Long War Does Not Require Brute Force

Geopolitics: Gen. McChrystal has pulled all US soldiers and Marines out of the Korengal Valley, a remote mountainous enclave in northeastern Afghanistan nicknamed the valley of death. As is the case in nearby Nuristan province, Korengal has a strong tribal structure; neither Karzai’s government nor the Taliban hold sway over these fearsome tribesmen. When McChrystal pulled out of Nuristan, the tribes rose up and crushed the Taliban. This is likely to also occur in Korengal.
Indeed, anti-Taliban tribalism is the key to vanquishing the bad guys in Afpak. A tragic incident with the Pak Army illustrates this point. A Pak airstrike recently killed about 70 anti-Taliban tribesmen that were attacking a Taliban compound just as Pak jets were dropping their bombs. Obviously this is a huge blow to the war effort and shows how important intelligence is in the Long War. As good as Pak intelligence is it should have been better. The ISI should have known that good bad guys were attacking bad guys while the good guys were doing the same thing.
US intelligence officials are saying that Iran is closer to deploying nuclear weapons than previously thought, maybe 5 years away rather than 10. Opinion polls in the US show support for allowing Israel to launch an airstrike against Iranian weapon labs and installations. To have any hope of success, Israel would have to seize territory inside Saudi Arabia and build an airbase. This would magnify the Long War into a conventional war as big as WW II and shatter the world economy. A US airstrike against Iran wouldn’t be much better. The answer to the Iranian problem is for the US to strengthen its embryonic proto-alliance with Russia and allow our new ally to control Iran’s nuclear program. Iran can’t move forward without Russian help on nuclear weapons. The Iranian leadership must be turned into good bad guys through skillful American diplomacy with Russia. And on this score there is positive news, the situation in Kyrgyzstan is stabilizing and some cooperation is evident between Russia and the US. When Russia reinforced its airbase in Kyrgyzstan with elite Special Forces troops, the US humbly said it would start using an airbase in Kuwait to replace the Manas base in Kyrgyzstan, mollifying Russia. Now the Manas base is back in business. The Long War is not WW II. It requires smart chess playing, not brute force.

Free Market Fascism

Charts: The S&P 500 closed at 1211, up 1.1%. The index opened above the 1200 resistance level. In the morning it dropped and successfully tested 1200 and then rocked up, bullish chart action. Our next big Fibonacci resistance number is looming at 1240. This is also about where Goldman Sachs says fair value is for the broad index.

Specific Stocks: Singapore is led by a pro-capitalist dictator with a genius-level IQ (the Minister Mentor or MM). He only intervenes in the private sector to make individual companies more profitable. For instance, it is perfectly legal for Singapore Airlines to discriminate against men and average-looking women in favor of beautiful women when hiring flight attendants. But one day the MM noticed that some Singapore Girls weren’t properly filling out their uniforms, so he told the executives to hire even sexier attendants. The country needed a new airport and the only site was an ancient cemetery, revered by the locals. In a democracy the new airport wouldn’t get built. In Singapore the cemetery is bulldozed without fanfare. When western governments are making it quasi-illegal for banks to trade derivatives and slashing bank executive salaries, the MM sees an opportunity and builds a high speed electronic trading platform and offers overseas bank executives bonuses to poach talent from foolish rival countries.
Singapore’s government is a kind of pro-American Fascism. As was the case in Hitler’s Fascist Germany, Singapore practices Eugenics, the scientific breeding of people. Unlike Hitler, the MM doesn’t mindlessly select for eye and hair color, but intelligence, ambition, and multi-racial genetic diversity. Like the old school Fascists, MM spends more on his military as a percent of GDP than any other country and the result is an American ally with fearsome capability.
Does pure free market Fascism work? Last night Singapore announced its GDP grew in Q1 by a mind blowing 32.1%. Manufacturing output was up an unbelievable 139%. The Singapore index (EWS) was up 4% today.
It’s time to consider industrial late-bloomers, companies that will kick into gear at the mid-point in an industrial boom. Last time I broached this topic I mentioned GTI and HSC. Today let’s talk about Wabtec (WAB), a company that manufactures brakes for locomotives and railcars. WAB also makes entire locomotives and railroad signaling equipment. This is all stuff that wears out and needs replacing at the mid-point in a railroad boom. WAB has a big presence in China and India.

