Specific Stocks

Charts: Correlation between individual stocks has plunged in the past couple months from 80% to 15%. For the first time in years it is a stock pickers market. Support for the S&P 500 is at 1308 and resistance is at 1320. We want the index to bounce between these levels and consolidate. If that happens, then it will remain a stock pickers market.

Wabtec (WAB): This company makes locomotives, brakes for rail cars, and about 100 other rail products. It makes a computerized safety system linked to GPS satellites that can make rail accidents virtually impossible. American law mandates that this system will become universal here. Other countries will probably do the same. Competition will emerge in time, but WAB holds the lead in automated rail safety for now. It competes with Caterpillar in rebuilding rail cars. Essentially WAB is the arms merchant to the rail industry.

Komatsu (KMTUY) and Caterpillar (CAT): These two make expensive mining and construction equipment. Their stuff costs more but last longer and doesn't break down. As mineral deposits become harder to access mining projects will get bigger and more expensive, shutting out small miners who tend to buy cheap gear. Komatsu is taking market share away from Caterpillar in China. KMTUY leads in robotic ore hauling trucks. This is the wave of the future. CAT, however has its own advantages with a superior dealer network and the ability to rebuild equipment.

Coach (COH): In a way Coach is similar to the two companies above. It makes women's hand bags that have heavier stitching and last longer than higher end stuff from Italy. Coach patiently took ten years to conquer the Japanese market, creating new styles that were specific to Japan. Now it is conquering China. It is moving into men's hand bags in Asia. In America there is a cultural prejudice about men carrying purses, not so in Asia.

Lincoln Electric (LECO): Obama says he wants to spend new money on infrastructure. At some point local, state or federal governments are going to have to address real infrastructure needs and stop all this nonsense about high speed rail, solar power, and magic unicorns that sprinkle moon dust on congested highways to clear traffic jams. Most American bridges were built using conventional welding techniques and welding rod material. They should have been built using high impact welds that can withstand constant pounding. This is why bridges are collapsing. Since this does not involve unicorns and moon dust, politicians don't like rewelding almost every bridge in America, but necessity will some day force this to happen. LECO has the lion's share of the gear and material needed to make this happen.

Lululemon (LULU): This company makes expensive yoga attire. I ask moderate income women in my yoga class how they can afford this pricey stuff. When they practice yoga at home old sweats are fine, but when they go to class they have to look awesome. Therefore, they sacrifice somewhere else to buy this stuff. And LULU clothes are very flattering. This is a Canadian company and in its native land LULU clothes are no longer just for yoga, but for everyday wear as well. It is now expanding into America and Australia, where the culture is the same as Canada, so they don't have to change their business model or culture. If it does as well in its new turf as it did in the great white north, then LULU will expand 10 fold.

Monsanto (MON): For a while the number one seed company in the world had trouble with its triple staxx concept, where it stuffed more genetically engineered material into seeds than its competitors. It could create more traits than anybody else but yields went down as the genome of the plants in question cried in protest over this gross manipulation. But recently we have learned that Doctor Frankenstein (MON) is building better monsters. It has a drought resistant corn seed that should sweep Africa by storm.

A French court just said certain laws against GMO seeds are illegal. MON says it won't sell these seeds in France even if it is now legal. I was impressed. Stick to the emerging world where nobody cares about Frankenfood.

Dupont (DD): This is MON's main competitor. It is moving away from the industrial chemical business and into ag products. Often when large cap companies transform themselves like this they steadily go up and for a long time.

Phillip Morris International (PM): When I was in Indonesia I researched PM and learned first hand that it is clobbering local cigarette makers. What if people stop smoking? PM has more research on anti-smoking technology than anybody. It will get the whole world (except the US) hooked on ciggies and then sell them the stuff that will cure their addiction. Brilliant.

Several Mice Are Roaring

Charts: As growth investors, what we want to see is apathy, where volatility is so low nobody cares about the stock market. When this happens correlation between stocks disappear and at long last we have a stock pickers market. The first hints of apathy are emerging.

