Charts: The S&P 500 closed at 1004, down 0.85%. CAF (Chinese index) closed at 32.65, down 4% on the week. The US market took a sickening lurch in early going, crashing through three support levels, but by the closing bell the broad index fought its way back up through the key 996 and 1000 levels. So only 1010 was violated. 31 is a key level for CAF and it needs to hold the line there. We’ve been talking about America taking the lead role, and that’s all well and good, except China is still the world’s second biggest economy and its stock market is also number two and it needs to hold together.

Fundamentals: The next leg in the global recovery is dependent on America’s back to school shopping season. Speaking to that concern, today consumer sentiment dropped from 66 to 63.2. It was expected to increase. Yesterday we saw retail sales were weak. Wall-Mart is the epicenter of back to school shopping and it reported weak sales. DMU actually did some field work by sending our ace reporter (Martha) on a back to school shopping junket with a typical Midwestern family where the dad is a fire captain, the mom is a nurse, and there are three school kids (a demographic bulls-eye for Middle America). The family was very frugal in its purchases (yikes!). Also, there was a tiny whiff of deflation in the CPI data; that indicates weak consumer spending but is good for interest rates and housing. On the flip side, industrial production came in better than expected and yields on the government’s gargantuan debt came down (bullish). Today the fundies are mixed. One thing to watch: Cit Group (CIT) has a deadline this evening concerning its debt restructuring. If bondholders don’t play ball, CIT will file bankruptcy. This will be like a mini-Lehman collapse. Wells Fargo and other banks have taken over a lot of CIT’s clients, so the danger is getting less and less every day, still there are thousands of retailers that won’t be able to stock up for Christmas in the event of a CIT bankruptcy and the US economy is in no shape to withstand even a soft blow.

Geopolitics: In Pakistan we need a program to keep the various players straight. The dead Taliban super-chieftain was named B. Mehsud. The new Taliban super-chieftain is named H. Mehsud (they’re from the same tribe and have the same last name). The “good-bad-guy” Taliban fighters that we talked about yesterday are led by a pro-government Taliban chieftain named Turkistan. Turkistan’s militia continues to battle H. Mehsud’s militia for a second day. The fighting is fierce and dead good-bad-guys and bad guys are stacking up like cord wood. In a massive air operation to support Turkistan’s militia, Paki Army helicopter gunships are ripping apart the bases of the H. Mehsud network. Thursday alone good guy helicopters killed 12 bad guys (bullish).
In Chechnya, bad guys stormed a police checkpoint and killed 4 good guys. The jihadists then attacked a public bath house and killed 7 innocent civilians who weren’t wearing enough clothes to satisfy Sharia decency standards.
Two platoons of Philippine Army Rangers and Marines in a large operation attacked two Abu Sayyaf (an Al-Qaeda franchisee) camps and killed 31 bad guys. 23 good guys were killed. The camps were essentially factories for making bombs like the ones that were recently used in Indonesia. Abu Sayyaf knew the government’s soldiers were coming and met them from prepared positions, indicating that the bad guys have an effective intelligence arm (bearish).
In Northern Yemen, fighting between the Yemeni Army and radical Islamic sect Zaydi entered its fourth day. Yesterday’s body count: 16 dead bad guys and 2 dead good guys. Zaydi is not affiliated with Al-Qaeda, in fact they hate Al-Qaeda, but unfortunately there is also an Al-Qaeda franchisee rebellion in Southern Yemen. So the Yemeni Army is stretched thin and needs US help.

Specific Stocks: There sure is a lot of fighting by US allies recently. They need high performance tactical radios made by Harris Corporation (HRS). Yesterday HRS reported good numbers and the Philippine Army, for example, is a big customer. I’ve been buying EWS (Singapore Index). EWS took a dive when America made a deal with Switzerland to grab tax evaders' records. Singapore is the Switzerland of Asia with secret bank accounts, etc… But the US/Swiss deal isn’t even that bad for Switzerland, let alone Singapore.