World's Most Dangerous Bad Guy

Geopolitics: The title of most dangerous bad guy on the planet now goes to Doku Umarov, leader of the Chechen Islamic revolution in Russia’s North Caucasus region. Umarov ordered the twin suicide bombings in Moscow 2 days ago and today 11 people (including several police officers) were killed in Dagestan, a N. Caucasus region boiling with a low level but steadily increasing Islamic insurgency. The number of deaths at the hands of insurgents in Dagestan has doubled year over year and is set to double again this year.
This is what Umarov is saying on his website: “As you all know on March 29 in Moscow, two special operations were carried out to destroy the infidels and send a greeting to the FSB.” FSB is the new name for KGB.
The Chechen insurgency was originally motivated by nationalism and the desire for a separate (non-Russian) nation based on ethnicity. Under Umarov’s leadership the movement is now based purely on radical Islam, the desire for a Taliban style government that encompasses the N. Caucasus region. Umarov talks constantly of establishing a “Caliphate.” I think he is successfully trying to lock in his leadership role in front of a gigantic influx of bad guys from the Afpak region. And here’s why:
Combing the Pak media for Tuesday’s body count is frustrating because so many bad guys are getting killed nobody can accurately count them. Pak Air Force jets, Pak Army helicopters and artillery killed about 60 bad guys on Tuesday. Pakistan’s tribal lands have become a bad guy meat grinder.
The long term danger is that the good guys declare victory at some point in Afpak and ignore the deteriorating situation in the peripheral battle zones of the Long War. The short term danger is the bad guys attack Russia's energy pipelines into Europe, cutting off supplies, and triggering huge price increases worldwide.

The CIA's War

Editor's Note: Today's newsletter goes out before the bell.

Geopolitics: The Moscow terror bombing yesterday struck a subway station right next to FSB (new name for KGB) headquarters. The location of the attack sent a clear message: Russia’s intelligence agency is the bad guys’ main enemy, not the Russian Army. A similar message came out of a recent Pentagon update of its planned offensive in Kandahar. The Pentagon is saying that it needs more intelligence and less firepower to secure the city. In fact the Pentagon is now saying there won’t actually be an offensive in Kandahar in the traditional sense of the word, rather a massive armed infiltration.
The salient feature of the Cold War was nuclear weapons. In many ways the US Air Force was the most important branch of the armed services back then. The Air Force is the least important branch in the Long War. Originally the Pentagon had the Air Force operating drones. This has proven to be impractical and drones have since migrated to the Army and the CIA. In truth the Long War is the CIA’s war. It is vastly more important than conventional forces. What it needs the most is darkness, which is to say no oversight and no civilian meddling. Think of the CIA as a free market economy that flourishes best without interference.

Hellacious Whack-a-mole In 2 Years

Charts: The S&P 500 closed at 1173, up .6%. The index opened above 1170 and in early going it dropped, found support at 1170 and bounced above this key level. This is good chart action but volume was iffy. FXI (Chinese blue chips) closed above its 200-day moving average in good volume. So far in March it has crossed the 200-day line 7 times. If FXI trades above this level for four days in a row it will be technically significant and bullish for global stock markets. Yield on the US Treasury ten-year note ticked up a tiny bit but stayed below long term technical level of 3.95%. Last Thursday it hit this resistance level, bounced down and has stayed below ever since. It needs to stay below 3.95% this week. The dollar was down sharply today, a good sign.

Fundamentals: On Monday Greece successfully sold $6.7 billion worth of debt. This is why the dollar came down, emerging markets rallied, and the whole financial world heaved a sigh of relief.

Geopolitics: Six days ago the Pak Army launched an offensive against the Pak Taliban in a northern region of the tribal lands. The offensive has killed huge numbers of bad guys to date. Pak media reports claim that between 11 and 22 bad guys were killed on Sunday. Pak media also reports the deal for transferring drone technology from the CIA to the ISI has been finalized and the good guys in Pakistan are overjoyed at this terrific news.
There is no question that the bad guys are taking it on the chin in the Long War’s central battle zone in Afpak. But in the periphery battle zones of the Long War, far away from Afpak, the bad guys are doing much better. Over the weekend 38 civilians were killed in Moscow by Caucus based Islamic terrorists. Two Moscow subway stations were obliterated by female suicide bombers. Not good. Thousands of miles from Russia, the authoritative newsletter Intelligence Online, reports that Yemeni intelligence has been completely infiltrated by AQAP. This goes a long way to explaining why AQAP has been able to send so many terrorists into Saudi Arabia recently. Finally, Sudanese rebels claim to have shot down two army helicopters near Darfur, straining the recently announced peace treaty.
The Afpak theater has a long ways to go before victory can be declared. Way before then the CIA must get a better grip on the vast regions on the periphery of the Long War because someday there will be a hellacious whack-a-mole effect.

Pak Army Kills 156 Bad Guys

Charts: The S&P 500 closed at 1167, up a fraction. The dollar was down today as were treasury yields. Both weakened into the close, good technically. FXI (Chinese blue chips) jumped 2% and is 1% away from the 200-day moving average. Today was a better chart day than the flat reading from the American index would lead you to believe.

Geopolitics: Today was proof of how geopolitics can rock world markets. The final bailout package for Greece clicked into place and the market was poised to rally when a South Korean warship suffered an explosion in its hull and started sinking in a fishing zone that has often seen North and South Koreas' navies clash. The S. Korean Navy combed the area with radar. They got a reading and fired forward guns (shoot first ask questions later). The reading turned out to be a flock of birds. Several birds were vaporized. There was no sign of North Korean warships. As traders began to digest the implications of the S. Korean Navy not finding any bad guys, global markets started to recover hesitantly.
The Russian stock market popped up while all this was going on because Hillary’s nuclear arms reduction treaty was finalized. Russian ADRs soared 2% even though the price of oil was down today. There is something like an 80% correlation between Russian stocks and oil.
Meanwhile, the media is ignoring the real geopolitical news of the last few days. The Pak Army has been advancing on a Taliban stronghold in the tribal lands that border N. Waziristan. In three days it has killed about 90 bad guys. On Friday, the Pak Air Force killed 66 bad guys. Bad guys are getting chewed up by the Pak Army and this probably explains the AQAP surge: the whack-a-mole effect is in full swing.

Specific Stocks: Calgon Carbon (CCC) is the leader in manufacturing activated carbon, the stuff inside smokestack scrubbers for coal-fired power plants, big municipal water plant filters, and the little water filters in your household Brita system. In the last year CCC’s stock has only gone up about 12%, even though its earnings have been growing stoutly. It has a PE of 25% while its peer Koppers Holding (KOP) which makes specialty carbon products for steel and railroads has a PE of 32%. CCC’s earnings have grown 3 times faster than KOP’s. The market is afraid of coal fired power plants because of global warming fears and hence the discount. But here’s the kicker, as the leader in activated carbon, CCC has special products that work in cleaning up illegal Chinese coal power plants, of which there are hundreds. When the Chinese government finds an illegal power plant, it doesn’t shut it down, it orders a cleanup, an endless supply of business for CCC.

AQAP Is On The March

Charts: The S&P 500 closed at 1166, down .17%. The market was up all day but then experienced a bearish reversal into the close. FXI (Chinese blue chips) got shredded today. FXI is screeching down away from its 200-day moving average. The charts are overall worse than one would think merely from looking at the S&P 500.

Fundamentals: Progress was made overnight in bailing out Greece. This is good but it opens up a can of worms. Bond vigilantes are now attacking US government debt. Yield on the 10-year is shooting upward, now over 3.9%, nearing the 4% danger zone. In the middle of the trading day Fed Chief Bernanke tried to jawbone interest rates down. It is scary that he feels the need to do this and markets were unsettled by his performance. The dollar was up again today. High treasury yields equal a strong dollar: this hurts the carry trade, clobbers emerging market debt and while it should theoretically help emerging market exports into the US that salutary effect is potentially diminished by a weakened US consumer, not to mention US housing will be annihilated if interest rates keep rising.

Geopolitics: Russia and America have hammered out a nuclear weapons reduction treaty. By cementing US-Russia relations this treaty prevents India from embracing Russia, which allows the US to give more military aid to Pakistan. Meanwhile ground action in the Long War rages on. The Pak Army killed 21 bad guys in heaving fighting along the Afpak border. As the Pak Army digs into the border region, it uncovers better intelligence and some info leaks out to the press. A picture is emerging of AQAP (Al-Qaeda’s Yemeni franchise) being stronger and better organized than previously thought. There are rumors of Yemeni surgeons implanting explosive breast implants in female suicide bombers in secret Al-Qaeda clinics in the Pak tribal lands. While this might sound like a tabloid news item, it is not. AQAP’s underwear bomb also sounded goofy but was real. Also, Saudi security forces have recently arrested 113 AQAP bad guys inside the Kingdom. While it is good the Saudis have captured these bad guys, it is disturbing that there were so many and raises the question as to why the big AQAP surge all of a sudden. Finally, US Naval Intelligence issued a warning that AQAP is getting ready to attack shipping off the Yemeni coast. AQAP is on the march.

CIA Still Extremely Pissed Off

Charts: The S&P 500 closed at 1168, down .6%. The index pushed below support at 1170, which is mildly bearish. FXI (index of Chinese blue chips) retreated sharply from its 200-day moving average, which is more than mildly bearish. All year we’ve seen emerging markets underperform. American leadership is good but the followers need to respond to the leader.

Fundamentals: Portugal’s debt was downgraded today. This caused the dollar to rock up. The strengthening dollar hurts emerging markets, the only true source of growth in the world economy. US housing data continues to weaken, which is causing US treasury yields to go up. Yield on the 10-year leaped by the greatest amount in 8 months. For the past three trading days the market has decided that Obama-Care won’t destroy the world economy for another couple years. Today the market is moving past Obama-Care and focusing on some of the other problems that have been with us for awhile, and getting worried again.