Fundamentals: The European Central Bank is funneling billions into European banks, who in turn are buying Italian and Spanish debt. True central bank QE would have the ECB buying the bonds directly; in that case there is no limit to how many bonds it could buy. But European banks will soon hit a wall and the purchases will have to stop. Italy needs to be well on the path to free market reform when that happens or the global stock rally will reverse. So in future blogs we will follow Italy's restructuring progress, which is so far going better than I predicted. The thing to remember is that Italy is not a giant Greece. Italy has powerhouse multi-national exporters like Fiat and Gucci.

Long War: The USS Abraham Lincoln aircraft carrier battle group has been joined by small British and French flotillas. This armada is now in the Strait of Hormuz, facing down the Iranian Revolutionary Guard Navy. Right before the armada sailed into Hormuz China told Iran that if the bad guys were to close the strait, then the Great Dragon would consider this an assault on "many nations." So Iran is crossing swords with two superpowers. What has pushed China and America into such a bold stance?

The great powers are acting to preclude an Israeli attack on Iran. Israel is a mouse roaring.

CIA drone strikes have resumed at a normal pace (maybe one or two strikes a week). The peace talks between America and the Taliban are taking shape and drone strikes will be used as a negotiating tool. And we are told the most recent drone strike took out Al-Qaeda operatives, not Taliban; which seems to indicate that peace talk drone strikes are already happening. Another interesting aspect of these talks is crystallizing, Qatar is not so much acting as a host to these talks, but actually running them in all significant details. Karzai's government in Afghanistan is lobbying Qatar for a position at the talks. Qatar seems to be deciding who represents the Taliban. The US has agreed to release 5 Gitmo detainees as a goodwill gesture to the Taliban to get the talks started. The detainees are being delivered to Qatar and the tiny emirate will do with them as it wishes. Qatar is a mouse roaring.

Turkey is too big to be a mouse. Let's call it a large rat. As the government of Iraq tries to rebuild itself as a Shiite dictatorship aligned with Iran, Turkey is subtly threatening to invade Iraq and pressure Maliki's government in other ways. Turkey is a roaring rat.

Going Rogue Is So Good

Charts: The euro reached an all-time low against the New Zealand dollar. The euro is not down nearly as much against the US dollar. The New Zealand dollar is a carry trade destination and the US dollar is not. So there must be at least a bit of a euro carry trade going on. Maybe a full blown euro carry trade will evolve. This would be very good news (when and if it happens) and means we should pile into emerging market debt and stocks.

Long War: America's highest ranking military officer is now in Israel, trying to talk the Israelis into not attacking Iran. Enormous pressure is being brought to bear against the Jewish state. Promises are being made. There are discussions about establishing "red lines," i.e. certain Iranian actions will automatically trigger a US attack on the bad guys. This new policy would be simliar to the red lines concerning North Korea attacking South Korea or China attacking Taiwan. Israel has totally gone rogue and is pushing the superpower into a very aggressive stance. If Mossad and the CIA are going rogue together it is bullish for stocks.

Is CIA Director Petraeus the kind of guy who would go rogue? Consider the Iraqi surge, the offensive he masterminded that won the Iraq War a few years ago. The Joint Chief of Staff was 100% opposed to the surge at first because it involved arming, training, and leading Sunni tribes from Iraq's interior against Al-Qaeda. These tribes were fighting for Al-Qaeda right before the surge and needed to switch sides, a tall order. Nobody at the Pentagon except Petraeus thought the surge would work. President Bush and Petraeus created a parallel Joint Chief structure to implement this strategy, completely bypassing the establsihed chain of command. The brass hated Petraeus until he became a hero. So, yes, the CIA Director is a good candidate for going rogue because he already did it once.

Now consider the greatest example in American history of a general going rogue. This was when Air Force General Curtis LeMay started firing ICBM nuclear missiles over Russia at the height of the Cuban Missile Crisis. Months before the crisis erupted LeMay tricked President Kennedy into issuing a standing order stating LeMay could test fire Minutemen missiles at any time (LeMay foresaw the crisis, genius). On paper LeMay was not committing treason. But in reality he was telling the USSR that he would unleash America's nulcear arsenal against the communists whether Kennedy wanted him to or not. For a brief moment America became a dictatorship with an Air Force general in charge. This scared the holy crap out of Khrushchev. LeMay had 100% gone rogue. If he hadn't done this, then America would not have won the Cold War. Rogue is good.

