CIA Short of $

Charts: Over the summer the All-World index dropped 26%. A bear market begins with a 20% drop. So the bull market that started in March of 2009 is over and a new bear has begun. One sign that this new bear has ended would be the S&P 500 trading above its 200 day moving average for several days in a row with other technical indicators turning bullish. The recent rally met savage resistance at the 200-day line (about 1270) which pushed it back into a technical correction. Therefore the charts are saying we are still in a very young bear market.

This means we have an entirely new set of Fibonacci retracement levels. Yesterday the S&P 500 found support at 1187, this is the 61.8% retracement of the first down leg in the new bear market. Today that support was shattered.

The salient technical factor of today's market is volatility. On an intraday basis this market is the most volatile in 200 years. On a closing basis it is the fifth most volatile ever. Forget the VIXX, it measures implied volatility. Actual volatility is best measured by the Excess Volatility (EV) gauge. EV measures the broad index's chart pattern as a percentage deviation from a straight over a series of 5 day periods. Right now EV is about 110%, a normal market has an EV of 30%. Only five times has it got over 100%. When it gets that high one of two things occur: 1) EV quickly drops to a normal level and a multi-year bull run ensues. 2) It drops to about 50% and several more years of bear market follow, this occurred in the mid-70s and 30s. EV has never stayed at today's levels for very long. Continued volatility is bearish. In other words, the Dow going up 500 points one day after dropping 500 points is bearish. It would be better if it retraced the loss with ten days of 50 point gains.

Fundamentals: If left to itself the private sector would absorb the default of Greek and other European government bonds with Credit Default Swaps (CDS). These are insurance-like structured financial products. CDS are shrouded in mythology, for instance they are wrongly blamed for causing the Great Recession. Recently CDS have been paying off very nicely on corporate debt defaults. There is nothing wrong with CDS. Eurozone governments are attacking private sector CDS. They have designed their bail out plans for Euro debt so CDS will not be triggered and announced that so-called naked CDS will soon be illegal. The boneheaded move to make certain CDS illegal a few weeks ago forced investors to sell Italian debt because they assumed that shortly there would be no way to hedge their exposure. The recent escalation in the sovereign debt crisis is due to this attack on private CDS.

Eurozone governments are saying that they will leverage their Euro debt bail out fund by insuring 20% of all bad debt. By itself this obviously won't work because two markets will quickly spring up: 1) The 80% of Euro debt not insured. 2) The 20% that is insured. To combat the formation of a second market for bad debt the Eurozone governments are saying they will create brand new complicated and bizarre structured financial products like CDS. To do this they would have to go to a company like Goldman Sachs. They have not done this and the new structured products don't yet exist, which is (in a way) a good thing because they would be a disaster.

The point of all this is not to cry in our beer about how stupid the Eurozone is. Rather we must be alert for signs the Eurozone is backtracking and starts saying private sector CDS are okay after all. If this doesn't happen it will be very bad.

Geopolitics: With Obama saying all American troops will be out of Iraq in a couple months the pressure on the CIA and NSA to take over all aspects of the Long War are enormous. We know the top spy agencies are over stretched because of the following incident: Several months ago an off-shoot of Islamic Jihad (Palestinian terror group) built a training camp in Egypt's Sinai peninsula where IJ fighters were trained and equipped to look just like Egyptian soldiers. The fake Egyptian soldiers attacked an Israeli outpost and nearly triggered a war between Israel and Egypt.

The Camp David Accord charges the CIA and NSA with monitoring the Sinai for military camps. They have been doing this for decades, but clearly are stretched so thin they are not doing it any longer. This is just the sort of thing they would abandon if they were being pressed everywhere else on the globe.

Libya War Rages On

Fundamentals: The stock market wants the Federal Reserve to implement QE3, printing money out of thin air to buy government bonds. Bernake knows QE3 is a horrible idea but he doesn't want to spook the markets with honesty, so he essentially said,"Probably no QE3, but maybe, we'll see in September." In a childish mood, the market took maybe as yes and rallied.

Also on Friday, Euro-zone ministers are trying to rescue the Greek bail out package, which is falling apart as Finland demands hard liquid collateral for its share of the rescue fund. Finland has talked Greece into siphoning off part of the bail out loan package and putting it into a separate account that insures Finland (and only Finland) suffers no down side. Of course all the other European creditor nations want the same deal, which will derail the bail out, force Greece to default, and destroy the world economy. Germany is trying to get Greece to give state owned real estate to the various creditor nations as collateral. If Germany succeeds, then the new bail out package is much better than the original because it would be more free market, much tougher, and it would result in harsh foreign owners taking over Greek state owned assets if payments are not met: tough love. If Germany fails, we're all screwed.

Long War: The conventional stage of the Libyan War rages on. Gaddafi still controls a sizable chunk of the country. NATO war planes and drones are operating at the same tempo as before. In one sense, the longer the conventional phase lasts, the better. It is a good thing if Gaddafi's forces are ground to dust in a conventional onslaught. It is a good thing if the bad guys fight to the last man in set piece battles and are utterly defeated. If this happens, then the guerrilla phase of the war will be much smaller.

Perhaps sensing that a horrible enemy is emerging in Libya with the new (battle hardened and pro-American) rebel government, AQIM (Al-Qaeda North Africa) is moving into Nigeria. Islamic attacks in Nigeria are exploding. This is crippling oil production and doing as much harm to the world economy as shutting down Libyan oil production. Obviously this widens the North African aspect of the Long War and guarantees that fighting will continue for decades even if the rebels win 100% in Libya.

ASS Wins War

Long War: Media reports gave the impression that the Libya War had ended yesterday, with the rebels victorious. The war still rages as of today, but the rebels are winning. As I write, the rebels are attacking Gaddafi's main command and control complex in Tripoli, Bab al-Azizya. Reports indicate they are successfully tearing apart this complex.

Right before the big rebel push into Tripoli, the CIA announced it was introducing extra Predator drones into the theater. At the time this seemed to serve only one purpose: provide a fig leaf for the imminent exposure of a much bigger CIA footprint in Libya than anyone guessed possible. And indeed, there are an increasing number of media reports of western Special Forces soldiers embedded within the rebel army.

Also, it is becoming apparent that the infrastructure damage from the NATO air campaign is almost zero. Oil refineries, pipelines, bridges, etc... have not even been scratched. But when NATO ran a similar air campaign in Kosovo, the infrastructure damage was huge. The damage in the Balkans was so great much of it has not been repaired even now. CIA drones are capable of clobbering the bad guys without damaging infrastructure to a much greater degree than traditional aerial bombardment from manned jets.

If I am correct in surmising that the CIA's drone campaign in Libya was much bigger than media reports would have us believe, then we have evidence that General Petraeus is in charge of the CIA ahead of schedule (he is supposed to take over in September). During the Iraq War Petraeus displayed a special genius for neutering the Media; this is a unique talent that he alone possesses, no other military commander can muzzle the press the way he can. It is hard to imagine a better skill set for a CIA Director.

Throughout rebel held Libya there is graffiti saying: "Thank you Britain. Thank you France." Apparently there is no graffiti saying: "Thank you America." And certainly there is no talk anywhere of the CIA's role in the Libya War. This is all to the good because America is running a global empire that dares not speak its name and America is fighting a century-long global war while voters have a desperate thirst for a century-long peace.

After Libya is mopped up, our attention must turn to Syria. And this is what we must look for: Turkey getting involved in the Syrian Civil War. We need to see graffiti inside rebel held Syria saying: "Thank you Turkey."

As always, our only concern is investing. We must never forget that there is a 100% correlation between the Anglo-Saxon Superpower (ASS) winning wars and a bull market. Today is a case in point, we are having a huge up day, but the most recent economic data is very weak.

The CIA

Libya: The Free Libya Army has assaulted and taken Tripoli. This should spell the end of the conventional phase of the Libya War. Over the weekend a sophisticated pincer movement engulfed Tripoli as a massive number of sleeper cells were activated within the capital city by imams giving a coded message through the traditional call to prayer. The sleeper cells were installed months ago. The entire operation was highly coordinated and speaks toward a much bigger CIA and French intelligence presence in Libya than anyone guessed possible. Big problems are still possible in Libya, primarily a guerrilla campaign against oil infrastructure. Western intelligence will have its hands full dealing with the aftermath of the war.

Syria: The Syrian rebels will now be emboldened by the success in Libya. Assad will have to use air power to stop them; something he has not yet done to any significant degree. NATO will have to start an air war against Assad and travel the same path that it took in Libya. If not, Iran will vastly increase its power in the region since Assad is an Iranian puppet. And Iran will then have Iraq surrounded. Iran is already engaging in a low level war against Iraq. American and European voters will go insane at the prospect of Libya style air war in Syria. It might be possible to avoid all this if Congress can somehow be forcibly removed from CIA oversight; i.e. targeted assassinations could wipe out Assad's government and Syrian rebels could be built up covertly.

Afghanistan: European leaders within NATO and western diplomats are calling for the resignation of Kandahar police chief, General Raziq, the CIA's point man in southern Afghanistan. Essentially the complaint against Raziq is that he is too hard on the Taliban. When NATO gives Raziq captured insurgent prisoners to interrogate they come back from the interrogation cells bearing the marks of obvious torture. NATO no longer gives Raziq any prisoners.

Afghan experts agree that Raziq is the only man in southern Afghanistan that the Taliban fears. The bad guys are happy they no longer will have to face Raziq if they are captured by NATO troops. But if they are captured by Razik's forces, it will now go even harder on the bad guys.

All of this highlights the crying need to get NATO, the State Department, the US Congress, and everybody else out of the CIA's face and turn it loose. By fits and starts this is indeed happening. The pace that it occurs will dictate whether the global recovery can remain intact.