CIA Has Finger In Sudanese Pie

Charts: The S&P 500 closed at, 1197, up .07%. The index dropped in early going, hit support at 1190, and bounced up, good chart action. Resistance is at 1200. Yield on the ten-year note keeps going down (bullish for both stocks and bonds). Today is day 2 for the Dow trading above 11,000. Equity volume is horrible, but it must be horrible to support the bond market. Ultimately, geopolitics is supporting the US bond market.

Fundamentals: In 8 months the Bush tax cuts expire, the equivalent of a tax hike. And taxes will steadily rise every year after 2011 as far as the eye can see, choking the private sector. Businesses and individuals are bringing purchases, income, and activity forward into 2010 to beat the gathering tax tsunami, making hay while the sun shines. This will artificially juice the economy for the next few months. Someday there will be a hangover of epic proportion but for now the party continues.

Geopolitics: VP Joe Biden has a big mouth, lucky for us. Biden says that Iraqi Intelligence has not cooperated closely with the CIA in the past but is changing gears and reaching out to its American sister agency. Last week Iraqi counterterrorism operations increased fourfold. After the big election, Al-Qaeda in Iraq launched several big terror strikes against both Sunni and Shiite targets, an attempt to reignite sectarian war. It didn’t work and only forced the good guys to get serious about hunting down the bad guys.
The loser of the election, Maliki, tried several anti-democratic moves to cling to power such as a rigged vote recount and disqualifying candidates he doesn’t like by claiming they are former Baathists. Grand Ayatollah Sistani says he won’t put up with this nonsense and that effectively ends it since defying the Grand Ayatollah would be suicide for Maliki.
It’s almost as if the CIA has handpicked Allawi as the next leader of Iraq. There is evidence that the same thing is happening in the impending elections in Sudan. Jimmy Carter is in Sudan monitoring these elections. The former President says the election is shaping up to be reasonably honest and the current Islamist dictator (a good bad guy), al-Bashir, is likely to win. Al-Bashir is supposedly willing to allow a referendum in a few months that will see southern Sudan split off and form a separate country, which should end the nearly century-long Sudanese civil war. Al-Bashir’s enemies uniformly call him a “CIA stooge,” that plus the fact he is pursuing a host of pro-American policies is strong evidence that the Agency has a finger in the pie.
And the CIA is doing a good job along the Afpak border region where one of its drones killed 5 Taliban leaders yesterday. While the Hellfire missiles were flying, the Pak Army was busy killing several dozen bad guys up and down the length of the border region, a daily occurrence.

Specific Stocks: Private equity firm Cerberus bought small defense company DynCorp yesterday, paying a 50% premium. DynCorp is levered to the Long War. Cerberus is saying that the Long War will last a long time. ITT and CUB are similar to DynCorp. And don’t forget RTN (my favorite).
I am building a position in LTD, maker of Victoria’s Secret lingerie and Body Works. For years LTD wouldn’t make plus size woman’s apparel. It does so now but with the illusion that it does not. Lulu Lemon (LULU, maker of high end women’s athletic apparel) is also pursuing this strategy, to great success. LTD has strong value metrics such as cash flow.

Democracy Is Good For Iraq

Geopolitics: While pushing democracy on Afghanistan and Somalia is a bad idea, democracy is working like a charm in Iraq. The CIA’s good buddy, Allawi, won the recent election by a whisker and he is cobbling together a coalition government, a process that will take a couple months. Allawi made two brilliant moves after the election: 1) He said the multitudinous oil contracts that his predecessor had hammered out with the world’s major energy companies will not be changed even though in the campaign he promised to scrap these deals and negotiate better ones. The existing contracts cannot be improved upon and can only be scrapped or left alone. If left alone, these contracts will increase Iraqi oil production by 12 times over the next 10 years, making Iraq the largest oil exporter in the world. The global recovery cannot continue without cheap oil. 2) Allawi reached out to the Iranian leadership and told them America will never launch an attack against Iran from Iraqi territory. The CIA maintains an anti-Iranian guerilla army in an encampment along the Iran/Iraq border; this would be the source of a US attack. With his vast CIA connections, Allawi is in a position to make good on such a promise. Shiite Iran now publically supports Allawi’s pro-Sunni political party, tacitly endorsing it as the leader in the coalescing jumble of parties that will form the new government. Iran’s former darling, Maqtada al-Sadr, is now sidelined. This is important because when Allawi was Prime Minister of Iraq the first time he (successfully) ordered the Iraqi Army to crush al-Sadr’s radical Shiite Mahdi Army, so the two men hate each other. Without Iranian backing al-Sadr should be toothless.
The Pak Army is killing an average of 15 bad guys a day starting a little more than three weeks ago. This offensive isn’t getting a lot of press but we must remember that the Taliban is like any other army or militia: kill enough bad guy fighters and the bad guys will lose the war. The Pak Army is executing a powerful offensive against the Taliban while at the same time running a large mechanized war game exercise on the Indian border. Backed by its superpower buddy, the Pak Army is a colossus, one of the largest, most effective and powerful armies on Earth.

