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.