All Eyes On Libya

Charts: The S&P 500 has executed a death cross. Please go to the blog below this one to reference the significance of this chart formation.

Fundamentals: Advanced economies equal 60-70% of world GDP. As a group they are currently growing at about 0.7%. Economists call this "stall speed," which means that a global recession is likely. The only hope is for emerging market economies to start growing more strongly. They are held back by roaring inflation, which forces tight monetary conditions. The inflation is caused by the high price of oil, which is primarily caused by the Libya War. Despite all the bad economic news, oil went up today. It has to come down or we are royally screwed. This can only happen if the rebels win in Libya.

Long War: The CIA is publicly saying that it is introducing 2 more Predator drones into Libya. It would only say this if its footprint in Libya has grown so large that the mainstream media is on the verge of exposing this growing footprint.

CIA fingerprints are becoming more and more obvious in Libya. We are seeing supposedly untrained rebel fighters effectively calling in NATO air strikes. The rebels are acquiring NATO satellite data of Gaddafi's troop movements even though NATO is not giving them this information.

Gaddafi's capital city of Tripoli is surrounded by the rebel army. All supplies into Tripoli are cut off. The rebels would probably like to let Tripoli starve. But the world economy needs a bloody siege and relatively quick victory.

Gaddafi is in command of small numbers of elite troops who will fight to the death in an urban combat situation. It is very hard to take a city quickly under these conditions.

The US would throw more weight behind the offensive against Tripoli if Russia and China would look the other way. Team Obama has just cancelled the sale of 55 or so advanced F-16 fighters to Taiwan. This could be Team Obama being total wooses or it could be a bargain that allows China to ignore a very heavy CIA footprint in the Libya War.

The coming offensive in the Libya War is the most important event for the world economy anywhere on Earth. Forget the big Fed meeting in Jackson Hole. It means nothing. All eyes on Libya.

Don't Count Chickens Before They Hatch

Charts: The stock market is in a rally attempt. This attempt needs to succeed or we could be in big trouble. Earlier in the year the S&P 500 battled with its 200-day moving average. The loss of this battle knocked stocks down a good 10%. The line in the sand right now is with the formation of a death cross, where the 50-day moving average plunges through the 200-day moving average; when this happens the two lines form a cross. A death cross produces a full blown bear market about 50% of the time. The current rally attempt began just as the 50-day line had curved down and intersected the 200-day line. So we were saved by the bell. If this rally attempt fails and we get a fully formed death cross, then a savage bear market is likely.

If a death cross does not materialize and the market puts in a bottom, then we need to see apathy. We need to see sideways trading. Roaring up in thin volume, as it has done for 2 1/2 years, is not good.

Long War: The Libyan rebels have Tripoli 100% surrounded and are in the process of cutting off all the oil pipelines that feed the capital city. They are planning on choking Tripoli and fomenting rebellion from within. And indeed there have been small armed uprisings inside the city and this is why Gaddafi's top lieutenants are fleeing the ship. Now that he is cornered and on the brink of defeat, Gaddafi must decide whether to use chemical weapons or not. He practice fired a Scud missile yesterday, obviously a prelude to delivering chemical warheads into the rebel held city of Misrata.

Scuds are clumsy. Helicopters are the best way to deliver chemical weapons but then Gaddafi would have to fight through the NATO air force that is constantly overhead. So if he goes down that path, very few chemical weapons will get through. More to the point, the moral authority of NATO will grow immensely if it stops a chemical attack.

And if NATO wins the Libya War, it will be immensely strengthened. It will then start doing better in Afghanistan. No point in counting your chickens before they hatch. If NATO loses a war for the first time ever, the results will be apocalyptic.

Cut Butter, Not Guns

Charts: Earlier this week the all world index at one point registered a 20% decline from its April highs, nipping into bear market territory. Despite that, the market is not technically driven, rather fundamentals and geopolitics are the driving forces.

Fundamentals: China is trying to ride to the rescue again as the world economy teeters on the brink of a horrific double-dip recession. The Great Dragon is letting its currency rise sharply against the dollar, which will give a boost to American exports and lower the price of oil within China. With lower oil prices, Chinese consumers will spend more and overall imports into China will increase which will help Europe and the rest of the world.

China can only raise its currency by buying less American debt. This means there has to be less US debt hitting the credit markets or interest rates will rise in America, which will force a global double-dip recession. So the Congressional super panel charged with reining in US spending is going to have to really do some cutting and then Obama is going to have to back these cuts. If not, China cannot ride to the rescue.

Also, if the super panel doesn't make real cuts to domestic spending it will trigger automatic "doomsday" spending cuts to the CIA and Pentagon, which will be catastrophic to the Long War and Cold War II.

Cold War II: This week China launched its first ever aircraft carrier for a trial run. At the same time, North Korea shelled the same South Korean island that it has attacked in the past. The North Korean shells splashed into the ocean, but came close to doing real damage. South Korea responded with a heavy artillery barrage, with its shells also falling into the ocean. South Korea had the last word, as its shells landed closer and closer to North Korean gun placements, the North tucked tail and silenced its cannons. These two incidents illustrate how huge cuts to the US Navy aren't really possible. Insiders say China plans on building a fleet of four aircraft carrier battle groups by 2030.

Long War: After SEAL Team 6 lost over two dozen men to a Taliban RPG, NATO and the CIA hunted down and killed the Taliban unit responsible. The next day 5 more US soldiers were killed in Afghanistan. President Obama made a speech saying the US is not leaving Afghanistan after this bloody week of combat. None of the doves in Congress made a peep. Obama did a good job with his speech. But the above incident tells us that huge cuts to the Army, USMC, and CIA are not possible.

If you can't make big cuts in the Army, USMC, Navy or CIA, then you aren't making big cuts to Defense. So the Congressional super panel is going to have to cut butter, not guns, or we're all screwed.

Through The Lens of The Long War II

Long War: Through QE2, the Empire (America) tried to tax its provinces by debasing its currency; exactly as its predecessor (ancient Rome) did so many times. The only way a tax like this can stick is if the Empire keeps winning its wars. Is the tax hike sticking? Is America forcing its debt down the world's throat? The S&P downgrade of America's debt was followed by the biggest one day combat loss ever in Afghanistan. Not only did 31 Navy SEALs die as a Taliban RPG took out a transport helicopter, there were 4 other combat deaths that day from separate firefights. Even though financial writers will make no connection between the combat losses in Afghanistan and the debt downgrade, the markets are making a connection, which is amplifying the ongoing stock market correction. Several country stock markets have already been pushed deep into bear territory.

But also over the weekend the CIA backed African Union Army and pro-American Islamic militias seized control of 90% of Mogadishu, the capital of Somalia, dealing Al-Qaeda backed Al-Shabab a nearly mortal blow.

And the Libya rebels have seized a key town which opens up the invasion route to Tripoli, even as they battle Gaddafi/Al-Qaeda sleeper cells that have been activated within the rebel heartland. Overall, a good situation in Libya but clearly not enough CIA presence if bad guy sleeper cells exist inside good guy territory.

So CIA-only Long War hotspots are doing okay.

The recent economic weakness is very good for Al-Qaeda, just as the Great Depression was very good for European Fascism. With oil prices falling, Mideastern economies will only get worse and the ranks of the bad guys will swell. With a nearly infinite pool of jihadist fighters to draw upon, the Long War is morphing into a structure that can not be dealt with by conventional Western military forces.

But the demands on the CIA are many times greater than its capacity and the US Congress is still interfering in Company business, exhibiting an isolationist streak that can only be described as toxic. One example: the rebels in Syria need to be supported by the CIA and they need to win. If Assad wins, then Iran's power is vastly multiplied. Iran is already attacking Iraq by supporting Shiite insurgents. If Iraq were surrounded by both a hostile Iran and Syria, the attacks would soon come from two directions and a conventional invasion would not be far off and the price of oil would reach $300 a barrel.

There are only two ways this dire situation can be rectified: Either Congress increases the CIA's budget by ten times or it absolutely untethers the CIA from all control, a complete free hand in all Company affairs. A sign of this latter possibility would be if DEA agents were pulled out of Afghanistan and somehow media attention is curtailed from the CIA's take over of the world's heroin trade as it tears this cash cow away from the Taliban.

Jobs

Fundamentals: The economy will go into a double-dip recession if jobs growth doesn't pick up. We have three jobs reports to consider. Yesterday the ADP jobs report came in a little bit better than expected. The ADP survey is skewed toward construction and contractors and as a consequence it is the least reliable of the three.

The government's payroll survey said 117,000 jobs were created. This is a horrible number, but better than expected. In the Great Moderation Era (GME) investors are trained to react positively to any data that beats a forecast, even if that data sucks, the forecast beat is everything. Investors are also trained to accept the payroll survey as more accurate than the household survey because supposedly the Federal Reserve only looks at the payroll survey. The GME is characterized by an almost religious belief in the power of the Fed. As far as accuracy, the payroll survey only looks at bigger companies, not self-employed people or very small businesses.

The household survey said 38,000 jobs were lost last month. The month before it said 445,000 jobs were lost. This survey looks at a wide selections of households, where people work for large companies, small ones, and are self-employed; in other words all facets of the labor market are included. It, however, has a smaller sampling size than the payroll survey, thus the Fed's supposed focus on payroll. Over time the smaller sampling size is less important because the household survey is casting its net over an increasingly bigger selections of households, therefore trends established by the household survey over several months should be more accurate than the other surveys.

Other data indicate the household survey is more accurate. So far this year the US economy is growing at a .8% annualized GDP rate. PMI surveys are plunging at a rate equivalent to what happened during the Great Recession, and so forth.

