigantic global strategic retreat. The two longest strategic retreats ever were Mao's Long March in the 1930s Chinese civil war and Nazi General Erwin Rommel's great retreat in the N. Africa campaign of WW II. After losing the Battle of El Alamein Rommel's mechanized army was reduced to almost a guerrilla army with trucks and guns but almost no tanks and planes. The retreating German Army was equipped like and acted just like a modern Taliban fighting unit, relying on booby traps and subterfuge rather than frontal assaults. The British chased the Germans across 5 North African countries before the bad guys holed up in Tunisia for a last stand. British fighters and bombers played the same role that drones play today. By studying past strategic retreats we can predict the outcome of the impending Great Jihadist Retreat (GJR). One thing is clear, with much of North Africa, Mideast, and South-central Asia as a theater vastly improved surveillance will be a necessity. Live feed from reconnaissance drones and satellites will have to be stitched together into one picture with communication links and software. Also, computers will have to filter out useless data so that humans can concentrate on relevant data or the system will be overwhelmed by white noise. The current defense majors are too lumbering and old school to build this network. It will get built by a more agile company, like Harris Corporation.

Germany Bad At Socialism After All

Charts: The S&P 500 rose this morning to 1227, the next Fibonacci number, and turned tail, plummeting downward in big volume. This is a failure of a key technical level. Not good.

Fundamentals: Recently Germany has cooked up a scheme that would give bond holders of Euro-periphery debt a haircut in the event of default. This has clobbered Euro-periphery debt. Which in turn hurts German banks, many of them state owned and it might even threaten the global recovery. Here we have proof that Germany really isn't that good at socialism after all.

Geopolitics: India has a military strategy called "Cold Start." Dedicated division sized strike forces are supposed to drive into Pakistan within a couple days of mobilization if a second Mumbai-style terror event occurs anywhere inside India. Pakistan says that it would devote a much bigger part of its military to fighting the Taliban if India would dismantle Cold Start. The Pak Army thinks that the existance of Cold Start gives the Taliban a way to start a war between India and Pakistan. The assumption built into Cold Start is that the Pak Army has total control over all the jihadis operating in the tribal lands (not true). Obama is telling India that he will work toward giving it a permanent seat on the UN Security Council, sell billions of dollars worth of new weapons, and other goodies if it does away with Cold Start. For now India is publically saying: "Cold Start, what's that? We've never heard of Cold Start." It might be saying something else behind the scene.

Battle Of Kandahar Started

The Taliban hit Bagram Air Base in Afghanistan for the second time in a week. This time 12 Taliban fighters were killed and no good guys. Then the Taliban attacked Kandahar Air Base with mortars, rockets, and a sizeable force. At least 10 Taliban fighters were killed and no good guys. NATO helicopter gunships spent hours chewing up nearby fields so there was probably another dozen or so bad guys killed in the after action.
The Taliban has been conducting a surge into Kandahar and Marja. Combat is heating up in both these areas and in other parts of the country. US Special Forces have executed over 100 hundred raids in Kandahar over the past few weeks, aimed at killing or capturing Taliban leaders. It is safe to say that the Battle of Kandahar has started.
Kandahar is a city of 1 million people. Half of its districts are firmly under Taliban control; the bad guys are effectively running governments in these districts. Part of the Taliban surge is a campaign to win the hearts and minds of the Afghan people. Mullah Omar has ordered his people to stop beheading criminals. Now they use firing squads.
It is disappointing that the Battle of Marja is still ongoing. The Marines are slowly expanding the parts of Marja that they control by giving fertilizer, seed, and agricultural equipment to farmers. The Marines then protect these famers from the bad guys. Every week a smaller percentage of farmers accepting this stuff are killed. The battle will be over when zero farmers are killed. The Marines also control everything leaving the farms through elaborate checkpoints. Marja produces more opium than any other part of Afghanistan and the Marines are finding success in choking off drug money to the bad guys. It is incredibly slow going.
Now that he has sewn up his domestic agenda with healthcare and financial reform, President Obama is getting ready to give a major speech on foreign policy. There will be a lot of fluff in the speech but he will make two main points: The US will rely on native troops to do most of the Long War fighting, and there is something called the Long War going on. He won’t use the phrase “Long War” of course but he will start preparing the American public for the fact that while there might be a troop reduction in Afghanistan next year, it will be modest and American forces will be there for a very long time. And he might say something like, “I cannot rule out the deployment of US troops to other troubled regions of the world besides Afghanistan.”

Watch Car Dealers

Charts: The S&P 500 had a strong day, up 1.5% to close at 1088. The correction is at an inflection point. Lows for the year are 1057. These levels have been probed a couple times now. If the index breaks through these lows it could spell the start of a bear market. If support holds, as it did today, the charts are saying we are only in a correction.

Fundamentals: Germany passed the trillion dollar bailout package for Euro-periphery debt last night. Germany’s bizarre restriction on shorting Euro-debt was a Hail Mary to try and avoid funding the bailout. The Hail Mary didn’t work but the bailout won’t work without Germany’s head in the game. The US Senate passed its financial reform bill. Now the House and Senate will merge their respective bills. The House version exempts car dealers from financial restrictions and the final bill may keep this exemption. If this were to happen it would be a sign that the government’s attack on the private sector is losing steam.

America's Responsibilities

Charts: The scariest chart by far is first time jobless claims. Through most of 2009 it plunged sharply, reflecting good employment trends. But at the start of 2010 it hit a floor and traded sideways in a well defined channel, which spoke to an anemic L-shaped recovery in hiring. Today jobless claims jumped sharply out of that channel, suggesting a double-dip recession. Today’s bloodbath on Wall Street is because of the jobless claims jumping.

Geopolitics: The Pak Taliban launched a big conventional style assault on the Pak Army and got chewed up with dozens of bad guys killed. The Afghan Taliban launched a similar assault on NATO’s Bagram Air Base in Afghanistan. And the Afghan Taliban was slaughtered as well, with the good guys barely scratched. The Afghan Taliban says that it is starting its spring offensive against NATO. The bad guys have a tremendous capacity to absorb casualties and probably don’t consider these two big assaults failures.
In Kyrgyzstan, violence against the government is steadily increasing with sporadic blow-ups here and there. The beginning of an Islamic insurgency is evolving and the highly stretched CIA must find some way of dealing with this new threat.
In Thailand, a full-blown civil war is underway. The Redshirt rebels trying to topple the government are not Islamic radicals but Thailand does have an Islamic insurgency that is helped by the chaos engulfing the Southeast Asian country.
South Korea has formally charged North Korea with torpedoing one its cruisers last month and tensions are rife on the Korean peninsula.
All three of these problems are America’s responsibility. The structure we have foisted on the world of an ever expanding US deficit funded by austerity measures everywhere else will only work if America truly solves all geopolitical problems across the globe. This includes Al-Qaeda’s advance in West and North Africa, the Islamic insurgency in Russia’s Caucus Mountain region, Somalia, Yemen, and everywhere else.

