Long War Comes To A Boil

Charts: The market's ongoing correction has produced only mild pressure on stock prices so far, although this is the first time the Dow has been down five weeks in a row since 2004. There have been three rally attempts in this correction, but the S&P 500 has not yet had one technical rally. A technical rally differs from a rally attempt in this key respect: a technical rally will have a follow through day. This is what all the rally attempts have been missing.

Step back and look at the entire market cycle for the past decade and we see something else has been missing. The two great bear markets over that time period never produced an apathy period, a sideways drift for a couple years where nobody cares about stocks except professional traders. Previous big bears have always gone through apathy periods. Instead our market has either been smashing up or screeching down. From a technical standpoint we need an apathy period.

Fundamentals: QE II ends in a couple weeks. This will have less effect on bond prices than a lot of people think. The Fed has bought trillions of dollars worth of federal debt and mortgage backed securities since the Credit Crisis began. The Fed will reinvest the trillion of dollars of maturing securities that it holds on its books in new Federal debt as the old debt matures. With all this old debt rolling over into new debt, QE II isn't really ending. Meanwhile, the vast short positions that traders have laid down on US treasuries in anticipation of QE II ending is beginning to cause short squeezes as the market wakes up to the facts that I have just presented. This is why US treasury prices have been going up lately. For me this means buying emerging market debt on dips.

Libya War: British and French attack helicopter pilots have just finished their second night of tearing Gaddafi's army to shreds around the oil city of Brega. At the start of the Libya war I said that the US had to employ Warthogs to show it is serious in taking out Gaddafi. That didn't really happen. The Anglo-French Apache and Tiger attack helicopters must employ their 30mm cannons, not just their Hellfire missiles, to show they are serious. This is because the 30mm cannons are short range weapons, up close and personal, a way to destroy troops on the ground. For the last two nights the Apaches and Tigers have come back to their helicopter carriers with their 30mm cannons red hot from usage. They are also coming back with every Hellfire missile expended, leaving behind a trail of twisted armor and dead bad guys. And they are taking fire themselves, although none of the pilots have yet been injured. NATO pilots taking fire is a first in the Libya War, a sign they mean business.

Over the past several days the Free Libya Army has torn 6 towns away from Gaddafi's army in the western mountains bordering Tunisia.

The Apaches and Tigers have not yet attacked the largest concentration of bad guys around Misrata. The FLA says that once this chopper attack starts it will begin to march on Tripoli. Gaddafi is losing.

Yemen War: There are three forces at war with President Saleh's government: 1) The Al-Ahmar Clan, a federation of anti-Saleh tribes. 2) Pro-Al-Qaeda elements of the Yemeni Army that have split away from the government. 3) Al-Qaeda itself. Youthful pro-democracy demonstrators exist in Yemen but are not a factor in the war.

Most of the fighting against Saleh has been done by the Al-Ahmar Clan. But the pro-Al-Qaeda elements of the Yemeni Army took out Saleh's Presidential Palace last week with a skillful missile barrage. Saleh is seriously injured and in Saudi Arabia. Saleh's sons are still in command of serious firepower and will probably fight on. If they lose, then the country could get handed over to Al-Qaeda unless the Saudis step in.

Saudi Arabia has for years paid the major Yemeni tribes tons of money every year as a way of controlling the country. These tribes depend on Saudi handouts to survive. The Saudis will withold this money if the Al-Ahmar Clan forms an alliance with Al-Qaeda. More than that, the Saudis will expect the Al-Ahmar Clan to fight Al-Qaeda if Saleh's government is gone. What all this means is that if the Yemen War truly calms down now that Saleh is gone it will be bad news in the long run but probably good news for the markets in the short run. The market can be foolish in the short run.

Af/Pak War: The ISI says that CIA drones last Friday killed Al-Qaeda mastermind and super-genius Ilyas Kashmiri. The CIA could only have killed Kashmiri with the help of dirty or formerly dirty ISI officers. Kashmiri was or is the most prized asset of ISI Dirt after Mullah Omar. Kashmiri was reported to be a contender for taking over Al-Qaeda in the wake of OBL's death. One of his many evil accomplishments was masterminding the Mumbai terror strike. Two weeks ago he executed the Al-Qaeda attack on the Pak Navy base that destroyed electronic surveillance aircraft vital to Pakistan for fighting India. This was a message from ISID (ISI Dirt) to the rest of the ISI that the bad guys were willing to go to any length to protect assets like OBL, Mullah Omar, and Kashmiri; even if it means helping India.

Supposedly the body of Kashmiri was spirited away from the carnage of the drone strike with blinding speed by bad guys. So there is no proof he was actually killed. It would be in the interest of ISID for America to believe that the Dirt is rolling over, transforming from bad guys to good. This makes you think Kashmiri is still alive.

On the other hand, all hell is breaking loose in Pakistan right now as the Al-Qaeda faction Kashmiri controlled is lashing out in revenge with numerous terror strikes. This makes you think Kashmiri is dead.

Either way, the ISI as a whole is playing ball with the CIA in a big way right now, giving the spooks from Langley good intel and the tempo of drone strikes is ratcheting up dramatically. The Pak tribal lands are alive with the sounds of Hellfire missiles. And the Taliban's spring offensive in Afghanistan is also coming to a boil with huge spikes in combat deaths on both sides.