Another troubling economic indicator to watch is the yield on the ten year Italian and Spanish government bond. They both closed yesterday at about 6.2%. A few months ago they were around 4%. If they reach 7%, then Italy and Spain will probably need to be bailed out since the three PIGs needed to be bailed out when their debt yield reached 7%. It seems that the only way to stop the two large Mediterranean countries from reaching 7% would be if the ECB were to start aggressively buying their debt. There are rumors today that this might be happening.

If Spain and Italy require bailing out in the same way that the PIGs did it will be very bad for the global economy because France and Belgium will then need to be bailed out as well. In other words, Germany will have to essentially bail out most of the Euro-Zone, which is impossible.

Through The Lens of The Long War

Long War: The Stock Market is experiencing a historic correction. There hasn't been a downturn this bad in decades. It has many causes, primarily the sovereign debt crisis, which has spread to Italy and Spain, countries that are so big if they need to be bailed out the Euro-zone will be bankrupt. But you can read about all this in the Wall Street Journal. Today let's look at the stock market melt down through the lens of the Long War.

The bill that just raised America's debt ceiling only pretends to cut domestic spending while it actually slashes the budgets of the Pentagon and the CIA. It is unexpected and shocking that the CIA should be singled out for draconian cuts. It would be far better to eliminate aircraft carrier battle groups and actually increase the CIA's budget. That is not in the cards.

Consider recent Long War events... Gaddafi announced he is forming an alliance with Islamic radicals in rebel controlled Libya. Through his son, he is saying that after defeating the rebels, Libya will become a Jihadist nation, like Iran. His alliance has already born fruit, it seems to be responsible for the assassination of the rebels top general. Al-Qaeda will be only too happy to cozy up to Gaddafi, who still has access to billions of dollars in hard currency and gold.

There is a small CIA presence in Libya. But for it to handle a problem of this size there should be a huge presence. Unfortunately there is yet another resolution waiting in the wings of Congress to curtail America's involvement in the Libya War. While bad guys across the globe may tremble at the might of the CIA, the Agency itself trembles in fear of the US Congress. Right now Washington DC is saying it is okay to lose a war. This stance, if fully implemented, has a 100% correlation with a bear market.

And finally, in recent days, the Islamic rebellions in China and Thailand have flared up dramatically. Obviously the US Army is not going to land in Thailand or China. The Long War is morphing into a conflict that only the CIA can deal with.

There are currently three Long War type wars in oil producing regions (Libya, Sudan, and Yemen), this is jacking up the price of oil and crushing global growth. The debt crisis has only one solution: more growth. Every actor in the crisis has cut government spending as much as it will be cut. The Euro-Zone countries have austerity budgets in place. America has made cuts to the war fighters and that is all that will be cut. Growth will only come with lower oil prices.

Al-Zawahiri Is A Genius

Charts: At Midday on August 2, the S&P 500 has crashed through its 200-day moving average in heavy volume. This is not good.

Fundamentals: Nobody is fooled by Congress's phony budget deal. China, European bond investors, average voters on the street, everyone is seeing through the smoke and mirrors. The black hole of America's roaring debt machine is sucking up the world's capital, diverting it away from productive uses and into Uncle Sam's gaping maw.

Long War: The only real cuts in the recently voted budget deal is to the Pentagon and CIA. The only way America can tax the world with its debt is if we clobber the bad guys. This is hard to do with budgets getting slashed.

Meanwhile, out on the Long War battlefields, it is getting hairy. China's Al-Qadea linked Islamic insurgency is exploding across the mineral rich west. If it gets much worse, China will not be able to access vital mineral resources and the world's only big growth machine will falter.

Stepping away and looking at the big picture: Al-Qaeda's new leader, Al-Zawahiri, has a policy of attacking everywhere except in the American heartland. He understands the Tea Party and knows they will give up the rest of the world if America itself is not threatened.

But America is dependent on overseas oil and markets. The only GDP growth we are seeing is coming from exports. If not for exports we would be in a second recession. America cannot give up its global empire and sail blissfully along by itself.

1948, Start Of A Rocky Period

Fundamentals: The "baseline" for the US government budget is the trajectory spending will take if Congress does nothing. In other words, the baseline means all existing laws, like ObamaCare, go into affect. The baseline calls for spending to increase by 7% a year for the next 10 years, which amounts to about $45 trillion in total spending.

The baseline is wrong. Consider Obamacare. The pilot programs running in a few states to test ObamaCare are running 90% over projections. The original projections for Medicare in the 1960s also understated the eventual cost by 90%, so there is a historical precedent for these projections to be inaccurate.

But even if the baseline were accurate, the deal being cobbled together in Washington over the weekend only cuts $1 trillion in spending from the baseline over the next 10 years and another $1 trillion worth of cuts is promised through smoke and mirrors. So spending will grow by 6.5% each year rather 7%.

So we need an election with fiscal hawks winning both chambers of Congress to enact real cuts. If the deal over the weekend convinces voters that the problem has been solved and the coming election does not revolve around spending cuts, then it will be very bad.

Long War: Gaddafi apparently has activated tribal elements within the Free Libya Army that are loyal to him, a fifth column. These elements have assassinated the top general of the FLA and have started a small battle around Benghazi, this is FLA territory. As a consequence, the FLA is back on its heels.

The above development is not the end of the world and the FLA is still overall winning the Libya War. However, it is a reminder that the Long War is at the same stage the Cold War was at in about 1948. We are not at a 1982 moment where victory is clearly in sight and the news is so good it powers a bull market over any obstacles.

An Instant Balanced Budget

Fundamentals: Today, after the bell, the Obama administration is supposed to tell us how it will pick and choose paying government obligations. This comes after Congressional gridlock has made raising the debt ceiling impossible in the short term. If the picking and choosing is done wisely, then we will instantly have a balanced budget and massive spending cuts might not derail the economy. No matter what there will be a Keynesian hit with the government spigot turned off so quickly. It is hard to guess what psychological effect an instant balanced budget will have on global financial markets.

Long War: In Afghanistan, Kandahar: Over the past few weeks there have been five assassinations of political leaders, all of them President Karzai's allies. The most recent was yesterday when a suicide bomber killed the mayor of Kandahar, which almost completely destroys Karzai's influence in southern Afghanistan. The Taliban was at first surprised by the assassination but then decided to take credit for it. Here is an abbreviated quote from the assassinated mayor's daughter: "The Taliban did not kill my father... there are elements within... the police chiefs, who are criminals... and President Obama invests in them."

So it is possible that the CIA's new point man in southern Afghanistan, Police Chief of Kandahar General Razik, is behind all these assassinations.

In the western mountains of Afghanistan the rebels made their biggest one day advance ever against Gaddafi's army. The rebels say they were given satellite data by NATO. But NATO says it did no such thing. So again we have an example of CIA fingerprints.

John Boehner Man of the Hour

Charts: Up until a few weeks ago the current bull market had seen low volatility and one of the highest correlations between different stocks in history. There was no point in even buying individual stocks rather than an index because everything was moving up or down in lockstep. But now, all of a sudden, we have the weakest correlation in history. If one stock beats its earning forecast by a penny it might go up 20% in one day. If another stock misses by a penny it might go down by 20% in one day. And volatility is very high. This shift speaks to naked fear permeating the market. The debt ceiling debate is the source of all this fear.

Fundamentals: Speaker Boehner is holding a vote in the House tonight on his debt plan. It makes some real cuts, although not enough. Its main feature is to extend the debt ceiling only 6 months and therefore make America's debt crisis the focal point of the election. This is very smart because real spending cuts can only come by way of a voter mandate with the Republicans taking both the House and the Senate. Contrary to what the Tea Party thinks, real spending cuts cannot be achieved right now. So tonight's vote is crucial. If Boehner gets his way in the House, then the Senate will quickly vote his plan down. Boehner will then have to craft a new bill with Sen. Reid over the weekend, to do this he will have to give away some spending cuts. Then both chambers will have to vote on the new bill and it must pass before anything resembling a default on America's debt can occur, including a downgrade.

The key factor in the new Boehner/Reid bill will not be how much spending is slashed, rather it will be whether or not the spending ceiling is extended to right before the election or after the election. If it is extended until after the election, then voters can pretend that the problem is solved and they can vote for big spending Democrats and the crisis will start all over again.

That is unless a failure of Boehner's bill immediately reignites the crisis. Interest rates are soaring in Italy and Spain. Cyprus is highly exposed to Greek debt and is teetering on default. A tiny shove and Cyprus will be the first European country to default and contagion will spread through Europe like wildfire, plunging the globe back into recession.

US money market mutual funds represent a key source of short term funding for European banks. These funds are jerking hundreds of billions worth of funding out of the European financial markets. A tiny shove and they will jerk everything out, clobbering European banks.

The majority of central banks across the globe have US dollars as their primary source of reserve. If Boehner's plan fails, the dollar will crash and central banks will become insolvent.

These are just a couple examples. Many other bad things will happen if Boehner's plan fails.

Long War: Today's super volatile stock market is similar to the market in 1948. The charts look exactly alike. Charts did not stabilize until after the Korean War in the early 50s when America entered a period where the Pentagon was not fighting the Cold War, but the CIA was. So this blog will continue to chart CIA activity.

America and World Need The Man

Charts: If the US budget crisis is resolved we will want to buy stocks by using chart analysis. Over the years the KOSPI (Korea) index has led the indexes of Singapore and Taiwan. In other words, Korea moves first and the others follow. YTD Korea is up 8% and Taiwan is down 2%. EWT is the ticker symbol for Taiwan.

Fundamentals: In a whining tone, President Obama gave a speech last night where he begged America to support his vision of pretending to cut the budget after the elections are over. Then House Speaker Boehner gave a speech with a grim face outlining a plan for painful cuts before the election and then more cuts after the election. Boehner promises more unpleasant debate starting now and continuing for years. His plan will make the election about budget cuts. Boehner represents "The Man." You know, the guy starry-eyed left wing college students sell out to when they start making money. In day to day life The Man tells young people to cut up their credit cards and pay cash. If you don't have the cash, go without. The Man is no fun.