Geopolitics: CIA drones once again sent multiple salvos of Hellfire missiles into Taliban compounds and vehicles in North Waziristan. The ISI says that 6 bad guys were killed but once again their identity cannot be confirmed because the drones are more aggressive than usual and independent observers can’t get close to the killing zone. The CIA remains extremely pissed off. The group I have been calling the “North Waziristan Taliban” is actually called Hezb-e-Islami. These non-English names are impossible to remember or keep straight, so let’s stick with my terminology. A spokesman for the NW Taliban said today that his group is not actively negotiating with Karzai’s government. That is a lie of course, but it is evidence that the CIA’s tactic of literally blasting these peace talks apart is beginning to work.
Karzai is worried about his fate when American troops begin to be withdrawn from Afghanistan in about a year. America wants the Pak Army to essentially replace the US Army/USMC when this happens. This would make Karzai a figurehead at best. Right now the top generals of the Pak Army are in Washington DC negotiating a massive increase in military aid and weaponry. Karzai is having kittens.

CIA Extremely Pissed At Karzai

Charts: the S&P 500 closed at 1174, up .7%. The index successfully tested support at 1154 twice since Friday. It bounced up against resistance at 1170 once, got knocked down, regrouped and popped through, bullish chart action. FXI is the blue chip index of China. Today it almost broke above its 200-day moving average. FXI’s chart action had been saying China was in a bear market. US leadership is fine, but in today’s global market it is technically significant for FXI to move above the 200-day line. Meanwhile, oil has been unable to breach resistance at $83 a barrel, good for China and America.

Fundamentals: Obama-Care front loads taxes and back loads benefits. It will probably lower the deficit for the next couple years and then massively raise it for the next few decades. Even the bond market doesn’t look years ahead and the stock market certainly doesn’t.
Every year the big iron ore miners and steel mills negotiate an annual ore contract. The talks are breaking down. Currently the spot price is about twice as high as the contract price because of Chinese demand. The biggest ore miner, VALE, is sensibly telling the big European mills that the contract price must double. The European mills are freaking out and trying to take legal action against VALE rather than hammer out a deal. The contract system is probably going to be destroyed and the price of ore is set to double. Steel represents 80%-90% of industrial metals, so the contract system collapsing is huge news and creates all sorts of losers and winners.

Geopolitics: Hillary made a speech in front of the most powerful Israeli lobby, blasting Israel with verbal bombs like this: “New construction in E. Jerusalem or the W. Bank undermines mutual trust and endangers… talks… that both sides want and need.” Slamming Israel in front of its lobby is incredibly bold. If Israel freezes settlement building, a Palestinian state will arise all by itself, even without peace talks. This would be a deadly blow to Al-Qaeda. It gets something like $500 million a year from wealthy Arabs who mostly give because of the Israeli/Palestinian conflict.
Israeli PM Netanyahu is in DC and firing back at Hillary, trying to play tough guy, big mistake. Defense Secretary Gates is talking about selling F35 Joint Strike Fighters to the United Arab Emirates. No Arab country has ever been offered a weapons system this advanced before. If Arab countries were allowed to buy the F35, Israel would be in big trouble.
On Sunday CIA drones killed 8 bad guys in N. Waziristan. Who was killed is not known because a drone wolf pack stayed in place and kept killing anybody that tried to help the wounded or even get close. The CIA does this only when it is extremely pissed off. The anger is probably due to ongoing Karzai/Taliban peace talks. Karzai better watch his step.

Give Peace A Chance? CIA says: NO WAY!

Geopolitics: The UN was negotiating a peace deal with the Afghan Taliban when the CIA and ISI arrested the Taliban’s lead negotiator, #2 Chieftain Mullah Baradar, supposedly destroying the chance for a diplomatic end to the Long War. Darn. Along the same lines, last week CIA drones killed several leaders of the North Waziristan Taliban. The NW Taliban has been actively negotiating a peace treaty with Afghan President Karzai, probably a deal was close before the drones hit Taliban houses and cars with 3 separate salvos of Hellfire missiles. The peace deal literally went up in flames. A Pattern is clear, whenever one of the Talibans makes serious progress in crafting a peace treaty with one of America’s weak-kneed junior partners, the CIA arrests or kills the bad guy leaders trying to hammer out a peace treaty. In all probability the mere act of negotiating exposes the bad guy leaders to danger since the UN or Karzai’s government is easily infiltrated by the CIA and ISI. Going forward, UN diplomats or Karzai’s diplomats will probably also be in danger if they try to negotiate a peace deal with a Taliban chieftain because CIA Director Panetta has publically said he is willing to strike bad guys in urban areas at any time. And yet Gen. McChrystal says he is open to peace talks with the Taliban. This is just spin from McChrystal.
By destroying peace deals, the CIA is controlling public opinion in America. If American voters learned of a peace treaty between Karzai and the Taliban, they would demand US troops come home immediately. Of course any peace treaty wouldn’t be worth the paper it’s written on and US troops would have to return someday in bigger numbers. This is exactly what happened to Pakistan in the Swat Valley and elsewhere.
The Long War is not going well in the Caucus Mountains of Russia. The heart of the Caucus Islamic insurgency, Chechnya, is relatively stable but the rebellion is spreading outward. The hardest hit region is Dagestan. The number of police officers killed by bad guys in Dagestan doubled between 2008 and 2009. In a vicious cycle, the bad guys wreck the local economy and then enjoy a rush of recruits from jobless young men, which allows them to wreck the economy even more. This is one of the reasons why the Russian stock market has a very low P/E ratio.

Osama bin Laden Please Help Us!!!

Charts: The S&P 500 closed at 1160, down .5%. Today was a tripling witching options expiration day, so volume data is less meaningful. The index tested its closest support level (1154) and bounced up off support. This is good technical action, especially considering the fundamental news was really bad, although geopolitics continues to be really good.

Fundamentals: India raised interest rates overnight. Inflation is heating up in emerging markets, thus the concern over rate hikes and slowing growth.
Greece is saying that it can’t sell any more debt unless the IMF and/or Germany cobble together a genuine support program. Germany has been trying to get away with jaw-boning Greek credit spreads down. Greece can sell debt but wants to do so at the lower rates that will come with an implicit guarantee. It is put up or shut up time for all the actors in the Greek drama.
Stocks levered to emerging market growth took big hits today.

Geopolitics: In a Washington Post interview CIA Director Panetta said Al-Qaeda was in such disarray that one of its lieutenants, in an intercepted message, pleaded with Osama bin Laden to come out of hiding and provide leadership. OBL and a handful of top leaders are apparently dug down very deep somewhere in Pakistan and are in pure survival mode. Panetta went on to say, “It’s pretty clear from all the intelligence we are getting that they are having a very difficult time putting together any kind of command and control; that they are scrambling. And that we really do have them on the run.” This speaks to a huge whack-a-mole effect at some point. To that end, the Director says the CIA is willing to strike in urban areas or anywhere. He goes on to explain that the CIA has been involved in the interrogation of #2 Taliban Commander Mullah Baradar somewhere in Pakistan and significant intelligence is being acquired. Obviously these interrogations are gloves off and the CIA is not being constrained by human rights organizations or the US Congress. That Panetta would openly admit as much speaks to the massive political insulation he has built between his agency and liberal lawmakers in DC.
Hillary was supposed to negotiate with Russian PM Medvedev (good guy) today over nuclear weapons but Russian Pres. Putin (bad guy) horned in on the action. Elbowing Medvedev out of the way, Putin told Hillary that Russia is going forward with plans to build a nuclear reactor in Iran. Putin’s action was part of a long running power struggle that he is having with Medvedev. America needs Medvedev to win before it can go forward with creating a US-Russia alliance, which would be cemented by a nuclear arms reduction treaty. If such a treaty were to materialize, then it would actually be great if Russia built reactors in Iran and controlled fissile material there.

Night Is The Kingdom of The Taliban

Charts: The S&P 500 closed at 1166, down a fraction. The market is digesting its torrid gains. Oil continued retreating from technical resistance after it hit $83 a barrel.

Fundamentals: Retail inflation came in tame today. Employment data was slightly soft but roughly inline. Obama-Care is gaining momentum but still up in the air (scary). European countries are trimming their deficits while the US Congress is busy shoveling pork with both hands. So there is a shift of sovereign debt away from virtually every country on Earth to America. These are the questions for the 21st century: Is buying US debt becoming a sort of global tax? Who pays for the bread and circuses of the United States of Rome?

Geopolitics: CIA drones last week killed a Yemeni linked Al-Qaeda leader who organized the December massacre of 7 CIA officers. The recent drone strike was in Pakistan and the Dec. massacre was in Afghanistan but it is interesting that the bad guy was linked to AQAP. Evidently Al-Qaeda must reach out to its outer provinces to find quality leadership. In a recent interview CIA Director Panetta said Afpak Al-Qaeda/Taliban leadership has been seriously degraded. As we’ve seen, there has probably been old-fashioned assassination alongside high tech drone attacks. The lack of bad guy leadership is evident in Marja. Taliban fighters are coming out at night and brutalizing the local citizenry with tactics that include beheading. One tribal elder told the New York Times, “After dark the city is like the kingdom of the Taliban.” In the long run such brutality will hurt the bad guys. In the short run it will slow down the advance on Kandahar because conquered territory is not yet pacified.
Hillary is off to Russia to hammer out the final details in a nuclear weapons reduction treaty. Pres. Obama is directly involved in the negotiations. When and if the treaty is finalized, US-Russian relations will take a big jump forward. India is already backing off from its recent craziness at the prospect of the Russian bear and American eagle making nice.
And Israel is also inching away from its anti-US craziness, allowing Palestinians more freedom of movement, backing away from its recent crackdown.

General Petraeus Hates Israel

Charts: The S&P 500 closed at 1166, up .6%. Resistance is at 1070. Oil hit $83 a barrel, encountered technical resistance and fell back slightly. Oil tends to trade in a very technical manner, so if it breaks above $83 it will probably keep going.

Fundamentals: Wholesale inflation came in cooler than expected. This validates the Fed’s ultra-low interest rate policy. If the Fed really can keep rates this low for another year, then lofty stock P/E ratios can be justified a while longer and earnings can play catch up to these lofty valuations. It all boils down to tame inflation for a long time. The greatest inflation threat on the horizon is soaring oil prices.

