Please Trust CIA

Charts: The S&P 500 closed at 1178, up .7%. The broad index has tested support successfully at 1170 several times over the past few days, good chart action. FXI (Chinese blue chip index) is trading well above its 200-day moving average, bullish for emerging markets. Oil has broken up above $83 a barrel. This is a problem. Yield on the 10-year note is trading below 3.95%, so good so far.

Fundamentals: Industrial data from every major economy came in stronger than expected, led by China. About 45% of the world’s steel is consumed by China but Chinese buildings do not have enough steel in them because of weak building codes and corrupt code enforcement. China will soon consume 50% of the world’s steel. The rest of emerging Asia needs more steel as well. SLX (the steel index) is up 31% in the last six months. Graftech (GTI) is down 4% over that time period. GTI makes the multi-ton graphite electrodes and graphite kiln liners used in electric arc steel mills: they wear out and need replacing at the midpoint in a steel boom, not the early phase. So GTI is a late bloomer. Harsco (HSC) is a steel mill service provider, also a late bloomer.

Geopolitics: In Pakistan’s tribal lands near NATO supply lines, the Taliban attacked two Pak Army forts in platoon-sized units that featured guns, rockets, and explosive laden suicide vehicles, conventional warfare tactics. 25 bad guys were killed. 6 good guys were killed and 30 seriously wounded.
In Indian held Kashmir, over the past few days there have been 3 battles between Taliban fighters and the Indian Army resulting in 4 dead Indian soldiers and 12 dead bad guys. We are seeing the Taliban going on the offensive and racking up surprisingly high kill ratios.
In N. Waziristan, CIA drones killed 6 bad guys. We don’t know if these bad guys are members of the N. Waziristan Taliban (Hezb-e-Islami) but we do know that the N. Waziristan Taliban met with Karzai’s government Tuesday for more peace talks and that the CIA is trying to literally blow apart these negotiations with Hellfire missiles. Yesterday’s drone strikes hit an abandoned school and a compound owned by local tribesmen (not owned by the Taliban). Therefore, whoever is being targeted by the CIA is on the run, digging down deep, acting as if they have been hit many times before. So it probably is the peace-talking N. Waziristan Taliban. The US State Dept. and Army are more tolerant of these peace talks than the CIA. But consider: The N. Waziristan Taliban has far deeper CIA ties than any other Taliban. These ties were developed during the 80s in the Afghan war against the Soviets. So the CIA knows the N. Waziristan Taliban much better than the State Dept. or Army. We should trust the CIA’s judgment.