Long War: Red-faced, the Pentagon is saying billions of dollars in US Afghan military support contracts have flowed straight into the pockets of the Taliban. America's allies in Afghanistan are corrupt and lazy because aid money and contracts have been thrown around the same way pork barrel spending sloshes around in the US.

In Libya, the Free Libya Army is acquiring a few mine clearing vehicles but 90% of the mine clearing is done by small groups of soldiers poking into sand dunes with sticks while braving withering fire from Gaddafi's Army. These soldiers don't even wear body armor. The FLA doesn't get billion dollar pork barrel contracts from Uncle Sam, just training, leadership, and some limited material support. Yet the FLA is winning while the Afghan Army flounders. You can call this approach The Man or tough love or old school CIA; either way this is the approach that works.

US Debt Debate

Fundamentals: There seems to be four different possible outcomes to the US debt ceiling crisis: 1) President Obama could evoke the 14th amendment and raise the debt ceiling by executive order. If this happened there would be no spending cuts and US debt would get downgraded by the rating agencies. This would jack interest rates and threaten the recovery. 2) The Republicans are trying to pass a resolution in the House that will cut spending by a couple trillion, keep taxes the same, and raise the debt limit only enough to put the issue back into play right before the next election. This is the best scenario on the table right now because it would make cutting the deficit the center piece of the next election. 3) Democrats have a plan where they pretend to cut spending after the election, which they can then ignore if they keep control of the Senate. This would be very bad. 4) If there is no resolution before August 2, then the US will not default on its debt because Treasury can pay interest on the debt, pay all of social security, and keep the Pentagon fully funded with incoming tax receipts. But every other Federal obligation would be in jeopardy. So the rating agencies would probably radically downgrade US debt, which would really jack interest rates and probably trigger another recession.

Long War: Qatar is providing the Libyan rebels with advanced mine detection vehicles to get through the huge mine fields around Brega. Qatar is also ramping up its support for the rebels in a hundred other ways. The rebels are saying that Gaddafi can stay in Libya if he surrenders and agress to live in a highly guarded compound. Presumably Qatar and the CIA are involved in these talks and there may be an endgame in the Libya War.

If Gaddafi were to fall, the rebellion in Syria would explode. The Syrian rebels would see that the sacrifice and misery they have endured could result in victory. The US would have no choice but to support the newly energized Syrian rebels because Assad's government is a puppet of Iran's and Iran will do whatever it takes to keep control of Syria. Remember, Iran's other puppets (the Houthi rebels in northern Yemen and Hezbollah in Lebanon) have made big gains lately. Also, Iran is now supporting Shiite rebels in Iraq with advanced weapons. Iran is on the march and the US cannot allow this. The US public will not want any US involvement in the Syrian rebellion, but perhaps the CIA can get the job done without raising any red flags in the media. It will have to act through Saudi Arabia as it is now acting through Qatar in Libya. There is some evidence of Saudi involvement in Syria already.

The CIA has killed yet another Iranian nuclear weapon researcher in Tehran. This is good news to Saudi Arabia and may help goad them into helping in Yemen and Syria.

In Yemen, Al-Qaeda suicide bombers are hitting Yemeni Army supply convoys that are supporting the war effort in the south. This is hurting the momentum of the good guys and this little war is forming a stalemate. A New York Times Mideast correspondent described what happened when Al-Qaeda took control of Abyan province a few months ago. Jihadist fighters broke into bank vaults and seized stacks of hard currency. The bad guys didn't pocket this loot. Instead they handed it out to people on the street. So we can see that Al-Qaeda is 100% free of corruption and has incredible discipline. This just shows how hard it will be to defeat these bad guys.

CIA Hacks Taliban

Fundamentals: The market rallied yesterday on hope that the US debt ceiling will be raised. The source of hope was a plan put forth by the so-called Gang of Six. This plan is smoke and mirrors. It doesn't specify cuts to the government's budget, but sets up committees to some day make these cuts. Thursday the EU meets to solve Greece's debt problems. Since America's debt problems are being solved with smoke and mirrors, Europe needs a genuine solution.

If every other advanced country on Earth cuts its deficit, then America can be the one lone hold out and keep spending like a drunken sailor. America is in effect taxing the rest of the world. This has been going on for decades, so it's not that big of a stretch. But the superpower needs to win its wars for the tax to stick.

Long War: China is once again experiencing jihadist violence from its Uighur minority. Russia says it foiled a huge Islamic terror attempt in Moscow. Both China and Russia say that their home grown Islamic insurgencies have connections to Al-Qaeda. China shares a border with Afghanistan and Pakistan. Probably because of all this, China is backing off on its aggression against its Asian neighbors over mineral rights to the South China Sea.

The CIA has hacked into the Taliban's mobile network and web sites. It then told the world (pretending it was the Taliban) that Mullah Omar was dead. Now Mullah Omar has to make a public statement to prove he is not dead. This will allow the CIA to trace his courier network. This is how OBL was killed. Probably Mullah Omar will not make a statement. But then he grows more isolated.

CIA Hates Peace Talks

Long War: In Libya, the big push by the Free Libya Army on the eastern front of Brega has bogged down because Gaddafi's army is executing a skillful strategic retreat. As the bad guys are pushed out of Brega, they sow massive minefields in their wake. When the rebels are fully engaged in a laborious effort to dig up these minefields, they suddenly encounter Gaddafi forces disguised as rebels, which is to say bad guys dressed in mismatched civilian clothes driving ragged pickup trucks with homemade rocket launchers. The disguise is so good the rebels can't tell if they are being relieved from their own side or about to be attacked by the bad guys. Then, at the last minute, the disguised bad guys open fire and lay waste to the rebel mine clearing team.

The news out of Yemen is better and in a way similar to the first reports of the rebel offensive in Brega. Here is the similarity: A huge army of anti-Al-Qaeda tribesmen has appeared out of nowhere to attack the bad guys in the southern Yemeni province of Abyan. The difference between the two offensives (One in Libya, the other in Yemen) is that Gaddafi was prepared and ready to deal with the attack while AQAP has been caught flat-footed. And Al-Qaeda is on the retreat in Yemen.

Big armies emerging from the desert out of nowhere speaks to CIA involvement. Recent events in Afghanistan and Pakistan also bear CIA fingerprints but are even harder to interpret. Last weekend we learned that some organization in Afghanistan killed President Karzai's brother. Seemingly a new CIA strongman (Gen. Raziq) was waiting in the wings. During Wali Karzai's funeral there was another attack and several other allies of Pres. Karzai were killed and injured. Gen. Raziq was at the funeral and gave a press conference afterwards, castigating the Taliban for its dastardly deeds. Raziq was unhurt.

Then a day later yet another assassination occurred. This time Pres. Karzai's chief negotiator for the peace talks with the Taliban was killed. With a lot of head scratching, analysts are saying the Taliban must not want to negotiate with President Karzai anymore and rather than simply breaking off the talks, they killed Karzai's representative. If you were Mullah Omar you would want peace talks, you would want to turn the spineless Karzai into a Taliban puppet and return to power without a fight. The CIA, however, has demonstrated in the past that it is willing to kill (with drone strikes) to scuttle peace talks. As a general principle, it is much better to kill bad guys without drone strikes. The best way to kill bad guys is to make it look like other bad guys are killing bad guys.

As far as peace talks, think about how the Vietnam War ended. After years of negotiations, an elaborate peace treaty was hammered out between America and North Vietnam. America then pulled out of Vietnam, pretending that it had not been defeated because of this absurd peace treaty. North Vietnam did not honor its peace treaty commitments but America did. America was played as a fool. The CIA does not want this to happen again.

In any case, we have a change of leadership in Langley. General Petraeus is supposed to take over in September. But he probably has been in charge for a while. Also, Petraeus says he will not make big changes. Instead, he told the media that he is going to sit back for several months and absorb the CIA culture and learn how to become a team player. This is not what he did when he took command of NATO forces in Afghanistan. In Afghanistan he started kicking ass from day one.

Good Guys Strike Back in Libya and Yemen

Charts: At Friday's close the S&P 500 was sitting exactly on its 100-day moving average at 1316. The market is not in a correction nor is it in a rally. It is balanced on a precipice and could go either way from a chart viewpoint. Monday's close and the coming week will be significant to give direction for the rest of the summer.

Fundamentals: This week the US debt ceiling crisis comes to a head and so does the Greek debt crisis with key meetings taking place on either side of the Atlantic. The fundamental picture is balanced on a precipice and this is why the charts are pointing in two directions. On Thursday Greece needs to be actually bailed out with either direct capital injections or EU debt guarantees that lower interest rates, extend and pretend will no longer cut the mustard. Potential outcomes for America's big debt decision is not so clear. If the debt ceiling is raised without meaningful spending cuts, there could be a relief rally as America avoids default. But the global sovereign debt crisis will then get worse. The entire sovereign debt issue is unpredictable.

Long War: Several months ago Al Qaeda seized control over the biggest city in the Yemeni province of Abyan, carving out its own little Caliphate, its own little piece of hell on Earth. In the process it isolated and surrounded the Yemeni Army's heroic 25th Brigade. The bad guys have laid siege to the 25th Brigade ever since. Their inability to destroy the 25th has halted their expansion so far.

A coalition of Yemeni Army regulars and armed tribesmen are fighting through Al-Qaeda front lines this weekend, tearing through the bad guys to rescue the beleaguered 25th Brigade. If the good guys can do this they will have split the enemy forces in two and can start to dismantle the Al-Qaeda caliphate in southern Yemen.