Russia & USA Must Prevent Civil War

Charts: The S&P 500 closed at 1194, up .7%. Resistance at 1190 was finally breached. The broad index crossed 1190 eight times today. Over the past few days it has repeatedly fought in and out of this battlefield resistance level. A hard fought battle like this is good chart action. Yield on the 10-year note was down today. It is retreating down away from 3.95%, so this resistance level is holding firm, good news.

Fundamentals: The short confession season is over and the long earnings season starts on Monday. The confession season is usually a very accurate predictor of the earnings season and since this confession season was about twice as strong as historical norms it is a safe bet that earnings season will also be very good. Nobody cares. The market is going up and down based on the prospects of Greece getting bailed out. Today the news (rumors) is that Greece will get bailed out after all; hence the rally.

Geopolitics: The government of Kyrgyzstan was overthrown two days ago by pro-democracy rebels. The rebel’s interim government has control over the army and the northern part of the country. It has only spotty control over the south and some parts of the national police force. The ousted president is holed up in the south, trying to gather enough firepower to start a civil war and retake control of the country.
Kyrgyzstan is sharply divided between the south and north. The south is poor, agrarian, Islamic, anti-Russian, and anti-democratic. The north is wealthier, industrialized, anti-Islamic, pro-Russian, and pro-democratic. The interim government is pro-American (since it is pro-democratic) and pro-Russian at the same time.
America’s gigantic Manos air base is in Kyrgyzstan, the most important supply base for the Afghan war, vital to the war effort. Russia also has a big air base in the country, which it is now reinforcing with elite troops. While the Kyrg. government was being overthrown, Russia and America were busy signing the new START treaty, marking the beginning of a proto-alliance. A full scale civil war will erupt in Kyrgyzstan unless Russia and America work together, a test of the proto-alliance. If the two great powers pass the test, it will be bullish; if not, very bearish and here’s why: Aborting the embryonic Russo-American proto-alliance will push Iran and Russia back into each others’ arms, shut down the flow of supplies to the USMC as it starts the big offensive in Kandahar, and heat up the already hot Islamic insurgency in Russia’s Caucasus region.

Specific Stocks: Don’t count your chickens before they hatch. Boeing thinks it is waltzing away with the $100 billion Air Force refueling tanker deal. EADS (A.K.A Airbus) is getting ready to put together a new competitive bid after its last one was shot down. The financial press reported that the Boeing proposal was favored over EADS because Boeing’s planes would be cheaper (dummies). As you will recall, this newsletter reported that Boeing’s proposal was actually favored because it featured superior anti-missile capability against Iran. In preparation for its new bid, EADS is talking to Raytheon (RTN) about forming a partnership and designing the new tanker together. Boeing is very good at anti-missile technology. Raytheon is better than Boeing. Raytheon is better than anybody.

Islamic Dictatorship Is Good

Charts: The S&P 500 closed at 1182, down .6%. Resistance for the broad index is stiff at 1190. Resistance for the Dow is even stiffer at 11,000. But yield on the 10-year note broke through support at 3.95%, which is helpful. Yesterday the VIX (fear gauge) hit a 2 ½ year low, signaling complacency.

Fundamentals: Fear of Greek debt default has flared up again. This is pushing yield on the US treasury 10-year note lower, which is both good and bad, or to put it another way—the threat of Greece defaulting is okay but an actual default would be catastrophic. China is getting ready to allow its currency to rise; again a mixed bag. It will help America and other countries export into China but it means China will buy less American debt and since Congress is still ramping up spending, interest rates will eventually be forced up. Also, any hint of China tightening terrifies investors.