Geopolitics: Over the past few days CIA drones have killed perhaps two dozen bad guy leaders in repeated strikes against North Waziristan Taliban compounds. The NW Taliban is led by Hafiz Gul Bahadur, who has made various peace deals here and there, playing both ends against the middle, but remains one of the top bad guys in the world. The NW Taliban may be providing sanctuary for the upper echelon of Al-Qaeda, possibly Osama bin Laden. There has been speculation that Al-Qaeda leaders have moved into the slums of Karachi but the latest drone strikes suggest otherwise.
In January a team led by Gen. David Petraeus made a report to the Joint Chiefs castigating Israel and showing that it is causing major harm to the US in the Long War. Since Petraeus is the greatest military mind of our generation let’s take this as a given: Israel under its current leadership is a deadly enemy to the US. Right now there is bloody rioting in E. Jerusalem as Palestinian protestors are tangling with Israeli security forces. Pres. Obama has canceled a scheduled trip of US special envoy Mitchell to Tel Aviv, effectively scuttling peace talks, slapping Israel in the face, and aiding the Palestinians. Republicans in Congress are attacking the President because he is step by step dismantling the US/Israeli alliance. The Republicans are 100% brain dead on this issue and Obama is doing the right thing.

Old-fashioned CIA Assassination

Charts: The S&P 500 closed at 1159, up .8%. Over the past several trading days the index has been defeated by the 1150 resistance level 6 times. In moderate volume it broke through this barrier, signaling possible continuation in the current rally leg. Support is now 1154.

Fundamentals: Greek debt was given a thumbs-up by a rating agency, cooling fears of default. The Fed says interest rates will remain low for a long time. Also, the Fed says that while it still plans to stop buying mortgage backed securities in a few weeks if housing softened dramatically, then the buys would restart. That’s the good news. Rumors are swirling of another rate hike in China, the bad news.

Geopolitics: The Afghan Army killed 5 bad guys Monday without help from NATO. It killed 9 bad guys (including a Taliban commander) on Sunday with NATO back up. Over the weekend the Taliban tried to blow up a prison in Kandahar to release hundreds of imprisoned Taliban fighters but failed because Afghan Intelligence knew about the plot ahead of time. This paints a picture of Afghan forces making rapid progress. However, the Afghan Taliban is making and planting 22 IEDs every day, that’s 8000 a year. NATO and the Afghan Army are encircling Kandahar by taking over numerous small villages on the big city’s periphery. The Afghan government is sending 1500 extra police to Kandahar to help control the city as the noose tightens. The Battle of Kandahar is coming faster than expected.
In Yemen, the truce with the Houthi rebels is holding so the Yemeni Air Force has started a bombing campaign against Al-Qaeda positions. The Yemeni government says that AQAP is planning big terror strikes and its campaign is disrupting the bad guys.
The New York Times says that a former Defense Intelligence operative named Michael Furlong has been running an assassination ring in Afghanistan and funding it by siphoning money from an innocent-sounding US program to “study the tribal landscape.” Furlong has no provable CIA connections but the good guys doing his dirty work are former CIA officers and CIA-linked Delta Force soldiers. The CIA says it is positively shocked that a rogue clandestine operation has been running under its nose and it only assassinates bad guys with drones, never the old-fashioned way (yeah right). It is a sad commentary on the folks here at Dave’s Geopolitical Market Update, but we actually like rogue CIA operations and buy stocks when we hear about them.

Israel's Hand Grenade & Oceanic Pain For India

Charts: Large caps and mega-caps have been exhibiting stalling behavior, which is bearish. When the S&P 500 hits 1150 volume goes up and it churns futilely against resistance without breaking through. It would be much better if volume were to fall off as it bumps against resistance. The mega-cap Dow is showing an even worst stalling pattern, small caps not so much.

Geopolitics: Last week VP Joe Biden and Israeli PM Netanyahu were getting ready for a state dinner in Israel when both men learned that Israeli Interior Minister Eli Yishai had (from out of the blue) approved 1600 new settler housing units in E. Jerusalem. Netanyahu was as shocked as Biden and the unprecedented action by the notoriously ultra-hawkish Interior Minister amounted to a palace coup. Biden reacted poorly to this hand grenade by cravenly begging the Palestinians to not cancel the opening of peace talks. Biden should have stormed angrily out of Israel and threatened to cut off military aid. The next day Hillary salvaged the situation somewhat by using the strongest anti-Israeli language ever recorded by an American diplomat. The above incident supports my theory that the CIA has been stepping on Mossad over the last couple years. Palestinian/Israeli peace talks are sure to be scuttled, a victory for Israeli hardliners. On the other hand, Mossad and the other hardliners are playing a dangerous game and putting a lot of faith in pro-Israeli lobbyists in America.

Russia and India had their big powwow and the Russians left the meeting wondering if India had gone insane. India says it will buy $15 billion worth of Russian warplanes and 19 Russian nuclear reactors (worth maybe $60 billion). Then India proposed an anti-Taliban/anti-Pakistan/anti-American military alliance consisting of Uzbekistan, Tajikistan, Russia, and India. In panicky and hysterical tones India explained that America was about to realign the Taliban with Pakistan, pull all its troops out of Afghanistan, and turn the whole region over to Osama bin Laden (!). Russia wants to take as much money from India as possible but wants nothing to do with this bizarre idea of a new anti-American military alliance. A couple days after the Russian/Indian meeting Russia and America made big strides in perfecting the START anti-nuclear missile treaty, a move toward cementing the fledgling Russo-American alliance and probably Russia’s way of subtly sidelining India.
Like Israel, India is playing with fire and here’s why: The biggest single insurgency in the world is India’s huge Maoist separatist movement, which is gobbling up territory in the Asian giant’s interior. India’s Maoist guerilla movement is bigger than any one Islamic separatist movement, but it is mostly contained to India, and definitely not linked to the global Islamic revolution. Obama’s CIA is as ruthless as Eisenhower’s CIA of the 1950s. If the ruthless spooks from Langley were to turn Indian Maoist guerillas into good bad guys, it would create an ocean of pain for India.

India Should Buy MIG Fighter

Charts: Today’s newsletter goes out before the bell, so let’s dive into geopolitics.

Geopolitics: The experts are convinced that Mullah Omar has moved out of Pakistan’s tribal lands and is now somewhere inside the city of Karachi, hidden among the teeming slums of 16 million people. Other Taliban and Al-Qaeda leaders are probably also hidden in the giant city, including Osama bin Laden. CIA drones have forced bad guy leaders to give up their de facto nation states on the Afpak border. But lower level Taliban leaders and fighters are still in the tribal lands and are still fighting. History shows that without the leavening hand of the top leaders the lower level bad guys will become increasingly brutal to the local populations, alienating local tribal leaders and making it easier to build good bad guy Islamic militias.
Hunting down bad guy leaders in Karachi and building g/b/g Islamic militias will require even greater cooperation between the CIA and the ISI/Pak Army. This means the US needs to step harder on India. Right now Russian leaders are meeting with Indian leaders, trying to sell them the next generation MIG fighter. As perverse as this may sound, it is better that India buy weapons from Russia than the US.
Along these lines, Afghan Pres. Karzai is refusing a Pak Army offer to train Afghan troops. Karzai does not want Pakistan dominating Afghanistan once US troops start withdrawing. Karzai is reaching out to India to prevent this. But the US wants Pakistan to dominate Afghanistan. At the same time, the US cannot step on Karzai. Sift through all this and one point stands out: if Russia and the US were de facto allies and India turned to Russia because of deteriorating Indo-American relations, it would be a good thing.

Dali Lama Is a Bad Good Guy

Charts: The S&P 500 closed at 1150, up .4%. The broad index is exactly at a major resistance level.

Fundamentals: Consumer inflation data from China came in hotter than expected (scary). Chinese real estate prices are still soaring but the sales pace is slowing. So Chinese tightening measures are starting to bite. China is acting like the planet’s central bank, dictating the pace of global recovery and global inflation. This tightrope balancing act will probably work so long as oil prices don’t break above the technically significant level of $83 a barrel.
Sen. Leader Reid says reconciliation will be used to pass Obama-Care. So the Demos are growing for broke. If they try and fail it will be fantastic. If they succeed it will be very bad.

Geopolitics: America has 17 different intelligence agencies. The 17th agency (DNI) was created by Congress after 911 to stitch the other 16 together, a bad idea then and a worse idea now. A better idea would be to cut the CIA loose from bungling Congressional watchdog committees as well as DNI and then keep DNI busy by letting it screw with the 15 intelligence agencies that are not the CIA. This is exactly what Pres. Obama has done, proof he is brilliant in national defense.
The Dali Lama says he now supports China’s Islamic bad guys, the Uighurs, and hints that he will coordinate insurgent activities with them. The very first Gitmo detainees were Uighurs, very nasty folks indeed. The short guy in the orange robe is a genius at public relations in the West, but he is not a man of peace. Like many of today’s bad guys he is a Frankenstein-like creation of the CIA during the Cold War and his soldiers were used back then against Maoist China. So China will need help from the CIA.
Indonesian counterterrorist forces have killed the Islamic bad guy who masterminded the Bali bombings. All the recent progress we’ve seen against bad guys in SE Asia lately is starting to bolster Malaysia’s stock market (EWM). Malaysia is the most capitalistic Muslim nation and a leader in Islamic finance.

Specific Stocks: Nissan (NSANY) is the only Japanese auto maker with a brake override feature, which prevent the supposed surging problems plaguing Toyota. Nissan will benefit from Toyota’s woes and these woes will be long lasting. Nissan is introducing the only electric car in the US in a few months, it will do better than analysts forecast, and NSANY is cornering lithium ion battery supplies. Nissan is introducing a line of light commercial trucks that will do better than expected. The Japanese Central Bank says it is going to depreciate the Yen, which will help Japanese manufacturers. I like NSANY’s chart.
A.O. Smith (AOS) is the largest water heater maker in North America. It makes water heaters and electric motors in China (growing fast). Its stock is undervalued because the market thinks it is levered to residential housing. But most of its N. American revenue is levered to replacement water heaters, not new construction. The charts show AOS is starting to break out.