The fact that tribes are fighting with the Yemeni Army speaks to CIA involvement in the offensive and drones are probably providing air support. Even though it will largely be ignored by the outside world, this is a very important battle in the Long War. If Al-Qaeda crushes the offensive and goes on to destroy the 25th, it will be very bad. If the opposite occurs, it will be very good.

In Libya we have seen the Berber tribes in the western mountains making progress but not much has happened in the oil rich east around the city of Brega. That has now changed. The rebels have pushed a professional army up into Brega from deep inside Benghazi and have launched a big multi-pronged assault on the key oil center. NATO war planes are providing massive air support and as of Sunday 1/3 of Brega has been liberated by the Free Libya Army. As Gaddafi's army retreats it is laying down gigantic mine fields to slow the good guy onslaught.

This offensive comes hot on the heels of America officially recognizing the rebels as the legitimate government of Libya. This move will eventually result in the release of $30 billion to the FLA from frozen Gaddafi bank accounts. With $30 billion the FLA can buy attack helicopters, tanks, etc... The combination of these two events will crash the morale in Gaddafi's officer corp and defections are sure to follow.

Gaddafi, however, has billions of his own and the rebels will need a big fully equipped conventional army to wrest Gaddafi out of Tripoli. Ramadan starts in two weeks. Gaddafi is mounting a propaganda blitz to show the Muslim world that the Christian nations in NATO are getting ready to bomb Muslims during the holy month. This propaganda campaign is already bearing some fruit for Gaddafi.

In Afghanistan, the CIA's point man, Ahmed Wali Karzai, was asassinated by one of his security chiefs. The Taliban claimed responsibility for the killing but experts say this is not the case; so some other organization was behind the killing. Ahmed Karzai used drug money to run a CIA supported militia and spy ring in Kandahar. The CIA seems to be already putting forth another strongman, General Raziq, to take over southern Afghanistan.

Ahmed Karzai rigged the last election and helped his brother (H. Karzai) retain the Presidency of Afghanistan. It is a good thing that A. Karzai is dead. General Raziq will create a power base that will help dethrone H. Karzai, who has become a liability. H. Karzai is now prone to calling NATO an occupying power and is in peace talks with the Taliban. Whoever killed A. Karzai might kill H. Karzai. Who do you think killed A. Karzai?

Congress Is Our Greatest Enemy In Long War

Charts: The broad index plunged through key support of 1333 today in a spectacular manner. It is now only 3 points above both the 50-day and 100-day moving averages of about 1316. The Vix (fear gauge) screamed up today. If the index starts punching through 50, 100 and 200 day moving averages with an elevated Vix, it will be very bad. We are approaching Sept. and Oct. These months are the most dangerous for equities.

Fundamentals: The yield and credit default swaps on Italian debt roared up today. The Italian stock market is in a power dive downward. European banks are also falling like rocks. The plan to bail out Greece is unraveling. For the first time there is talk of "controlled" and "selective" default of Greek debt. Greece is bailed out only until September. So without a breakthrough it will default in October. We don't have to guess if there will be contagion to other European countries because there already is. Europe is 25% of the world economy but the real problem is on our side of the Atlantic.

President Obama can raise America's debt ceiling with an executive order. As talks to cut spending fall apart this looks likely. If America does not cut spending the sovereign debt crisis could get worse. There could, however, be a relief rally if he does raise the ceiling. It might be smart to sell into that rally, if it does indeed occur.

Long War: The Pak Army recently mounted an offensive on the tribal land that it will need to secure before a full-scale invasion of North Waziristan can begin. Attacking and conquering North Waziristan is the Holy Grail in the Long War.

As this courageous and vital offensive gets underway, the Pak Army learned Team Obama is slashing its military aid by $800 million. Pak military leaders went incandescent with rage after hearing this. No doubt, the ISID ("D" for dirt) was overjoyed to hear that America is pulling the rug out from under the clean ISI and Pak Army.

The Pak Army will halt its offensive and shut down NATO supply lines that run through Pakistan if pushed hard enough. It has more soldiers involved in much bloodier combat on its side of the Af/Pak border than NATO does on the Afghan side. Furthermore, civilian terror strikes in Pakistan have increased since the death of OBL by (perhaps) a hundredfold. Just last weekend, the streets of Karachi ran red with blood after a huge Taliban terror episode. And the bad guys will be only to happy to make a deal with the Pak Army and stop the terror strikes if offered a deal.

Now is an incredibly bad time to cut off military aid to Pakistan. Team Obama is not stupid, just weak-willed. The House of Representatives is hellbent on taking America out of the Long War. The House would cut off aid to Pakistan if Obama did nothing. And it would have cut off more aid than Obama did. So the cut off was a form of damage control, the lesser of two evils.

But it doesn't make any difference who is to blame. If Pakistan stops fighting in the tribal lands, then the Taliban, Haqqani Network, and Al-Qaeda have in one fell swoop more than doubled their combat capability.

Editor's Note: The Staff of Dave's Market Update is leaving for its annual summer vaction. The blog will be offline for one week.

Panetta Kicks Congress In The Teeth

Charts: If the S&P 500 trades below 1333 for several days in a row it is likely that another correction will ensue. Ideal chart action would be consolidation or trading flat. If the market were to develop a long running flattish trading channel, then we can pick individual stocks and make some money.

Fundamentals: The US government's payroll survey showed a paltry 18,000 jobs were created last month. The household survey showed 455,000 jobs were lost. If the household survey is correct, then a double-dip recession is on the horizon.

The Greek debt crisis has spread to Italy, with the yield on Italian debt soaring last week. Greece is a midget and Italy is a giant. Italy has more outstanding debt than any other Euro-zone country. It is too big to bail out. Still, the real problem is America's debt, which dwarfs that of any other country. If America were to sharply cut spending, the global sovereign debt crisis would ease.

Over the weekend we learned inflation is accelerating in China and growth is slowing. China's problem is high oil. This is also Italy, Greece and America's problem because high oil is slowing economic growth, which is exacerbating the sovereign debt problem. Which takes us to the Long War.

Long War: The US House of Representatives passed a military spending bill which restricts the CIA's ability to place detainees in Gitmo. This is the House's fourth attempt to clip the CIA's wings. A coalition of hard left Democrats and Tea Party Republicans wants America to stop fighting the Long War. The CIA is in their cross hairs because it is taking the lead in the global conflict.

Shortly after the House passed its bill, Sec. of Defense Leon Panetta announced that the CIA is on the verge of strategically defeating Al-Qaeda. Panetta says the CIA has the location of the top 10 Al-Qaeda leaders and can reach out and kill them anytime, which (he claims) will effectively destroy the bad guys.

It is likely that a few Al-Qaeda leaders either have been killed recently or are about to be killed. But this won't destroy Al-Qaeda and it is nowhere close to being defeated. Panetta's statement has very little to do with Al-Qaeda and everything to do with the House's efforts to stick its beak into Company business.

The American public holds the CIA in much higher esteem than its holds Congress. Panetta can paint a picture of heroic CIA operatives battling for America's freedom and blast Congress for hindering these efforts. For instance, he can point out that the current leaders of AQAP were released from Gitmo because of Congressional interference.

The Big Picture

Charts: On a down day when the key Fibonacci retracement level of 1333 is once again under assault it pays to look at both the immediate details of the Long War and the grand cycle that governs the long term outlook.

Long War: American troops in Iraq are now engaged daily against Shiite militias supported by Iran. Casualties in Iraq are greater than in Afghanistan. Obama says he wants to keep 10,000 American troops in Iraq to serve as a trip wire in case Iran invades Iraq, much like the 30,000 US troops in South Korea who also serve as a trip wire, i.e. if North Korea invades South Korea, the US would have to go to war.

The Yemeni Army yesterday lost 10 soldiers in ground combat with Al-Qaeda. It appears that Al-Qaeda is (for the moment) winning in Yemen.

The Berber tribes and the CIA are taking the wood to Gaddafi. The good guys are winning in Libya.

Okay, let's look at the big picture. Shortly after the Bush administration coined the phrase "War on Terror" scholars at the Pentagon rejected this term because it was inaccurate. Terrorism is actually not the main focus of the enemy. Suicide bombers are more likely to hit military targets than civilian ones and the bad guys are even more likely to fight in conventional military units such as what we are now seeing in Yemen.

So the term Long War Against Islamic Extremist Militias was created. But this is also inaccurate and reflects wishful thinking. The Long War encompasses much more than Islamic militias. The first Gulf War was a Long War action and it was against a nation state, Saddam Hussien's Iraq. The three decade long cold war against Iran is nation state vs. nation state. The war in Libya is against a truncated nation state, Gaddafi's rump government. Eritrea and North Sudan are jihadist nation states. Once Syria crushes its "Arab Spring" revolution it will certainly become a jihadist nation state. If Hezbollah were to take full control of Lebanon it would become a jihadist nation state. North Waziristan is pretty much a jihadist nation state and can only be conquered by a conventional army. All jihadist nation states are enemies in the Long War.

The more accurate term then should be the Long War Against Islamic Extremist Militias and Jihadist Nation States. And this is the big picture: Around the beginning of the Christian era, Rome had conquered every major power in the known world except the gigantic Persian Empire to the east. Rome then went to war against all the existing smaller powers, as well as barbarian tribes on the periphery of its empire, and it continued what proved to be a 700-year long cold war with Persia. The historical parallels between then and now are stark. America = Rome. China = Persia. Islamic militias = Barbarian tribes. Jihadist nation states = Smaller powers.

There were three different enemies facing Rome just as there are three different enemies facing America. For economic expansion to gain ground the two different kinds of Islamic enemies need to be steadily ground down and China needs to be held at bay. Sometime in the distant future radical Islam will be defeated and a day of reckoning with China will occur.