Euro's Direction Controls World Markets

Charts: The Euro was up today, probably because Germany is forbidding German hedge funds from certain types of shorts on Euro-debt. Short covering caused the Euro's pop. The S&P 500 was only down .5%, closing at 1115, exactly break even for the year and sitting dangerously on an important support level. In early going the index cratered and briefly plunged under the 200-day moving average but then climbed steadily to register a mild loss. The reversal was no doubt due to the Euro’s gain. So the market was buoyed by technical factors, not fundamentals. The market is still in a correction.

Fundamentals: China’s tightening policy is working. Chinese real estate prices are declining, averting a real estate bubble similar to what Japan and America have gone through. In the long run this is good news. For now it is threatening China’s construction boom which is hammering the price of iron ore, copper, and other commodities. This slow down coupled with the Euro-zone debt crisis is putting tremendous pressure on the recovery.

Geopolitics: Yemeni and Saudi commandoes raided an Al-Qaeda in the Arabian Peninsula (AQAP) camp and rescued two German hostages that AQAP was holding for ransom. It is heartening to see our allies giving AQAP a black eye.

Special Forces In W. Africa

Charts: Investors are fanatically watching the Euro. There is an 85% correlation between the direction of the Euro and the S&P 500. Virtually every hedge fund on Earth is short the Euro. This means a short covering rally in the Euro will lift the stock market. A stock market rally based on Euro short covering is obviously suspect. The positive reversal on Monday was just such a rally.

Geopolitics: On Tuesday the Pak Army killed 28 Taliban fighters and lost one soldier. The US Army lost 5 soldiers as the Afghan Taliban launched a suicide bomber into a NATO convoy. As the Long War grinds on in Afpak the Pentagon is preparing for the inevitable whack-a-mole effect that will scatter the bad guys to peripheral battle zones in a few years. The biggest chunk of bad guys will wind up working for Al-Qaeda in the Islamic Maghreb (AQIM). Maghreb means the “Sahara Desert.” AQIM is the most economically viable and self-sustaining of all Al Qaeda franchisees. It smuggles cocaine, cigarettes, and illegal alien workers into Europe from Africa, netting millions. Plus it makes millions more with a lucrative kidnapping operation. AQIM has a lock on organized crime in North and West Africa and pays its fighters very good salaries. Roaming the wide open expanses of the great desert, nobody knows how big AQIM is but we do know it is growing larger and more powerful because the national armies of Mali, Mauritania, and other Saharan countries are increasingly clashing with AQIM. A new front is opening in the Long War.
US Special Forces have unleashed Operation Flintlock against AQIM. Flintlock seeks to train local allied armies as well as strengthening local judicial systems to enforce the rule of law; in other words nation building. As the Pentagon turns its attention to these peripheral battle zones it not only relies on Special Forces but independent contractors, US defense companies. And it is relying on independent contractors in Afpak as well. The Pentagon’s “rogue” assassination/spy ring we talked about yesterday is administered by Lockheed Martin.

How Long?

Geopolitics: How long will the Long War last? US Army doctrine calls for clear, hold, and build in regards to taking territory away from the Taliban. The clear stage for the Battle of Marja took two weeks. But Marja is still mired in the hold stage as Taliban fighters keep infiltrating the region and killing Afghanis who cooperate with NATO. Building projects have moved forward at 1/10 the pace originally envisioned and are now coming to a virtual halt. The Taliban’s kill ratio of Afghan citizens participating in NATO building projects is very high but its kill ratio of NATO soldiers is tiny. Taliban intelligence is good; it only kills citizens that play ball with the good guys. NATO intelligence is iffy.
We can tell how weak intelligence gathering is from the following. The New York Times has dug deeper into what was originally reported to be a rogue CIA spy/assassination ring a couple months ago. The Times is now saying that the ring is not connected to the CIA even though it is run by ex-CIA officers. The US Army is outsourcing Afghan intelligence/assassination to a private sector entity because the CIA is stretched so thin it can’t help the Army in Afghanistan. The CIA has its hands full. It is running an entire war in Somalia, which is now locked in huge battles and saw the Somali parliament overrun by Al Shabab fighters over the weekend. And the Agency is running its own air war in Pakistan, stepping it up in Yemen, probably Thailand, probably Kyrgyzstan, you get the picture.
And while there is plenty of good news (like the Pak Army slaughtering another 5 dozen bad guys over the weekend) it is an inescapable conclusion that the Long War is going to last much longer than the American public even dimly appreciates. How does this affect the stock market? I will cautiously draw one conclusion: At a minimum we aren’t at a 1982 moment when investors could see that a US victory in the Cold War was inevitable. Yes, the good guys are winning but here is the broader question: What does it mean for stocks if the US is in a more or less constant state of forward progress in a war that will last for centuries?

Greek Marxist Terror Bombing

Charts: The S&P 500 was down 1.9%, closing at 1136. The market is in a correction. It will be very bad if these support levels are violated: 1120 - the pivotal Fibonacci #. 1115 - breakeven for the year. 1110 - the 200-day moving average.

Fundamentals: US economic data came in strong today. However, a host of concerns overrode this good news: sovereign debt in Europe, weak growth outside Asia, the US Congress attacking financials, and electronic gremlins hidden in trading platforms. The specific trigger for the latest leg in the correction is the bombing of a Greek prison and courthouse by the Greek Marxist group “Revolutionary Struggle.” The CIA will have to help the Greek government clobber these communist bad guys so austerity measures can proceed smoothly. It is a sign of great stress when the CIA is mentioned in the fundamental section of the newsletter but also a sign of hope.

Geopolitics: The FBI has uncovered a Pak Taliban ring within the US that was part of the NY car bomb attempt. The Justice department has gone from crowing about catching these bad guys to trying to calm public anxiety. Pak Taliban presence within the US is alarming investors.
Quasi-Islamic rebels in Kyrgyzstan captured several government buildings on Thursday. By Friday the government recaptured these buildings with dozens killed on both sides. An Islamic insurgency could be arising in Kyrgyz, only a few miles from Afghanistan. The CIA and Russia’s FSB are probably working together to stamp it out.
In heavy fighting, NATO and the Afghan Army have killed dozens of bad guys this week in northern Afghanistan. Recent battles have been almost exclusively in the north, centered on protecting supply convoys for the Battle of Kandahar, which will start in June. If fighting is this heavy just to secure supply lines, imagine how nasty the actual battle will be. America’s collective consciousness is slowly and painfully shifting toward acceptance of a multi-decade (if not multi-century) war, causing volatility in the stock market.

