NATO Afraid Of CIA

Charts: The S&P 500 closed at 1146, up .8%. Support at 1132 has been tested twice this week with the index bouncing off this level both times. The broad index has not violated its nearest support level (good). The Nasdaq did break below the psychological 2300 level but has now regained it (good). Financial are leading tech so far in 2010, iffy leadership.

Fundamentals: Global stock market weakness induced by Chinese monetary tightening has had the salutary effect of lowering US interest rates. Mortgage rates dropped 5 basis points over the past week which caused weekly mortgage applications to bump upward. Oil and other commodities have also moved down because of China growth fears, reducing the threat of inflation. There are at least some positive aspects to Chinese growth cooling. Of course this begs the question, is China’s growth really going to slow down? The effects of the so-called “Shanghai Sneeze” (China sneezes and whole world catches a cold) are already dissipating. Steel stocks levered to China resumed climbing by this afternoon and US interest rates ticked up. Still, your portfolio should be more than a one way bet on China.

Geopolitics: Yemeni commandoes killed a mid-level Al-Qaeda leader and arrested several more on Wednesday. In December the Yemeni Army killed 60 Al Qaeda members and should match that feat for January.
CIA drones killed 16 bad guys in Afghanistan, a sign that the CIA is still pissed off. NATO is trying to say that the latest drone strike did not originate with the CIA (ha ha ha), a sign that even NATO is worried about the CIA’s bad mood.
Syria is allowing much greater foreign investment in its banking sector and rapidly dismantling its socialist economy. Free market reform and strong GDP growth in Arab countries are major threats to Al-Qaeda.
China successfully tested an advanced missile interceptor (scary). After the test China beat its chest and warned that no country should sell weapons to Taiwan, or else. Taiwan replied that it is more likely to rejoin the mother country if it is armed to the teeth and not feeling bullied. There is little chance of a great power conflict between America and China over Taiwan; however, the odds of conflict are not zero. The part of coastal China facing Taiwan is bristling with missiles. If there were a dust up over Taiwan it would involve missiles, not foot soldiers. Taiwan just bought a billion dollar upgrade to its Patriot missile shield. It needs to upgrade its offensive missiles too.

Specific Stocks: Here are my stocks not levered to rapid growth in China: Perrigo (PRG) is a generic drug maker with a 70% market share for generic cough medicine. The unusually cold winter is driving demand for cough syrup. PG&E (PGC) is benefiting from cold weather too as Californians turn up the thermostat. Abbot Labs (ABT) makes the best infant formula and coated heart stints. Defense: ITT makes bomb detectors. As the Taliban gets hammered in open warfare in Afghanistan it will rely more and more on roadside bombs. Defense: Harris Corporation (HRS) is my biggest single stock holding. The Army’s grandiose Future Soldier System is being slashed. Bits and pieces of FSS are being farmed out into smaller programs. The part of FSS designed to integrate all military communication into a seamless web is being replaced by the Modernization of Enterprise Terminals program (MET). This program cleared a big hurtle today. HRS will design and partially build MET. China’s hunger for missile offense and defense is creating an arms race that helps Raytheon (RTN) and its Patriot system and Harris Corp’s MET.