Brain Dead US House of Representatives

Long War: The US House of Representatives voted 225-201 to cut off funding for any US effort to train and equip Libyan rebels. This measure is unlikely to pass the Senate and even then it would be vetoed by the President. Nevertheless, it is troubling because the vote takes direct aim at the CIA, a towering example of Congressional stupidity and hubris. And previous House attempts to muzzle the CIA were defeated. This is the first one to pass. I don't like the momentum it is seemingly creating.

Consider the backdrop behind this ill-conceived vote. The youthful "Arab Spring" Libyan rebels in the east are unable to make any progress against Gaddafi's army. But the Berber tribes in the western mountains are capturing village after village and severing supply lines to Tripoli, a python strangling a goat. The Berbers are winning the war and as explained in yesterday's blog, there is reason to believe heavy CIA involvement is propelling these gains.

There was good news on jobs today but the price of oil rocked up. Any bit of good economic news is self-defeating because it spikes oil in the current geopolitical environment. The global expansion will only continue if oil comes down and this will only happen if Gaddafi is defeated, which will not only reopen production in the massive Libyan oil fields it will also tamp down Islamic violence in oil rich Nigeria and Sudan.

The House doesn't have the foggiest notion what a victory for Gaddafi would entail. The sanctions on Libyan oil would then become permanent. The current Libyan war has knocked oil prices up by about $20 a barrel, but this increase is predicated on the Libyan oil shut down being temporary. If it were permanent, oil would really rock up.

Gaddafi at one time was the largest sponsor of state terrorism on the planet. If he were victorious he would surely unleash a hurricane of terror across the globe. And for the first time in history NATO would have been defeated in combat. This would probably spell the end to NATO as an effective fighting alliance. The war in Afghanistan is a NATO effort. If NATO were to effectively collapse, Afghanistan would be handed over to the Taliban and Al-Qaeda.

America is tired of war but war is not tired of America. Just yesterday Homeland Security admitted that it is monitoring a plot by AQAP to put suicide bombers with surgically implanted bombs in airliners. The mainstream media is treating this like a joke. But there have been reports for years of Pakistani surgeons training with Al-Qaeda to use breast implants as bombs. These would be undetectable by current electronic screening devices. Only trained dogs could detect these devices and there is no effort to use dogs in this fashion.

Finally, clipping the CIA's wings right now as it is taking over from the Pentagon as the main instrument for fighting the Long War would be toxic beyond belief.

The reason for the vote against the CIA is the ongoing talks to curb the US deficit. These talks need to be finalized and the wild thrashing around on the part of Congress needs to halt.

CIA Doing Better

Charts: Last week's gigantic rally came on volume that was the lowest yet for the current bull market. Volume could be described as paper thin, very fragile. As such the market desperately needs to consolidate, e.i. trade flat to slightly up. Since it breached the key level of 1333, it needs to consolidate above that level.

Fundamentals: The big American rating agencies recently downgraded Euro-periphery debt. This should have sent the Dow down 1000 points. But counter-intuitively it ignited a fire under the Germans and the European troika charged with bailing out the weak Euro countries. The Germans are essentially saying, "Nobody is allowed to beat up my little brother, except me." The Germans have so far put together a Mickey Mouse bail out package. But today they are so insulted by the Americans calling their little brother (Greece and Portugal) an insolvent mess, they are (perhaps) gearing up to mount a more serious bail out effort. This is good news but the Euro-debt problem is still a huge mess that could tear down the world economy. Credit markets are saying there is an 85% chance Greece will default and 59%chance Portugal will also. The ultimate solution is for the EU to guarantee all of Greece's debt and then have the Germans run an expanded privatization program. Guaranteeing Greece's debt would slash the interest rates it has to pay to service its debt. The current bail out locks in super high interest rates, which will definitely cause a default in time. The current bail out program is a typical "Extend and Pretend" gimmick similar to how Japan's zombie banks dealt with bad loans. It will not work.

Long War: The CIA is over-stretched and having a hard time fighting everywhere in the global war against Islamic bad guys but in Libya the situation is looking better. In Tripoli (Gaddafi's only real stronghold) the night is filled with armed revolutionaries attacking police check points. During the day Gaddafi's secret police comb neighborhoods and arrest suspected insurgents. But the next night the good guys are only stronger. This is a sort of new front in the war and it bears Agency fingerprints.

The rebels have mounted a co-ordinated two pronged assault on Gaddafi's army from Misrata and the western mountains. The strongest rebel force and the one doing Gaddafi the most damage is the Berber tribesmen in the western mountains. There are reports of Qatar and France arming these rebels and while these reports are certainly true the activation of a non-Arab tribal fighting force is classic CIA tactics. In a broader historical context, this divide and conquer tactic is also what the British East India Company would have done and when we see actions that look imperial it speaks to CIA involvement. Furthermore, the co-ordination of the Free Libya Army in Misrata with the Berber tribe speaks to an outside force directing a larger overall strategy.

Surge in Long War Violence

Long War: Equity markets are (for now) ignoring the overall bad situation in the LW. The price of oil, however, continues to trade at elevated levels and this is due mostly to the recent big surge in LW violence.

North Sudan is locked into a relatively large war in the disputed province of South Kordofan and a small war in Blue Nile. North Sudan is not at war with South Sudan, but rather with tribes allied to South Sudan in the two disputed provinces. The US is restraining South Sudan and trying to get Ethiopia to install peacekeepers in the disputed provinces. It looks as though North Sudan is using the peace talks with Ethiopia as a delaying tactic to keep pounding S. Kordofan. South Sudan will only put up with this for so long and appeasement never works. The possibility of full-scale war between North and South Sudan is at least 50/50.

The nearly century old Sudanese conflict pits African Muslims against African Christians and has its roots all the way back to the crusades. Nigeria has seen a huge increase in Muslim on Christian terror strikes in the past couple weeks. This is directly linked to violence in Sudan. Nigerian oil infrastructure has not been hit yet by Islamic radicals, but this would be the next step if Sudan descended into full-scale war. Nigeria is a major oil supplier.

Al-Qaeda in the Arabian Peninsula (AQAP) has seized control over the Yemeni province of Abyan. As I write the Yemeni Air Force is bombing AQAP positions in Abyan cities. The truncated Yemeni government of deposed pro-American dictator Saleh says it needs help against AQAP soon or it will be directly threatened by AQAP.

The CIA and US Army Special Forces have mounted a robust drone campaign in Yemen and this campaign has recently expanded to Somalia because AQAP has also expanded into Somalia, reaching out to Al-Shabab.

There is good news, the Pakistan Army has mounted a large offensive, involving thousands of soldiers, against a tribal land bordering North Waziristan. This would be the logical staging ground for a full-scale assault on North Waziristan.

In Iraq, US soldiers are in combat once again. Not against Al-Qaeda but Shiite militias funded by Iran. This is in conjunction with the success of the pro-Iranian Houthi rebels who have carved out an independent country in northern Yemen. The US Army and USMC will leave Iraq vulnerable to intimidation from Iran once they leave in a few months.

The overall Long War situation can be described as entering a transition period between the Pentagon in charge and the CIA in charge. The transition period though has a lag built into it, the Pentagon is retreating faster than the overly stretched CIA can advance, leaving a gap. This gap is causing the current surge in LW violence.

CIA = British East India Co.

Charts: At midday on the first of July the S&P 500 is at 1333, the last Fibonacci number in the series and a level freighted with cosmic significance. Earlier in the year the index blew past this key level twice in low volume and both times it came crashing back. At the time I said the index needs to hug 1333 and consolidate. That is also true now.

Fundamentals: American employment data is weak. Over the past two days American industrial data has come in stronger than expected. This could mean that the last two months of weak American industrial data was due to the Japanese earthquake and this negative effect is ebbing. Chinese industrial data continues to be weak. But if oil prices stabilize and Chinese real estate cools, which appears to be happening, then China can hit the monetary gas and juice its economy again.

Long War: The US Justice Department had been investigating 100 CIA interrogation cases where torture had been employed. Justice has narrowed its investigation to just two cases, where both detainees were killed during interrogation. Justice hinted that it really isn't going to go after these two cases very hard. The ACLU was enraged by this development. The CIA was very happy.

Combine this with the recent House vote where brain dead politicians failed to interfere in Company business and we are seeing (hopefully) the beginning of all non-CIA branches of government removing their long beaks from CIA affairs.

If it is totally left alone and allowed to act with 100% freedom, the CIA will evolve into something like the British East India Company (BEIC) of the 19th century. Britain didn't conquer the world with its army, BEIC did that under government license using inexpensive native troops. America has spent over a trillion dollars fighting in Afghanistan and Iraq. If a modern day BEIC were to have performed the same task, it would have made a profit and paid taxes to the government. Also, it would have won more easily.

BEIC invented the modern stock market. It was the first ever publicly traded company, the first where short and long positions were struck. The modern industrial world evolved from BEIC and the establishment of the British Empire. So if the CIA were to evolve into a modern version of BEIC, then history will be repeating itself or we could say retracing a previous path. And this helps explain why Fibonacci retracement levels are so important.

Haqqani Network Takes a Blow

Long War: A couple days ago the Kabul Attack Network (KAN) launched a terror strike on a prominent hotel in downtown Kabul, killing foreign businessmen and stabbing a dagger into the heart of the war effort. Today a NATO air strike killed the Haqqani Network chieftain who organized the terror strike. KAN is an elite group of jihadist fighters handpicked from the Pakistan Taliban, Haqqani Network, and other terror groups. It is essentially run by the Haqqani Network and is a tool not only for launching sophisticated terror strikes but also to establish the Haqqani Network as dominant over its fellow jihadist organizations in the Af/Pak theater. What then is the Haqqani Network and what are the implications of today's successful blow against it?