By the way, the movie Dr. Strangelove was based on this incident. Rent it. Watch it.

Long War Gets Religion. Al-Qaeda Makes A Mistake

Long War: I was pretty shaken up at the realization that Israel is now openly fighting alongside America in the Long War. What a sea change. Since the early days after 9/11, the US has had a policy of keeping religion out of the global conflict. US Generals were fired for saying things like,"My God is bigger than Allah." Not only had Israel been kept out of the conflict but African Christian countries like Ethiopia have contributed less than they could have because a religious dimension, an Islam vs. Christianity/Judaism dimension, was thought to generate stronger recruitment for the bad guys.

But then a couple months ago we saw Christian Ethopia invade Somalia and bad guy recruitment is way down because the Ethopian Army (along with the Kenyan and African Union armies) are killing so many bad guys that working for an Al-Qaeda franchisee in Africa is no longer a nice job. Young men have been signing up to serve as fighters for Al-Shabab for the paycheck, not for religious reasons. So the CIA might as well use a powerful local army if it is available.

South Africa does not contribute soldiers to the AU Somali effort for the same reason, it is a militantly Christian nation and therefore underutilized. South African soldiers are the best of the best. Probably we will see them fighting in the LW in the years ahead, maybe sooner.

Do you remember my blog that stated America's approval rating in Muslim majority countries does not go up or down based on the superpower's military actions in the Mideast? Even invading a Muslim country doesn't change the approval rating. It stays at a negative 90% or in the high 80s no matter what.

And with all this in mind the recent dispatch directly by President Obama of a Special Forces unit into central Africa dedicated to wiping out the Lord's Resistance Army (LRA) makes sense. This must have been CIA Director Petraeus' idea. The LRA is the strongest and most evil radical Christian militia in Africa. Although not as big as Al-Shabab these Christian bad guys are even more terrifying. They will chop a little kid's head off for spitting on the sidewalk.

If all the bad Christian militias are eliminated in Africa, then good Christian militia can fight for the CIA. And it looks like we will need to ramp up this new crusade quickly. Boko Haram is another African Al-Qaeda franchisee (in Nigeria) and it is 100% devoted to killing Christians. The Nigerian Long War battlefield is a pure Christian vs Muslim environment. And Al-Qaeda opened this part of the war up only recently, wanting to go after African Christians for some reason (probably to disrupt Nigeran oil exports). Al-Qaeda then is at least partially responsible for the CIA's new policy of inserting religion into the war.

It may turn out to be a strategic mistake on Al-Qaeda's part to create new enemies like this.

Bad Analysis Becomes Good Analysis

Long War: I've given you all a raft of bad analysis concerning the brewing Iran crisis. Sorry. But now we have the good stuff on tap...

For the last two years there has been a two pronged covert campaign against Iran's nuclear weapons development program: 1) Assassination of top scientists. 2) Sabotage of Iranian centrifuges and other nuke devices by computer virus and perhaps other means.

We know that the CIA along with NSA and Britain's MI5 have been running the sabotage campaign because German industrial giant Siemens and other huge multi-national companies were involved in creating the Stuxnet virus. Siemens was essentially declaring war against Iran by joining this effort, putting its own employees at risk from Iranian retaliation, plus the Stuxnet virus infected Siemens industrial equipment outside of Iran. There is no way Siemens stuck its neck out like that at Israel's behest.

We also know that the two campaigns were coordinated very closely because one of the assassinations involved an Iranian scientist on the verge of putting a software patch over Stuxnet. He was killed right before the patch was complete.

So this makes you think the CIA was in charge of the whole enchilada. I thought this was also true because there were several obvious signs left behind by the early assassins that made you think Israel was running this part of the two-pronged campaign. It seemed too obvious, a red herring. But Israel is now saying openly (using the obscure language of diplomacy) that it has been behind these assassinations all along. The US, Britain, and Iran are essentially saying the same thing. Probably there is a hardened cadre of Iranian Jews inside the country working for Israel and the Iranian government does not know these people are Jewish.