Boeing Tanker Ready For Iranian Missiles

Charts: The S&P 500 closed at 1146, up .45%. The market bumped repeatedly against stiff resistance at 1150, was knocked down, but held its own, hovering angrily just under that level, which is the bull market high. Support is at 1125 and under that 1120 is significant support.

Fundamentals: Trade data out of China came in stronger than expected. The Chinese government has been hinting that it is going to let its currency appreciate to slow down growth and today’s data made that seem more likely. This originally hurt material stocks. Then the US government said its February deficit was a record $221 billion, which hurt the dollar and sent materials gyrating. US sales and inventory data was better than expected. All this led to a wild ride on Wall Street.

Geopolitics: There have been several reports of CIA surveillance drones flying over the Somali capital city Mogadishu. The Somali Army and AU have been sporadically fighting Al-Shabab for a few weeks, making probing attacks here and there, seemingly avoiding an all out push in order to gather better intelligence. On Wednesday fighting in the big city flared up with 8 dead and scores wounded. The only reliable news source out of Mogadishu is a radio/TV station. Al Shabab has started beheading the reporters from the station so info is hard to come by. This does speak to Al-Shabab not doing that well in the fighting.
In Afghanistan, the US Fifth Stryker Brigade is beginning to secure the roads leading to Kandahar. Gen. McChrystal says that the Kandahar campaign will be different from Marja. In Kandahar the good guys will slowly build a noose around the city and even more slowly tighten it. Just because McChrystal was honest when he gave details of his Marja battle plan to the Taliban doesn’t mean he is being honest now when he says the attack will be in late summer. It isn’t his job to be honest. His job is to deceive.

Specific Stocks: Boeing has designed a refueling air tanker that is loaded with electronic countermeasures. The competing Airbus/Northrop design isn’t even in the running. It carries more fuel but has weak countermeasures. A few years ago the Airbus design was deemed better but since then Iran has developed a much stronger arsenal of missiles so Boeing is the winner. Over the next few decades the contract will be worth $100 billion.

Whack-A-Mole!

Charts: The S&P 500 closed at 1140, up .17%. Volume patterns within this rally are okay but the total amount of volume has been freakishly low. The vast majority of investors are sitting on the sidelines, probably spooked by the chance that Obama-Care might pass and the reemergence of sovereign debt fears.

Fundamentals: Germany, Canada, and China are cutting government spending and all three will soon be running surpluses again. Big country spending cuts exert enormous pressure on small countries to follow suit. Of the Euro-zone peripheral countries Greece, Ireland, and Spain have slashed spending but rating agencies are saying Portugal hasn’t cut enough. So the sovereign debt crisis is now pivoting on Portugal. Obama-Care must fail before America can focus on freezing spending. Since America’s debt is so vast progress here would help everywhere.

Geopolitics: Russia’s KGB is now called the FSB; it killed 8 Islamic bad guy leaders and arrested 10 more a few days ago. The main leader of the Caucus Islamic separatist movement was killed. This is very good news. The FSB is hinting of new advanced technology, maybe a sign of CIA help.
Singapore’s spy agency warned of Islamic attacks on Southeast Asian shipping a couple weeks ago. Obviously acting on a Singaporean tip, Philippine Marines raided an Abu Sayyaf camp and demolished it, killing scores of bad guys. Russia and SE Asia are possible whack-a-mole destinations. The good guys in these areas are working to staunch a possible bad guy in-flow as the USMC advances across Afghanistan.
In Afghanistan, the Afghan Taliban attacked a smaller rival Taliban and has taken over a big chunk of its territory in northern Afghanistan, far away from Kandahar and Marja. This territory produces revenue for the bad guys in the form of religious taxes. The Afghan Taliban is getting ready for a short whack-a-mole move away from the coming onslaught against Kandahar.
In Nigeria, Muslim and Christian mobs battled each other, resulting in about 200 dead. This is not organized Long War fighting such as the Marines vs. the Taliban but something worse. Spontaneous fighting between Muslims and Christians in Africa taps into the deep historical roots of the LW, akin to the nearly century-long Sudanese Civil War. Africa is the ultimate destination for the bad guys once the Afghan war winds down and a truly gigantic whack-a-mole effect kicks in.

Specific Stocks: Korea Electric Power (KEP) is an integrated utility in S. Korea. It also leads a consortium of companies and builds nuclear power plants in emerging markets. Its power plant design cannot withstand the impact of a fully laden 747 power-diving into the reactor core. Western designed power plants are strong enough to withstand this sort of terror attack and consequently they are twice as expensive as KEP plants but not better in any other way. Emerging market countries don’t want to pay for all the extra steel and concrete to ward off an attack that is unlikely to ever occur. Here we have silly Western Long War phobia helping an Eastern company.

United States Of Rome

Geopolitics: The rise of the American superpower and the rise of ancient Rome are an example of history repeating itself and comparing the two can help us become better investors.
Stretching back to the dawn of Western civilization the center of military power was the old world of North Africa and the Mideast. In 264 BC Rome defeated the strongest old world power (Carthage) and the world’s military center began shifting to the new world of Europe. Over the next 91 years Rome fought two more wars against Carthage. Once the third and final war was over Europe had become the world’s military center and Rome the world’s sole superpower. For the next 2135 years the world’s military power was concentrated in Europe. It became the old world. Of the 3 big wars that Rome fought against Carthage the biggest by far was the second, where Hannibal’s columns of armored war elephants came pouring into Europe. To this day Hannibal remains a mythic figure of terror and dread.

In 1918 America was instrumental in defeating the strongest old war power (Germany) and the world’s military center began shifting from the old world (Europe) to the new world (North America). Over the next 71 years America fought two more wars against the strongest old world powers (Germany and then Russia) and once the third and final war (the Cold War) was over the world’s military power became concentrated in the new world. And once again the world had a single superpower. The second of the 3 European wars was by far the biggest, where Hitler’s mechanized armored columns nearly conquered the world. Hitler remains a mythic figure of terror and dread.

Around the time that Carthage fell Rome began to conquer, one by one, almost every country in the known world. Rome built roads in the provinces that it conquered. These roads linked the markets of individual towns together and formed larger markets. The outer provinces were literally emerging markets. A socialist rot infected the core of the empire as Roman citizens demanded government supplied bread and circuses. But the dynamic emerging markets countered the rot in the core and the imperial economy flourished. At about the time of Christ, Rome stopped conquering other countries and there was world peace for two centuries. During this period of peace the countries not conquered by Rome became stronger and stronger while the socialist rot in the heart of the empire got worse and worse. Rome engaged in what we call Quantitative Easing (printing money out of thin air) by debasing its currency. When the barbarians began pouring into Rome its financial system was so screwed up it couldn’t afford to raise big enough armies and the empire collapsed in 476 AD after centuries of bloody conflict.

America is today where Rome was in 190 BC, when it conquered Syria and began its domination of the Western world’s small powers. It is no small coincidence that America’s recent conquest of Iraq is right next to Syria. What roads were to Rome, stock markets and free trade accords are to America. So the American global empire can flourish for centuries even with a socialist rot at its core as long as it keeps fighting and winning the Long War, plus stock markets and free trade accords follow in the wake of its military victories. So far this is happening. The Pentagon dismantled Iraq’s trade barriers and turned it into a free trade zone. If we were ancient Roman investors we would want to focus on emerging markets and so it is today.

How Do You Spell Armenia?

Charts: The S&P 500 closed at 1139, up 1.4%. The index is comfortably above the super important Fibonacci support level of 1120. Almost every technical indicator has turned positive. Only one is bearish: investor sentiment, which is signaling complacency. The shaky rally has morphed into a sturdy rally.

Fundamentals: Greece crushed its government unions, announced gigantic spending cuts, and successfully floated a much anticipated bond issue. Portugal is just beginning this process and off to a great start. A good domino effect is rippling through highly indebted Euro-zone peripheral countries.
The big US jobs report came in much better than expected today and the Fed reported that consumer credit increased last month. This is the reason for the rally.
The Premiere of China made a speech implying that instead of further monetary tightening the Asian colossus will curb real estate investment and leave the rest of the economy alone. Consumer inflation is tame in China but a real estate bubble is forming. China has been using a sledgehammer to swat a fly. Now it will use a flyswatter. Stocks highly levered to growth in China had been suffering lately but today came roaring back.

Geopolitics: Iraq’s national election is underway. We want the incumbent, Maliki, to lose and the challenger, Allawi, to win. Through debaathification Prime Minister Maliki has been persecuting the minority Sunnis, playing into Al-Qaeda in Iraq’s hands (AQI is Sunni, the Baath party was Sunni). The biggest mistake that Bush made in Iraq was the so called debaathification campaign where every member of Saddam Hussein’s Baath party was fired or worse. A secular minded Shiite, Maliki has continued this pigheaded campaign. Allawi is a Shiite as well but he will put a stop to the mindless persecution, destroying AQI’s major recruiting tool. Furthermore, Allawi has very old and strong ties to the CIA. When the US Army leaves Iraq the CIA must move in to fill the void. Allawi will make sure that happens.
General McChrystal is telling us that the Battle of Marja is a dress rehearsal for the much bigger Battle of Kandahar coming in late summer. He is creating an entirely new command structure just for the Battle of Kandahar, reconfiguring almost all his resources around this goal. If Kandahar will be that much bigger than Marja won’t it be the pivotal battle that decides the fate of the Afghan war? No, pivotal battles aren’t necessarily the biggest ones. The pivotal Battle of Stalingrad was smaller than the Battle of Berlin in WW II. Therefore Marja is everything. How is it going? Fighting has died down since Monday. NATO is busy clearing every land mine, IED, and booby trap in houses, streets, and fields over a 155 square mile area, a huge task; and the bad guys are probably playing possum out there. During the searches, the good guys are not confiscating or removing bags of dried poppy seeds or raw heroin. In a policy shift, NATO is now fighting a war, not acting like the DEA. Stupidly, there are DEA agents in Marja, but these bad good guys are being sidelined.
A Congressional committee passed a resolution condemning Turkey for its WW I massacre of Armenians, enraging every Turk on the planet. With all the trouble we’re having keeping Turkey as an ally this is incredibly stupid. Turkey recalled its US ambassador. But Hillary is doing a fantastic job soothing Turkish feelings, explaining how brain-dead Congressmen are and how the average American can’t even spell the word Armenia.

