Obama Channels FDR And Truman

Geopolitics: The Pak Army says that it has control of the three S. Waziristan fortress cities that the conventional thrust was aimed at. Good but not great news. The Army has control of most but not all of S. Waziristan. The conventional phase of the campaign is winding down and the guerilla war is getting bigger. The Pakistani Taliban has stepped up its presence in the Swat Valley and the other tribal lands. The fighting has diminished by about 40% but is nowhere close to stopping. Pakistan is now in a constant state of war. The whack-a-mole effect is being felt. This is a phenomenon were thousands of bad guys leave a collapsing theater of war and move on to other hotspots where the good guys aren’t as ascendant. Friday, a Russian commuter train was bombed by Chechen terrorists, killing dozens of innocent civilians. This was the biggest Islamic terror attack in Russia in 6 years. Chechen fighters are leaving S. Waziristan to fight in Russia and Afghanistan. Sunday, Afghan border police killed 27 Taliban fighters in a huge battle and captured one Chechen Al-Qaeda type for interrogation. This guy is probably a whacked mole from Pakistan. Most of the Pakistani Taliban will set up shop in the many tribal regions of Pakistan and hook up with other Taliban factions and then resume the jihad against their own country. If the Pak Army can capture and kill H. Mehsud it will take a big bite out of the whack-a-mole effect and be very bullish.
Obama launches his new Afghan war policy on Tuesday. This will be the most important speech of his career. This might be the most important speech of the 21st century. He is going to talk about an exit strategy. What we want to see in the speech is vagueness and little emphasis on the exit strategy. The more detailed the exit strategy references, the more bearish the speech. A large amount of time spent talking about the exit strategy is also bearish. If the first sentence includes the words, exit strategy, it would be very bearish. If the speech were to make zero reference to an exit strategy it would be extremely bullish. Of course every word of the speech will be important. The President has to show that he is a warrior. He needs to seize the moment and channel FDR and Truman. He has dithered for 3 months on the troop decision. He needs to step up to the plate and hit a homerun.

Carry Trade Gets Clobbered

Charts: The S&P 500 closed at 1091, down a stinging 1.5%. Volume is always low on a holiday week but there is a big technical problem with the recent drop in volume. Low volume exaggerates price moves and makes chart patterns less meaningful. Low volume is a sign that the big boys are not participating in the rally. The uptrend is under severe pressure.

Fundamentals: The government of Dubai is allowing its state owned investment company, Dubai World, to halt payments on $20 billion dollars worth of debt. Dubai World has another $40 billion in debt that is now at some risk of default, big enough to roil the world’s financial markets. After a long hiatus we are experiencing another “shoe” dropping in the credit crunch. Dubai is a Persian Gulf country with almost zero oil, but it foolishly acts as though it is brimming with oil, engaging in grand projects and huge debt fueled investments. The stock market has always assumed that Abu Dhabi would bail out its sister country within the UAE if there was a problem. Abu Dhabi has oil and could easily afford to bailout its sister, but maybe it is unwilling. This news has weakened the carry trade and in turn global stock and commodity markets. Latvia and even Greece are also close to defaulting on various kinds of debt. Remember, emerging market debt (EMD) is an end point in the carry trade; EMD is one of the major asset classes that shorted (carry trade) dollars are buying and therefore emerging market debt is integral to the entire phenomena.
The market thinks that Abu Dhabi will step in if more Dubai debt goes south and that the IMF will step in to help Latvia or Greece. If Abu Dhabi and the IMF behave as the market expects, then after a hiccup the carry trade will continue and (hopefully) the rally continues as well. Tapping the IMF does not erase bad EMD, it only transfer the debt from (for example) Latvia to Europe, America, and Japan. Abu Dhabi really can erase Dubai’s debt if it wants to. And they are part of the same country. The West is often confused about the United Arab Emirates. On paper, it is eight separate countries jammed hap-hazardously into one. In reality, Dubai is more like a province of Abu Dhabi, the leader of the UAE. The market knows all this of course and assumes that tens of billions of more bad debt from Dubai will get backstopped by the UAE’s leader. If this doesn’t happen, the carry trade will take a bigger blow and so will stock markets.

Mullah Omar Is The Taliban

Charts: The S&P 500 closed at 1111, up .45%. Oil is moving in a band of $75.50 and $80. It is important that oil continues to meet resistance at $80. The dollar carry trade is still fueling the recovery/rally and it is benign as long as oil and interest rates behave, which is the case with yield on the government’s ten-year note under 3.4%, well below the 4% danger zone. We are seeing a Yen carry trade grow next to a dollar carry trade. Professor Roubini has criticized the dollar carry trade as “mindless.” But the Yen carry trade is powered by hundreds of thousands of wealthy households in Japan, not a handful of hedge funds, so it is more discerning, therefore sustainable and bullish. Plus, the yen carry trade uses less leverage, more cash.

Fundamentals: First time jobless claims fell below 500,000, a key psychological number. Consumer sentiment has unexpectedly turned up and new homes sales came in stronger than expected. This creates a triple dose of good fundamental news.

Geopolitics: On Tuesday President Obama is unveiling his decision on McChrystal’s troop request and policy review. The President is expected to say that there will be 35,000 new US troops and 5,000 new non-US NATO troops for Afghanistan. As far as strategy overhaul, McChrystal is already moving troops out of far-flung outposts and into Kandahar and the Helmand River Valley (HRV: right next to Kandahar). This is the beginning of the counterinsurgency surge and a new strategy that will focus on establishing full government control in the Taliban’s birthplace, Kandahar, which is also the largest southern city. The initial strategy also calls for the Marines to take control of HRV, where opium poppies are grown to fund the Kandahar Taliban. In a way it will be like opening up a third front in the Long War because Afghanistan has been neglected for so long its eruption will seem like a new war. Going forward, southern Afghanistan is going to become the focal point of the Long War. Kandahar is Mullah Omar’s hometown. Mullah Omar is the Taliban.

Obama Wake Up!

Charts: The S&P 500 closed at 1106, down .05%. Support at 1100 is holding. Resistance is at 1110. Chart patterns look good. Volume patterns, however, look bad. Monday saw a huge gain but once again on feeble volume. The technical picture isn’t as good as the charts indicate.

Fundamentals: Q3 GDP was revised down from 3.5% to 2.8%. Real Final Sales (RFS) is GDP without inventory adjustments, a government generated number. It could also be called “Real GDP.” RFS showed American GDP growth at 1.9% (all numbers annualized). The Clunker program was in Q3 and had some sort of one-time boost, but let’s be generous and overlook that and say the US economy is growing at 1.9% in the fifth month of recovery. That’s anemic by historical standards. The Euro-zone is probably growing at the same pace as the US. China is probably growing at 10%, with the rest of emerging Asia keeping pace with China. Israel raised interest rates for a second time, the most aggressive tightening move yet by any country, further evidence of emerging market strength. The dinosaur vs. tiger quandary is still alive. ISL is the index for Israel.

Geopolitics: The Wall Street Journal ran an article today describing how the ISI’s pet terrorist organization, LET, has been caught trying to launch several fresh terror operations against India. LET is responsible for the huge Mumbai bombing a year ago. Pakistan has promised to shut LET down but there is evidence that ISI is keeping its pet alive and healthy although on a short leash. A point to bear in mind is that LET is ultra-competent and ultra-deadly, an elite commando terror army. The question that can’t be answered yet is how short is ISI’s leash on LET? What if LET goes rogue and attacks India without ISI’s permission? It would be disastrous if LET did succeed in a big showy terror strike inside India or even worse, a prolonged terror campaign. That isn’t happening yet, the leash seems to be working so far.
The bigger picture is this: America better let Pakistan do what it wants as far as LET is concerned. The Pak Army is a jihadist killing machine that is currently running at full throttle. Pak helicopter gunships are roving the Afghan/Pak border hotspots and chewing up bad guys like threshing machines. Pak infantry and artillery are wading into the heart of darkness and destroying the most powerful Taliban network in the world, the one anointed by Al-Qaeda as the sharp end of the spear.
Meanwhile, On the Saudi/Yemen border, the Saudi Army is running war operations at a steady pace. The Houthi rebels in northern Yemen are being continously pounded by Saudi artillery and F-16 strikes as the Saudi infantry continues to secure its side of the border and preseumably work on establishing its buffer zone. The bad guys are infiltrating the long mountainous border to put fighters inside Saudi Arabia. On its side of the border, the Yemeni Army is also running at full steam. Ominously, the Yemenis are saying that Al-Qaeda in the Arabian Peninsula (AQAP) and the Houthi rebels to the north are cooperating to a much greater degree than previously thought.
The Long War is running pretty hot right now and it does need US involvement even though the Saudi and Pak Armies are doing a good job. Obama, wake up!

