Hot Steel And High Explosives

Charts: The S&P 500 closed at 1074, down 1%. The index is now trading well below the 100-day moving average. Today it punched through another support level of 1076. Next support is 1072. Leadership is horrible. All technical indicators are negative. The Shanghai index has broken below its 200-day moving average, a technical indicator that a bear market could be forming in Asia. The bear’s growl is now officially a roar.

Fundamentals: Preliminary American Q4 GDP came in at a stout 5.7% growth, way above expectations. Stripping out inventory adjustments gives a more honest figure called Real Final Sales: up 2.2%; solid growth, not spectacular, half what it should be at this point in the business cycle. The Chicago PMI manufacturing index came in strong today. 78% of S&P 500 companies are beating estimates so far in this earnings season; again quite solid but not spectacular.
Despite this good data the market has one big worry: Greek sovereign debt default. Dispirited from having their bonuses ripped away, Goldman Sachs brokers couldn’t talk China into buying Greek bonds. The Economist reports that this failure galvanized Germany and France into crafting a secret plan to bailout Greece. The market will no longer respond to rumors. It needs to see real progress on Greek debt. This is the nightmare scenario: Greece defaults because bond vigilantes continue driving up debt yields. This would cause yields to soar for Spanish, Portuguese, Italian, and Irish debt. If any one of them were to default, the credit markets would go berserk and our previous bear market would look like a Sunday picnic.

Geopolitics: The Saudi Army proudly invited reporters for the first time to tour the border between Yemen and Saudi Arabia. What had been a battle zone is now closer to a highly militarized frontier, a mini-version of the border between North and South Korea, although not quite that calm. Mortar rounds landed and exploded a couple miles from the reporters’ Land Rovers and Houthi snipers were still firing at Saudi soldiers. Every hilltop along the border is a Saudi Army outpost. Newly built roads link these bases and there is constant patrolling by the now battle hardened Saudi Army. Although the Kingdom denies it, the Saudi Air Force is still active in the skies over Yemen. Hopefully Yemen and Saudi can now turn all their firepower on AQAP.
Reporters are also converging on the largest NATO bases in Afghanistan as Gen. McChrystal gets ready to launch his first big offensive in about 3 weeks. The bases are beehives of activity. Hercules heavy transport airplanes roar in and out of airfields, unloading supplies and troops at a fevered pitch. Chinook troop helicopters fill the air with clouds of swirling dust as they move men and material to forward bases. The ground is alive with NATO troop movements. A powerful storm is gathering and it will soon descend on the Taliban with a rain of hot steel and high explosives.
Malaysian security forces have captured a dozen or so bad guys. The Singapore Straits Times says several of these bad guys have links to AQAP, demonstrating the importance of crushing AQAP in Yemen but also the importance of having a robust CIA presence in countries like Malaysia.