We must go all the way back to the mujaheddin war against the Soviet occupation of Afghanistan to answer the first question. The Haqqani Network was associated more closely with the CIA and ISI during the anti-Soviet war than any other mujaheddin group. The Haqqanis were in fact created by the CIA and ISI and as a consequence they were (and are) the best of the best. Osama Bin Laden rose to prominence after the Soviets left Afghanistan because his group of mujaheddin never accepted money or training from the CIA, totally the opposite of the Haqqanis.

But as years of Afghan fighting wore on after 9/11 it became less and less important who was associated with the CIA back in the old days and more important who was skilled and effective in the here and now. Also, as a creature of the ISI, the Haqqanis had lots of useful contacts within the Pak government. In fact the Haqqanis and the dirty part of the ISI are like a hand and glove.

Finding and killing the leader of the Kabul hotel terror strike so quickly means that the CIA has infiltrated the ISI or the Haqqani Network or KAN or all three.

Now let's take a step back and examine the relationship between the CIA and ISI. It is best explained with an analogy. The relationship is like a dysfunctional marriage where the husband (CIA) routinely beats the wife (ISI). And as is so often the case in a relationship like that, the wife often leaves the husband only to come crawling back, weeping and groveling. Also, there is always the chance that the wife will try to stab the husband while he sleeps but the husband wakes up just in time and then gives the wife a sound thrashing.

So with all this in mind I have one other news item for you: The Pak government (probably at the behest of the ISI) has closed down a key CIA drone base inside Pakistan. If we put our analogy in play it works like this: The CIA has killed an asset of the ISID (ISI Dirt), this is like the husband beating the wife. In retaliation, the ISI has closed down a CIA drone base, the wife tries to stab the husband in his sleep. But the husband and wife still love each other despite the dysfunction and the marriage lives on.

Senators Lick Their Wounds

Charts: The S&P 500 closed above 1300, which is the 50% retracement of the recent correction. Stock prices say we are now in a technical rally but volume patterns say we are not. The entire bull market over the past couple years has shown strong price action and weak volume.

Fundamentals: Jobless claims came in weaker than expected. Oil popped up so overall fundamentals continue to suck. The market of course is fixated on Greece, and nothing else. The Greek Parliament voted for the austerity bill with a wide enough margin to assure Tomorrow's vote on specific spending cuts will go through. Investors are apparently hoping that Greece will be permanently bailed out by Germany and the troika in the same way that Fannie Mae and Freddie Mac are being permanently bailed out by the US Treasury. For this to happen Greece will have to actually implement all aspects of the austerity package. Remember, there was an earlier austerity package a year ago and Greece did not implement it. Perhaps with the Germans breathing down Greece's neck it will do a better job this time. Since the austerity package is flawed, Greece will continue to flounder in a horrible recession, living through a sort of economic purgatory. Other peripheral Euro-zone countries will see this and perhaps make free market reforms to avoid Greece's fate.

Long War: General Petraeus has hung up his uniform and quit the Army. Soon he will take over the CIA. He was considered the most politically astute general of our times and the most media savvy. In Iraq he was able to muzzle the media by (in essence) threatening to not protect embedded reports as they went on combat patrols with US troops. What the CIA needs to do in Afghanistan is not a mystery to Petraeus or the existing CIA leadership. The trick is to get Congress and the media out of the loop so they will be able act freely. Can he do it?

Petraeus' confirmation hearing in the Senate was encouraging. The Senators latched onto the fact that the general disagreed with Obama's sharp troop reduction call in Afghanistan. They tried to get Petraeus to say he would resign from the Army over this disagreement if he weren't going to the CIA. The general was prepared for this nonsense and made a stirring speech about how the privates in the line of fire can't resign, commanders also should never resign, and even suggesting it was unpatriotic to bring the subject up. The speech wound up in the media and made the Senators look bad. They were licking their wounds after the hearing and are probably eager to avoid confronting the new head spook again. A good start.

Pangalos Threatens Military Take-over

Charts: The market is in a rally attempt, the 8th one within the ongoing correction. We are seeing big gains that are magnified by weak volume. Leadership is much improved in this rally attempt. Today Caterpillar is up about 3%. The S&P 500 is something like 30 points above its 200-day moving average, taking it well away from the danger zone. Still, truly leaving the danger zone depends on the Greek vote.

Fundamentals: In the last few weeks Greek banks have lost about 8% of their depositor base, pushing them close to total collapse. Greek Deputy PM Pangalos says that if the two austerity bills are not voted through Parliament, he will call out tanks and the army to blockade Greek banks to prevent further runs on deposits. The threat of a quasi-military take-over has seemingly pushed wavering PMs into supporting the austerity bills, so passage now appears likely. And we are seeing a global relief rally in response. Lost in all this is a host of weak economic data such as horrible consumer spending in the US, zero wage growth and bad consumer confidence. If the Greek debacle is solved or at least kicked down the road at least a year, maybe all this weak data will turn around. When Lehman Brothers folded, consumers immediately stopped spending. This surprised economists who thought consumers world-wide were too stupid to understand the implications of the credit crisis. Even humble street vendors in New Delhi stopped spending, humble but not stupid.

It is still likely that the Greek government will not implement the austerity measures once the white hot spotlight of world attention is turned away. We should look at the bigger picture of sovereign debt, and not focus solely on Greece. This week the US government is selling $99 billion worth of debt. Forgiving one week's worth of US debt would almost make Greece whole. The problem of global sovereign debt will only be solved if the ongoing talks between Obama and the Republicans produce a big cut in spending. Turing America's debt problem around would take pressure off Greece, Portugal, and everybody. And it would make for a long lasting bull market.

Long War: The armies of Mauritania and Mali joined together last week to attack what was probably the largest Al-Qaeda camp in North Africa. A sizable battle ensued featuring air strikes from the good guys and apparently artillery and other heavy weapons from the bad guys. Almost certainly US satellite data and other intelligence assets were involved in this operation. A similar strike involving a US attack helicopter was launched against Al-Shabab at about the same time in Somalia. And finally, a Yemeni security patrol caught a large number of Al-Qaeda bombers entering the country from the sea. All of these incidents involve the CIA and show us the way forward into the 21st century.

There is no way US Marines can land in Mali or put boots on the ground in Somalia. As I've repeatedly said, there is only one answer, CIA. That's why the defeat in the House (two weeks ago) of a bill to curb Agency activity in Libya was so welcome. We need Congress to get its beak 100% out of Company business, bring home the US Army and USMC, and turn running the world over to the spooks in Langley.

The Taliban is Like Japan

Charts: We've seen the 200-day moving average of the S&P 500 repeatedly tested in recent days. Each time it has been tested, it has found support, which is good. Here's the rub, the index is finding support exactly at the 200-day line. The precision is too great for it to be simple technical support. This means there are computerized trading programs moving the market. They will likely dump stocks if the 200-day line does not hold up. And programs like this can be very dangerous: computerized stop losses caused the flash crash 14 months ago that sent the Dow index down nearly 1000 points in a few hours. The flash crash stop losses were put in place because of the Greek debt crisis and we are still grappling with this issue.

Fundamentals: On Wednesday the Greek Parliament will vote on a broad austerity program and on Thursday it will vote on specific legislation to enact the broad program. Greek Deputy PM Pangalos says the Wednesday vote is pretty much a cinch but the Thursday vote is still up in the air. This is because specific cuts will hurt specific Members of Parliament (MPs) while the broad program does not directly do this. If either vote fails, Armageddon will descend upon our portfolios like the wrath of an avenging God (scary). The stock market thinks everything will turn up roses because nobody could be so stupid as to invite the wrath of an avenging God. Who could be that dumb? Keep reading...

The Greek Socialist party is sponsoring the legislation and holds the key for victory. It controls 155 seats out of 300. One Socialist MP has defected and two are on the fence. So right now there is a cushion of only two votes. Last Thursday the EU/IMF/ECB (the so-called Troika) toughened the austerity package. One of the things the Troika did was increase taxes on Greek minimum wage workers. This was incredibly stupid because it won't generate much revenue but it enraged Greek voters.

The Trokia's austerity package is in fact very poorly designed, heavy on job killing taxes and light on privatization. The Greek government owns over $300 billion in hard assets and has only $400 billion in outstanding debt. So massive privatization combined with a lower-tax, business-friendly environment could easily solve the problem. But that is not on the table.

What is on the table will bankrupt Greece and force a default at some time in the future. The term "kick the can down the road" has appeared hundreds of times in financial periodicals to describe this approach. Everybody knows Greece will default, it's only a question of when. The stock market wants the vote to succeed, have the can kicked down the road a couple years, and then rally in relief.

If the vote succeeds, there probably will be a global relief rally. But the market is wrong if it thinks the can will be kicked down the road for years. It might be only months or weeks or even days. Here's why...

The first Greek bail out package over a year ago was also accompanied by an austerity program. The first program did not get off the ground very far. For instance, Greek tax collection is based on Medieval customs where tax collectors are given a territory and tacitly allowed to pocket bribes as they shake down tax payers. This was supposed to have been reformed by the first program but wasn't.

If the vote does succeed, the bond and credit default swap markets will be watching to see if the second austerity program is actually being implemented. Probably it won't be implemented because of the stupid taxes on low income Greeks and all the other garbage put in place by the Troika. If the credit markets start to panic, the equity markets will eventually follow suit.

Long War: There are more American combat deaths in Iraq right now than there are in Afghanistan. American combat deaths in Iraq are at a three year high and as the US troop draw down goes into high gear things are looking dicey. Long War hot spots run by the Pentagon (Iraq and Afghanistan) aren't doing very well. The hot spots run by the CIA (everywhere else) are doing much better. This brings us to Joe Biden's vision.