Vietnam History Lesson

Geopolitics: The debate rages over Obama’s new strategy in Afghanistan. The word Vietnam is getting thrown around by the peaceniks but in a sloppy manner. To avoid being sloppy let’s review the history of the Vietnam War. The war lasted from 1946 to 1989 (four times longer than most people think). North Vietnamese Communists fought France from 1946-1954; then America from 1955-1973; then South Vietnam from 1973-1975. In 1975 North Vietnam defeated South Vietnam and took control of the entire country. But the war didn’t end in 1975 because that was the year Communist Vietnam went on the offensive, attacking and conquering other countries. In 1975 Vietnam gained control of Laos through a Viet Cong style guerilla war. In 1979 Vietnam invaded and occupied Cambodia in a blitzkrieg campaign. This is the same year that the USSR invaded Afghanistan. The two invasions were coordinated for maximum effect, a global bad guy push of enormous proportions. The Soviets got bogged down in Afghanistan but Vietnam had no trouble conquering Cambodia. A few months after the invasion of Cambodia (still in 1979) China invaded Vietnam because the smaller Communist power had become dangerously expansionistic. The Sino-Vietnam War was short but bloody. China withdrew from Vietnam with the understanding that there would be no more conquests. Vietnam fought a low level guerilla war in its conquered territories until it withdrew from Cambodia in 1989 in unison with the USSR’s withdrawal from Afghanistan; the final hours of the Cold War. Vietnam and the USSR remained highly synchronized until the bitter end. Vietnam withdrew from Cambodia because the Cold War was over. The Vietnam War lasted for the entire length of the Cold War because the Vietnam War was the Cold War and the good guys won the Cold War. We won the Vietnam War and heaven help us if we’d lost because it would have meant losing the entire Cold War. It’s not okay for America to lose a war.
The Long War has not affected stock markets as strongly as the Cold War did, not yet.
If Obama screws up badly enough that could change. America could start losing the Long War. Eritrea has already established itself as an Al-Qaeda ally. That makes one impregnable Taliban nation-state; a country that America cannot touch. If the Houthi rebels in northern Yemen were to hive off a nation-state there would be two. In Somalia all that would need to happen would be a truce between the government in Mogadishu and Al-Shabab and a third fully functioning Taliban state would spring into existence. What if Pakistan wins in South Waziristan but then stops because America has a week-kneed withdrawal timeline in Afghanistan and the Pakistanis don’t want to be left hanging by themselves against a rising tide of Islamic violence? Now there are ten Taliban states plus whatever arises out of Afghanistan. It’s not hard to spin scenarios where the Long War gets very ugly so we need to start seeing some backbone from the Commander-in-Chief.

Mehsud Terror Factory Dismantled

Charts: The S&P 500 closed at 1091, down .3% and under the key 1100 long term resistance level (bearish). The fourth rally leg is under pressure. Volume patterns in this latest rally are worse than the other three. Uncertainty over the carry trade is probably causing the weak volume. Emerging market economies are starting to slap capital controls on foreign investment, which hurts the carry trade.

Fundamentals: The bad US housing numbers that we saw earlier in the week are roiling the market. The numbers were weak because the $8000 Tax Credit expired, but it has since been reinstated and made even bigger. Fine, except that in April and March the new Tax Credit expires and the Fed’s program to buy mortgage backed securities also expires. American housing looks like it can’t stand on its own two feet and the looming expiration dates are scary because the stock market usually looks 6 months ahead. Growth in China remains strong so we are back to the tricky calculation of whether the strong tiger economies can overcome the weak dinosaur economies.

Geopolitics: The Pak Army is dismantling small Taliban towns in S. Waziristan that have been used as training centers for suicide bombers, this is the main thrust of current operations. The Army intends to shut down the Mehsud tribe’s capability for terror strikes within the rest of Pakistan by taking apart the terrorist infrastructure of the Mehsud tribal lands in S. Waziristan. The Mehsud terror factory is probably the largest in the world. Still, there is a lot of bad guy country in the other tribal lands besides the Mehsud territory. Terror strikes could be launched from other (non-Mehsud) Taliban areas and towns. Any non-Mehsud Taliban that launched a new terror campaign would be next on the Pak Army’s invasion list after the Mehsuds are dealt with. Bear in mind that H. Mehsud was Al-Qaeda’s favorite to take over the Pakistani Taliban alliance, the strongest in the country. That makes him the number one bad guy in the world. What this all boils down to is that the Army is correct to strike directly at H. Mehsud.

Powell Doctrine Bad News

Geopolitics: The Obama Administration is apparently saying that before a final decision is made on McChrystal’s troop request there must be a clear exit strategy in Afghanistan. Various leaks and rumors have percolated out of the White House and Pentagon concerning the Afghan strategy deliberations. The leaks are sometimes contradictory, purporting one thing and then another. We of course don’t really know what is going on within these deliberations. Some of the leaks have been positive. The one cited above is negative. The term “exit strategy” comes from the so-called Powell Doctrine. Applied to Long War conflicts the Powell Doctrine is not only irrelevant, it would be disastrous. The PD says all wars should be fought like WW II or a sort of romanticized version of WW II. That is to say that public support (poll numbers) should be sky-high in favor of the war before American forces engage. The expeditionary force must be overwhelmingly huge with total national resources devoted to the war effort; the country must be on the path to full mobilization as in WW II or the war should not be fought. The PD departs from WW II strategy by saying that if US forces start to lose there should be an exit strategy, i.e. the troops should be brought home and not left in the field to fight a protracted lost cause. Truthfully, the core of the Powell doctrine doesn’t even really work for big conventional wars like WW II. Opinion polls were against American involvement for two years once war broke out in Europe. Japan mopped America up in the Pacific for the first several months of fighting, should that have triggered an exit strategy? The US Army was knocked back hard in the Battle of the Bulge, exit strategy?

Powell Doctrine Bad News

Geopolitics: The Obama Administration is apparently saying that before a final decision is made on McChrystal’s troop request there must be a clear exit strategy in Afghanistan. Various leaks and rumors have percolated out of the White House and Pentagon concerning the Afghan strategy deliberations. The leaks are sometimes contradictory, purporting one thing and then another. We of course don’t really know what is going on within these deliberations. Some of the leaks have been positive. The one cited above is negative. The term “exit strategy” comes from the so-called Powell Doctrine. Applied to Long War conflicts the Powell Doctrine is not only irrelevant, it would be disastrous. The PD says all wars should be fought like WW II or a sort of romanticized version of WW II. That is to say that public support (poll numbers) should be sky-high in favor of the war before American forces engage. The expeditionary force must be overwhelmingly huge with total national resources devoted to the war effort; the country must be on the path to fully mobilization as in WW II or the war should not be fought. The PD departs from WW II strategy by saying that if US forces start to lose there should be an exit strategy, i.e. the troops should be brought home and not left in the field to fight a protracted lost cause. Truthfully, the core of the Powell doctrine doesn’t even really work for big conventional wars like WW II. Opinion polls were against American involvement for two years once war broke out in Europe. Japan mopped America up in the Pacific for the first several months of fighting, should that have triggered an exit strategy? The US Army was knocked back hard in the Battle of the Bulge, exit strategy?

Al-Qaeda In Crosshairs

Charts: The S&P 500 closed at 1110, down .05%. Uptrend intact.

Fundamentals: The October Consumer Price Index rose .3%, 3.6% annualized, much worse than expected. Most inflation data lately has been tame but the shaky trapeze-like recovery is highly dependent on super-low interest rates for a long time, so inflation is more dangerous than in a normal recovery. Housing starts plunged 10.6%, worse than expected. The Home Buyer Tax Credit had expired by October but it has since been renewed and expanded. We don’t know yet if the new HBTC will keep housing afloat or not. The recovery is not only dependent on existing government policies, those policies have to work perfectly. And any new big spending government program (like healthcare) is probably destined to cause a double-dip recession.

Geopolitics: The Pak Army is saying that most of the Pakistan Taliban fighters have indeed retreated from S. Waziristan. But the resistance is as strong as ever. The Pak Army is taking the bad guy capital city of Makeen one bloody street at a time. It has killed over 500 bad guys so far. The fighters that are left are mostly Al-Qaeda types: Arabs and Uzbeks, the inner chamber of the heart of darkness. So America’s wish that the Pak Army should take on Al-Qaeda has come true.

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.

Take A Jarhead To Lunch

Geopolitics: Assuming the leaks are correct and the troop decision has been made the market’s attention will turn to the perennial question: will the good guys win in Afghanistan? The answer: Yes, because in the years ahead most of the hard fighting will be done by the Marines, not the Army. Conditions are much tougher in Afghanistan than Iraq and it is going to take longer to sew it up there. It is a good thing that McChrystal instinctively turns to the Marines over the Army for the sharp end of this spear. Fuel has to be trucked hundreds of miles through mountain passes filled with missile toting bad guys in Afghanistan. Soldiers sleep in the dirt in Afghanistan, not in heated and cooled buildings like in Iraq. Frankly, there are conditions on this battlefield that are beyond the capabilities of the US Army.
Put bluntly, the Marines are better than the US Army. Put another way, the US Army is the second best army in the world. Thank God America has the very best and second best armies in the world because we’re going to need both of them, but mostly the varsity team: USMC.
Not only do the Marines produce better soldiers in the field than the Army, it has better people throughout the whole chain of command. Consider the Army Major who went on a killing spree in Fort Hood. The guy had Al-Qaeda on speed deal and screamed, “Allah Akbar!” like a Taliban before firing. That sort of thing would never happen in the Marines.
That’s why USMC has been winning all the big battles so far in the Long War. Iraq turned around after the Marines won in Fallujah because conditions there were too hot for the Army. And today the Marines are in the middle of bad guy country. They are your best friend. The person who you think is your best friend cannot keep your portfolio from crashing. Only the Marines can do that. So take a jarhead to lunch. Do something to show your appreciation.
And the Marines are commanded by a savvy Commander-in-chief. I have been saying that Obama’s track record was nearly flawless in geopolitics until he caved in on settlement building with Israel. I have rethought my position. Obama was right to cave. The original policy of forbidding all settlement building in the West Bank and East Jerusalem would have been more than effective, it would have been hyper-effective; a fully functioning Palestinian state would arise in a couple years if Netanyahu froze all settlement building. Game over. No Likud PM will want to be at the helm when a Palestinian state is formed. Israel will have to hold an election and put a dove in office before that can happen. But Obama has hit on the path forward that will eventually produce the new independent state and take the Long War off boil. And talks are on hold until there is a settlement freeze, which enrages the doves in Israel. So Obama hasn’t caved that much. He is just playing smart poker. Now the issue of settlement building will dominate the next Israeli election.

A Healthy Carry Trade Today

Charts: The S&P 500 closed at 1093, up .6%. Uptrend intact. Resistance at 1100.

