A Long and Bumpy Road

Charts: Today's action crushed the market's most recent rally attempt and we are back to being mired in a correction. For the past week or so the S&P 500 has three times plunged toward its 200-day moving average while the Vix (fear gauge) spiked. In every case the index bounced off the 200-day line and the Vix calmed down. Today the market is sitting right on top the 200-day line with the Vix elevated. The market is waiting for the Greek Parliament to vote Tuesday. It is likley that if the vote goes the wrong way, then the index will pierce the 200-day line with the fear gauge screaming upward. If it does this and trades below the 200-day line, the charts will be saying we are entering a bear market.

Fundamentals: Yesterday the market executed a big upside reversal when word leaked out the Greek Finance Minister had agreed to an even tougher austerity package to present to the Greek Parliament, because his fingers were held to the flame by Germany. The market got it wrong, a tougher austerity package is bad news in the short and medium turn because obviously it will be harder to sell. And indeed, today one Greek MP switched sides and said he will vote no. The Socialist Party (good guys) have only a razor thin majority so any defections are very bad.

European banks are exposed to Greek debt and several Italian banks cratered today because of the dicey situation concerning the Greek vote. This is why the market tanked today.

In the long run Greece defaulting will be a good thing, but that is the very long run, after another recession and bear market, years in the future. If Greece is bailed out, a host of new problems arise. One is that bond vigilantes will probably go after Ireland next and there is no appetite for an Irish bail out. Even if other Euro-periphery countries do get bailed out, we are then consigning the world economy to decades of Japanese style tupor because the system will be loaded with bad debt, not flushed out and started anew. That's okay from an investment perspective, because stability will give us a way to go.

Long War: The Syrian Army is conducting massive maneuvers against rage rebels near the Turkish border. Turkey is warning Syria to back off, or else. The Turkish Army could crush Syria, but only after a horrendous war that would set the Mideast afire. Congress is asking Obama for a better reason as to why America is at war in Libya. The potential Turkish-Syria dust up illustrates why. America needs to gain control over the rage rebellion by defeating Gaddafi and reasserting its traditional role of hegemon in the Mideast. In the early stages of the Cold War an honest answer like this could be provided to Congress and the voters. But today such honesty is impossible because America is tired of war. Unfortunately war is not tired of America.

Obama is pulling 33,000 troops out of Afghanistan over the next year and a half. As it is there are only enough troops to tackle the Taliban in one third of the country at a time, allowing the bad guys to gain strength elsewhere. The surge strategy is to gain control of the south, around Kandahar, hand over control to the Afghan Army, and then mount an offensive in the east near the Pak border, hand over control to the Afghan Army, and so forth. Now that strategy is defunct. Instead the CIA will have to mount a gigantic drone campaign over the entire country. This next step isn't even in the planning stage. General Petraeus is just now being grilled by the Senate in confirmation hearings to take over the CIA. A long and bumpy road lay ahead.