Final nail in the coffin: Today Israeli and American intelligence officials gave a warning that Iran's puppet, Hezbollah, is sending bomb making expertise to bolster Thailand's Islamic insurgency. The fact that Iran is increasing its global terror footprint is interesting in and of itself but it also shows that the CIA and Mossad are now speaking with one voice. The charade that the CIA and Mossad are not joined at the hip has been shredded.

So the CIA has been authorizing all these assassinations by Mossad except for the most recent one, which is an example of Mossad going rogue against the Western alliance (that it is a part of) and not an example of the CIA going rogue as it did in the 50s and 80s. The American led alliance does not want war at this juncture, but Israel does. On a practical basis for you and me (retail investors), a rogue CIA is bullish. A rogue Mossad in unpredictable.

Meanwhile, on the Mideastern battlefield, America is funneling weapons and ordnance into the Gulf Arab militaries at a furious pace. America is loading the Gulf Arab allies for bear. On the water, Iranian speedboats are buzzing US warships, making practice runs at them. So I was probably wrong when I said Iran would sow the Strait of Hormuz with mines and not directly attack the 5th Fleet.

Saudi Arabia is saying it can put 2 million barrels a day of extra oil on the market when and if war explodes in the Gulf or if a total boycott of Iranian oil were to occur. This means OPEC no longer exists. So just the prelude to war has changed the economic structure of the world.

Worrisome: A while ago the US Navy ran an exercise designed to mimic a likely tactic of the Iranian Revolutionary Guard Navy. The bad guy tactic is to overwhelm big warships with hundreds of tiny speedboats loaded with proximity bombs as well as traditional weapons. True to form, this tactic would require the small speedboats to engage in suicide (how jihadist). Anyway, the exercise showed this tactic is pretty effective. Also, Iranian shore batteries are harder to hit than I previously thought and they occupy about one thousand miles of shoreline. When and if war erupts, it will be no walk in the park for the good guys.

Opinion polls within Iran show that support for Hezbollah is unpopular as is support for Syria. The Iranian public does not like Iranian force projection at the borders of Israel. However, the Iranian nuclear program is very popular with the Iranian public. They will fight to keep this program alive. And the now obvious involvement of Israel in an Islamic war is not good. After the war at sea and in the air is over there will be some sort of land war. President Obama has recently said America doesn't do conventional land wars any more. Yeah right.

America is tired of war. War is not tired of America.

CIA or Mossad?

Charts: The S&P 500 has been meeting fierce resistance at 1292, its October peak. Support is at 1285. At midday this Friday it has moved in and out of this support level about ten times. It needs to hold above support or we could see further technical damage.

Fundamentals: The S&P rating agency is set to announce downgrades on France, Austria, and maybe a few other EU countries after the bell today. Hopefully it does not also downgrade the European Financial Stability Fund (the bailout fund for Europe's weaklings). And there are rumors that Greece's second bail out package is falling apart. The big picture is that Europe needs to at least stabilize enough to have a lost decade like Japan, rather than a huge depression. A fledgling euro carry trade has emerged, just like the yen carry trade during the first two of Japan's lost decades. If the euro carry trade strengthens we will be okay. If not, we are screwed. Such a carry trade will weaken the euro. Up until recently a weak euro has been bad. It might now be good.

Long War: President Obama has a mechanism for communicating with Iranian dictator Ayatollah Khomeini. Obama is telling the Ayatollah that if the Strait of Hormuz is closed, then the US 5th Fleet will unleash everything it has on the Iranian regime. What does it have? Right now there are two aircraft carrier battle groups ready to go. Just one of these carrier air wings is much stronger than the entire Iranian Air Force. In the nearby Med there are USMC amphibious assault ships. The 5th Fleet also can take command and control of the substantial British naval assets in the region. All Gulf Arab navies and air forces will come under 5th Fleet control in the event of war. Gulf Arab military assets are designed to work with the American military like a hand and glove. The US Air Force has a huge land based presence in the Gulf, which will come under the flag of the 5th Fleet when and if hostilities begin.

