Al-Qaeda Doesn't Understand Hot Tubs

Charts: Today’s newsletter goes out before the market closes so let’s take a long term look at charts. Our first Fibonacci resistance level of 1120 was breached once and fell back. It then blasted above 1120 in big volume with a very good advance/decline line and nice leadership and has stayed above it since. So 1120 was successfully tested. This indicates the rally still has some legs. In real terms the index is still off 28% over the past decade and could therefore still be in a secular bear market, making the current uptrend only a cyclical bull. The next Fibonacci resistance level is 1228 (sorry, I did the math wrong in an earlier newsletter, this is accurate). Breaking above 1228 with other good technical indicators would cast grave doubt on the secular bear scenario.

Fundamentals: Goldman Sachs upgraded the entire industrial and material sectors, singling out X, ZEUS, CBI, MMM, and DOW. Industrials are outperforming because of China. I own some of Goldman’s picks already but my biggest industrial position is the Korean index (EWY). I think Wall Street doesn’t quite get Korea. Analysts will say that Korean households carry a huge debt burden, one of the highest in the world. Not true, Koreans have a very high rate of self-employment and small company debt shows up as household debt because of accounting quirks. Everyone is focused on the dollar carry trade and China’s peg to the dollar but forgets that the Chinese Yuan has appreciated over 20% in the past few years against the Korean Won, allowing Korea to export like crazy into China. Recently Korean Electric (KEP) won a bid to build several nuclear reactors in the Persian Gulf and is making similar deals around the world. Korean industry is as advanced as Europe or America but has cost and currency advantages like an emerging market.

Geopolitics: Let’s take the long view here as well. The Cold War is as similar to the Long War as WW I was to WW II; there are big differences but overall the wars are similar and will have the same impact on the stock market. From 1945 to 1948 Britain fought the Cold War pretty much alone. In 1948 America jumped in with both feet with the Berlin airlift. The world had never seen anything like the airlift. America invented modern air traffic control and an entirely new sort of computer system to make it work. The Soviets were dumbfounded and terrified at this burst of technical prowess. Also, the bad guys knew that entering the CW was very unpopular in mainstream America; so how did Truman even pull it off? Whenever dictatorships fight America they always put great stock in their own will to fight and the Yankees’ ambivalence toward war with a desire to hot tub instead, thinking this gives the bad guys a huge advantage. Toward the end of the Cold War the Soviets figured out that American pacifism can suddenly and unpredictably reverse and what once looked like a pussycat is now a huge tiger ready to tear you apart. Bear in mind that during WW II every great power was fully mobilized except America, who never even came close to marshalling all its military resources; it fought with one hand tied behind its back and still created nuclear weapons, military computers, etc... Today we are in the same spot as we were in 1948: just beginning to fight against an enemy that is technologically inferior, has a tremendous will to fight, but doesn’t understand how the pussycat can morph into a tiger. And stock market charts today look like the late 40s.