Permanent Drone Blitz

Charts: The S&P 500 rose 1.4% and closed at 1172. Graphic chart patterns are saying that the rally attempt has given way to an outright rally after resistance at 1170 was breached. Volume sucks, but it has sucked throughout the bull market; nevertheless volume patterns are saying we are still in a rally attempt. All technical indicators are good other than volume and the fact that China is in a bear market.

Fundamentals: Yesterday world stock markets were shaky because a trillion dollars is being thrown at indebted Euro-periphery countries but only Greece and Ireland have launched honest austerity programs. Today Spain announced it will slash government spending, making the rescue plan more credible. The US Treasury said that its April deficit hit an all-time record, about 60% higher than expected. Every country on Earth is exerting fiscal discipline except America. The only way the superpower can get away with this is by winning the Long War, dealing with North Korea, brokering peace between Israel and the PLO, and—well—running the world effectively.

Geopolitics: Word has leaked out that the Obama Administration has given the CIA new orders concerning drone strikes. The Agency had been using drones only to attack Taliban or Al-Qaeda leaders and great care was exercised to mitigate civilian casualties. The new policy is apparently to attack any jihadist fighter anywhere, no matter how lowly, and accept higher civilian casualties. CIA drones are now operating in giant wolf-packs of 9 drones and attacking makeshift tent camps on hillsides, motor vehicles, and other targets previously avoided. Missile salvos are much larger than before with drones coming back to base empty of ordnance, similar to WW II bombing missions. And the drones are hitting targets every day; perhaps the beginning of a permanent drone blitz. Anti-American editorials are gushing from the Pak media.
How important is pro-American sentiment? When Britain and Rome ran the world they were reviled and hated. This was especially true when they were at their military peaks and their world empires were running smoothly. The old saying, “The sun never set and the blood never dried on the British Empire,” provides reasonable guidance.
As far as North Korea sinking the South Korean frigate, there is no way for us to know whether the US 7th Fleet is moving into Koreans waters and dealing with this problem. My guess, however, is that this is in fact happening. The North Korean submarine fleet is a joke and it is well within the 7th Fleet’s capability to make sure no more torpedoes hit our ally.

Hellfire Missiles Send Jihadists To Hell

Charts: The stock market is in a shaky rally attempt within an ongoing correction. Monday’s big 4.4% gain was in weak volume. Today’s .3% loss was disappointing because the index needed to see consolidation. Yesterday support at 1150 was tested 7 times and held. The S&P 500 finished today at 1156, so support is holding. 1150 is where the first correction of 2010 started and is therefore a key level. The most important technical indicator right now is the Euro vs. the dollar. The stronger the Euro the better. The Euro is still very weak. Overall then, the charts are not great.

Fundamentals: A trillion dollar life preserver is being thrown to the Euro-periphery as it drowns in debt. This buys time for the whole Euro-zone. Now it needs to start growing by implementing free market policies, which will take a long time. Chinese inflation is coming in hotter than expected so we can expect more tightening from Beijing. Stocks levered to China are getting hammered. This leaves America as the only short term source of global growth (scary).

Geopolitics: The Justice Department is breathlessly telling the world that Shahzad (the NY car bomber) was working directly for the Pak Taliban. The Pentagon and CIA are yawning over this revelation and moving on to other problems. On Sunday a CIA drone wolf-pack attacked the N. Waziristan Taliban’s home village and blew away 10 bad guys. Karzai is in America right now rubbing elbows with liberal Congressmen who want him to negotiate peace with the N. Waziristan Taliban. This is the CIA’s way of saying, “Don’t do it, Karzai.” Stepping up the pace, on Monday and Tuesday a fleet of CIA drones hit two other N. Waziristan villages, a training camp right on the Afpak border, and at least one vehicle. Hellfire missiles sent dozens of bad guys to Hell (ironic).
After getting blasted by the US Congress, the Pak Army is telling us they are fighting the Pak Taliban in their current offensive. So far this week 73 bad guys have been killed and 9 good guys. On Monday the Pak Taliban tried to overrun a Pak Army outpost with platoon-sized units, this is where the good guy casualties came from.
It is also heating up in Afghanistan with US Marines and the Afghan Army killing 10 bad guys over the weekend.
Finally, the South Korean military says a North Korean torpedo sunk one of their warships a few weeks ago. Like all geopolitical issues across the globe, this is an American problem and it is up to America to make sure it doesn’t happen again; which means working through China to threaten an aid cut-off to North Korea. Korean stocks got shredded.

Hillary Wants To Invade Pakistan

Charts: The S&P 500 has experienced its worst start to May ever by a huge margin. The second worst May start was 1930. It is not good when today’s charts resemble those from the 30s. The broad index is experiencing a historically severe waterfall pattern. This is the most damaging pattern possible. All indications are that the correction has further to go, although we have a headline driven market so a fundamental improvement in the Euro-periphery debt crisis could turn around equity and credit markets.

Fundamentals: The market is demanding that the ECB buy Greek sovereign debt or the EU extend its bailout to Portugal and Spain, putting a floor under the price of Euro-periphery bonds. If this doesn’t happen, then a second credit crunch will rock the globe and plunge the world back into recession. As of Sunday the ECB and EU are huddling, deciding what to do. The markets also want the US Fed to flood Europe with dollars. A small credit crunch is already underway as European banks refuse to lend to each other, causing a shortage of dollars. Trade finance will freeze if the Fed doesn’t step up to the plate.

Geopolitics: Because of the failed NY car bomb attempt the State Department is putting enormous pressure on Pakistan to launch an offensive in N. Waziristan, going as far as hinting that the US will send troops into Pakistan or radically beef up Special Forces already there unless the Pak Army gets into gear. Shahzad, the failed car bomber, trained with one or more Talibans in N. Waziristan. The Pak Taliban initially took credit for the car bomb attempt but has since fearfully recanted after the State Department started talking about invading N. Waziristan.
The Defense Department isn’t beating its chest nearly as hard as State. Sec. Gates points out that the Pak Army is currently halfway through an offensive grinding through a tribal land near N. Waziristan and is realistically doing everything possible. On Saturday the Pak Army killed another 15 bad guys. It’s easy for civilians to demand action; on the other hand it can't be denied that Hillary has big balls and I think the bad guys are terrified of her (as are the good guys).
America’s planned offensive in Kandahar isn’t exactly moving forward at warp speed. The US Army is bogged down designing a new system for road checkpoints that will kill fewer civilians. The new system will feature different types of checkpoints in different neighborhoods and elaborate checkpoints-in-depth. One study shows that Taliban checkpoints in areas that it controls kill fewer civilians than NATO checkpoints. As the Kandahar offensive gets underway NATO will take territory away from the Taliban and then set up checkpoints to help control the new turf. Obviously NATO checkpoints have to be superior to Taliban checkpoints. In fact the offensive can’t begin otherwise

Pak Tribesmen Achieve Infinite Kill Ratio

Charts: Yesterday’s chart action resembled capitulation, but it was a mirage. Bizarre electronic trading anomalies caused the illusion. The market is in a correction. The S&P 500 closed down 1.5% at 1110. Next support is 1100.