Fundamentals: The greatest danger to the dollar carry trade is emerging market countries depreciating their currencies by buying dollars or establishing capital controls or both. China is hinting that it might prevent this from happening by increasing the value of the Yuan. If China allows its currency to appreciate then virtually every other emerging market currency is effectively depreciated and these countries will probably stop attacking the carry trade. China allows its currency to rise by slowing down its purchase of dollar denominated assets like treasuries. In response, the other tiger economies will not step up their purchase of dollars and the greenback keeps falling. There are three dangers in basing the global recovery on an ever falling dollar: 1) Oil will keep going up until it hits $100 and crushes the recovery. 2) The US government has trouble financing its gargantuan debt, causing interest rates to spike. 3) The dollar can’t fall to zero.
Today we saw the dollar down, oil down, and treasury yields down, an atypical pattern. So problems 1 and 2 did not occur at least on the day and we had a much healthier version of the carry trade. We should start thinking of the carry trade in these terms: healthy or unhealthy. Here is the definition of an unhealthy carry trade: the dollar goes down causing interest rates and oil spike.

Geopolitics: The Saudis said that they had cleared all rebels from their territory two days ago. But now fighting appears to have spilled back into the Kingdom because a spokesman for UNICEF (a UN agency) said that 240 Saudi villages along the border are being evacuated, a sign there is fighting again on Saudi soil. Also, the Saudi and Yemeni Navies are intercepting boats carrying weapons and possibly fighters into the border region. These small sea craft are probably sponsored by Iran, so the Ayatollah is taking harder action than I predicted. Long story short: the Yemen war is pretty hot.

And the war in S. Waziristan is getting hotter. 17 good guys were killed and 22 bad guys in extremely heavy fighting Thursday. This was the highest single day body count for the good guys and (unfortunately) a relatively low body count for the bad guys. The Army’s three pronged assault now looks like one huge circle with three smaller circles inside. Three Taliban fortress cities continue to hold out. And fighting is also flaring up in the Swat Valley. Nevertheless, the Pak Army is winning.

Bad Guys Fight Back

Charts: The S&P 500 closed at 1087, down 1%. 1100 is providing tremendous resistance.


Fundamentals: The dollar was up today with predictable results. Emerging market countries across the globe are beginning to defend their currencies. This is beginning to put upward pressure on the dollar, harming the carry trade. Lately all financial asset prices have moved in a pattern against or with the dollar. Short covering on the dollar (unwinding the carry trade) is bad for stocks.

Geopolitics: Enough leaks have occurred for us to know Obama is giving McChrystal 35,000 new troops and 10,000 new trainers. Assuming the leaks are accurate, Obama is doing the right thing. This is good news. Before we get too overjoyed let’s remember that the bad guys get a vote too and there are plenty of hurdles ahead. The fighting in S. Waziristan is no picnic. Despite announcing a retreat, the bad guys are digging in. Pak Army kill ratios are dropping fast as the good guys are forced to crawl into bobby-trapped tunnels a kilometer long and pick through the rubble of bombed out towns to find hidden bad guys armed to the teeth. The bad guys left are fanatics. The SW war started with a 100-1 kill ratio as jets and artillery did the heavy lifting. Now it is only 3-1 as fighting goes practically hand-to-hand against hardened Taliban veterans. The Taliban capital city of Makeen and several other fortress-type cities are still in bad guy hands. The Army is battling just to acquire complete control of all roads leading to Makeen and may be laying the groundwork for a genuine protracted siege. The good guys are pulling more ammunition, weapons, and bombs out of S. Waziristan than anybody dreamed possible, trucking away tons of lethal ordnance. S. Waziristan is, after all, the heart of darkness and it’s not easy to stop the black heart from beating.
Unfortunately, the bad guys have made some progress globally as well by enlarging the battlefield. Steady and unrelenting Long War combat is occurring in Pakistan, Afghanistan, Somalia, Yemen, and most recently Saudi Arabia. The Saudis say that they have now retaken all the lost territory that the Yemeni rebels had seized, but they are still fighting the rebels, still taking casualties.

Al-Qaeda's Worst Nightmare

Charts: The S&P 500 closed at 1099, up .5%. Uptrend intact. Resistance is at 1100.

Fundamentals: The Blue Dogs are talking about creating a deficit commission, modeled on the lines of base closure commissions, which allow only up or down votes on spending cuts. If they can pull it off this would be great news. Industrial production data from China came in stronger than expected. This was the catalyst for the rally’s continued momentum.

Geopolitics: The Saudi Army is establishing a militarized buffer zone inside Yemen similar to the buffer zone Israel maintained in Lebanon from 1985-2000. Also, the Saudi Navy is blockading Yemen’s coast, preventing Iran or any other bad guys from funneling fighters into the combat zone. Iran is talking diplomatic smack against Saudi Arabia and the Kingdom is answering with warships and troop movements. The ball is in Iran’s court and most likely the Ayatollah will wimp out. The Saudi Army has never been used in battle, so the world is unprepared for its massive strength. The power struggle between Iran and Saudi Arabia is currently the biggest factor in the Long War. If Saudi Arabia prevails, slapping Iran and its proxies hard, ending the rebellion in northern Yemen, then Al-Qaeda will have sustained a tremendous body blow. And not just for obvious tactical reasons.
Al-Qaeda’s reason for existence is to reestablish the Great Caliphate of the Middle-Ages. Its greatest fear is that the Saudi royal family will do just that, forge an alliance of Islamic countries that essentially recreates the Great Caliphate. Al Qaeda was created because America saved the holy city of Mecca from Saddam Hussein’s clutches in the first Gulf War, not the House of Saud. The Saudi failure to stop Iraq in 1990 is Al-Qaeda’s number one talking point. America (99% infidels) is currently the guarantor of Mecca’s sanctity, Al-Qaeda’s number two talking point. Al-Qaeda’s worst nightmare is America voluntarily turning over the reins of power in the Mid-East to a newly militarized Saudi Arabia and pulling Yankee troops out of Muslim lands.

Army + Stock Exchange = Good Guy

Charts: The S&P 500 closed at 1093, flat on the day, up 2.2% on the week. The volume on Monday’s big up day was high enough to turn the rally attempt into a genuine rally, signaling the start of the fourth rally leg within the bull market that started in March. The volume pattern is now bullish within the 2-week old rally leg. But only 4.66 billion shares traded on the NYSE Monday compared to the ‘09 average of 5.78 billion. And during the recent correction the average volume on down days was greater than Monday’s total. Volume is becoming a technical issue as the bull matures. As noted yesterday, stock market volume has to be low to allow enough funds to flow into the nearly insatiable government bond market and it’s working, we continue to see stocks and bonds rally simultaneously. Like a trapeze artist the rally and recovery are wobbling along.

Fundamentals: The leaders of the G20 met over the weekend and pledged to keep deficit –fueled fiscal stimulus measures at current levels until a full recovery is under way. The bull market so far has been liquidity fueled and this pledge insures hyper-liquidity for the foreseeable future, inflating financial assets and commodities through the dollar carry trade, this is not necessarily good news fundamentally. But economic data from Germany and China keep surprising to the upside. The global recovery is uneven. America is limping along and Latvia announced another shocking 18% collapse in GDP.

Geopolitics: It’s very simple to tell the good guys from the bad guys among the armies/militias fighting in the Long War. All armies/militias connected to stock exchanges are good and the ones not connected to stock exchanges are bad. The Taliban, Al-Qaeda, and Al-Shabab do not have stock exchanges and are bad. NATO countries, Afghanistan, Pak, Kenya, the African Union, Ethiopia, Iraq, S. Korea, and Somalia have stock exchanges and are good. The Somali stock market is up the most of this group, 500% in the last 3 months. Even though the leading Somali stocks are publically traded sea pirate companies, the country has a corporate structure and some legitimate companies are flourishing. Among the good guy national armies only Yemen does not have a stock exchange. This is a massive weakness in our global alliance. Fortunately, Dubai is working night and day to open an exchange in Yemen and by early 2010 we will be able to buy and sell Yemeni shares. Dubai, therefore, is striking a blow for the good guys through financial engineering.
In Afghanistan, The Afghan Army has killed 130 bad guys in a major battle in the northern part of the country. With NATO air support and help from US Special Forces, the Afghan Army did the lion’s share of the fighting and suffered no combat deaths.
Iran and Saudi Arabia are trading diplomatic threats over the Saudi military operations in Yemen. The Saudi government says it will stop attacking the northern rebels once they retreat 10 kilometers inside Yemen. Saudi jets are still pounding the bad guys at present.

CIA Is Your Last, Best and Only Friend

Charts: Since the bull market began in March its greatest technical weakness has been volume. The 2002-2007 bull market saw a net inflow of $250 billion into domestic equity mutual funds. With nearly a 70% gain since March, this bull market has seen a net inflow of only $7.8 billion. If this were a normal bull market, the inflow would have been $150 billion by now. In recent months and weeks volume has been getting worse to the point where we are now seeing outflows even as the market rises. The rally attempt that we are currently in has seen very low volume, so low that even with big price gains it has not yet qualified as a technical rally. What all this means is that retail investors are not participating in the uptrend and a swath of big institutions are also MIA. Volume this anemic is a hallmark of a cyclical bull market within a secular bear. At some point volume must pick up for a multi-year bull to emerge. But there is a Catch-22 to a volume pick-up. Read on.

Fundamentals: The current bull market can only continue with very weak volume flows because there is so much government debt coming to auction that a massive and continuous flow of funds must keep pouring into treasuries. If volume were to improve to historical levels in the stock market then fund inflows would dry up in the government bond market, jacking up interest rates, clobbering housing, and then tearing apart the balance sheets of the globe’s financial firms who still hold billions worth of mortgage backed toxic assets on their books. We have a fragile Goldilocks recovery where economic conditions are scary enough to keep most investors in bonds but not so scary that a few brave souls are buying stocks.