What will happen if The 5th Fleet goes to war against Iran? Consider the Powell Doctrine, which was created to prevent another Vietnam War type outcome. The Powell Doctrine says America should never engage in a conventional war unless overwhelming forces are brought to bear and US public opinion firmly supports the use of this force in a decisive manner. The doctrine asserts that victory is assured if these criteria are met. American public opinion supports going to war against Iran in survey after survey. This is the only military action that the US public supports. And the force I just described is indeed overwhelming. So Iran would be annihilated.

Now think about the recent assassination of an Iranian nuclear scientist. This incident occurred at the most sensitive possible moment. The scientist killed, we now know, was in charge of procurement for the Iranian nuclear weapons program. This is the most important position in the program because Iran cannot acquire the materials and technologies for nuclear weapons from within its own borders. Coming when it did, the assassination seemed to be designed to enrage and goad Iran into taking action that would unleash the fury of the 5th Fleet against the jihadist regime. The bulk of the American military establishment and the Western alliance does not want to goad the bad guys into war. Yesterday the EU called off its sanctions on Iranian oil to cool the temperature and give Iran breathing space, working against whatever entity committed the assassination.

If Iran thought that entity was Israel's Mossad it wouldn't be super afraid, more pissed off. If it thought that entity was the CIA, then it would be terrified. Because the CIA has a long history in the 50s and 80s of going rogue and working against other parts of the US government to push the superpower into acting in a bellicose manner.

There has been a 100% correlation between an out-of-control, berserk, bellicose CIA and a bull market for US stocks. So it is important we answer the question in the title of this blog. Perhaps we should start with an easier question: Does Israel have the stones to push America toward a war?

I Am Sure It Is The CIA

Fundamentals: The European Central Bank says it is not using QE (printing money) to solve the Euro-crisis and it is only purchasing small amounts of Spanish and Italian debt. If it used QE to buy huge amounts of bad Euro debt, then the weak sisters in Europe would stop all free market restructuring and austerity programs and go back to sponging off Germany.

But the ECB is engaged in currency swaps with the central banks of America, Switzerland, Japan, and Canada. All these central banks are engaged in QE except Canada. They are printing their own currencies and buying Euros. So the ECB is effectively engaged in QE. And it using QE to flood European banks with super cheap loans. This creates the opportunity for the banks to open up a carry trade where they use low interest ECB loans to buy high yielding Italian and Spanish debt. Investors thought the European banks wouldn't have the nerve for such a risky carry trade. Today we learned they do have the nerve and this carry trade is in full swing. So the ECB is in a complicated Rube Goldberg sort of way using QE to buy Spanish and Italian debt. This is short term very good and long term very bad because reform efforts may now falter.

Meanwhile, in America, highly qualified unemployed workers have for quite some time had the ability to take unfilled low paying jobs. For the last four months they have been doing just that and we know this because low paying jobs are being filled but at the same time legions of unemployed workers are dropping out of the labor force. It is possible that once this low hanging fruit has been plucked the US labor market will falter again. Data that came out today indicate that this is indeed happening.

So the good news out of Europe and the bad news out of the US are warring with each other today for a wild ride.

Long War: The US 5th Fleet is moving one aircraft carrier battle group out of the Persian Gulf and moving two fresh battle groups in. This is an indication that it is preparing to deal with Iran's threat to close the Strait of Hormuz. As I've said before, Iran will lace the strait with mines, not attack the US Navy. I've researched the 5th Fleets operational doctrine for mine sweeping. It is more aggressive than I thought. Mine sweepers are very vulnerable to any sort of attack so the US Navy does not allow them to be attacked. Before the sweepers go into the strait, the 5th Fleet will take out all Iranian shore batteries and any Iranian surface ships or submarines that can possibly harm the mine sweepers.

The Navy will essentially go to war with Iran.