Fundamentals: The government’s monthly jobs report came in much better than expected, suggesting that the US recovery is still on track. Here’s why it might not matter: The most significant event yesterday occurred when a Senate page interrupted the financial reform hearings with the breathless news that the Dow had dropped 1000 points. The Senators angrily responded by saying they needed to hurry up and slap even stiffer regulations on those volatile Wall Street scoundrels, trying to put out fire with gasoline.

Geopolitics: On Thursday, up and down the Pak tribal lands there were clashes with government forces and Pak tribesmen on one side and the Taliban on the other. 41 bad guys were killed and 1 good guy was killed. The Pak Army killed 26 bad guys and the tribesmen killed 15. The 1 dead good guy was a Pak soldier, so the tribesmen had an infinite kill ratio. It is impossible to win a guerilla war with the local population hunting you down and killing you. Furthermore, the Pak tribesmen are being superbly trained, armed, and lead; acting like a professional army.

101st Airborne Division Combat Team Lands In Kandahar

Charts: At one point today the Dow was down almost 1000 points, with midday volume 2000% above average, all stuff for the history books. The Dow then climbed 646 points off its low, chart action that looks like capitulation, a pattern often marking a correction’s low. At the close the broad index was down 3.3%, at 1128. If today’s horrific losses do not mark capitulation, then we may be looking at something worse than a garden variety correction. This means that tomorrow’s chart action must show some strength or we’re all up the creek without a paddle.

Fundamentals: The correction is being fueled by the Greek debt crisis. The big loss Tuesday did have a geopolitical component, but that is now a distant memory. The Greek bailout must still be approved by the German Parliament. The bailout is immensely unpopular in Germany and there is a real chance it could get derailed. German and French banks hold over $100 billion in Greek government debt. A Greek default would tear down these European banks. American banks hold about $1 trillion worth of European debt of various kinds; this is the contagion mechanism for Euro-zone turmoil to hop the Atlantic. Any substantial failure of European and American banks would require huge new government bailouts. Not only might politicians not do this, with government debt loads at all-time highs, they might not be able to. As I’ve said before, a Greek default will make the collapse of Lehman Brothers look like a Sunday picnic.

Geopolitics: 1st Battalion of the 101st Airborne Division’s 2nd Brigade Combat Team is en route to Kandahar. 3000 soldiers from the rest of the 2nd Brigade are gearing up to join them. This is the brigade that will lead the Battle of Kandahar. The 101st lead the Normandy invasion on D-day and is probably the most decorated unit in the American Army. The battle will start in June. It will be the biggest battle of the Afghan war. Almost every US soldier in 2nd Brigade is a hardened combat veteran, many served in Iraq and Afghanistan. Never before has an army gone into battle with rules of engagement that virtually forbid civilian deaths. As a consequence American casualties will be very high. Nevertheless, morale is terrific among the troops. Simply put, these are the greatest soldiers to have ever existed.

Hitler Wept That Day

Charts: At midday, 1168, the 50-day moving average is holding. All financial media outlets agree that yesterday’s massive selloff was caused by fear of Greece defaulting, not geopolitics. If I’m right, that it was geopolitics, then the correction will be mild. If I’m wrong and Greece is really that bad, then it will be horrific. This is why the geopolitical situation is actually pretty good…

Geopolitics: In Pakistan, the ISI is springing into action over the failed New York car bomb. Bad guys are being arrested and one small terror network is being rolled up. Recently Taliban video footage has been released proving that H. Mehsud, the leader of the Pak Taliban, is still alive. However, the Pak Army is hinting that the New York terror attempt originated with a smaller, lesser known Taliban, and this seems to be the group that is being rolled up.
The whole incident will have one beneficial effect: American peace protests over the coming summer offensive in Kandahar will be nonexistent. Today a NATO spokesman is using this shift in public mood to highlight the probable severity in good guy casualties as the Marines start pushing into Kandahar in the next couple months. NATO says the Taliban is loaded for bear. If not for the New York car bomb attempt large numbers of dead good guys would have been met with howls of peacenik protest. So the NY car bomb was a stupid move and thus it is believable that one of the big (strategically smart) Talibans is not behind the attempt.
And we must not lose sight of the fact that General McChrystal is one of the greatest military geniuses in history. McChrystal and Afghan Pres. Karzai are embarking on a tour of Washington DC. McChrystal is introducing Karzai to Senators and Congressmen. Karzai’s leadership will be solidified like super-strength concrete and he will be able to rig all the elections he wants. McChrystal is ensuring that someday Afghanistan will become a real democracy. All the mistakes America made in Iraq revolved around the concept of winning quickly. There is no winning quickly and building a real democracy will take a very long time. Now let’s look at the really big picture…
The ancient Greeks created democracy to win wars, not because they thought individual liberty is noble and moral. A democracy with its citizenry united and committed to winning a war will always tear apart any dictatorship. And thus we begin to see what a horrible mistake it is for jihadists to attack inside the United States. Both Hitler and Admiral Hirohito wept the day Japan attacked Pearl Harbor.

Taliban Terror Attempt In NY

Charts: The market is in a correction. The broad index closed at 1174, down 2.4%. The trading channel that the S&P 500 was churning in had a low point of 1182, which was violated. The March peak was 1180, a key support level also violated. 1168 is the 50-day moving average. The index hit 1168 twice and found support, the only ray of hope. If 1168 is violated it will be very bad.

Fundamentals: The financial press is saying today’s sharp sell-off was caused entirely by Euro-periphery bonds tanking on sudden fear of Greece defaulting (gosh there is a problem with Greek debt, who knew?). However, what actually happened is geopolitics caused a massive safe haven bid into US treasuries, which forced all risk assets to plunge, including Euro-periphery debt. Of course other factors also came into play: the SEC attack on Goldman, toxic financial reform coming up for a vote, and today the FTC launched an attack on Apple (unbelievable). But consider: the biggest sector loss today was airline stocks even though oil was way down. Airline stocks are the most sensitive to terrorism.

Geopolitics: It looks as though the New York car bomb attempt over the weekend did originate with the one of the Pak Talibans. Pak authorities have arrested several people related to the would-be bomber in Karachi and there are reports he spent time in the Pak city of Peshawar, which is Taliban central. There will be more terror attempts like this in the months and years ahead. Some of these attempts will succeed. The American public has been told by the White House that the war will be over in about a year, rather than three or four centuries. Today we can see Obama’s biggest foreign policy screw-up has been lying about the war’s duration. Will it really last for centuries?
The Sudan truce is unraveling and the nearly century-old Sudanese civil war may flare up again. So far this year the Lord’s Resistance Army (LRA) has massacred about 400 civilians in Congo and Uganda. These two news items are related. The LRA is an ultra-violent central African Christian militia. The Sudanese civil war is a central African conflict between Christians and Muslims. The Long War originated in central Africa as a Christian vs. Muslim dustup in the 1920s with roots snaking back to the Crusades. The Long War heating up in central Africa, its birthplace, is a sign that it’s going to last a long time.