Geopolitics: The Saudi Army has retaken a key mountain from the Yemeni rebels. The mountain in question straddles the border between the two countries. Media reports say that 6 Saudi soldiers have been killed so far and maybe 100 bad guys. The rebels claim to have shot down a Yemeni fighter-bomber and the Yemeni government admits that a jet did go down in the battle zone but denied that the bad guys were responsible (they probably were). The rebels are fighting both the Yemeni and Saudi Armies simultaneously and it is hard fighting on all sides. Saudi Arabia reached out to Pakistan, vowing to cooperate militarily. Saudi Arabia is waking up to its responsibilities in the global conflict. The Long War cannot be won without Saudi Arabia providing leadership to the Muslim world.
In Afghanistan, Afghan soldiers killed 17 bad guys in a fierce battle Sunday, backed up by NATO jets. This shows good progress on the part of the Afghan Army which numbers about 200,000 soldiers.
In S. Waziristan, the Pak Army is slowly moving into the biggest and most important Taliban cities, including the Taliban capital Makeen. And it is still killing about 30 bad guys a day. Unfortunately, the Taliban is once again stepping up its terror attacks against the non-tribal regions. It killed a score of civilians over the weekend. Pak civilian morale is holding up even under this savage onslaught, so far.
In Somalia, as heavy fighting continues in the north and central regions between the government and Al-Shabab, the super-bad guys are complaining vociferously to Kenya about its training camps that are readying an anti-Al-Shabab militia. There are reports that these camps are paying villagers large sums to have their young men enlist and fight for the good guys. Large sums in Africa mean only one thing: CIA involvement. Scholars call the global conflict the Long War against Islamic Extremists Militias. Someday we will call it the Long War between Islamic Extremists Militias and Islamic non-extremist Militias. When the CIA creates good guy Islamic militias it means that the US Marines will not be taking casualties and enraging American liberals, making America’s role in the Long War more sustainable. The CIA is your last, best, and only friend.

The Mighty Saudi Army

Charts: The S&P 500 closed at 1069, up .25%. The correction has morphed into a rally attempt, not a technical uptrend.

Fundamentals: The monthly employment report was out today. It has two components, Payroll and Household. The Payroll survey was good, it said that in October companies shed 190,000 jobs (15,000 worse than expected) but it revised the two previous months favorably by 91,000 (much better than expected). Payroll also said that temp hiring picked up and factory hours increased, positive indicators. The Household survey includes self-employed people and small firms as well as big firms, so it covers the entire labor force. The Household survey said that 589,000 jobs were lost and unemployment jumped from 9.8% to 10.2%, very bad. The Household survey said that 324,000 workers have stopped looking for jobs, a phenomenon associated with an ongoing recession. If these discouraged workers had kept looking for jobs unemployment would have risen to almost 11% (horrendous). The two surveys gave opposite views of the labor market. Investors are trained to focus on the Payroll survey. The voting public is trained to focus on the Household survey’s unemployment rate. Headlines will be screaming tomorrow: Over 10% Unemployment! The danger here is that Congress will start working on a second “jobs only” stimulus package and blow the deficit even higher. One of the bad side effects of (maybe) the healthcare bill going down in flames is immediate pressure for more spending elsewhere.

Geopolitics: The Pak Army is pushing into the Taliban capital city of Makeen, steadily killing about 30 bad guys a day. Despite the Taliban’s pompous announcement that it is engaging in a fighting retreat, resistance is heavy in this strategic city and the other Taliban towns that the Army is smashing into. The bad guys are fighting back as hard as they can because they don’t really want to become a homeless guerilla army. The Taliban is simply getting beaten by the Pak Army as opposed to executing a clever tactical retreat.
We have a better picture of the fighting between the Saudi Army and the northern rebels from Yemen. The bad guys seem to have actually captured a couple of Saudi towns along the border earlier in the week. The Saudi Army has retaken those towns and pushed the bad guys back into Yemen. The Saudi Army remains massed on the border. It is pounding the bad guys with artillery and flying bombing runs with F-15s. The Saudi Army is not yet moving regular troops into Yemen but continues helping the Yemeni Army in a myriad of ways including Special Forces operations. The rebels in northern Yemen are Shiites and Saudi Arabia has a restive Shiite population near the border region. These Saudi Shiites are always on a low boil, keeping the Saudi Army out of Yemen for now. The Saudis will take ground action in Yemen if they can clamp down on security on their side of the border. Hospitals in the Saudi border region have been ordered to get ready for Army casualties.

Productivity Saves The Day

Charts: The S&P 500 closed at 1067, up 1.9%, punching through 3 resistance levels. Stocks were up, the dollar was up, and oil dropped, all good. For today at least the toxic inverse correlation between the dollar and stocks was broken. So the dollar carry trade unwound to some degree but stocks rallied anyway. Action today was bullish but the market needs a follow through day for a technical rally to resume. The market is in a rally attempt.

Fundamentals: The fundie news today was entirely positive. Retailers posted a 2.2% increase in October, good but not great, better than expected. Work force productivity numbers came in much better than expected. Sky high productivity makes runaway inflation virtually impossible, which mitigates the danger of the vast monetary expansion engineered by the Fed, which in turn lessens the problems that Professor Roubini has been warning on dollar carry trade short covering. Cisco reported good earnings, but more importantly it gave an upbeat forecast. Cisco started the bear market a year and a half ago with a downbeat forecast so its current forecast carries a lot of weight. First time jobless claims came in better than expected today. Maybe the biggest news of all is Senate majority leader Reed saying the healthcare bill can’t pass this year. After the 2 Republican off-year election victories on Tuesday, moderate Demos are scared to push healthcare reform and it could be dead (bullish).

Geopolitics: The Iraqi government is at last signing contracts with outside oil companies to develop some of its gargantuan oil fields. The bulk of the development is going to be done by Chinese firms. This is a sign of a successful end game in the Iraq war. If Iraq’s energy industry were to become as developed as Saudi Arabia’s, then Bush was absolutely correct in starting and prosecuting the Iraq war. An unambiguous American victory in a major war equates with a bull market.
This might be the only clear US victory for a while. And that’s okay because the Long War is shifting away from the US Army and Marines. The Iraqi Army and security forces have over half a million troops and are a well-oiled machine. The Pak Army is even bigger and better. The Long War is more dependent on America’s Islamic allies than the Cold War was dependent on our weak-kneed European NATO allies (who never helped at all). Progress in the Long War is best measured by success or defeat of good guy Islamic armies like Pakistan’s, rather than focusing solely on the US Army.
The major news item for the day proves my point. The Saudi Army is currently massing on its border with Yemen, readying an attack against the Iranian sponsored northern rebels that are tearing Yemen apart. Saudi Special Forces are already inside Yemen. The Saudi Air Force is making massive bombing raids against the northern rebels, firing 100 missiles into a single rebel position. The success or defeat of the Saudi offensive in northern Yemen is more important than Obama dithering on the troop request or the fact that 1 US Soldier was killed in Afghanistan the other day. Unfortunately after decades of studying the Cold War we have reflexively ingrained US-centric thinking into our analysis of the Long War. That kind of thinking ends today.

Taliban Retreat!

Charts: The S&P 500 closed at 1047, up .1%. First resistance is at 1052, the 50-day moving average. Next resistance is 1056, a key retracement level of the correction. Above that resistance is at 1060. Support is at 1040. The market is in a correction. The market made a bearish late day reversal and failed to retake the 50-day line (not good).

Fundamentals: In its big policy statement the Fed said the economy is weak and rates will be low for a long time. America’s ISM service sector index came in worse than expected, registering a slight decline after a series of gains. An anemic American recovery coupled to strength in Asia pushes the dollar down and fuels the dollar carry trade, good for bubble-mentality and bad for fundamentals. Professor Roubinin gave a speech about the asset bubble today. He said, “When it unravels, it’s going to get ugly. Everyone shorting dollars will try to get out of those positions at the same time, and we’d have a stampede.”

Geopolitics: A spokesman for the Pakistani Taliban told reporters that the Taliban is making a tactical retreat in S. Waziristan because it is unable to fight toe-to-toe with the mighty Pak Army in conventional warfare. The spokesman said that the bad guys will complete a fighting retreat and then regroup for an extended guerilla campaign which will hit targets throughout Pakistan. Public opinion polls in Pakistan show that 51% of the population supports the war even though civilians are getting killed every week in large terror attacks (courageous).

Dollar Carry Trade

Charts: The S&P 500 closed at 1045, up .2%. The market is in a correction. The last two days action represent a rally attempt.

Fundamentals: M&A activity buoyed stocks today plus factory orders came in stronger than expected. Besides strong manufacturing data the global stock and commodities rally is also being fueled to some degree by a US dollar carry trade. This means that investors are shorting the dollar on margin and buying emerging market debt/stocks, commodity futures, and other risky assets. The carry trade investors are effectively borrowing at a negative 20% interest rate, making piles of cash so far. But it has become a ubiquitous bet of massive proportions. The link between the dollar going one way and the S&P 500 going the other (inverse correlation) is now about 70% and rising. Historically the inverse correlation is in the single digits. All major global financial movements are taking their cue from the dollar. Professor Roubinin says that this link must break down at some point because the dollar cannot drop to zero. He predicts that when the dollar stabilizes there will be an immense sell-off in risky assets (the bubble popping on dollar short covering) although Roubini does think the bubble may keep expanding for a while. Other economists predict a gradual unwind of inverse dollar linkage and are more bullish. The yen carry trade lasted 5 years in the previous bull market.

Geopolitics: There is evidence that the US Army opened the borders between Afghanistan and Pakistan, allowing perhaps a few thousand extra Taliban fighters into South Waziristan at the beginning of the war a couple weeks ago. The Pak Army made the original assertion and now claims that the US Army has sealed the border and bad guys are no longer streaming in. If all of this is true, then it is certainly was a brutal move on America’s part. It forced the Pak Army to kill more bad guys then they would have otherwise, spilling more good guy blood than initially planned. The alliance got a bit frayed over this move. The Pak Army felt better after India moved a division out of Kashmir.
Team Obama has abandoned its strongest diplomatic effort: The demand Israel halts its West Bank building program. The Team caved in because of problems with its domestic agenda. It couldn’t stick its neck out diplomatically against Israel while healthcare flounders.

Specific Investments: The Ridgeworth ultra-short government bond fund (SIGVX) pays 3.5% interest and is rated by Morning Star as low risk. Only cash is risk free, but cash is paying negative real interest rates.