As the 5th Fleet prepares for war, the State Department is having a cow over the CIA's decision to assassinate an Iranian nuclear scientist at this delicate moment. It's almost as if the @#$% CIA wants America to go to war with Iran. Can you imagine an organization being so bellicose? Tsk. Tsk. Tsk. These assassinations have been going on for two years but for the first time ever America's diplomatic corp is saying (untruthfully) that the US has nothing to do with them.

How do we know it is the CIA, not Mossad? All the assassinations have been done in the same manner and are therefore done by the same organization. For various reason it can only be Mossad or the CIA. Two years ago one of the first assassin's body was recovered and a tattoo was found on his arm that had verses from an ancient Hebrew text that involved the ancient Persian Empire. So somebody then was trying to say the assassin was from Mossad. For this and other reasons I am sure it is the CIA.

All CIA Channel

All CIA Channel: CIA drones attacked and killed three low ranking militants in the Pak tribal region. With all the intel the CIA has gathered recently it could surely have attacked a higher ranking target. The drone moratorium has been getting a lot of press recently and this is the CIA's way of saying there is actually no moratorium. There is a moratorium but this little flea bite of a drone strike is taking Agency actions out of the glare of headlines. The press has been saying the moratorium is designed to increase America's approval ratings in the Muslim world. This is not true. Opinion polls conducted in Muslim majority countries show that drone strikes don't help or hurt America's image. Most Muslim countries have about a 90% disapproval rating of the USA and this number stays constant no matter what the superpower does. It doesn't even make any difference if a Muslim country is invaded with American troops, the approval rating will stay the same.

No, this is all about the coming peace talks. Step back in time and remember when the US was conducting peace talks with North Vietnam, the B52 bombing campaign was ratcheted up and down according to how well the talks were going. If the talks were going poorly, then the tempo of bombing increased. When the talks went well, fewer bombs were dropped. The drone strikes in Pakistan today are like the bombing campaign in Vietnam and Cambodia. Contrary to what you might think, Kissinger's peace treaty with North Vietnam was a good one, it would have held if the US had simply maintained its support of South Vietnam after 1972, just as the armistice with North Korea has held up over the decades because the US has kept supporting South Korea.

Finally, the CIA has killed another Iranian nuclear scientist. We can assume that he was a key member of the bad guys nuclear weapons development program. It must be demoralizing when a scientist makes a breakthrough and is then quickly killed. Imagine a classroom where the students who get good grades are killed. What an incentive to leave early and goof off.

Taliban Peace Talks

Long War: Everyone concerned is furiously preparing for the coming peace talks with the Taliban. The host country, Qatar, has made the sale of pork and alcohol illegal in much of the country. This is an important gesture to the bad guys, making them feel important and welcome. Qatar has also made office space and other accommodations available to the evil ones. Supposedly the Taliban is happy with their new offices.

For the past two months or so the CIA has halted all drone strikes in the Pak tribal lands. This is much more than a small gesture. Because of the cessation of drone strikes, NATO has seen a big uptick in good guy combat deaths and the bad guys have made huge inroads in other ways. The Pak government has been forced to forge mini-peace deals with several of the smaller Talibans to keep from being overrun in the tribal lands.

One is tempted to think the CIA has lost its mind with this grand gesture. How could the peace talks be that important to give away such an advantage to the enemy? It is a good question and I will try to come up with an answer but a few other things are occurring beneath the surface that makes the CIA look less than crazy. For one, CIA surveillance drone flights are way up. Under these watchful eyes the rats are all leaving their holes in the Pak tribal lands, scurrying about to perform their evil deeds. Taliban spokesmen have been quite chatty lately, talking about how wonderful it is to have the freedom of movement that comes from zero drone strikes. No doubt the CIA is recording all this activity, gathering intelligence for the day when drone strikes resume. For another, the ISI and the Pak Army are experiencing the horror of zero CIA drone strikes. My guess is that the big upsurge in goodwill they thought was coming from the Pak public is failing to materialize and their own existence is threatened much more than they anticipated.

And there are other preparations being made for the peace talks. Team Obama is releasing at least five of the most dangerous inmates at Gitmo. We have the name of only one of these bad guys and we know that he is a specialist in sectarian violence, Sunnis killing Shiites. Al Qaeda has recently stepped up its campaign of sectarian violence but the Afghan Taliban has not been happy with this move.