Geopolitics: Afghan President Karzai’s recent behavior isn’t that bizarre if we review Afghan history. The initial US invasion after 9/11 was led by the CIA. The Agency entered the country with suitcases stuffed with hundreds of millions of dollars. The Taliban’s arch-enemy, the Northern Alliance (NA), was given weapons, leadership from Special Forces, and cash. After the NA crushed the bad guys, the strongest war lord in every little valley was given gobs of CIA cash so long as he adopted an anti-Taliban stance. The CIA’s original idea was to build a government around the war lords and the Northern Alliance led by Karzai, who is a Pushtun with long standing ties to the CIA. The Taliban are also Pushtun. Very few Northern Alliance members are Pushtun, so Karzai was the right choice.
The original plan worked great until it was screwed with. The IMF says that in 2004 Afghanistan’s GDP grew by 30%, faster than any other country. With the CIA in charge, the war lords were getting rich and the Taliban was being rooted out. Then the Bush Administration began an anti-war lord campaign, an anti-opium campaign (source of GDP growth), and the first presidential election was held. The result was that opium continued to be produced but the money went to a newly invigorated Taliban, not US allied war lords. The economy fell apart. It will be hard to put the genie back in the bottle; i.e., put the CIA in charge of a tribal based war lord alliance.
Recent events in Somalia illustrate a lesson learned from the mistakes made in Afghanistan. Right now Al-Shabab is engaged in heavy fighting with CIA backed Islamic militia Ahlu Sunnah. The war has been flaring up in Somalia for several days now. Al Shabab has lost every battle fought against Ahlu Sunnah so far. The CIA has been quietly letting Ahlu Sunnah take over the Somali government. A Sufi Islamic dictatorship is evolving in Somalia (how undemocratic!). None of this is being reported by the Western media and that’s why the policy is working.

Democracy Is Bad For Afghanistan

Charts: The S&P 500 closed at 1189, up .2% on the day and 1% on the week. Resistance is at 1190. The Dow is facing stiff resistance at 11,000, which is holding the broad index back. Yield on the 10-year note blew past resistance of 3.95% Monday (scary) but fortunately the 4% danger zone is providing substantial resistance so far. The charts are bullish so long as yield on the ten-year stays under control.

Fundamentals: Since the beginning of the year, the government’s household survey shows the US economy created 1.1 million jobs. The payroll survey on the other hand shows a net loss of jobs. The household survey is more accurate because it captures small and micro-sized businesses, which the payroll survey ignores. The household survey also shows discouraged unemployed workers looking for jobs in huge numbers, this is a first since the recovery began a year ago and a sign that the labor markets are turning around. The Senate and the House have both passed extensions to unemployment benefits but are unable to reconcile the two different bills. If they can’t reconcile, then unemployment extensions will stop. Discouraged workers will only keep looking for jobs if benefits dry up. This very much needs to happen for the recovery to continue.

Geopolitics: For 1979 to 1989, the Soviets occupied Afghanistan and deliberately weakened the country’s tribal structure. From the early 90s to 2001, the Taliban did the same thing, systematically weakened the tribes. After 2001, the Bush Administration and the Taliban each controlled different parts of the country and they both continued weakening the tribes for different reasons. For 30 years the Afghan tribes have been eviscerated and enfeebled. For America to win its war, Afghanistan needs to develop back into a tribal society, then a feudal society, and someday in the distant future: democratic capitalism.
President Karzai is calling the US Army an occupying force and threatening to join the Taliban if he isn’t allowed to run phony-baloney rigged elections. Karzai (rightfully) hates democracy and wants to be a tribal overlord. Unfortunately, Afghan tribalism can only be built from the bottom up, not the top down. The USMC is doing just that in Marja, where they pay money directly to local tribal leaders who then disburse it within their clan. Fearful of the strengthening effect this has on Marja’s tribal structure, the Taliban tries to kill any tribal leader who accepts money from the Marines. In central Marja, the tribal leaders are safe and tribal structures are firming up. In northern Marja, a large percentage of the local leaders are being killed or brutalized.
Here is proof that everything depends on rebuilding Afghan’s tribes and not holding any more elections: In the most remote northeastern corner of the country there is a province called Nuristan where the tribes were never destroyed, not even the British in the 19th century could scratch these fiercely independent tribesmen. In a brilliant move, a few months ago, General McChrystal pulled all NATO forces out of Nuristan. Within short order the Nuristani killed every Taliban fighter in their province. If every Afghan province had tribes as strong as those in Nuristan, the Taliban would cease to exist in about 2 months. Elections massively hinder this goal.
Karzai needs to be mollified by having elections indefinitely postponed. Obama knows this and can hopefully keep Congress and the UN out of the loop.

