Saudi Kill Zone

Charts: The S&P 500 closed at 1110, up 1.5% since Monday, breaking through long term resistance of 1100. The big gain on Monday came in higher volume. This was the first time we got decent volume on a big up day in the current rally leg that started a couple weeks ago. The slavish movement of all asset classes in response to the dollar is breaking down, at least in the last few days. If the rally and recovery can continue without the carry trade it would be good news. Chinese officials warned Obama that they wouldn’t tolerate the carry trade indefinitely. Not only could China dismantle the carry trade at any time, it has to actively keep it going or the carry trade would unwind by itself.

Fundamentals: Japan’s Q3 GDP came in twice as good as expected, almost entirely based on China’s blistering recovery, not internal Japanese strength, which is still very weak. American retail sales for October came in much better than expected but September was revised sharply downward. All these gyrations for US retail data are due to the reverberation of Cash-For-Clunkers. September saw a bigger plunge in auto sales than first thought as Clunkers ended and the October upside surprise was due to autos bouncing back from the freakishly huge September plunge.

Geopolitics: The Saudi Gazette reports that the Saudi Army is in a mopping up phase on its side of the border in the Yemen war, hammering bad guys with Apache helicopters and resuming efforts to build a militarized buffer zone inside Yemeni territory. The Saudis are calling the buffer zone a “kill zone,” an indication that the good guys mean business. On Monday the rebels and the Yemeni Army locked up in a major battle. There is no media presence for this hotspot, so no body count, but the rebels are appealing to the Arab League to intervene and stop the war, which speaks to the rebels not doing that great.

The Pak Army says that it is has slowed down offensive operations and is consolidating all its positions in S. Waziristan. It also says that since Saturday it has killed 36 bad guys in the Swat Valley, an area that has proven to be hotter than expected since the push into S. Waziristan started. The Los Angeles Times reports that the CIA is providing 30% of the ISI’s budget and training ISI operatives in its North Carolina facility. There are ongoing reports that the ISI (Pak version of CIA) is still helping the Taliban in North Waziristan. The two NW Talibans provide safe haven for Al-Qaeda and have a truce with the Pak Army. With the CIA joined at the hip with the ISI, the implication is that the CIA is helping Al-Qaeda. The Obama administration is starting to put pressure on the Pak Army to mount an offensive in North Waziristan. But it’s not as simple as all that. The Swat Valley and S. Waziristan have to be totally stabilized before the Pak Army can even think about pushing into N. Waziristan. And Pakistan has still another mini-rebellion in Baluchistan that must be dealt with. It’s called the Long War for a reason. It’s going to take a long time before the Pak Army can actually go after Al-Qaeda and by then Al-Qaeda will have moved to Somalia or Eritrea. The flare-up in Yemen is a signal that the LW is slowly moving its center of gravity toward the horn of Africa.