So the peace talks may be designed to split the Taliban away from Al-Qaeda. In fact this is openly stated by the good guys prior to the talks.

But I ask long term readers to recall my blogs from a couple years ago when I was talking about the CIA's campaign to kill participants in the first fumbling attempts at peace talks. It does seem a stretch that today the CIA would perform a 180 and abort its most important mission in the Af/Pak theater (drone strikes) just to facilitate these nebulous peace talks. Now I ask you to imagine what the Taliban will say to America's demands during these talks. American demands will include renouncing terrorism, supporting women's rights, etc... Of course the Taliban will say, "Pound sand." The talks will fail. And then a mighty swarm of drones will darken the sky over the tribal lands and a fusillade of Hellfire missiles will light up the evening sky.

Are We Winning The Long War?

Long War: Pres. Obama and Def. Sec. Panetta gave speeches yesterday explaining what they will do with the Pentagon's budget and overall LW strategy in the years ahead. Since Obama will almost certainly win the next election this is a pretty big deal and it begs the question: Are we winning the LW?

Obama says he will slash troop levels and expand the Reserve. The Navy and Air Force will be held steady but the Army and USMC will shrink drastically. Special Forces will be expanded. Weapons systems that can defeat China will be maintained but if there is a big war with China, the US will have to ramp up to win. Either that or resort to nuclear weapons right away. He can't talk about the CIA in public but just look what he's done... Panetta is a former CIA Director and the current director, Petraeus, is the greatest military mind in 70 years. As I've said so many times, the LW is being handed over to the CIA.

Let's take a detour and talk briefly about Tajikistan (trust me its relevant). To escape the Af/Pak war the bad guys there have to go through Tajikistan to hook up with the bad guys in the Caucus mountains of Russia. Tajikistan has the most savage anti-jihadist laws and policies of any country in the world. Radical Islam is brutally crushed there in a hundred different ways and in a manner that speaks of heavy CIA involvement. This bottles up the bad guys in Af/Pak. Changing the nature of the Tajik government from the inside out is something the US Army simply cannot do, no matter how much money we might throw into tanks, men, and guns. So Obama's strategy is correct, assuming there is no war with China.

Okay, here is how we know if we are winning the LW or not... Global reserve currencies held by the planet's central banks are currently 62% US dollars, slightly above historical average. For decades the dollar has gone up in value and increased its reserve currency status whenever the geopolitical temperature goes up. Except one time, when Obama said that America will "lead from behind" in the Libyan War. But shortly after he said that media accounts exploded of Special Forces soldiers with phony British accents leading the Libyan rebels and taking the wood to Gaddafi. The dollar returned to its former role as investors figured out what lead from behind actually meant.

The highest reserve currency percentage level ever attained by the dollar was 73% shortly after 9/11. It went down as the US faltered in Iraq and then back up as the US prevailed. The percentage has gone up every year of the Obama presidency. Look, we could try to add up the daily number of bad guys killed vs good guys killed in the LW, graph this info and scratch our heads at the trends to decide if we are winning or not. But a better report card is the role played by the US dollar. And the report card is saying America is getting a solid B- in the Long War. Now I know a lot of you got straight A's in school, but any normal person will tell you a B- is pretty good.

Straits of Hormuz

Charts: Because of bad news from the Euro-crisis, in early going, the S&P 500 crashed down through the 1270 breakout level we talked about yesterday. The index crossed above and below 1270 six times in a hard fought battle for support throughout the morning. At midday support finally held and this technically driven market crawled fitfully up for a modest gain. So the nascent bull market is still intact.

Volatility has come down sharply, which is bullish. The spot VIX measures implied or expected volatility for the next 30 days, this is what traders simply call the VIX. For you and me (long only stock investors, not options traders) it is a forecasting tool and it is once again becoming useful. The spot VIX has over the past couple months screeched downward, again this is good. The February VIX is elevated, this is bad. The VIX's for the next few months ahead are all higher because of the vast amount of Euro debt that needs to be rolled over in Q1. These coming debt auctions will give us all a stomach churning white knuckle ride.