Blinded By Anger And Revulsion

Charts: On Friday I incorrectly said the market was in a correction. Blinded by anger and revulsion over the Goldman criminal charges, I made a prediction rather than calmly looking at the charts. Technical analysis is not a prediction of the market’s future direction, but a snap shot of its current technical state. Rally or a correction? Bull or bear market? As of 4/30/10 the S&P 500 is neither in a rally nor a correction; the rally has morphed into stalling action within a trading channel. This is not good chart action, but the index did not dip out of its channel as of Friday.

Fundamentals: Obama-Care received a boost in the polls shortly after it passed. A few weeks later the bill started plunging in popularity again. Now it is more unpopular than ever with 60% of voters in favor of repeal. Terrified, the Demos are trying to reposition themselves for the mid-term elections by scoring a victory with financial reform, using even more hardball tactics than they used with Obama-Care. Financial reform polls very strongly, about 60% approve. But a similar number of voters also say it won’t work. So support is a mile wide and an inch deep and Republicans would be safe filibustering if not for the hardball tactics. The basic Demo strategy is to get Goldman Sachs to settle out of court on the various trumped up charges it faces and then point to this admission of guilt as a reason to shove financial reform down America’s gullet. Goldman settling would be short term good and long term bad.

Geopolitics: The hottest theater in the Long War right now is Somalia. The Somali Army is in a pitched battle with Al-Shabab, probably being helped by Ahlu Sunnah. Hizbul Islam is in a separate battle with Al-Shabab. Ahlu Sunnah is in still another battle with Hizbul Islam. CIA Director Panetta publically admits that there is a “CIA surge” going on in Somalia and it is safe to say that the complex four-way conflict is being choreographed to some degree by the Agency.
It is a complicated war and it is unclear who are the good guys and bad guys. Al-Shabab is definitely bad, in fact super-bad. It controls almost half the country and is the most savage Taliban-style government in the world. Its leaders have Al-Qaeda on speed dial. Hizbul Islam controls a big chunk of Somalia, but not as big as Al-Shabab. It is unbelievably savage and amputates limbs for minor offenses, beheadings at the drop of a hat, etc… It had been partners with Al-Shabab but it is now taking territory away from the super-bad guys, blowing up Al-Shabab Mosques, and killing rival leaders. This makes you think Hizbul Islam is in the good bad guy camp, but it’s not that simple. The CIA probably has something to do with the war between Al-Shabab and Hizbul Islam, but maybe not since the genuine good bad guys (Ahlu Sunnah) is attacking Hizbul Islam. Al-Shabab spokesmen accuse the Somali government of helping Hizbul Islam, perhaps without CIA approval.
We probably should simply classify Ahlu Sunnah as straight good guys. The CIA apparently wants this Islamic militia to take over the Somali government. Ahlu Sunnah controls central Somalia and has defeated Al-Shabab in several battles. The Somali government is of indeterminate status. Its soldiers are as likely to sell their guns to the bad guys as fight. The long planned offensive seems to be occurring but it also seems to be heavily dependent on Ahlu Sunnah.

India Needs Love

Charts: The market had fallen into a pattern of wild swings in big volume, up one day and down the next. This is called churning or stalling, high volume and high volatility movement that goes nowhere. When the market is furiously running in place it can signal a market top. Today the S&P 500 closed at 1187, down 1.7%, again taking out key support and breaking down out of the stalling pattern. It looks like a correction has started.

Fundamentals: The Congressional grilling that Goldman Sachs is undergoing has revealed that the SEC doesn’t have a case. In a panic, the SEC asked a US Attorney General to open a criminal investigation against Goldman, masking incompetence with ultra-aggressiveness. This is the sort of attack on the private sector we would expect from Hugo Chavez. Investors are terrified that the rule book is being thrown out the window and anything goes.
Yesterday the Republicans ended their filibuster with the understanding that the Demos would give way on the more toxic aspects of the pending financial reform proposal. Today the lead Republican, Sen. Shelby, said the Demos lied and aren’t compromising on anything. If Republicans don’t grow a set and return to a rock solid filibuster, a world of pain beckons.

Geopolitics: The Pentagon’s big report on the Afghan war points to one major problem: The bad guys are able to infiltrate back into areas that the Marines have cleared, such as the city of Marja. In Iraq and Pakistan this has not been as big a problem because local tribes that live in the cleared areas have been effectively armed and trained by the good guys. These Pak and Iraqi tribes have been able to keep the bad guys out. The tribal structure of Afghanistan is so weak this hasn’t yet been possible. This is why the Pentagon is saying the Afghan war will take much longer than anybody anticipates. But the good guys will still win.
India and Pakistan are restarting their peace talks. One of the major points of contention is shared waterways, which is being addressed in these talks. America has blatantly been favoring Pakistan over India, which has been the right move up till now. It’s time for India to get a little love. Pakistan is saying that the talks will address the issue of terrorism, India’s main concern. So here’s the love.

Egyptian Spies Hang Bad Guys

Charts: The major indexes smashed up through resistance levels in big volume, undoing recent technical damage. The broad index finished at 1207, up 1.3%. Leadership has flipped around and is now very good. Next resistance is at 1220.

Fundamentals: The EU and IMF have quit pussyfooting around and are taking a hammer to the Greek debt problem. Yields on Greek, Spanish, and Portuguese debt are dropping.
Cowardly Republicans rolled over on the financial reform filibuster. The bill is now slated for debate. But there is no bill. It is 100% in flux. The GOP is promising the final bill will not hurt car dealers and the really nasty parts will be gutted.

Geopolitics: Egypt’s intelligence agency has caught 26 Hezbollah spies. Four of these bad guys are already being fitted with hangman nooses. It is a virtual certainty that Egyptian intelligence is receiving massive help from the CIA. Other allied Muslim intelligence agencies are being similarly helped, probably with training, high tech devices, and information sharing. So while there is no “central intelligence agency” (note the small caps) linking the 17 American intelligence agencies together, there is such an agency linking and coordinating Muslim intelligence agencies. Ironically, the CIA is well-named after all.
The Pentagon sent a 150-page report on the Afghan war to Congress. Brutally honest, the report shows the Pentagon’s failures and successes and can be summed up this way: the Afghan war is being won, but at a much slower pace than Pres. Obama has promised the American public. The Pentagon calls the global conflict the Long War for a reason. Defense stocks jumped today. The more levered to the LW, the more they jumped; for instance HRS was up 9%, ITT was up 3%, and RTN was up 2%. HRS makes encrypted tactical radios for infantrymen, ITT = night vision goggles, RTN = tracking systems for drones.