Pak Army On The March

Charts: The S&P 500 closed at 1041, up .5%. The market is in a correction.

Fundamentals: America’s October national ISM manufacturing index came in today much stronger than expected. The employment and export components were good but new orders softened. Manufacturing data out of China, the Euro-zone (mostly Germany), and S. Korea also came in strong. Combine this data with weak GDP out of Britain and a picture emerges of China leading the fragile global recovery almost single-handedly. Germany is levered to China. S. Korea is highly levered to China. American manufacturing is levered to China. Britain is not levered to China. So we are back to the dilemma of whether or not bad economic policy by America’s government is being offset enough by China to keep the global recovery chugging along.

Geopolitics: The indomitable Pak Army reported Sunday that the war in S. Waziristan is going better than expected after a few early setbacks. The Army has captured 8 Taliban cities and says 3 more will fall this week. In each of these captured cities the surrounding countryside and mountaintops have been 100% secured. The super strategic city of Makeen (capital city of Taliban) is being surrounded once again, but this time the encirclement is much sturdier than the first attempt because of all those mountaintops and forests that are under Army control. The Army says that elite Uzbek and Arab fighters are abandoning their Pak Taliban brothers, perhaps to regroup and wage guerilla war in S. Waziristan at a later date or these foreign bad guys may move on to other hotspots like Somalia. It is important to remember that S. Waziristan is not really a guerilla war at this point. It is more like a conventional war between two countries. And the Pak Army is supremely equipped to win a conventional war. After the conventional phase, a guerilla war will emerge and the formation and efficacy of good guy tribal militias will be important. The Taliban’s terror campaign in the non-tribal regions grinds on but at a slower pace. Terror attacks are increasing in many of the other tribal regions besides S. Waziristan. If the Taliban really is shifting away from attacking non-tribal parts of Pakistan in favor of the tribal regions, then this is a sign that the Taliban is fighting for its life.
The Afghan runoff election is canceled and the moderately corrupt Karzai is now president once again of Afghanistan. This is good news. Liberal pundits and leftwing pinheads will moan that there is no longer any chance that Afghanistan will have a corruption-free, stable and honestly elected government like Switzerland (gasp!). But there was never a chance of that happening. Here is one lesson from the Vietnam War that applies to Afghanistan: the US pulled support from a moderately corrupt S. Vietnamese government in the early stages of that war, causing the government to fall. It was a huge mistake. Big surprise, the next S. Vietnamese government was much worse. In 1979 America pulled its support from the moderately corrupt Shah of Iran and that turned out to be a mega-disaster. Yes, it would be wonderful if S. Vietnam, Iran, or Afghanistan could have been magically transformed into Switzerland. US foreign policy should not be based on magic.

India Hurts The Taliban

Charts: The S&P 500 closed at 1038, down a painful 2.8%. The market is in a correction. Based on long term cyclically adjusted PE ratios the market is 40% over valued at current prices.

Fundamentals: Today professional economists did the calculations that I roughed out yesterday, stripping out the government’s Home Buyer Tax Credit and Clunker boost from the GDP numbers. They said the 3.5% increase would have been 2% without the government programs. If we also strip out the inventory distortion, then the Q3 GDP increase was 1%, which is about 1/3 of average for this stage in a recovery. Investors are beginning to ask themselves if 1% growth is worth permanently tripling the annual federal deficit as a percent of GDP.

Geopolitics: The Pak media was allowed into S. Waziristan today. The media received the impression that the war is much larger than the Army has been saying, with 80 bad guys getting killed every day rather than 30 or so, which dovetails with what refugees streaming out of S. Waziristan have been saying. This means that the Taliban in Afghanistan are probably much stronger than is generally supposed and it is more important than ever for President Obama to listen to his generals and grant McChrystal’s troop request and policy changes. Obama is meeting with his top generals today, by tomorrow there will be leaks concerning this meeting and we can analyze these leaks.
India says that it is going to remove 15,000 soldiers off the Pak/India frontier and engage in peace talks with various separatist factions within Pakistan over the Kashmir conflict. This will allow the Pak Army to move one more division off the militarized frontier and into the fight against bad guys.

Market Snaps Back

Charts: The S&P 500 closed at 1066, up 2.3%. The asset-bubble re-inflated violently today. The dollar dropped while oil, gold, and stocks jumped with emerging market stocks outperforming massively. During the recent downturn the dollar strengthened and assets plunged. The stock market is still technically in a correction and today’s action was a rally attempt.

Fundamentals: America’s Q3 GDP grew at 3.5%, proof that the recession has ended and higher than the 3% forecast. The government is quirky and wrongheaded in the way it uses inventory changes to calculate GDP. Strip out inventory distortions and GDP grew by only 2.5%. Investors are trained to only look at headline GDP. America’s so-so Q3 GDP was boosted by Cash for Clunkers and the expired Home Buyer Tax Credit; if we strip these two government programs out and the inventory distortion, then there would still have been growth, maybe 1-2%. The Home Buyer subsidy is probably going to be re-instated and expanded so let’s factor it back in and we get American GDP growth of 2%. So the US economy is expanding weakly out of the Great Recession. The world economy looks better. Germany today said that its unemployment rate dropped, which means that it is further into the recovery cycle than America. And since Germany didn’t enact huge deficit fueled stimulus programs its recovery is more sustainable. Norway raised central bank interest rates, following Australia and Israel. The global economy is tip-toeing into a fiscal and monetary tightening cycle.

Geopolitics: In S. Waziristan, the Pak Army is grinding forward on its 3-pronged offensive, killing 1.5 bad guys every hour around the clock. The Taliban is killing Pak civilians at about the same pace in the non-tribal regions, although civilian terror deaths come in bursts, not a steady drumbeat as is the case with bad guy combat deaths. About 300 bad guys and 300 civilians have been killed so far. Good guy combat deaths number somewhere around 30 or more. The Army does not have troop lifting helicopters so it slogs up mountains on foot under fire from the bad guys. The Army made its first attempt to raise a good guy tribal militia in S. Waziristan this week and failed. The tribes won’t play ball until they know the Army is winning for sure. Once the tribes come to this realization, a militia can be formed, trained, equipped and turned loose. Then the bulk of the Pak Army can withdraw and low level fighting between the good guy militia and what’s left of the bad guys will continue forever. At that point economic growth will be the Pak government’s most potent weapon against the bad guys in the tribal regions, peeling young men away from the Taliban with jobs.All Islamic counterinsurgency campaigns must go through this process to be successful. Advanced armies must bear the brunt of the fighting until a tipping point is reached. Local militias then carry on the fight. The advanced army draws down troops but it must always maintain some presence in the combat zone to oversee the low level war forever. This must happen in Afghanistan. After that America must begin the process in Somalia/Yemen. Does Obama know all this? Probably. Will he abandon healthcare reform in favor of the war? While mulling the troop request he has met with every half-backed peacenik in the country. Friday he meets with the Pentagon leaders. They will hammer him mercilessly to do the right thing.

Market In Correction

Charts: The S&P 500 closed at 1043, down 2%. The market is in a correction.

Fundamentals: The Commerce Dept. reported that new home sales experienced the first decline since the rally started in March. The Home Buyers Tax Credit is effectively expired, the reason for the decline. Congress will probably extend the program. The new program will have less impact than the original but it will bolster housing for a few months and when it expires housing will take another dive and the debate will begin for a third extension. GMAC just got its 3rd bailout today. Failed stimulus and failed bailouts is the pattern of Japan in the 90s (not good).

Geopolitics: The Pak Army 3-pronged attack in S. Waziristan advanced on 2 prongs and stalled on 1 prong, killing 42 bad guys Tuesday with one good guy killed. It is possible that the bad guy body count is accurate but more good guys were killed than the Army is admitting. The Pak Army says that overall Taliban resistance is stiff. In the non-tribal areas of Pakistan the Taliban continues to inflict big damage through terror attacks.
In Somalia, Al-Shabab says that it is ready to attack Uganda. The Ugandan Army supplies most of the troops to the AU force fighting the bad guys in Mogadishu. The Ugandan government takes the threat seriously enough to start rounding up Somali nationals and refugees inside its borders. The war rages on in Mogadishu in a bloody stalemate.
Yemen and Somalia are only separated by a small body of water. If we look at a map and draw red circles around Afghanistan/Pakistan and Yemen/Somalia it appears that there are two combat zones in the Long War. The President of Yemen said as much today by calling on the Arab world to help the good guys in Somalia; he knows that his government is in grave danger if Al-Shabab takes complete control of Somalia. Now look at a map of the Mid-East’s proven oil reserves in relation to Yemen and Afghanistan and you will see why the long term danger is so great from these conflicts.
The big picture for the Long War revolves around Obama giving McChrystal the green-light on troops and strategy. This hinges on Healthcare reform passing. Healthcare is floundering as Senate Majority Leader Reid reintroduced the public option to his version of the package to bolster liberal support. This stripped support from Blue Dogs and Republicans.

Obama Delay Hurts War Effort

Charts: The S&P 500 closed at 1063, down .3% on the day and 1.5% since Monday. Leadership is weak. Volume patterns are bearish.

Fundamentals: South Korea reported Q3 GDP and surprised to the upside, a pocket of strength to otherwise downbeat global data. American consumer confidence numbers today and over the past couple weeks have been coming in very weak, due to fears over rising unemployment. In China, internet advertising revenue is weakening. Weak data out of the US and China could be attributed to the so-called “air pocket” that the Economist talked about.

Geopolitics: The Pak Army body count is more reasonable this week and therefore probably accurate with 29 bad guys killed and 6 good guys killed on Monday. The fighting is of course mostly in S. Waziristan but other tribal regions continue to see clashes. In S. Waziristan, the Army is slowly grinding forward on all three of its prongs, methodically clearing forests and mountaintops around small Taliban towns that it needs to conquer and hold before it can advance on key cities like Makeen (capital city for the Pakistani Taliban). The Army says that it captured two more small towns on Monday.
In Afghanistan, 8 US troops were killed in a coordinated Taliban multiple bombing attack. 14 troops were killed earlier in the week in non-combat helicopter accidents. US combat and non-combat deaths in Afghanistan are more damaging to American public opinion now then under normal circumstances because the President is locked into his delaying tactic over McChrystal’s policy review.