Volatility has come down but it is still very high. I look at my own portfolio today and reach for the Maalox bottle. Railroad supplier Koppers Holding (KOP) is down 2%. My other railroad supplier Wabtec (WAB) is up 2%. There is no news to explain the divergence, just nerves. We are all very scared. Where's my Maalox?

Fundamentals: American employment is strengthening because the extended unemployment benefits are set to expire in 2 months. There are 3.4 million unfilled jobs openings right now in America. They remain unfilled because of these benefits. When the benefits go away, unemployment will plunge. Obama wants to extend the bennys another year. This would be incredibly toxic to the now strengthening recovery. From a political perspective, Obama is running circles around the Republicans. He is eating their lunch. His competence is a danger to the stock market.

The Pentagon's Long War: Iran used to be able to rattle its saber and oil prices would go up. This would obviously help Iran. Now Iran rattles its saber and world oil prices go up, but the price Iran gets for its oil goes down. It is giving oil away to Greece for free, getting nothing more than IOUs. China is demanding lower and lower prices from Iran as sanctions bite deeper and deeper.

Iran is more desperate than most military experts think. Iran is saying it will close the Straits of Hormuz if the US 5th Fleet sends one of its two aircraft carrier battle groups into the Strait. Also, Iran is saying if there are any more sanctions, then it will close the Strait. Since it made that threat there have been more sanctions.

Military experts calculate the strength of the Iranian Navy compared to the 5th Fleet and say it would be suicide for the bad guys to attack the good guys. Furthermore, if there were such an attack the US would take out Iran's nuclear program and the rest of the world wouldn't bat an eye. All of this is true.

But Iran can do other things besides a frontal attack on the 5th Fleet. Namely, it can sow the Strait with mines. If a few oil tankers were to run into Iranian mines and blow up there is a good chance that the 5th Fleet would do nothing more than dispatch mine sweepers. This would lead to a slow motion ratcheting up of the conflict, not a decisive blow against Iran. This would be very bad. We all forget that the US Navy fought a mini-war with Iran's Navy over the course of three months in the late 80s. That war started because of mines and it was just the low key affair I am describing.

CIA Titan

Charts: On the last day of 2011 the S&P 500 was a whisker below its 200-day moving average, indicating that it was still in a bear market. In the last few months of 2011 it was displaying a coiling pattern, where volatility comes down and the spread between highs and lows tighten. The Nasdaq and the all-world index over that time period were both forming a clear wedge pattern. Both wedge and coiling indicate a market that is going to break either up or down when the pattern is complete. The direction of the break should have long term implications because the sharp end of the wedge centered on the 200-day moving average.

With the new year the market broke above the 200-day line of 1260 with the breakout conformation number at 1270. Today the index tested 1270 and found support. The breakout was in good volume compared to recent downdrafts. The charts then are saying we are in a new bull market. Charts can always be wrong but that's what they are saying.

Fundamentals: In Q1 2012 Euro-zone banks and governments have to roll over $700 billion in debt. Rating agencies may downgrade Euro debt and make a successful roll over impossible. China and America are getting stronger but the Euro-zone could tear us all down. Consider this one factoid: Italy has cut subsidies to loss-making Communist newspapers by only 50%. Italy is not serious about deficit reduction if it is still floating debt to subsidize Communist newspapers. So Europe is screwed. But the rest of the world can soldier on. This is the tug-of-war for 2012: Sick Europe vs. a relatively healthy world.

All CIA Channel: The #1 chieftain of the Pak Taliban is in open warfare with the #2 chieftain. The top bad guy thinks his underling is taking money from India, this is the source of the warfare. Al Qaeda and the Afghan Taliban are trying to hold their fragile axis of evil together by holding jurgas or meetings. This is a towering achievement for the CIA.

In Somalia, the African Union Army, the Kenyan Army, and the Ethiopian Army are tearing territory away from Al-Shabab. If the Somali war is successfully concluded, then the good guys will have a launch pad for attacking Al-Qaeda in Yemen. Using African armies to fight the Long War in this part of the world is the only way to go.