Congress Is Our Greatest Enemy In Long War

Charts: The broad index plunged through key support of 1333 today in a spectacular manner. It is now only 3 points above both the 50-day and 100-day moving averages of about 1316. The Vix (fear gauge) screamed up today. If the index starts punching through 50, 100 and 200 day moving averages with an elevated Vix, it will be very bad. We are approaching Sept. and Oct. These months are the most dangerous for equities.

Fundamentals: The yield and credit default swaps on Italian debt roared up today. The Italian stock market is in a power dive downward. European banks are also falling like rocks. The plan to bail out Greece is unraveling. For the first time there is talk of "controlled" and "selective" default of Greek debt. Greece is bailed out only until September. So without a breakthrough it will default in October. We don't have to guess if there will be contagion to other European countries because there already is. Europe is 25% of the world economy but the real problem is on our side of the Atlantic.

President Obama can raise America's debt ceiling with an executive order. As talks to cut spending fall apart this looks likely. If America does not cut spending the sovereign debt crisis could get worse. There could, however, be a relief rally if he does raise the ceiling. It might be smart to sell into that rally, if it does indeed occur.

Long War: The Pak Army recently mounted an offensive on the tribal land that it will need to secure before a full-scale invasion of North Waziristan can begin. Attacking and conquering North Waziristan is the Holy Grail in the Long War.

As this courageous and vital offensive gets underway, the Pak Army learned Team Obama is slashing its military aid by $800 million. Pak military leaders went incandescent with rage after hearing this. No doubt, the ISID ("D" for dirt) was overjoyed to hear that America is pulling the rug out from under the clean ISI and Pak Army.

The Pak Army will halt its offensive and shut down NATO supply lines that run through Pakistan if pushed hard enough. It has more soldiers involved in much bloodier combat on its side of the Af/Pak border than NATO does on the Afghan side. Furthermore, civilian terror strikes in Pakistan have increased since the death of OBL by (perhaps) a hundredfold. Just last weekend, the streets of Karachi ran red with blood after a huge Taliban terror episode. And the bad guys will be only to happy to make a deal with the Pak Army and stop the terror strikes if offered a deal.

Now is an incredibly bad time to cut off military aid to Pakistan. Team Obama is not stupid, just weak-willed. The House of Representatives is hellbent on taking America out of the Long War. The House would cut off aid to Pakistan if Obama did nothing. And it would have cut off more aid than Obama did. So the cut off was a form of damage control, the lesser of two evils.

But it doesn't make any difference who is to blame. If Pakistan stops fighting in the tribal lands, then the Taliban, Haqqani Network, and Al-Qaeda have in one fell swoop more than doubled their combat capability.

Editor's Note: The Staff of Dave's Market Update is leaving for its annual summer vaction. The blog will be offline for one week.