Specific Stocks: Growth at a discount stocks trade at a lower multiple than their peers. Dow Chemical (DOW) and DuPont (DD) both reported blowout numbers. DD reported better growth, yet it trades at a much lower multiple than DOW. MMM is the world’s leading diversified manufacturer. Its PE ratio is two percentage points lower than the industry average. The reason: MMM just acquired a big Asian competitor and investors reflexively hate acquisitions. As far as DD vs. DOW, the latter is always making sexy partnership deals in Saudi Arabia, but its blowout numbers came from its boring Basic Plastics division and other bread and butter stuff. In fact, DOW wants to sell its bread and butter stuff to finance the sexy stuff. In all this I am treating growth stocks like value. What about actual value? Goldman Sachs (GS) is trading at a gigantic discount to its peers. If it survives the SEC attack it is a screaming buy.

Pak Army Kills 450 Bad Guys

Charts: On Euro-debt fears, the Dow plunged under 11,000 yesterday but regained that key support level today. Also on Tuesday, in massive volume, the S&P 500 smashed through support at 1200 and 1190, for a savage 2.3% loss. Today the broad index retook 1190 in good volume to finish at 1191, up .7% on the day. Leadership is poor. The rally is intact but very fragile.

Fundamentals: This week S&P downgraded the debt on Greece, Portugal, and Spain, jacking up yields on Euro-periphery bonds, increasing the chance of default and pushing the global financial system a step closer to Armageddon. In response, the EU and IMF are saying $132 billion will soon prop up Greek debt. Finally they’re hitting Greek debt with a hammer.
Republicans are halting the financial reform bill. Their filibuster is holding because Democrat Sen. Nelson has joined the Republicans. Financials are supporting the entire market right now. And the filibuster is supporting financials. In other words, if Sen. Nelson caves in there will probably be a market correction. He caved in on healthcare, so this is a real danger.
S. Korean GDP surged 7.8% y/y, reminding us that strength in emerging Asia counters weakness in Europe. The deciding factor is therefore America, which magnifies the importance of financial reform failing.

Geopolitics: Israeli PM Netanyahu just blinked in his stare-down with Obama, agreeing to freeze settlement building in E. Jerusalem and buckling on a host of other issues that should get peace talks going again with the Palestinians.
The interim government of Kyrgyzstan has not yet established control over the country. Looting in the capital city is increasing day by day as are anti-government demonstrations. The family of the deposed Kyrgyz President is actively working against the government but there is not yet a genuine Islamic insurgency, probably because the Taliban is gearing up for the coming Battle of Kandahar. Russia’s FSB is straightening out this mess, maybe with US help.
Thailand too is sliding into chaos at the hands of pro-democracy rebels. Unfortunately Thailand has an established Al-Qaeda linked Islamic insurgency and chaos plays into its hands.
With the far-flung nature of these Long War conflicts in mind, the CIA announced restructuring efforts that will allow it to quickly “surge” officers to hotspots around the globe. Just such a surge is occurring right now in Somalia and Yemen.
Meanwhile, CIA drones killed 5 bad guys in Pakistan Tuesday. The Afghan Taliban attacked a NATO supply depot in Kandahar and says it is laying in supplies for the big battle. The Pak Army killed 5 bad guys Wednesday. In a little over a month the Pak Army has killed 450 bad guys and destroyed 50 Taliban outposts.

Opening Moves In Battle Of Kandahar

Charts: The S&P 500 was up 2% last week. Chinese stocks were down 5%. Hong Kong was down almost 3%. Japan was down 1.7%. Asia is the only source of genuinely powerful growth in the world. The S&P 500 looks okay but global stock markets are not looking super healthy. Fear of Greece defaulting is causing American stocks to acquire a safe haven aspect. This speaks to strong geopolitics and weak global fundamentals (scary).

Fundamentals: With sovereign debt loads running about 3 times the historical average in OECD countries we have to question the sustainability of government borrowing at these levels. Going forward, these astronomic debt levels are only sustainable if GDP growth at least equals the yield on a given government’s 10-year bond. The yield on Greece’s 10-year bond is about 9% and the consensus forecast for GDP growth is slightly negative for the rest of this year and 2011. So there is a real problem with Greece and proposed bailout schemes might not get the job done. America has a 10-year bond yield of about 3.8% and GDP growth is forecast at 3%. This tells us that the situation in America (and therefore the world) is touch and go. Whatever you think about the financial reform bill preventing some future credit crisis, in the here and now it will strangle growth. The cap and trade bill that taxes carbon emissions would be even worse. At some point Washington is going to have to ink free trade accords and institute other genuine free market pro-growth policies or we’re going to have to start thinking about cashing out our stock portfolios, harvesting gains, and riding out another bear.

Geopolitics: Six CIA drones have been circling a village in N. Waziristan, Pakistan, since Saturday. On Sunday the wolf-pack launched Hellfire missiles into two Taliban houses, killing at least 8 bad guys. The drones stayed in place and fired missiles at rescue parties entering the two buildings. The drones are still over this town and have it in lockdown mode.
It’s a good thing the German Army has transformed itself from a pacifistic Bundeswehr to a warlike Wehrmacht because the Afghan province it controls, Kunduz Province, has become a new hot zone in the war. A key NATO supply line runs through Kunduz and the bad guys are stepping up efforts to attack NATO supply lines, to hamper the coming offensive in Kandahar. Over the weekend the Afghan Army (backed by US ground forces and air power) killed 20 Taliban fighters in Kunduz. There has been constant fighting for the past week in different parts of northern Afghanistan between the Taliban and the Afghan Army and casualties are stacking up without being officially reported through media channels.
Further south, another NATO supply line was attacked in tribal Pakistan along the Afpak border. Four fuel tankers were set ablaze by the bad guys and several good guys were killed. All this fury over NATO supply lines amounts to opening moves in the Battle of Kandahar.

Don't Piss Off The Giant

Charts: The S&P 500 closed at 1217, up .7%. Today the index punched through one resistance level, 1214. Earlier in the week it found clear support at exactly 1190. It is staging bullish reversals and finishing the day at the higher end of its trading band, bullish signs. Small caps are leading large caps, also good. However, Chinese stocks and American financials are struggling. Investor sentiment is signaling complacency.

Fundamentals: The financial reform bill doesn’t set out new parameters for financial firms; it creates new bureaucracies and empowers old ones to establish these parameters. The bill has the federal government running the financial industry the way state governments run electric utilities. Take derivatives, since the credit crisis subsided most derivatives have moved by themselves onto central clearing platforms, but others have not, the free market at work. If the bill passes, a “derivative czar” in DC will decide which ones will be traded on what platform. Like any attempt at central planning this will prove to be a disaster. But the bill hasn’t passed yet. On Friday there was some evidence of Republicans and Blue Dogs stiffening their spines. I hate to get spiritual in this newsletter, but it could be that the ghost of Ronald Reagan is stirring.

