Bad Guys Fight Back

Charts: The S&P 500 closed at 1087, down 1%. 1100 is providing tremendous resistance.


Fundamentals: The dollar was up today with predictable results. Emerging market countries across the globe are beginning to defend their currencies. This is beginning to put upward pressure on the dollar, harming the carry trade. Lately all financial asset prices have moved in a pattern against or with the dollar. Short covering on the dollar (unwinding the carry trade) is bad for stocks.

Geopolitics: Enough leaks have occurred for us to know Obama is giving McChrystal 35,000 new troops and 10,000 new trainers. Assuming the leaks are accurate, Obama is doing the right thing. This is good news. Before we get too overjoyed let’s remember that the bad guys get a vote too and there are plenty of hurdles ahead. The fighting in S. Waziristan is no picnic. Despite announcing a retreat, the bad guys are digging in. Pak Army kill ratios are dropping fast as the good guys are forced to crawl into bobby-trapped tunnels a kilometer long and pick through the rubble of bombed out towns to find hidden bad guys armed to the teeth. The bad guys left are fanatics. The SW war started with a 100-1 kill ratio as jets and artillery did the heavy lifting. Now it is only 3-1 as fighting goes practically hand-to-hand against hardened Taliban veterans. The Taliban capital city of Makeen and several other fortress-type cities are still in bad guy hands. The Army is battling just to acquire complete control of all roads leading to Makeen and may be laying the groundwork for a genuine protracted siege. The good guys are pulling more ammunition, weapons, and bombs out of S. Waziristan than anybody dreamed possible, trucking away tons of lethal ordnance. S. Waziristan is, after all, the heart of darkness and it’s not easy to stop the black heart from beating.
Unfortunately, the bad guys have made some progress globally as well by enlarging the battlefield. Steady and unrelenting Long War combat is occurring in Pakistan, Afghanistan, Somalia, Yemen, and most recently Saudi Arabia. The Saudis say that they have now retaken all the lost territory that the Yemeni rebels had seized, but they are still fighting the rebels, still taking casualties.