Greece Fears German Conquest

Charts: The S&P 500 closed at 1068, down .2%. The broad index failed to move above resistance at 1071. I have been saying that the charts indicate the correction is over but the technical picture is cloudy enough for different chartists to disagree. The charts reflect the uncertainty of the fundamental outlook.

Fundamentals: The bull market is dependent on an ongoing EU meeting where the Greek bailout is being discussed. If Greece isn’t bailed out, the EU is in danger of unraveling. This would tear the global economy to shreds. The strength of the Euro has allowed Greece to spend like a drunken sailor for years, a binge made possible by Germany’s fiscal prudence and a glaring weakness in the monetary union. Long suffering German voters will be furious when and if a deal materializes. Any bailout will come with strict austerity measures, i.e. Germany telling Greece what to do. The Greek press is filled with angry references to Germany’s WW II conquest of Greece, vitriol that Germany could do without. The entire process must be repeated with Spain and Portugal. The consequences of Germany not bailing out the three drunken sailors is so dire the market is fairly sure it will happen, although not certain.
Today Bernanke outlined how the Fed will tighten monetary policy once the economy is strong enough or if inflation forces its hand regardless of the economy’s strength. This clobbered corporate bonds. If you have big gains in corporate bonds it might be wise to lock in profits.

Geopolitics: After a week long battle the Pak Army has killed 74 Taliban fighters and lost 10 good guys in Bajaur, a mountainous tribal region well north of the Waziristan killing fields. Probably the bad guys have been roaming far afield to find alternate infiltration routes into Afghanistan, desperate to feed reinforcements into Marja before the heavy fighting starts. The Pak Army has stationed large numbers of troops on the Bajaur mountaintops and sealed this part of the border.
The offensive against the Taliban fortress city of Marja is called Operation Moshtarak (Operation Together). Half of the army assembling around Marja consists of British, American, and Canadian troops. The other half consists of Afghan soldiers. Together they probably equal 30,000 troops. Moshtarak will feature the largest helicopter assault in 20 years, an attempt to bypass gigantic minefields. The operation will probably begin in earnest when Gen. McChrystal thinks every Afghan civilian capable of leaving the battle zone has done so. The Taliban is currently seizing civilians and preparing to use them as human shields. Of course its goal is the opposite of McChrystal’s; the bad guys want civilian casualties to be as high as possible. NATO is clamping down on body counts, eager to thwart the sort of tallying that is bread and butter to those of us trying to keep score. However, reports from Afghanistan indicate NATO military hospitals are already overflowing with casualties.