A Ticking Time Bomb

Charts: The S&P 500 closed at 1123, up .4%. Above 1120 is good. Everyone is on pins and needles about Friday’s big jobs report.

Fundamentals: A raft of data came out today that was generally good. Except for the housing data. This brings up the big picture of proposed financial reforms. Whenever American real estate prices take a sharp dip homeowners bailout of mortgages and the financial system suffers a severe crisis. This doesn’t happen in any other advanced country. Take Hong Kong as one example. Real estate prices there can fall by 50% in a given year, a much steeper drop than anything ever experienced in the US. But even with a fall that great Hong Kong homeowners by and large don’t default, the city-state’s financial system is barely ruffled, and real estate prices always bounce back without government intervention. Real estate loans are recourse in Hong Kong (and everywhere else except America) plus there are steep minimum down payment requirements. In other words, in Hong Kong financial instruments don’t have built in consumer protection but corporate protection. What this all boils down to is that the Demos proposed consumer protection agency that is supposed to rework every financial instrument to afford greater consumer protection is a ticking time bomb. That is if it passes.

Superpower Now Hates India

Charts: The S&P 500 closed at 1119, up a fraction. The index is facing stiff resistance at 1120, the 50% retracement level and a very significant Fibonacci number. Most likely Friday’s big jobs report will push it above or below 1120. Below is not good.

Fundamentals: Congressional Demos are figuring out parliamentary tactics to get around Republican gridlock. So the once gridlocked unemployment extension is going through after all and the toxic healthcare attempt is gathering steam. If a healthcare bill does not pass by March 26, it is dead for good because of Congress’ Easter vacation. Financial reform is also gathering steam. Demos and some turncoat Republicans seek to create a “consumer advocate” agency that will rewrite regulations for all financial instruments to favor consumers over corporations; very bad indeed.
Today’s service sector PMI survey came in much stronger than expected. Since the service sector is 70% of the economy this is very good news. The market is struggling with good news from the private sector being balanced by bad news from the socialist public sector.

Geopolitics: The Pak Army and ISI are cooperating with the US to an amazing degree and their reward is on the way: A fleet of 12 surveillance drones, plus the most advanced F16 fighter-bombers equipped with high tech smart bombs. This means the ISI is not going to get Reaper strike drones. The F-16s and Pak foot soldiers will do the striking and the surveillance drones will act as spotters. This package is going to require a lot of other US gear not mentioned in press releases and we can deduce what this stuff will be. Feed from the drones will have to be linked to Pak air bases and infantry units. This means much of the ancillary gear will be supplied by Harris Corporation (HRS). This is a surprise to defense analysts and HRS popped up today. We all thought the ISI was going to get Reaper drones because giving the Pak Army advanced F-16s and smart bombs is a terrible blow to India.
The Pak Army might be getting ready to launch its offensive into N. Waziristan much sooner than expected. There are reports of Pak Army movements along the Waziristan border. Curfews in this region are being imposed. Leaflets are being dropped from airplanes. If the timetable for the N. Waziristan invasion is being radically advanced we must ask why. The Pak Army could put several hundred thousand troops in the tribal regions tomorrow if it had no fear of India. If your superpower buddy is coming out strongly against India, then obviously your fear of the Asian giant is diminished.

Saudi Spies Perform Miracles

Charts: The S&P 500 closed at 1118, up .2% on the day and 1.2% for the week. Major indexes are above 50-day and 100-day lines. Volume patterns have improved slightly so most chartists are saying we are in a shaky rally not a counter-cyclical bounce. 1115 is the breakeven point for the year, so overcoming this resistance is significant. 1120 is the 50% bear market retracement and a huge Fibonacci number, so it should provide big resistance. Healthy consolidation would see a trading range between 1150 and 1120.

Fundamentals: Gridlock has derailed the most recent extension of unemployment benefits. In most recoveries hiring returns only after benefits run out and workers start taking any job they can, so this helps both the budget deficit and the macroeconomic picture. Gridlock has also (for now) forced a cut to Medicare funding. Laws on the books automatically force spending cuts to Medicare unless Congress proactively unwinds these cuts every year. If gridlock became entrenched, Medicare cuts would automatically make the program solvent in time. Friday is the big jobs report, a source of potential volatility.

Geopolitics: Saudi’s spy agency is called GIP. Loose-lipped Pak diplomats are saying GIP and CIA have established a much closer working relationship. It seems GIP is the driving force behind ISI’s recent aggressive moves to roll up Al-Qaeda and Taliban leaders inside Pakistan. Only today, ISI arrested 7 more senior Taliban leaders. Also, Lebanon and Dubai’s intelligence services have recently been clobbering Israel’s Mossad with super advanced technology. Probably this technology has come from GIP acting as a proxy for CIA. The broad pattern then is CIA reaching out to its sister services within allied Muslim nations and at the same time stepping on Israel. In return, Muslim intelligence agencies are hammering the bad guys.
A few weeks ago a CIA drone strike wiped out an Al-Qaeda camp in N. Waziristan that was devoted to exporting jihad to China. Perhaps this is why US carrier battle groups are now welcome in Hong Kong harbor. CIA drones are still very active over the tribal regions in Pakistan and are racking up steady kills. Ground fighting in Marja Afghanistan and Pakistan’s tribal lands continues at a slow grinding pace.
Germany has responded to the Dutch Army pulling out of Afghanistan by increasing troop levels by about 800. This heroic action should put a stop to any further exodus from Afghanistan by NATO allies.

Bad Good Guys Are Very Bad

Geopolitics: Good bad guys are good. Bad good guys are bad. The two are not to be confused. Bad good guys are democratic governments or pro-democratic groups that act against America’s interest in the Long War, such as Israel’s spy agency, Mossad. Recently Mossad was caught red-handed after assassinating a Hamas commander in Dubai. There is no way humble Dubai busted the mighty Mossad without help from one of the world’s top intelligence agencies. In the same vein, since 2008 Lebanon’s security services have broken up 25 Mossad spy rings. Lebanon has been using suspiciously sophisticated electronics equipment to dismantle Mossad operations. The Lebanese government hints that Russia or France has been helping it. No way. It is more likely the CIA is quietly declaring war against Mossad.
The democratically elected government of Turkey is openly Islamist. It advocates an Islamic theocratic government but with elections. This is exactly what Iran says. Up till now the Turkish government had been pretty mild mannered, nothing like Iran. But within the last couple weeks it has started arresting retired ex-Army officers who supposedly planned a coup in 2006, but never acted on these supposed plans. For the last 70 years the Turkish army has overthrown civilian governments when they become too Islamist, a cornerstone of Turkish stability and secularism. Turkey’s current civilian government is trying to destroy this covenant. It is officially a bad good guy organization. Obama is so far doing nothing about this problem (busy with healthcare). The Turkish stock market is crashing as a result of all this, which is not helping the turmoil in nearby Greece.
Amnesty International is also a bad good guy organization. It has put a former Gitmo detainee in a position of power. This guy is pro-Taliban and very open about his affiliation. Partially through Amnesty International’s lobbying efforts, a recent Congressional CIA funding bill contained language that would hand out 15 year jail sentences to any CIA interrogator who even lowered the temperature in an interrogation room while grilling a bad guy, let alone water-boarding, etc… This language was removed at the last minute by Republicans. Nevertheless, because of western groups like Amnesty International, the CIA cannot really interrogate bad guys any more. When the CIA cannot easily hand over captured bad guys to the Pak/Egypt/Afghan/Iraq spy agencies for interrogation it simply kills them in the field. We saw this last September when the CIA and Special Forces landed helicopters in Somalia and captured Saleh Ali Nabhan (a top Al-Qaeda leader) and several other big fish. These bad guys were simply killed on the spot. It would have been invaluable to have interrogated them but under the circumstances that would have risked the ire of western human rights organizations.
So once again we are faced with evidence that the Long War will last longer than what voters are expecting. How long will it take to do the following: dismantle America’s toxic alliance with Israel, neuter western human rights groups, and change the structure of democratic Islamist governments? Decades? And with the Turkish stock market crashing we see real world financial implications in these questions.

Will China Eat Russia's Lunch?

Charts: The S&P 500 closed at 1104, up a fraction. The index’s movements today were bracketed by the 100-day and 50-day moving averages. In fact it closed very close to the midpoint between those two moving averages. Today’s action bolsters my theory that the index is range bound.

Fundamentals: American economic data is weak, from housing to the Q4 GDP revision, it sucks. But today’s Chicago industrial PMI index was good because it is levered to the emerging world. Consumer spending of all emerging market countries combined is about 40% higher than America’s consumer spending. At the beginning of this decade American consumer spending was 3 times higher than total emerging market consumer spending. Recently emerging market stocks haven’t done very well because of the Greek debt problems. This is especially true of emerging market countries with high government debt ratios. But emerging markets without debt problems are starting to move.

Geopolitics: Sometimes geopolitics and economic fundamentals are tightly intertwined. Of all big emerging stock markets, Russia has the lowest valuation by price to book ratio and other measures. Yes, Russian stocks have soared in the past year but they are still relatively cheap because of Russia’s invasion of Georgia, Putin’s blustering talk, and fear of neo-Communist takeover. How dangerous is Russia’s army? Not very. Russia had a tough time conquering 1/3 of teeny-weeny Georgia. Because of that stupid invasion Russia’s Islamic bad guys are a lot worse. Any other foreign adventures and Islamic separatists will tear the Caucus region to shreds and send terrorists into Moscow. Russian expansionists are also being knocked back on their heels by Obama’s foreign policy. The US President says he wants to “reset” relations and act nice; but in reality he is encircling Russia with missile interceptors. As foolish dreams of recreating the USSR fade, the reality of China’s colossal military strength is taking center stage. Another realization is dawning: America does not have an old fashioned colonial empire; it has a global military empire. And joining this empire guarantees that China will not eat your lunch. Some day Russia will join NATO.
Russia’s economy is strong. It has no external debt, high savings rates, and good growth. The Russian stock market moves in synch with the price of oil, which is okay since oil is going up.