Heart Of Darkness Pierced

Charts: We have had 11 days of consolidation with the broad index bouncing between 1080 and 1100. With the market about 40% overvalued from the 100 year average and pricey even for the Great Moderation era, consolidation is healthy and needed for the bull market to have legs.

Fundamentals: 78% of S&P 500 earnings reports so far have beaten expectations. The historical average is 60%. The beats have been meaty, some (like Apple and Amazon) spectacular. And we are finally getting revenue beats, not just cost-cutting surprises. The average company is still showing a profit decline, but somewhere around 18% instead of the expected 25%. So this earnings season is coming in fairly strong, good but not great. Things are getting less bad, not way better. Does this improvement justify the strongest rally in stock market history? Part of market gains is due to asset inflation (bubble-mentality) and part is due to improving fundamentals. Even though the bubble has sprung a few leaks it is still there. Britain unexpectedly reported a negative Q3 GDP number Friday. It is still mired in the Great Recession when it was expected to have shown some growth like Germany and France. The country’s stock market should have tanked. Instead, it rallied, blowing away Germany and France. British investors rejoiced because supposedly the Bank of England will have to step up Quantitative Easing to fight the ongoing recession, which will cause liquidity driven asset inflation. This incident is one sign that bubble mentality is still in place.

Geopolitics: The Pak Army has recaptured Kotkai. After a bloody seven day siege, the birthplace of H. Mehsud is under Army control. The heart of darkness has been pierced, a big psychological blow to the Taliban. But the war rages on. The beast is still alive and fighting fiercely. Pak Army body counts have become unreliable which means that both sides are experiencing very high casualties. A better idea of the size of the conflict can be gleaned from media interviews of civilians streaming out of the combat zone. These refugees say that Taliban reinforcements are flowing in from Afghanistan in a big way. At the beginning of the campaign, the Pak Army gave some pretty low numbers for the size of the bad guy army, a few thousand fighters. A good guess now is that there are 15,000 Taliban fighters in S. Waziristan, the greatest concentration of bad guys on Earth.
A series of key towns have to be captured and held before the Taliban capital city of Makeen can be effectively seized and controlled. These towns are empty of civilians and are protected by heavily fortified bad guy positions in the surrounding mountains. The bad guys move from mountaintop to mountaintop via a complex network of mountainous trails and have the ability to rearm and re-provision themselves now and in the winter. S. Waziristan strategic towns and adjacent roads are riddled with booby-traps and bombs. The combat is the most hazardous that the Army has seen so far, much tougher than the Swat Valley. There is a long-standing tradition throughout the region to not fight in winter. There are reports that Pak soldiers are being issued winter gear so the campaign is probably designed to run through winter, despite the local belief that winter warfare is impossible. Probably the same is true of the fighting in Afghanistan.
The Saturday Wall Street Journal ran an article saying that President Obama has made up his mind and now favors the McChrystal Plan. According to the Journal this will be made public in a couple weeks. Secretary Gates says that he has troop commitments from most NATO countries. The commitments are said to be small but it might signify an eventual willingness to allow existing continental European troops to actually fight rather than just hand out food packets and hide if any bad guys show up. Allowing these troops to fight would be like adding 20,000 American soldiers

Pak Army In Siege Mode

Charts: The S&P 500 closed at 1080, down 1.2%. The Dow is under 10,000. The broad index is hanging onto the key support level of 1080 by the skin of its teeth. Volume patterns have been bearish for two weeks. The uptrend is in trouble.

Fundamentals: September existing home sales came in very strong but analysts attributed this to a final surge in 1st time home buyer tax credit buyers, this program is effectively expired now. Congress would like to extend the home buyer giveaway but credit markets are beginning to exert discipline on US deficit spending, plus the program was riddled with fraud, so it might not get extended. The dollar has popped up this week on safe haven buying which is hurting commodities and stocks. The dollar stabilizing, oil going down, and credit markets disciplining Congress are all fundamentally good news but bad news for the asset bubble. As I’ve been saying, much of the market’s gains have been based on bubble-type asset inflation. Consider: consumer stocks have risen in exact tandem with the price of oil. But oil and consumer stocks should be natural enemies like cats and dogs, moving in opposite directions.

Geopolitics: In Pakistan, in S. Waziristan, the Army’s multi-pronged advance is stalled on all points of attack and the Pak Air Force is ramping up helicopter gunship and F-16 sorties while the Army’s artillery pounds away. The Army says that all civilians are out of harm’s way. Whether this is true or not doesn’t matter in a military sense. If the Army and Air Force are willing to carpet every square inch of enemy territory with artillery shells and bombs, then they can kill all the bad guys given time, and it is irrelevant how many civilians are eventually pulled out of the rubble.
The strategic village of Kotkai is still under Taliban control and the Army is settling into a siege there and around other key Taliban towns. Fighting is occurring in wooded terrain, underground, and in mountains. 24 bad guys were killed and 4 good guys today in S. Waziristan. In other tribal regions, 34 bad guys were killed, and an unknown number of good guys. Fighting is unexpectedly heavy throughout bad guy territory, not just in S. Waziristan.
The Taliban assassinated a Pak Army general in Islamabad. This incident grabbed the biggest headlines in global financial journals. The war in Pakistan isn’t going as well as investors expected as indicated by a big drop in the Karachi Exchange and some of the recent overall global market weakness, but the good guys are striking straight at the heart of darkness, the epicenter of all evil, and the beast isn’t going to die without a great struggle. Investors don’t want to hear this. Also, when and if the beast does die in S. Waziristan, then the whack-a-mole effect will cause an increased Islamic flare-up elsewhere such as Yemen or Somalia. Investors might not like that either. Yemen produced 108 million barrels of oil last year. Investors won’t like the beast getting close to Mid-East oil fields. Finally, Obama dithering on McChrystal’s troop request isn’t helping.

40 Pakistani F-16s Attack Taliban

Charts: The S&P 500 closed at 1093, up 1%. The uptrend is intact but a little shaky. Support is at 1080. Resistance is at 1100 and after that 1125.

Fundamentals: China’s Q3 GDP grew by 8.9% vs. a forecast of 9%. That tiny miss wouldn’t have rocked markets too badly except inflation expectations are coming in hotter than expected in China, indicating that the government might ease off its massive stimulus programs. This knocked down Asian markets. The sell-off had a positive effect; it buoyed the dollar which caused oil to fall, unfortunately oil inched back up toward the end of the trading day. Canada, Australia, and Brazil are making noise about lowering their currencies against the dollar. This is positive news. A continued dollar collapse and runaway oil prices will eventually clobber the global recovery. It is smart to be overweight materials stocks in this environment. S&P 500 earnings reports continue to come in better than expected.

Geopolitics: The Pak Army is engaging in a three-pronged assault in S. Waziristan. All three advances had come to a halt after the bad guys recaptured the town of Kotkai. The Taliban still controls Kotkai and the fighting is intense there with the Army fanning out into adjacent areas to clear caves and bunkers as well as rugged fortified mountaintop positions. So this prong is stalled. The Army has begun advancing again elsewhere. It is spreading out around the key town of Makeen and laboriously securing caves and mountaintop redoubts, plus blocking all possible exits. The preparations to assault Makeen will take longer than initially expected. Conflicting body counts are coming from different commanders. It seems like the Army’s kill ratio is about 5-1, fairly low but fighting in caves and so forth is extremely hazardous. The Army seems to be killing about 1.5 bad guys every hour, around the clock.
In N. Waziristan, something blew up an Al-Qaeda bomb-making factory, killing 12 bad guys including bad women and bad children. The most likely explanation is a heavy missile strike (non-drone) from US forces across the border in Afghanistan. The Army has a treaty with two N. Waziristan Talibans, but not Al-Qaeda, so the (possible) US missile attack infringes on a gray area. The N. Waziristan Talibans are actively engaged against good guys in Afghanistan and they are Al-Qaeda’s cherished allies, nevertheless the treaty is a necessary evil.
The Pak Air Force has 40 F-16 fighter-bombers. These had all been arrayed against India on the militarized frontier. Now every single F-16 is arrayed against the Taliban in S. Waziristan. Elite ground units and other gear formerly reserved for permanent stand-by against India has been redeployed in S. Waziristan. The good guys are loaded for bear in the heart of darkness.
Iran and Pakistan are making diplomatic progress concerning the two Taliban terror strikes that occurred in Iran over the last few days, dashing the bad guy’s plan to foment a war between Iran and Pakistan or even a border incursion. Bear in mind that Pakistan has nuclear weapons and Iran does not. So it is unlikely that Iran will push too hard. The Taliban has made one terror strike against India recently (in Kabul). It would be taking an enormous risk by hitting India again. However, when and if Kotkai and Makeen fall maybe H. Mehsud will want to throw a Hail Mary.
In Yemen, the northern rebels say they have overrun and captured several Yemeni Army bases, acquiring big weapon caches. There are reports that the Saudi Army is now openly engaging the northern rebels in firefights. The southern rebels (Al-Qaeda of the Arabian Peninsula) are sending suicide bombers into Saudi Arabia but they keep getting caught, which in a way is good because it forces the Saudis to get more involved in the war.

Bad Guys Fight Back

Charts: The S&P 500 closed at 1081, down .9%. Today saw a savage reversal with an upbeat market completely turning around and plunging in the final hour. Support held at 1080. This will be a key level to watch tomorrow. The volume pattern has been bearish for two weeks now.

Fundamentals: The Fed’s Beige Book said that consumer spending is soft. Wells Fargo received a downgrade, which shook the market. The underlying problem is that the dollar keeps plunging which causes oil to soar. This is what Professor Roubinin warned against. He says that if oil hits $100 there will probably be a double-dip recession. Congress is getting ready to add another $250 billion to its healthcare reform package. This is pressuring the dollar.