It Pays To Lose A War

Geopolitics: Since Thursday the Israeli Air Force has attacked five different sites in the Gaza Strip, laying down heavy barrages of bombs and missiles. At the same time, Hamas is firing rockets into Israel; a mini-war is raging in this theater of the Long War. Who are the good guys? The answer: both sides will probably end up being good guys eventually. Here’s why…
On Friday word leaked out that President Obama has “unofficially” been sending retired American ambassadors to meet and negotiate with the leaders of Hamas over the past few months; America has never done this before. Along the same lines, a currently employed (but on vacation) US diplomat met with a Hamas leader in London for a debate sponsored by the Al Jazeera TV channel, a move bordering on diplomatic recognition. Obama is also sending Sen. John Kerry to negotiate with the president of Syria. The US is reaching out to its former Arab enemies in the Israeli/Arab dispute and turning them into friends. Israel, in turn, will become an American enemy unless it switches gears.
Israel might be grabbing the shifter despite its aggression in Gaza. On Friday and Saturday, violence flared in the West Bank as Israeli settlers began a series of demonstrations designed to trigger a violent reaction from the Palestinians and force the Israeli Army to shed Arab blood. The Israeli Army clashed with Palestinians, as we might expect, but it also clashed with the settlers, the undisputed bad guys in the whole mess.
The Israeli Army firing rubber bullets on West Bank settlers is bullish. If Israel is humiliated in its mini-war with Hamas as it was in its war against Hezbollah/Lebanon in 2006, then the Israeli stock market will rock upward. This leads us to a broader principle: any war that results in American interests prevailing is bullish for stocks and the opposite is also true.
If a country wins a war that America wants it to lose, then that country’s stock market will collapse. For instance, Russia won a war against Georgia and Russia’s stock market fell a staggering 75%. What if a country loses a war that America wants it to lose? Iran has in fact been losing its long running cold war against the West and its losses are getting worse. Recently, Russia is starting to lean against Iran. This means more sanctions. That should clobber Iran’s stock market. But Iranian stocks are soaring. It pays to lose a war against the US. Just ask Germany and Japan.

Please Trust CIA

Charts: The S&P 500 closed at 1178, up .7%. The broad index has tested support successfully at 1170 several times over the past few days, good chart action. FXI (Chinese blue chip index) is trading well above its 200-day moving average, bullish for emerging markets. Oil has broken up above $83 a barrel. This is a problem. Yield on the 10-year note is trading below 3.95%, so good so far.

Fundamentals: Industrial data from every major economy came in stronger than expected, led by China. About 45% of the world’s steel is consumed by China but Chinese buildings do not have enough steel in them because of weak building codes and corrupt code enforcement. China will soon consume 50% of the world’s steel. The rest of emerging Asia needs more steel as well. SLX (the steel index) is up 31% in the last six months. Graftech (GTI) is down 4% over that time period. GTI makes the multi-ton graphite electrodes and graphite kiln liners used in electric arc steel mills: they wear out and need replacing at the midpoint in a steel boom, not the early phase. So GTI is a late bloomer. Harsco (HSC) is a steel mill service provider, also a late bloomer.

Geopolitics: In Pakistan’s tribal lands near NATO supply lines, the Taliban attacked two Pak Army forts in platoon-sized units that featured guns, rockets, and explosive laden suicide vehicles, conventional warfare tactics. 25 bad guys were killed. 6 good guys were killed and 30 seriously wounded.
In Indian held Kashmir, over the past few days there have been 3 battles between Taliban fighters and the Indian Army resulting in 4 dead Indian soldiers and 12 dead bad guys. We are seeing the Taliban going on the offensive and racking up surprisingly high kill ratios.
In N. Waziristan, CIA drones killed 6 bad guys. We don’t know if these bad guys are members of the N. Waziristan Taliban (Hezb-e-Islami) but we do know that the N. Waziristan Taliban met with Karzai’s government Tuesday for more peace talks and that the CIA is trying to literally blow apart these negotiations with Hellfire missiles. Yesterday’s drone strikes hit an abandoned school and a compound owned by local tribesmen (not owned by the Taliban). Therefore, whoever is being targeted by the CIA is on the run, digging down deep, acting as if they have been hit many times before. So it probably is the peace-talking N. Waziristan Taliban. The US State Dept. and Army are more tolerant of these peace talks than the CIA. But consider: The N. Waziristan Taliban has far deeper CIA ties than any other Taliban. These ties were developed during the 80s in the Afghan war against the Soviets. So the CIA knows the N. Waziristan Taliban much better than the State Dept. or Army. We should trust the CIA’s judgment.

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.