Specific Stocks: RSX is the ticker symbol for the Russian index. It is mostly materials companies.

The 270 Year War

Charts: The S&P 500 closed at 1103, down .2%. The Shanghai index is below its 200-day moving average, a sign that a bear market is brewing in the world’s primary engine for growth. All the BRIC country indexes are below their respective 100-day lines. Debate among the chartists is over: global stock markets are in a correction. But the S&P 500 is finding support at its 100-day line and resistance at its 50-day line. It is 0.2% above the October high. This could be interpreted as consolidation, creating a stock pickers market. I will give you stocks I have been buying at the end of the newsletter.

Fundamentals: The big rating agencies are downgrading Greek banks and threatening to do a lot worse. Greek public sector unions are clashing with riot police in the streets of Athens, blood is literally flowing. The rating agencies say if these strikes gain traction and derail government spending cuts, then Greek bonds will face radical downgrades, which will trigger a return of the Great Recession. Greece was supposed to float a big bond issue today, but it is delayed to buy time to battle and defeat the unions. The global recovery is dependent on stopping pseudo-Keynesian government stimulus programs like the US Congress’ recent (moronic) jobs bill. Greece is the frontline in a global fiscal war. If bond vigilantes force Greece to slash government spending, they will prevail elsewhere.

Geopolitics: Will the Long War really last for centuries? It is convenient to say the LW started in 1989 with the Iranian hostage crisis. But it really started in the 1920s with the Sudanese Civil War, where Muslim Arabs battled black Christians, resulting in nearly 2 million dead. This war spawned an intellectual movement called the Muslim Brotherhood (MB), which took root in Egypt in the 1920s. Al Qaeda is based on the teachings of the MB. Today the MB is tightly woven into the fabric of Egypt’s political life. It is a political party but cannot legally hold office. If Egypt were a democracy, the MB would take over in a heartbeat. Egypt is the cultural center of the Arab world. The LW cannot end until Egypt’s MB is eliminated. The first steps in doing just that occurred several days ago when the Sudanese government announced a ceasefire deal that might be the beginning of the end of the nearly century old Sudanese Civil War. So progress is being made in central Africa where it all started and because of the CIA this progress will move north, toward Egypt. Between Egypt and Sudan stands Al-Qaeda in the Maghreb (North Africa), Al Shabab, Hizbul Islam, and several other bad guy groups. These groups must all be defeated militarily before cultural changes can take root in Egypt that will eventually neuter the Muslim Brotherhood. But that can only occur if military progress is also made against deeply rooted Islamic separatist movements in Russia, the Philippines, Thailand, etc… So yes indeed, the LW will last for centuries.
And events on the ground are giving this impression to investors. The Battle of Marja has become a long slow grind. The Pak Army is still fighting in the Swat Valley; invading N. Waziristan probably won’t happen for a couple years. America’s top general in Iraq is publicizing a “Plan B” to keep US forces there longer than the President’s withdrawal timetable allows. But we must never forget that Americans are innately a warlike people and they will eventually reconcile themselves to a war that will be over between 2200 and 2400.

Specific Stocks: Cliffs Natural Resources (CLF) is a very good, high tech, iron ore and metallurgical coal miner with a big operation in N. America, a mid-size one in Australia, and a toehold in Brazil. CLF sells iron ore at the long term contract price. The spot price is twice as high as the contract price. The contract system itself is likely to vanish soon. This will double the price CLF receives for its ore.

Looking For Consolidation

Charts: The S&P 500 closed at 1105, up 1%. Volume patterns are still bearish and the 50-day moving average is still providing resistance. The index is fractionally above its October high. In five months it has gone nowhere. Chartists see things as black or white, rally or correction. Very few want to forecast consolidation. However, consolidation (tight range bound trading) is healthy if volume is light. And we are certainly seeing light volume although a clear trading channel has not evolved because the sideways movement has been loose and sloppy. If it tightens up and looks to stay range bound for a long time, we will have a stock pickers market. In that case we can put some money to work.

Fundamentals: Yesterday’s Case Schiller data was bad without the seasonal adjustment; with the adjustment it was so-so. New home sales data today was very bad. Fed Chairman Bernanke softened the blow by saying interest rates will stay low as far as the eye can see. This week’s treasury auction has been very sloppy so far with yields jumping again on the 10-year. An all time record amount of debt (about $138 billion) has to be shoved out the door to make room for more gigantic auctions. Adding to the debt load, Congress is busy passing a $15 billion jobs bill. But the bill isn’t capped at that amount; it’s an open ended commitment to subsidize all new hires that have been out of work for a certain length of time. The real price tag will be closer to $30 billion (it’s only Monopoly money, right?). Goldman Sachs estimates Taiwan’s Q4 GDP grew at a superb 18% (annualized). Emerging Asia is our best friend, next to the CIA, USMC, and gridlock.

Geopolitics: A NATO spokesman said the alliance is facing a shortfall of 1600 trainers in Afghanistan as an alliance conference wound up today bearing very little fruit. The repercussions of Holland pulling its army out of the war are beginning to be felt. Def. Sec. Gates is trying to get the European countries still committed to Afghanistan to essentially send only trainers and scale back any other type of troops. He’s scrambling to fill a hole with help from Europe as the White House gives him the cold shoulder. Thursday is Obama’s big healthcare media event so he’s busy.

Sufis Are More Fun

Charts: The S&P 500 closed at 1095, down 1.2%. All 3 major indexes are below their 50-day moving averages. Today’s chart action supports the view that the recent rally has been a counter-cyclical pop within an ongoing correction. The bullish argument is that small caps are outperforming large caps and American stocks are outperforming the world index, so leadership is okay.

Fundamentals: Today’s sell-off was caused by a plunge in February consumer confidence. Joe Sixpack is feeling gloomy because the stock market has weakened as have home prices as measured by the most recent Case/Schiller numbers. It is problematic that Wall Street has been leading Main Street in this recovery, rather than the other way around. There is danger of a vicious cycle where the market falls, which hurts consumer confidence, which causes the market to fall, etc…

Geopolitics: Resistance is very stiff in Marja. Nevertheless, the Pentagon says in 30 days the battle will be over and preparations will begin for the Battle of Kandahar this summer. Kandahar is much bigger than Marja and presents bigger challenges. The Taliban had complete control of Marja but only controls parts of Kandahar, avoiding civilian casualties will be even more difficult. And avoiding civilian casualties is proving nearly impossible in Marja. Every civilian death ignites a firestorm of media attention. The rules of engagement for the current battle are the tightest ever. The Taliban is using this to its advantage; virtually every bad guy movement or action is done with human shields. The more Afghani soldiers doing the shooting, the less political damage there will be from civilian casualties. So a massive effort must be made to get the Afghan Army up to snuff before the Battle of Kandahar. Amazingly, the Pentagon is severely underfunded in its Afghan training program. Obama is still screwing around with healthcare reform rather than addressing this shortfall. He is a super-hawk only when he focuses.
The Somali Army has landed troops in several Al-Shabab controlled villages in central Somalia and opened an offensive. The good guys are reported to have arrived on rivers by boat. Al Shabab admitted that several attacks occurred and claimed it has already beaten the government troops and there is nothing left but mopping up. The bad guys are prone to exaggeration.
While fighting is occurring in the boonies, politics is occurring in Mogadishu. Ahlu Sunnah is acquiring formal authority within the Somali government, welding it into the good guy camp. Ahlu Sunnah is the most powerful good bad guy Islamic militia in Somalia, controls much of central Somalia, and is certainly involved in the freshly launched offensive. The CIA equips, trains, funds, and parties with Ahlu Sunnah. Its members are Sufis and share theological beliefs with the rulers of Sudan. This is why I think the recently announced peace deal in Sudan has CIA fingerprints on it. Al-Qaeda and the Taliban especially hate Sufi Muslims and vice versa. Harnessing Sufis for the good guy cause is a promising development. Of the major branches of Islam, the Sufis are the most fun, and terrific warriors to boot.

Dutch Army Withdraws. Fund Managers Unhappy.

Geopolitics: The 2010 Battle of Marja in Afghanistan probably represents the turning point in the Afghan war, just like the 2007 Third Battle of Fallujah in the Iraq war. Wars almost always pivot on key battles. Consider Stalingrad in WW II and Gettysburg in the Civil War. Of course Fallujah is the closest parallel to Marja.
The Iraqi Army played a minor role in Fallujah. It wasn’t ready to do any heavy lifting; the USMC did nearly all the fighting. However in 2008 the Iraqi Army was much stronger and it won the Battle of Basra pretty much by itself. Halfway through the Battle of Basra it was nip and tuck for the Iraqi Army. At one point it almost got clobbered by the Mahdi Army and needed a little help from the superpower. Just enough help, but no more, was given to the struggling Iraqi Army. Fallujah battle hardened the Iraqi Army and it is now a bad guy wrecking machine. In time this will happen to the Afghani Army. That is, if it is given time by ignorant leftwing Western voters.
The Sunday New York Times ran two stories saying that the Afghan Army is not doing the heavy lifting in Marja and is nowhere near ready to take over the war. This realization occurred to liberal politicians in Holland’s Parliament this weekend and the Dutch government collapsed Sunday over the issue of keeping troops in Afghanistan. The new Dutch government will certainly start withdrawing the Dutch Army from Afghanistan. It has 2000 troops in country and (unlike Germany and France) Dutch soldiers have been in the thick of savage combat from the beginning. So losing 2000 Dutch soldiers is like losing 2000 American or British soldiers.
The loss of good soldiers is not the primary danger represented by the Dutch withdrawal. The withdrawal shows how voters/politicians in Western democracies expect that the Afghan War will soon be over and are shocked to learn otherwise. It will not soon be over and when it is a new Islamic war will quickly spring up to replace it. When Western voters finally realize all this they might demand that the good guys stop fighting. The Dutch withdrawal might spark French and German withdrawals, which might spark a British withdrawal, and then even America will feel pressure from its left wing to withdraw. I don’t think all this will happen, but it is a possibility.
Most Western voters are woefully ignorant of the global conflict. In fact most would ask, “What global conflict?” Your local newspaper never uses the term Long War. The taking heads on the TV news tonight will report that the government of Sudan has agreed to a promising but tenuous peace deal with its southern rebels. The brain-dead talking heads will not explain that the Sudanese Civil War has been going on for decades, has killed nearly 2 million people and is a dangerous component of the Long War. They also won’t explain that the spiritual philosophy that guides the government of Sudan is a deadly bridge linking the Wahhabism of Osama bin Laden to the Sufi mysticism of good bad guy militias painstakingly nurtured by the CIA in central Somalia. Nor will they explain that as the locus of the Long War moves down into Africa the importance of Sudan is magnified. They sure as heck won’t speculate that the CIA might be pulling strings to get this fragile peace deal off the ground. No, none of these insights will be shared on the evening news. So voters remain ignorant.
But here’s a group of folks not woefully ignorant of geopolitics: Hedge Fund Managers. And since today’s bull market has little participation by retail investors it is important that Hedge Fund Managers remain happy. They are not happy when NATO armies withdraw from Afghanistan and Mullah Omar crows in delight.