Geopolitics: The Paki Army has lost ground in the most recent fighting. On the route to Makeen, it had seized the tiny Taliban village of Kotkai. This is the birthplace of H. Mehsud, the heart of darkness. The Taliban threw the Army back and recaptured Kotkai. Heavy fighting still rages around Kotkai. It is an accepted tactic to allow a powerful enemy to advance quickly and then counterattack as he gets extended. The Taliban may be doing something along these lines as it fires down upon the strung out Army from rugged mountaintop positions. So far in the campaign the Army says it has killed 115 bad guys while 16 good guys have been killed. The Taliban says that it killed 40 good guys alone in the battle for Kotkai. The Army seems to be halting its infantry, digging in and using artillery plus helicopter gunships to soften up the bad guys before it resumes advancing.
Outside of S. Waziristan, the Taliban continues to launch terror attacks. There have been numerous attacks in Pakistan and a second attack occurred in Iran where two cops were gunned down. The Iranian Revolutionary Guards are incensed, begging the Ayatollah for permission to hunt down Taliban fighters in Pakistan. The Paki Army cannot tolerate Iranian soldiers on its soil so this is a potential problem. India claims to have intelligence indicating that the Taliban are planning terror attacks within its country. The Taliban is fighting back hard and intelligently.The Afghan runoff election will be held on Nov. 7. With such a short time frame, election results will be the same as the original one. Karzai didn’t stuff ballot boxes himself. This was done by local Pushtuns throughout the country and it will happen again. I thought the international community would try to mount a huge effort at an honest election and it would occur in the spring. This quickie election is better, get the damn thing out of the way.

Makeen Surrounded by Paki Army

Charts: The S&P 500 closed at 1091, down .62%. The Dow is holding above 10,000 and the broad index is showing lots of support. Bonds have stopped moving in unison with stocks, returning to a traditional inverse relationship. The bubble mentality is receding. The market will have to be buoyed going forward by fundamentals.

Fundamentals: Government interventions into the private sector can be unpredictable. The private sector fundamentals for Brazil are strong but late Monday Brazil’s government unexpectedly imposed a tax on foreign investment to plug a budget gap from big election year giveaways. Brazil’s government thinks that taxing foreign investors is a painless way to raise revenue but the unintended consequence is that Brazil’s stock market tanked today, oops. On a bigger scale, the US government has decided to engineer a recovery by re-inflating the housing bubble. With virtually zero government subsidies, the US private sector is expanding in tech, export industries, and energy; this is what a true private sector recovery would look like if left unmolested by Uncle Sam. Today housing starts came in flat, calling into question whether the government’s recovery strategy is working. This was the cause for today’s sell-off.

Geopolitics: On day 3 of the S. Waziristan campaign, the Paki Army has seized and secured three more Taliban towns; among them a town specializing in training and equipping suicide bombers. The Army has rolled faster than expected to surround the key city of Makeen, H. Mehsud’s headquarters. Resistance is savage on the outskirts of this city and the Army is pounding the bad guys with massive artillery barrages. The Army’s lightening advance is slowing down. 4 good guys have been killed and 56 bad guys killed in the last 48 hours. 38 of these bad guys have been killed outside of S. Waziristan. Fighting in other tribal regions is heavier than expected. Taliban civilian terror attacks throughout the country continue at a fevered pace. And the Taliban has cleverly sent suicide bombers into Iran in an attempt to give the Paki Army a new foe. Pakistan is now embroiled in a diplomatic row with Iran.
Afghan President Karzai has agreed to a second round of voting after the first round was declared fraudulent. It would have been better if Karzai had agreed to a power-sharing arrangement with his opponent, Abdullah. An election in winter is almost impossible, so the voting will probably take place in spring, leaving a power vacuum in place for months (not good).

S. Waziristan Invaded!

Geopolitics: The South Waziristan campaign has started. The Paki Army began its invasion Saturday. By Sunday one Taliban town had been captured and secured with 60 bad guys killed and 5 good guys killed. The Army’s main thrust is toward a town called Makeen, H. Mehsud’s headquarters and stomping ground. North and South Waziristan contain three powerful rival Taliban militia alliances. The most powerful of all is H. Mehsud’s Taliban alliance (the Pakistani Taliban). This alliance is a dozen separate militias including H. Mehsud’s personal Mehsud tribal militia. The Pakistani Taliban commits 80% of Pakistan’s terror attacks. Sitting on top of the Pakistani Taliban is Mehsud’s tribal Taliban, the most powerful of the dozen or so smaller Talibans that make up the alliance. Obviously, H. Mehsud himself sits on top this entire evil structure.
From the opening action in the campaign we can see that the Paki Army is going straight for H. Mehsud, the Taliban super-chieftain, and his Mehsud tribal Taliban. The Army is rolling directly at his home town and the path appears to be greased by alliances from the two rival Talibans that control North Waziristan and other strategic real estate. This is good news. Remember, the North Waziristan Taliban almost killed H. Mehsud in the days following the drone strike that took out B. Mehsud. The 2 NW Talibans are potent good-bad-guys (bullish).
In Afghanistan, two or three separate firefights resulted in 14 dead bad guys and 1 dead US soldier. NATO is most likely inviting the bad guys to attack convoys and checkpoints and then walloping them in counter-attacks. This is tough on the enemy and it keeps good guy casualties down as the interminable debate grinds on in the White house on whether or not to grant McChrystal his troop request.
In Somalia, the battle lines that carve the capital city of Mogadishu between the good guys and the bad guys have become static as one side takes over a neighborhood only to be repelled after a few days of fighting and a return to the old battle lines. Outside of Mogadishu, the situation is more confusing, a lot of fighting has erupted between different militias but it is unclear who the good guys and bad guys are. It may be a good thing that Al-Shabab has less control over the country. For this to be so we must believe that the ensuing chaos and anarchy is better than Al-Shabab control, which is probably the case.
In Yemen, the government reports that recent fighting has resulted in 44 dead bad guys. The fighting is heavy with tanks, artillery and warplanes pounding bad guys around the key city of Sa’adah. The Yemeni Army says that it has captured the rebel’s field commander. Battlefield developments are therefore good. The bad guys are supported by Iran and a top level Iranian diplomat is now meeting with Yemeni diplomats. This too looks good. Maybe Iran will pull the rug out from under its puppets. Yemen’s separate rebellion to the south bubbles along. If the northern rebels are defeated, the government will turn to the south, these bad guys are Al-Qaeda and need to get whacked.

Dow Under 10,000

Charts: The S&P 500 closed at 1088, down .8%. The Dow closed at 9996. Retail investors will be disappointed that Dow 10,000 did not hold. Professional investors are relieved that support held for the broad index at 1080. The rally needs retail investors at this point.

Fundamentals: Some people consider GE to be the ultimate bellwether because the gigantic and sprawling conglomerate mirrors the entire US economy with its disparate holdings and businesses. GE reported a bottom line beat but revenue was a nasty miss. Investors have stopped drinking the Kool-Aid and are now demanding revenue beats. GE’s weak performance is the reason for today’s sell-off.

Geopolitics: The Paki Army is still building its ground forces around the border of South Waziristan. The two mechanized divisions are being fortified with infantrymen. As Paki troops pour into launch points the Taliban attack them with mortar fire, killing 3 good guys Friday. Helicopter gunships have joined jet fighter-bombers in the aerial assault. The bad guys are fighting back. Terror attacks in the rest of Pakistan are reaching a bloody crescendo. A wall of steel is about to slam into the bad guys in South Waziristan but a wave of terror attacks is smashing into the soft civilian underbelly of Pakistan’s non-tribal regions.
In Yemen, government security forces have captured a number of suicide bombers streaming up from the southern part of the country where a second rebellion bubbles menacingly alongside the exploding one to the north. It is not a good sign that the southern rebellion is heating up while open warfare rages to the north. However, every day brings more evidence of Saudi military aid to the beleaguered Yemeni government and Yemeni Army. The northern rebels are supported by Iran, therefore the Yemen war is in some ways a proxy struggle between Saudi Arabia (good guys) and Iran (bad guys).
The Somali war rages on and it is taking some interesting turns. Hizbul Islam did not attack its partner, Al-Shabab. Initial reports were inaccurate. We have to learn the name of a new militia: Ahlu Sunnah. This group is sponsored by the Somali government/CIA and consequently Ahlu Sunnah fighters are good guys, powerful good guys apparently. Earlier this week, Ahlu Sunnah attacked an Al-Shabab village, beat the tar out of the super-bad-guys, and seized control of the village. Ahlu Sunnah has been fighting Al-Shabab for two years. Only within the last few days have we learned that these powerful good guys are a serious threat to the super-bad-guys.
The Kenyan Parliament is angrily investigating reports that its military is raising a small good guy militia of about 300 fighters near the Somali border to use against Al-Shabab. The Kenyan Parliament didn’t authorize this action and doesn’t like its Army doing the bidding of the CIA and getting Kenya embroiled in the Somali war. Too late, Kenya is already embroiled. Damn those CIA meddlers.
Obama met face to face with General McChrystal earlier this week. Rumors are swirling out of the Pentagon that Obama is going for the McChrystal Plan with 40,000 new troops. This is according to the Financial Times. If the FT story is accurate, it is a bullish development.

Pakistan's Ring Of Steel

Charts: The S&P 500 closed at 1097, up .41%. With oil up yet again, energy stocks rocked while financials slumped. Technical indicators are bullish. Throughout this rally oil has gone up with stocks. That trend is holding up so far. Oil has broken through the $75 resistance. Oil and non-energy stocks can’t rally together forever.

Fundamentals: During this earnings season investors are punishing companies that report revenue misses, even if the bottom line beats. This is good news and bad news. It’s good because investors have stopped drinking the Kool-Aid; they aren’t blindly shoveling money into stocks regardless of the fundies. The bad news is that the current bull market has been built to some degree on just that sort of bubble mentality and the fundies are good but not great in the short term and horrible in the long term. The price of oil keeps rocking up, another concern.