Geopolitics: Here is Friday’s Long War body count… Pakistan: 25 dead bad guys and 1 dead good guy. Iraq: 56 dead innocent civilians at the hands of Al-Qaeda. Afghanistan: 5 dead bad guys and 2 dead good guys. Somalia: Al-Shabab and CIA sponsored Ahlu Sunnah have been locked in heavy fighting for about a week, dozens dead on both sides.
The fuel for much of this Long War bloodshed is, of course, Israel. Recently Obama said that announcements of new Israeli settlement projects in the occupied territories should be banned but not the actual projects, a way to slowly ease into a total ban. Israel saw this slow easing as a sign of weakness and flatly turned it down; furthermore Israel sidelined Special Envoy Mitchell and brazenly picked the weakest US diplomat in the docket as its preferred American liaison. This pissed Obama off. He switched gears and the State Department now backs a total settlement ban. Mitchell was put on a jet and Israeli PM Netanyahu was told to deal with the Special Envoy and nobody else. As Obama stewed, his anger continued mounting and he is now threatening to create his own peace accord and force it on the Palestinians and Israelis alike. The Palestinians are delighted. The Israelis are terrified. The lesson here? Don’t piss off the most powerful man on the planet.

Specific Stocks: Stocks are classified as Growth or Value. There is another category, so-called Growth at a Discount, or growth stocks that trade at a lower multiple than their peers. The best example is DuPont (DD) vs. Dow Chemical (DOW). DD has a multiple of 21 and DOW 95. Incredibly, over the past five years, DD has actually grown faster than DOW (crazy, huh?). DD and DOW are rivals but the real rivalry is DD and Monsanto (MON). DD and MON are the leaders in genetically engineered corn. DD corn is superior, it contains less GMO components but produces higher yields and is taking market share away from MON.

Germany Regains Warrior Spirit

Charts: Today’s newsletter goes out before the bell, but at midday this is the technical story: Global markets are very fragile and would certainly be tanking if not for American leadership. Stocks are strongest in proportion to exposure to the US market. US small caps (IWM) are strong and stronger still is US retail (XRT). The charts are telling us that good geopolitics is countering bad fundamentals.

Fundamentals: The EU has unearthed new smoke and mirrors accounting gimmicks that understate Greek debt, causing Greek yields to skyrocket, the danger of default grows greater day by day. Portuguese debt is beginning to come under pressure. If a domino effect occurs there is $600 billion in EU periphery debt that could go sour. Advanced country sovereign debt is the financial crisis of our day and the principle threat to the recovery.

Geopolitics: The invincible Pak Army killed 35 bad guys on Thursday and 1 good guy was killed.
Germany has added 500 extra soldiers to its Afghan force, bringing the total to 4500. These superb soldiers are now being allowed to fight. 7 German soldiers have died in combat so far this month. German Chancellor Merkel made a speech to her Parliament today. For the first time she used the words “war” and “warfare” to describe what Germany is doing in Afghanistan. To American ears this may sound trivial, but in reality it is a major sea-change for Germany. In a recent firefight with the Taliban, 14 American soldiers came to the German Army’s aid and helped turn the tide. Merkel awarded these American soldiers the Golden Cross yesterday. Again, this is a symbolic gesture that carries more freight than we Americans might suppose. Germany has stepped up to the plate just as Holland announced troop withdrawals from Afghanistan. Germany’s action stopped a mass exodus of NATO allies from the war zone. Germany’s new found bellicosity is not what the Taliban wants to see. Today a Taliban spokesman resignedly talked about what would happen if it lost the looming Battle of Kandahar. Even the bad guys know what kind of military machine Germany was at one point and could be again. It took the combined might of 64 nations to defeat Germany in WW II. Today’s Bundeswehr is starting to resemble the mighty Wehrmacht.

Slap Israel So Hard It Can't See Straight

Charts: The S&P 500 closed at 1206, down .1%. The broad index found support at 1200; it looks okay but certain chart data bears watching. FXI (Chinese blue chip index) in the past few days has plunged and is sitting just above its 200-day moving average. If it breaks below the 200-day line we are facing technical signs that China is in a bear market. XLF (big cap US financial index) is down 2.6% since the Goldman attack and it needs to stabilize. The VIX index (Wall Street fear gauge) is swinging wildly from day to day and it too needs to stabilize.

Fundamentals: It looks like the Republicans are rolling over on financial reform and this toxic nightmare will get passed. The threat of Greece defaulting is back in the news. Yield on the 10-year is coming down nicely because of Greece. US small caps (IWM) benefit as safe haven stocks on Greece fears.

Geopolitics: The prospect of Hezbollah acquiring Scud missiles has Israel breaking out in a cold sweat. Israeli defense officials are debating whether they need American permission for an airstrike against Iran (Hezbollah’s sponsor). The Pentagon has run numerous computer game simulations of an Israeli airstrike. These simulations are classified but the Pentagon has tacitly endorsed some private sector simulations, a hint as to what it thinks would happen in this eventuality. The Pentagon believes that the consequences of an Israeli airstrike against Iran would be much worse than politicians or voters could possibly imagine. Israeli fighter-bombers and its tiny fleet of refueling tankers are inadequate to get the job done in a reasonable manner. It would take months of bombing sorties, flying over powerful Muslim countries like Turkey or Saudi Arabia day after day, fighting through the Turkish or Saudi Air Force to get at Iran. These simulations show Israel seizing land and building an air base in Saudi Arabia to get around this problem. Unable to reach Israel proper, Iran’s only response would be to lash out at American positions in Afghanistan and Iraq as well as the Israeli air base in Saudi Arabia. The Kingdom would find itself at war with Israel and Iran. A civil war would break out inside Iran as the Iranian Army was bogged down abroad. America would be forced to finish the fight that Israel started, probably increasing our Mideast troop presence 20 or 30 times. America could, of course, succeed in finishing such a fight, but the world as we know it would change.
America needs to slap Israel so hard it can’t see straight. Here is the roadblock to doing just that: The Bible makes over 600 references to Jerusalem. The Koran makes zero references to Jerusalem. Evangelical Christians believe Israel’s occupation of certain parts of the Holy Land is a sign that Jesus will soon return to Earth. Evangelical Christians have a huge sway over Republicans and Blue Dog Democrats. However, I believe Obama is a foreign policy genius and will figure out a way to ring Israel’s bell.

Specific Stocks: Defense stocks levered to the Long War are rocking upward. Gates is opening the floodgates to arming our allies, cutting red tape, etc.