Karzai Calls The Shots

Charts: The S&P 500 closed at 1109, up .2%. The index is above both the 100-day and 50-day moving averages which is bullish. Over 50% of the correction has been retraced so we are definitely in some kind of rally. About half the chartists are calling this a counter-cyclical rally within an ongoing correction because volume continues to be horrible. Volume is bad because investors understand that any default on sovereign debt would be catastrophic. I’m sticking with my assessment that we are in a shaky rally.

Fundamentals: Yesterday wholesale inflation came in hot, so the Fed raised the interest rate on the discount window. Banks are no longer using the discount window so this is a symbolic move. Symbolic or not it terrified the Asian markets overnight, which crashed. Today consumer inflation came in cooler than expected and this calmed everybody down. Interest rates cannot stay this low forever or even much longer. Consider: 90% of the world’s aluminum stockpiles are owned by hedge funds that gobble up the metal in the spot market with ultra-cheap borrowed money and dole it out to industrial companies over time for an arbitrage profit, causing a dangerous price bubble in the aluminum market. Another example, Chinese and Canadian real estate markets are screeching upward, entering bubble territory. Interest rates need to go up to prevent more bubbles from forming but raising them will cause the carrying costs of massive government debts to sky rocket. We’re between a rock and a hard spot. Stock markets think the Tea Party movement will get deficit hawks elected in the November US elections and then spending will get slashed. If this doesn’t happen we are in big trouble.

Geopolitics: In N. Waziristan, Pakistan, a CIA drone blew away a van and incinerated a Taliban compound yesterday; both belonged to the Haqqani network. So far in 2010 CIA drones have made 17 strikes in Pakistan and killed over 200 of bad guys.
In Afghanistan, the Battle for Marja is growing more deadly for NATO as the good guys attack fortified bad guy positions. Five NATO soldiers died yesterday. I’m putting the bad guy death toll at roughly 170.
I was wrong when I said Gen. McChrystal will become the Emir of Helmand Province. McChrystal is actually letting Pres. Karzai call the shots. Some counterinsurgency experts are criticizing this strategy because Karzai is such a worm. But McChrystal is letting Karzai run the country and to some degree the war. For instance, Karzai is in charge of the efforts to turn the various tribes into anti-Taliban militias and reportedly he isn’t doing that great of a job. McChrystal is nursing Karzai along, trying to turn him into a real leader, like a drill instructor working with a soft recruit. If anybody can do it, McChrystal can (I hope).

Super-Hawk Obama

Charts: The S&P 500 closed at 1107, up .66%. This is day 3 above the 100-day moving average. One more day and long term technical damage is mostly repaired. The 50-day moving average is 1108. The index hit the 50-day line, found resistance, and bounced down. It will be good if it struggles for a long time with the 50-day line and then eventually wins. Volume continues to be terrible, so the rally is shaky. Yield on the 10-year note is screeching up (not good).

Fundamentals: Inflation data came in today hotter than expected, bad for bonds but good for material stocks. I have been rotating out of bonds and into two material stocks: DuPont (DD) and Cree (CREE). Let’s start with DD. America produces nat. gas cheaper than anybody. DD is levered to cheap US nat. gas (as a chemical feedstock), global agriculture, and industrial activity. DD is the world’s leader in titanium dioxide (used in paint); yesterday it raised the price of titanium dioxide. With nearly a 5% dividend, DD can replace bonds in your portfolio. CREE is the leader in LED lighting and it is opening a huge LED factory in China soon. In time every incandescent and florescent light bulb on the planet will be replaced with LED chips, a growth story of epic proportion. CREE is the leader in producing and finding applications for Gallium Nitride and Silicon Carbide. This levers it to a host of growth industries such as hybrid vehicles, solar power, and military applications relevant to the Long War.

Geopolitics: In Pakistan, last week the ISI and CIA captured the two most powerful Afghan Taliban “shadow governors,” or bad guy leaders that run Taliban governments within Afghanistan. Adding to the bad guys’ pain, last night the ISI/CIA captured 9 top Al-Qaeda operatives in Karachi. All these bad guys are being interrogated by the ISI (go long on cattle prods). Ever since the CIA agreed to give the ISI its own drone fleet, the two spy agencies have become so closely entwined they are virtually a single entity. Rubbing salt in the wounds, a senior NATO officer told the New York Times that Special Forces soldiers have killed “three or four” other Afghan Taliban shadow governors in the last few weeks.
The UN is criticizing an American policy that prevents food aid from reaching hungry people in Somalia. Aid workers end up giving much of the food to Al-Shabab, a bribe that allows them to give the rest to civilians. The US won’t put up with Al-Shabab getting a single crumb, even if some innocents go hungry. We are forced once again to quote General Sherman of Civil War fame, “War is cruelty. There is no use trying to reform it. The crueler it is, the sooner it will be over.” Super-hawk Barak Obama may lose his Nobel Peace Prize, but he will never lose a single battle in the Long War.

US Employs Global Strategy For 1st Time

Charts: The S&P 500 closed at 1100, up .42%. This is the second day the index has traded above the 100-day moving average, further technical evidence that the recent correction was a garden variety one. Chartists will want to see at least 4 days above the 100 day line before blowing the all clear whistle. There is a very worrisome inverse dynamic between Greek debt yields ebbing and rising yield on the US ten-year note. As the bond vigilantes stop attacking Greek debt, they start attacking American debt.

Fundamentals: Over 70 years ago John Maynard Keynes proposed a quite valid theory that said the business cycle could be smoothed out if governments ran big surpluses in boom times and deficits in downturns. America and most major economies are not practicing Keynesian policies with today’s stimulus programs because they run big deficits in boom times and bigger deficits in downturns. The effect of this pseudo-Keynesianism is best understood by another economic theory called Ricardian Equivalence (RE), which says that for every dollar of stimulus spent by a heavily indebted government the private sector will hold back a dollar as savings for future tax increases. Empirical data shows that RE is completely valid once debt loads reach a certain level and the trillions of dollars of government stimulus during the Great Recession has been hurting the world recovery. But there is huge political pressure to cut government spending; which we are seeing in Greece and elsewhere. What this all means is that the recovery will grow stronger if government spending is cut.

Geopolitics: 1100 elite Afghan paramilitary police are being deployed in Marja and other key towns in Helmand Province. The deployment is coming one month ahead of schedule. Several hundred more paramilitary cops are in the wings, ready to go. NATO and Afghan soldiers have seized most of their targeted positions in Marja and are moving to link these positions together into a seamless web that will engulf the entire region, placing it under control of the good guys.
Reports of Karzai’s government negotiating peace deals with various Taliban factions are coming with greater frequency. One such meeting was supposed to have occurred recently on the Maldives Islands. It is certainly true that some bad guys will negotiate in bad faith, play possum, and strike back at the good guys at a later date. Nevertheless, all this talk of bad guys surrendering is good news.
In Mogadishu, Somali Army and African Union troops continue to mass against Al Shabab. This will be the biggest and best organized offensive against the bad guys yet, a hopeful sign.
In Yemen, the Houthi rebels have left all their positions that were arrayed against the Saudi Army in the north of the country.
It is impressive that the US has been able to coordinate the action in Yemen and Somalia with the Battle for Marja, the first instance of a global US strategy in 31 years of fighting the Long War. On the other hand, this shows how the sluggish superpower is just beginning to respond as if it there is a global conflict. A long road stretches ahead. Centuries of road, in fact.

Millions of $ Or Torn Toenails? You Decide!

Charts: The S&P 500 closed at 1095, up 1.8%. The index pushed above the 100-day moving average which right now is 1091. If it trades above the 100-day line for several days, then the charts are saying the correction was a garden variety one, the fledgling rally will continue, and a new bear market is not imminent.

Fundamentals: The EU has clarified its bailout plans for Greece. The still evolving plan is a form of tough love: heavy on the tough, light on the love. The stock market would like to see all love. The bond market likes the tough. Since the bond market is leading the stock market right now, tough is good. Today’s rally was a gift from the EU and the USMC (see below).