Geopolitics: Pakistani fighter-bombers increased the bombing tempo in South Waziristan, pounding Taliban training camps, barracks, and homes with a constant barrage. Two mechanized divisions of the Pakistani Army with at least 30,000 troops have assembled at various launch points, surrounding the region in a ring of steel. Tanks and artillery are positioned to attack bad guy strongholds from several different angles. Helicopter gunships are poised to take off. Civilians are streaming out of the region in a torrent. The aura of a gathering storm hangs over the tribal land.

Intel Lights A Fire. Dow Over 10,000

Charts: The S&P 500 closed at 1092, up 1.8%. The index blew past resistance at 1080. The big boys had been waiting out the most recent rally to see Intel’s earnings. Liking what they saw with Intel’s report, institutional investors hit the buy button today and volume now looks better. The Dow closed above 10,000 which was a significant resistance level. Retail investors pay attention to the Dow. If the Dow holds above 10,000 as we move out of the treacherous month of October and into the seasonally strong Santa Claus months, individual investors should pile on.

Fundamentals: Intel reported blowout numbers top and bottom line. It said PC sales are ramping up. Intel is a bellwether. Its beat last earnings season ignited a big rally and this is where we want to see leadership, from tech. American retail sales came in better than expected even though consumer credit is shrinking. Tired of being frugal, Americans are opening up their wallets and paying cash. China’s recent industrial weakness does indeed look like an “air pocket” because it reported an improvement in exports. The dollar continues to plummet and oil keeps surging. Oil’s unending rocket ship ride up carries obvious danger to the bull market. Material stocks and resource rich country ETFs like Brazil, Canada, and Australia are a hedge against this danger. Brazil=EWZ and BRF. Canada=EWC. Australia=EWA.

Geopolitics: The fruits of America’s first victory in the Long War are ripening. Iraq is slowly forging deals with the Western oil majors to develop its vast oil fields. Iraq has so much oil it could singlehandedly drive down global energy costs once the majors are 100% on board.
America’s allies in the Afghan war are aware of President Obama’s game of waiting for healthcare to pass before getting serious about Afghanistan. To goose the reluctant commander-in-chief, some of our stronger European allies are planning their own troop increases. Britain says 500 new troops are being considered. Georgia is planning on sending an entire 1000-troop battalion straight into the nastiest region of Afghanistan, Helmand Province. Macedonia and others are also ponying up dozens of fresh soldiers. American opinion polls are unexpectedly strengthening in favor of the troop request. But the favorable turn is due almost entirely too Republican support, which is sky-high. It would be better if Demos jumped on board. Nevertheless, pressure is increasing on Obama to make his decision sooner rather than later. If the troop request is granted before healthcare passes, then healthcare might not pass (bullish). Let’s not get overly excited, but the market loves more guns and no butter.

Specific Stocks: At long last we now know how China is going to shut down its thousands of inefficient small steel mills, by modifying its tax code to encourage big mills to buy up and close small mills. Since China will soon produce 50% of global steel, this long awaited change will rock the global steel industry with countless ramifications. Let’s talk about just one today. Brazilian iron ore is higher grade than Australian ore and better for the smaller mills that will be closed. Australian iron ore is closer to China, takes less fuel to transport over the sea, and the big mills like it. So the surge in oil prices and closing of small mills helps Australian miners Rio Tinto (RTP) and BHP. BHP and RTP are jointly developing mines in Australia, which disproportionately helps RTP. Material stocks should be balanced with tech. SMU is a good Semiconductor index.

CIA May Win Big Award

Charts: The S&P 500 closed at 1073, down .3%. It is sitting on support at 1073. Resistance is at 1080. For the last 10 days volume patterns have been bearish.

Fundamentals: Singapore reported Q3 GDP growth was a red-hot 14%, which follows blistering Q2 growth of 22%. The recovery is indeed V-shaped in some of the scorching hot tiger economies. Can they keep growing at these rates even if the US economy stumbles? We’ll find out sooner or later because the US government seems determined to torpedo the recovery with an ever increasing debt load. The latest version of the Baucus healthcare bill claims to be roughly budget-neutral (over 10 years) because it includes $500 billion in phony Medicare cuts to offset $500 billion in new giveaways. These cuts will never happen because they are designed to be easily ignored by future Congresses, closely patterned after tens of billions worth of existing phony Medicare cuts that have been consistently ignored since 2003. There is also another $200 billion worth of smoke and mirrors in the Baucus bill that we won’t analyze to save space. The worst provisions of the stimulus program are being extended, COBRA healthcare subsidies and unemployment benefits, making them into new quasi-permanent entitlements. The home buyer tax credit may also become quasi-permanent. So the US deficit will keep exploding while other high debt countries like Singapore will be lowering goverment borrowing and low debt countries will start racking up surpluses. The dollar is tanking in response and oil is rocketing up. If oil gets high enough it will choke the recovery in Singapore as well as America. The dollar’s decline can also be traced to Obama’s refusal to quickly implement the McChrystal Plan.

Geopolitcs: General McChrystal is offering one plan with three different troop requests: A) Zero new troops. B) 40,000 new troops. C) 60,000 new troops. The Biden plan calls for zero new troops. So if the President really doesn’t want to add new troops to Afghanistan he could toss aside the Biden Plan and go ahead with one version of the McChrystal Plan, which any sane President would do in a heartbeat. But Obama is not doing that, instead he is threatening Congressional opponents of healthcare reform with the Biden Plan. Republicans and Blue Dogs have to roll over on healthcare before the Biden Plan goes away.
In Pakistan, the bad guys are throwing everything they’ve got into suicide bombings throughout the country, staging big flashy attacks, killing lots of civilians and good guys. The Taliban is screaming this message to the Paki voters, “Don’t invade South Waziristan!” The Army continues killing its 15 or so bad guys every day in routine operations and is putting in place final preparations for the big invasion.
In Yemen, over the last 2 weeks the Yemeni Army has killed 300 bad guys. Saudi Arabia is getting more visibly involved as the war escalates. There is now fighting in 19 different towns in northern Yemen, up from three or four a month ago. The Yemeni Army is doing an excellent job in killing bad guys but it is not yet able to seize and hold ground from the rebels. Yemen is a bigger war than Afghanistan or Pakistan right now as measured by combat deaths (super scary).
The CIA is doing a fantastic job in Somalia. We hear a lot about Al-Shabab but not so much about its evil partner, Hizbul Islam. But the two militias are about equally powerful despite Al-Shabab hogging the publicity and both have been walloping the American-backed Somali government lately. In the last few days, the CIA has gotten Al-Shabab and Hizbul Islam to attack each other, taking pressure off the good guys. And then the CIA has Kenya training an anti-Al-Shabab rebel army on its border with Somalia. Al-Shabab is practically at war with Kenya at present (bullish). The CIA needs to work its magic in Yemen once it can break away from Somalia. Already having won the coveted Dave’s Golden Bull Award, the CIA is now being considered for the even more coveted Dave’s Platinum Bull Award.

H. Mehsud Consolidates Power

Charts: The big week we just finished saw very weak volume. Chart patterns were bullish but the volume was bearish. This means that big institutional investors did not participate in last week’s rally. They are sitting back waiting for earnings season to progress, unconvinced by two days’ worth of good news. This suggests that the big boys (institutional investors) will not tolerate much bad news this earnings season. It’s been good so far and it better stay good.

Fundamentals: The very beginning of the earnings season coincides with the confession season where companies that missed earnings forecasts in a big way come clean and fess up before their scheduled reporting date. The confession season is about over by now and it went better than expected with only a handful of companies tearfully admitting that their quarter was a bloodbath. A positive confession season is a forward looking indicator for the entire earnings season.
The Economist magazine says that the recent weak industrial numbers from America and China are only an “air pocket” and the overall global recovery is still chugging along. The weak industrial data was immediately followed by an upside surprise in American service sector data from ISM. At the same time the government said that American service sector exports increased more than expected, driving down the US trade deficit. The weak dollar is helping these exports and will juice the American and Chinese economies as long as oil continues to find resistance around $75. China’s currency is pegged to the dollar, so the G2 economies are bond together. The Euro zone seems strong enough to give a little business away to the G2. The short term picture is therefore pretty good. The long term outlook continues to be horrible, the FDIC has closed 100 failed banks so far this year with the pace picking up. Souring commercial real estate is the culprit. This is the iceberg the US economy is sailing into. The Fed is using artificially low interest rates to build up bank balance sheets, to strengthen them enough to withstand the inevitable collision. We don’t know yet how well this is going to work. On a practical level for investors these conditions favor mega-banks and therefore their stock prices.

Geopolitics: In Pakistan, Army General Headquarters (AGH=Pentagon of Pakistan) was attacked by elite Taliban commandoes, who controlled much of the facility for about one day until Paki Special Forces regained control. Several bad guys got away and are still loose in Islamabad. This incident combined with the flashy terror attack against India’s Kabul embassy a few days ago indicates the H. Mehsud has consolidated his power over the Paki Taliban and probably has a working alliance with Mullah Omar’s Afghani Taliban. It is bad news if Omar and Mehsud are working together. H. Mehsud is trying to slow down or halt the Paki Army’s impending invasion of South Waziristan. He is in effect saying to the Paki man-in-the-street, “The Army has big problems outside of S. Waziristan and needs to get its house in order before haring off on an adventure in the tribal regions. And besides look how we are killing Hindus. Do you want that to stop?” The Army’s response was to step up its jet fighter-bomber missions in S. Waziristan, killing 13 bad guys Sunday. And it is sending paramilitary police into refugee camps in massive sweeps and scooping up anybody that even resembles a bad guy, an action that suggests the big invasion is getting closer. Finally, the Army made public statements that essentially said H. Mehsud is only pissing it off.

Specific Stocks: Credit Suisse (CS) is best in breed for investment banks and asset management. The small cap Brazil index (BRF) should outperform Brazilian large caps as long as the global bull market remains intact. Baidu (BIDU) is best in breed for Chinese language search.