Al-Qaeda In Iraq Clobbered

Charts: The S&P 500 closed at 1207, up .8%. Support at 1190 was tested successfully several times during the SEC vs. Goldman sell-off. Earlier we saw that 1190 was a battleground support level. This is why it held up under the latest onslaught.

Fundamentals: Word has leaked out that the SEC had voted 3-2, along party lines, to attack Goldman. Two Republicans voted against the attack. So there is not a monolithic government effort to tear apart the economy and maybe at long last the Republicans are getting their mojo back. This newfound mojo had better defeat the financial reform bill or the warm, fuzzy feeling will go away.

Geopolitics: Afghan and NATO forces killed 13 bad guys, including 4 leaders, on Monday. A Taliban suicide bomber killed 2 good guys after infiltrating a NATO base. Taliban suicide bombers are killing large numbers of innocents every day in Pak tribal lands lately.
Iraqi and US Special Forces killed the #1, #2, and #15 ranked leaders of Al Qaeda in Iraq, delivering the bad guys the single worst blow of the war. This helped global stock markets. Here we see Iraqi/CIA cooperation from simply reading the mainstream media.
Recent events in Kyrgyzstan require deductive logic to ferret out the CIA’s role. Consider: Kyrgyz’s deposed bad guy president, Mr. Bakiyev, was trying to jumpstart a guerilla war by addressing a huge group of his followers in the southern part of the country when a group of men (supposedly part of his loyal group) opened fire on the deposed president, scaring the hell out of him. As if on cue, diplomats from Russia and America quickly made contact with the terrified Bakiyev and spirited him to nearby Kazakhstan. Since then an emboldened Bakiyev has escaped his exiled country for parts unknown and bad guys have killed 5 people near the Kyrgyz capital, possibly the start of an Islamic insurgency. Deductive logic tells us that, with CIA cooperation, Russia’s FSB planted gunmen in Bakiyev’s group and they opened fire. Bakiyev has apparently figured this out and is back in the fight. CIA/FSB cooperation is good. A new insurgency is bad.

Specific Stocks: Syria is apparently giving Scud missiles to Hezbollah in Lebanon, giving the Shiite radicals the ability to hit any part of Israel. This is good for Raytheon (RTN) and its Patriot anti-missile system. It is bad for the Israeli stock market (ISL).

Don't Recruit Refugees, Kill Them!

Charts: Assuming the rally isn’t clobbered by the SEC’s witch hunt there is a massive resistance region about 4% above the current level of the S&P 500. Around 1220-1250 we have a resistance triple whammy: At the top of the band is where the broad index was right before Lehman Brothers collapsed, the bottom of the band is where Goldman Sachs thinks fair market value resides, and in the middle we have our next big Fibonacci number.

Fundamentals: The SEC is probably going to hammer other firms that traded in Collateral Debt Obligations (CDOs) besides Goldman. It’s easy to paint a picture of this triggering a correction or worse. It will make the crippling financial reform bill more likely to pass. It will open a floodgate of secondary lawsuits against the firms being attacked. And it is already lowering the value of the toxic assets (CDOs and other acronyms) on bank balance sheets, which will trigger more write-downs, which will curb lending, and start a vicious downward spiral. Just for fun let’s assume growth in China and other positives keep the rally going. The data mining of a broad-based SEC witch hunt will be enormously profitable for data storage firms like Iron Mountain (IRM) and Xyratex (XRTX). Warren Buffet loves IRM.

Geopolitics: In the Pak tribal lands, the Taliban is sending suicide bombers into the refugee camps the Pak Army has set up near its ongoing offensive, killing dozens of innocents. The Taliban doesn’t want non-combatant villagers to leave the battle zone for the safety of these camps but rather to stay and act as human shields. In the twisted calculus of the Long War this is a good sign. Previously the Taliban treated the refugee camps as recruiting stations, infiltrating them with a few senior bad guys who would talk young men into joining up. The Taliban is now so hated by the average tribesman there is no chance of recruiting refugees, only killing them.
Several weeks ago Afghan President Karzai threatened to join the Taliban unless he was allowed to pick all the members of an electoral watchdog group, which would let him rig the next election. The UN and Karzai have arrived at a compromise. Karzai can pick just enough watchdogs to semi-rig the election, enough to guarantee his victory but not walk away with it. This is also the kind of election that is occurring in Sudan and both are positive developments.
In Heavy fighting, 29 bad guys (including 2 commanders) have been killed in Northern Afghanistan over the past 4 days as NATO launches an offensive designed to secure its supply lines. NATO is also eliminating certain luxury items from its supply chain like pizzas and burgers. This emphasis on supply lines is a sign that the good guys are getting ready for the big Kandahar offensive.

Ronald Reagan Spinning In His Grave

Charts: The S&P 500 closed at 1192, down a whopping 1.6%. Support at 1200 was shattered in huge volume but 1190 held. Since only one support level was taken out the technical rally is still intact, but shaky.

Fundamentals: The SEC charged Goldman Sachs with fraud, just as the hideous financial reform bill was floundering; now it is certain to pass. Maybe a coincidence, but the timing smacks of an anti-bank witch hunt and is scaring the hell out of investors. Just as bad, President Obama signed another unemployment benefit extension into law, a step towards making this “temporary” benefit a permanent entitlement. The bill also torpedoes an automatic cut to Medicare and heaps on tons of miscellaneous pork. The refusal to cut Medicare today is strong evidence that the future cuts spelled out in the Obama-Care bill will never happen.

Geopolitics: In Pakistan’s Swat Valley, dancing parlors have reopened. For generations young women born into a sort of Muslim dancer caste have danced with men for money under heavy chaperonage and under strict rules that allow very little touching. The female dancers are also covered head to toe, of course. When the Taliban ruled the Swat Valley female dancers were brutally executed and tossed into the street. Dancing, music, and singing were all a death sentence. These activities have returned to the Swat Valley, proof that there are no Taliban left.
The Presidents of Russia and America, working closely together, have removed the deposed president of Kyrgyzstan to a neighboring country, averting a civil war. Since the ex-leader of Kyrgyzstan was a watered down Islamic bad guy, he would have certainly become a full fledged bad guy and drawn on Al-Qaeda support if a civil war had erupted. The war would have occurred 80 miles from Afghanistan. The consequences would have been earthshakingly bad. The two presidents were able to unite as a team because of the newly crafted START treaty. Republicans are determined to scuttle this treaty in the Senate. They are also doing everything possible to undermine Obama’s move to isolate Israel, principally by shifting focus to Iran and away from settlement building in E. Jerusalem. The Republicans are opposing the President’s “smart sanctions” (targeting Iran’s leaders) in favor of their own “stupid sanctions” (targeting average Iranians, leaving the leaders unscathed and fostering anti-American sentiment). As in the late 30s, the Republicans are promoting a toxic foreign policy that the President must overcome. What’s really sad is the Republicans aren’t doing anything to stop runaway government spending. So what good are they?