Geopolitics: Gen. McChrystal is a genius. On the second day of the Battle for Marja 12 civilians were killed by a ground based rocket barrage. McChrystal ordered a halt to this kind of rocket fire and a thorough investigation. Dead Taliban fighters were mixed in with dead civilians. Restriction on rocket fire was lifted. Even the gum-flapping human rights organizations are knocked back by the General’s rigid honesty concerning civilian casualties. He is controlling the Western press. And the citizens of Marja trust the general to keep civilian casualties to a minimum without giving the bad guys a break. When the Taliban blatantly use human shields, the Marines still blow them away, but as carefully as possible. Long story short: the Marines are winning the Battle for Marja and McChrystal will soon open his government-in-a-box. He will then become the Emir of Helmand Province.
The CIA and the ISI have captured the number two leader of the Afghan Taliban, Mullah Baradar. The ISI interrogated this super-bad guy with the CIA observing. The ISI does not have restrictions against water-boarding or tearing off toenails or using even more brutal techniques. The intelligence being gathered by the ISI from Mullah Baradar is vast. Also, it is now virtually certain that H. Mehsud is dead.
Losing in Marja, having the number two Afghan Taliban leader captured, and the number one Pak Taliban leader killed are three colossal blows one right after the other. The bad guys are indeed feeling the pain. Taliban statements are coming out fast and furious. The statements are bellicose but verging on hysteria: “We are winning in Marja! Our top leader is not captured! He is not singing like a canary! Western media is lying!”
All the big Talibans are screaming except one. Gulbuddin Hekmatyar, the leader of the fourth most powerful Taliban, is in peace talks with the good guys. And why not? Honestly cooperating with the CIA lines your pockets with millions of dollars, plus the ISI doesn’t tear out your toenails: a win/win situation.

Uncle Sam Will Get His Wish

Charts: The first half of the bull market saw a gain of about 60%. The second half has seen a gain of less than 2%. Graphic chart patterns no longer resemble the monstrously huge and short-lived bear market bounces of the 1930s. We have almost the exact gains at this point in the current bull as we did at the same point in the 1982 bull. As the ‘82 bull entered its second year earnings and GDP growth ceased moving the stock market, replaced by various credit spreads and interest rate yields as the most important technical indicators. Back then investors only cared that borrowing costs stayed low, nothing else mattered. And so it is today. Stock markets are being led by credit markets, which in turn are being whipsawed by spreads on Greek, Spanish, and Portuguese debt. The credit crisis is still with us. Primary concern has moved from insolvent banks to insolvent countries on the periphery of the Euro-zone. The technical picture is volatile and unpredictable.

Fundamentals: Foreign held Greek debt totals about $300 billion, roughly half as much as the realized losses from Lehman Brother’s collapse. Much of this debt is held by big European banks and insurance companies. Big German banks are also heavily exposed to Credit Default Swaps on Greek debt. This is a déjà vu of Lehman Brothers. The exposed debt of all the other weak countries on the Euro-zone periphery and the handful of weaklings just beyond the periphery (such as Latvia) plus Dubai (its credit spreads are soaring once again) are about ten times greater than the Lehman Brothers losses. If these sovereign weaklings start defaulting in domino fashion (contagion), the global economy will implode.
That’s the bad news. Here’s the good. Greek public opinion polls show overwhelming support for slashing government spending and increasing taxes. Greece has always had a culture of tax evasion. Some Greek taxpayers are now voluntarily paying back taxes. Heavily subsidized Greek farmers and bloated public sector unions are battling mightily to keep the gravy train rolling. The general population hates them and is pushing back. Still, there will literally be blood on the streets of Athens before this is over.
Spain and Portugal are not doing enough fiscal tightening yet to avert disaster but will probably end up doing whatever Greece does. The clock is ticking on a global sovereign debt bomb, a Maalox moment for investors.

Geopolitics: The Battle for Marja has begun. NATO candidly told the Taliban that the battle would start with a huge helicopter airlift of good guys into the town’s center. The bad guys were totally freaked out when this happened exactly as promised. The first few hours saw key road junctures, bridges and the town center seized by air-dropped NATO soldiers. Next, hundred-ton bulldozers carved paths in Marja’s labyrinthine minefields, laid down anti-landmine rocket barrages, and good guys poured into the battle zone. The Marines threw portable steel bridges across canals to avoid bobby-trapped bridges. Reaper and Predator drones circled overhead, firing Hellfire missiles into bad guy positions. Cobra attack helicopters fired more Hellfire missiles. B1 bombers dropped 500-lbs. bombs into larger bad guy positions. Harrier jets stitched the ground with heavy caliber machineguns. The bad guys recovered from their initial shock and are now fighting back fiercely. Causalities are mounting on both sides with a 14-1 kill ratio favoring the good guys (of course).
Gen. McChrystal has an Afghan “government-in-a-box” which will be opened and put in place once the battle is over. In other words, there is a hand-picked cadre of Afghan administrators plus battalions of elite paramilitary Afghan policemen ready to take over and run the Marja region once the NATO task force is removed.
Western media is aggressively reporting every civilian death and human rights organizations are treating these deaths like war crimes, as if they were intentional. So the Taliban’s human shield policy is bearing propaganda fruit for the bad guys. The Marines call Marja “The Heart of Darkness” for good reason. The inevitable loss of Marja’s vast opium production will be a terrible financial blow to the Taliban and will trigger a big Whack-a-mole effect; so we need to pay attention to the other little wars.
In Yemen, the truce between the Houthi rebels and the Yemeni/Saudi Armies is progressing nicely. The Houthi army has released several Saudi soldiers that it had taken prisoner. During the war the Houthis had completely encircled a forward element of the Yemeni Army; that encirclement has been relaxed and the trapped Yemeni soldiers are escaping. A Yemeni helicopter crashed, killing 10 soldiers, but it looks like a technical malfunction, not Houthi fire.
The CIA-led battle against Al Shabab in Somalia is heating up and a fresh battle against AQAP in Yemen is on the horizon. It will take a while for the Whack-a-mole effect (WAM) to funnel bad guys out of Afpak and into Somalia/Yemen. By the time the WAM swings into full gear, the US hopes that the bad guys will be entering a meat grinder, not a comfortable and cozy safe-haven. Looks like Uncle Sam will get his wish.

4 Little Wars = 1 Big War

Charts: Today’s newsletter goes out before the market’s close so let’s dwell on long term charts. Wall Street veterans often say, “As goes January so goes the year.” This is only partially true. Following a steep decline in January the most likely outcome for the rest of the year is a flat to slightly down market. And whether we are in a shaky rally or a stabilizing correction (almost the same thing) the charts do speak toward treading water.

Fundamentals: China tightened monetary policy last night. Inflation data from China the day before was benign so this came as a real shock. On the other hand, Chinese auto sales are still screeching upward, defying forecasts of a cool down. China is likely to keep tightening until its economy slows. Every 20th Century recovery was led by America. This is the first recovery led by China, so the effects of its tightening campaign are unpredictable.

Geopolitics: NATO thinks most of the civilians from Marja have made their escape. It is now sealing escape routes and tightening its encirclement of the Taliban fortress city. Marines and soldiers are wading through very muddy terrain, moving closer to the bad guys’ fortified positions. In the 1950s America built an extensive irrigation system crisscrossing the fertile lands around the city, part of an early Cold War nation building program. These canals are a mess and that’s why the ground is nearly impenetrable. There are more landmines around Marja than anywhere else in the world. After the Battle for Marja the US will rebuild these irrigation canals and bolster the region’s economy in other ways. Gen. McChrystal says these nation building efforts are more important than the fighting.
In Somalia, Al Shabab launched a huge mortar attack against the gathering Somali Army and African Union forces in Mogadishu. As in Marja, civilians are streaming out of Mogadishu as a titanic battle looms.
In Yemen, the government has agreed to a peace deal with the Houthi rebels. The fighting is gradually ebbing in the north, not coming to a sudden halt by any means. However, the Houthi/Saudi peace deal is finally taking hold and experts are confident that this second peace deal will also hold. The next step will be a big offensive against AQAP, which will take a while to organize.
This is the big picture: There is more coordination between the four little wars (Afghanistan, Pakistan, Somalia, and Yemen) within the Long War than ever before, a good thing.

There Is Only The Long War

Charts: The S&P 500 closed at 1078, up 1%. The broad index punched through one resistance level, 1071 and then encountered round number resistance at 1080. Today’s advance comes in low volume so chartists are still divided if the correction is over or not. I’m saying that volume is less important than graphic chart patterns and we are in a shaky sort of rally. Equity volume has to be low to support the government bond market’s insatiable appetite. As Greek bond yields come down US bond yields go up. It’s all very scary.

Fundamentals: The EU says it will not let Greece default on its debt although it is still hammering out bailout details. Weekly US jobless claims unexpectedly improved by 43,000. Maddeningly, the Dept. of Labor said the bad numbers in claims over the past three weeks has been due to it goofing off over the holidays and allowing a work backlog to build, not fundamental weakness in the labor market. After dodging the bullet of Obama-Care the next big fundamental danger is Obama’s proposal to give employers $5000 for almost every new hire, which could cost hundreds of billions. The huge snowstorm engulfing DC may help derail this new deficit threat, perhaps a gift from the stock market Gods.

Geopolitics: Recently the Pak Army has been sending Cobra helicopter gunships into the mountain passes along the Afpak border to stop the flow of bad guys into Afghanistan. Yesterday the bad guys shot down a Cobra, killing 3 high ranking Pak officers and the crew. A bad guy ambush killed 20 more good guys sent in as a rescue team.
The Somali Army has begun shelling Al-Shabab positions in Mogadishu, killing dozens of bad guys as well as civilians. The fighting in other Somali cities appears to be a ruse and the big battle will be in and around Mogadishu. Al Shabab fighters are now pouring into the big city as well as thousands of freshly trained good guys. This is the only Islamic war run by the CIA and if the coming battle goes well it may become a template for other conflicts.
About 3 years ago Canadian forces crushed the Taliban in the city of Marja. The Canadians couldn’t hold the city and gave it back to the bad guys. After that experience the city’s tribal leaders don’t trust NATO to do the right thing and hold the ground it has conquered, even though they hate the Taliban. Today the Afghan government met with the tribal leaders and told them this time it will be different and the greybeards need to cooperate with authorities and get civilians out of Dodge. The Taliban has mined all escape routes from Marja and is telling civilians to stay put.
China has okayed the American aircraft carrier USS Nimitz to make a port call in Hong Kong. This is a sign that China has forgiven America for stuffing billions of dollars worth of weapons into Taiwan and playing footise with the Dalai Lami. More to the point, it is a sign that there is no Cold War between China and America. There is only one global conflict: the Long War.

Greece Fears German Conquest

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

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

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