After the surge troops are withdrawn from Afghanistan there will be 70,000 US soldiers left in country. Biden wants them to stop engaging in "nation building" and instead deploy around huge military compounds that will be home to a fleet of CIA drones. Without nation building, civilian foreign aid will be stopped, saving billions. When the CIA is in charge there is never very much civilian foreign aid.

The CIA knows there is an inverse relationship between GDP growth in developing countries and foreign aid. The more aid, the less growth. Take the Marshal Plan after WW II. Ten times more aid went to Britain than Germany. But Germany's economy grew three times faster than Britain's. Then there's Somaliland, an independent (but unrecognized) country in Africa that receives zero foreign aid. It grows faster than similar countries that get foreign aid. One of the reason why the Libyan rebels are doing better than our Afghan allies is that the Libyan good guys aren't getting any real foreign aid.

Biden says that this CIA-centric structure will be permanent. A low level guerrilla war will be fought in Af/Pak for decades. He is very wise to admit this up front. All in all, Biden's vision is excellent. Here's the problem, Obama doesn't want a permanent war. And this is why we are hearing so much about America's not-so-secret peace talks with the Taliban. Apparently Obama thinks that the Taliban can be talked into peace and the whole problem will just go away. Here is another inverse relationship for you: The greater the number of combat deaths an army is willing to absorb, the less chance there is for a given war to be settled through negotiation.

In WW II, the Italian Army was quick to surrender on the battlefield, unwilling to absorb combat losses, and it was also amicable to peace talks. But the Japanese Army was willing to absorb huge combat losses. Japan had to have not one, but two, Atomic bombs dropped on it, plus face a post nuclear occupation from the Soviet Union, before it was willing to engage in peace talks. The Taliban is like Japan, not Italy.

A Long and Bumpy Road

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

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

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

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

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

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

Victory for AQAP

Charts: Yesterday's big gain in the S&P 500 came in weak volume. The Nasdaq also had a big gain which came in good volume. It is not clear whether the big up day was a follow through day because of this mixed message. For the S&P 500, 1300 is the 50% retracement of the correction. Because of the mixed message of the maybe follow through day we need to see 1300 conquered to be sure a technical rally is underway.

Fundamentals: The markets are still scared of Greece. The Greek Parliament votes on an austerity budget on Tuesday. If this vote doesn't have a favorable outcome global financial markets will tank.

Long War: On Thursday the House votes on two bills concerning the Libya war. One bill gives the green light to continued military action. The other will end drone missile strikes and other military activity, but allows refueling of NATO fighters. This second bill is toxic since it has Congress sticking its beak in Company business (telling CIA what to do). Furthermore, anything that hurts the war effort in Libya is bad because North Sudan is in a shooting war with tribal militias allied to South Sudan. In other words, North and South Sudan are a heartbeat away from full scale war. So the Libya war is already spilling outward and could enflame the entire region.

Saudi Arabia is trying to cobble together a government in Yemen. There is a shooting war between the Yemeni Army and AQAP. The good guys are being led by deposed Yemeni dictator Saleh's sons. So the media has it wrong, Saleh's government is the only thing holding Al-Qaeda at bay. The Saudis are wisely trying to meld the existing government with strong tribal factions. AQAP had been losing the war but yesterday it broke a hundred or so AQAP fighters out of prison and is rejuvenated. Forget democracy and the Arab Spring, there are two possibilities in Yemen, either it becomes a sort of vassal to Saudi Arabia or it becomes Al-Qaeda central.

Let Slip the Dogs of War

Charts: Technicians say various chart patterns indicate there is a 90% chance the Greek Parliament will vote in favor of the new austerity government put in place last week.

Fundamentals: After the market closes the Greek parliament holds its vote. If the vote doesn't go as expected bad things will happen to financial markets. Most analysts say it will be about as bad as the collapse of Lehman Brothers. We'll soon know one way or the other.

Long War: The Pak Army arrested a dirty general, i.e. one loyal to Islamic bad guys. Immediately after the CIA killed OBL (and Obama took his foolish bow) the Pak Army and ISI started rolling up the CIA network inside Pakistan. For the moment at least the tide has turned, bad guys are getting rolled up and reportedly some CIA informants have been quietly released. Also, a half dozen jihadist villages along the border with Afghanistan are being shelled by the Pak Army, perhaps the start of a new offensive. So the good guys are apparently back in the saddle.

The CIA had been sending drones exclusively to North Waziristan. Yesterday it executed drone strikes into other Pak tribal lands. This implies the ISI and Pak Army have given Langley permission to expand the drone program.

Tomorrow Obama will announce his troop draw down decision in Afghanistan. Probably it will be worse than we would like. He will only get away with this if he unleashes the CIA. This means getting rid of Congressional oversight. The best strategic move Obama has made so far in his presidency was the emasculation of the Director of National Intelligence (a CIA watchdog set up after 9/11). The second best move was when CIA Director Leon Panetta clipped Nancy Pelosi's wings and clipped them hard. The old school CIA would strike back at Congress and even the FBI by threatening to expose personal secrets, such as the fact that J. Edgar Hoover was gay. Hopefully when Patraeus becomes the top spook this old school mindset will solidify and grow.

Just Leave CIA Alone

Charts: Last week the S&P 500 bounced up off its 200-day moving average and since then the VIX or fear gauge has fallen sharply. On Friday the broad index was up but the Nasdaq was down, making it unclear if a rally attempt was underway. Today all major indexes are up and the fear gauge keeps going down, so a rally attempt is underway. It may or may not turn into a technical rally.

Fundamentals: On Tuesday the Greek parliament will execute a vote of confidence in the PM's new cabinet. If that goes well, then there will be a vote for a second austerity package. If that goes well, then the Greek crisis will be put on the back burner for the rest of the year and the market will turn its attention back to the global slow down. Economists are debating whether the slow down is just a soft patch or the start of a double dip recession.

Long War: The New York Times claims Obama is going to cut troop levels in Afghanistan quicker and more deeply than expected. That sounds bad but there is a silver lining. The White House has done an analysis that shows the CIA has been more effective than the US Army and USMC in defeating the bad guys. The plan supposedly is for Langley to take over the entire Af/Pak theater eventually.

Assuming the Times is correct, all the CIA needs to win this war and all the other LW wars is to be left alone by Congress, but really left alone, with no Congressional watch dog committees, no oversight at all. It doesn't even need to have its budget increased because if it is truly left alone, the CIA becomes self-funding.

In the first half of the Cold War the CIA ran dozens of profitable companies and used the proceeds to fund operations. That's how it earned the nickname "the Company." If it were really left alone in Afghanistan, it would act like a successful American street gang and take over the heroin trade from the Taliban, which would generate hundreds of millions of dollars for itself and take hundreds of millions away from the bad guys. We know this is true because it is already happening on a small scale in Kandahar with Karzai's brother, who runs a small intelligence network with drug money.

Every Long War hot spot that is run exclusively by the CIA does better than the ones it does not run. Just today the Yemeni Army reported that it is on the verge of taking back a key city that had been overrun by AQAP. It appears that AQAP has bitten off more than it can chew in Yemen. And there are no US Marines or soldiers there, just spooks from Langley.

Not only must Congress leave the CIA alone, the White House also needs to back off. When Obama announced that the CIA had killed OBL, he was interfering. Never before has a CIA assassination been made public. The greatest CIA assassination ever was when Salvadore Allende was killed in Chile during the Cold War. That act may have won the Cold War. As I write the family of Allende is digging up the old Marxist blow-hard and exhuming his body, an attempt to prove he was not assassinated by the CIA but died of natural causes. So even after all these years the CIA's smoke screen around that event is still intact. It is shameful that Obama stuck his nose in Company business.

Obama's Huge Mistake Hands Al-Qaeda a Victory and Defeat for CIA

Charts: The S&P 500's 200-day moving average is 1257. In volatile trading today the index rose in the morning then crashed to hit the 200-day line, found support, and bounced up for a tiny gain. It is positive that the 200-day line held. If it doesn't hold over the next few days while the VIXX (fear gauge) spikes, then more big losses are in store. The VIXX has been spiking lately, which is a new and unwelcome development in the correction. Up until now the VIXX had been tame.

Earlier in the week another rally attempt was brutally crushed. Over one month ago the correction started by forming a gently down sloping trading channel. Then we had a brief waterfall pattern, which means the market drops without slowing down when it hits support levels. Now it appears the waterfall period is over and we have entered another downward sloping trading channel where support levels check downdrafts (good). Throughout all this growth stocks have been really clobbered. Leadership is very bad. For instance, the Shanghai B index is down about 28%, entering bear market territory. But defensive stocks like Coke are holding up. This means the mild 7-8% drop in American stocks understates the technical damage done so far in the current correction. Coke cannot lead the market up to new highs. That is a job for Apple and Caterpillar.

Fundamentals: The market is fixated on the Greek debt problem. The EU, ECB, and IMF can't figure out how to put together a new bailout package without triggering a Greek default. The bailout package on the table calls for massive free market restructuring of the Greek economy combined with some sort of default. Any default will tear apart global financials markets. And Greece is proving unable or unwilling to accept this package and restructure. The possibility arises that the existing proposal will be shelved and a small aid package with no strings attached will be delivered to Greece to kick the can a few months down the road. Probably there will be a stock market relief rally if this happens. Kicking the can down the road makes a long term solution more difficult. If it is only kicked down the road a couple months, then it is likely any relief rally will get crushed without a real solution in place.

Long War: The CIA has infiltrated the Pak spy agency (ISI) and the Pak Army, with a small network. Al-Qaeda has infiltrated ISI and the Pak Army with a large network. The ISI has recently arrested the CIA operatives within its own ranks who helped kill OBL. So the CIA network that exists within the ISI is being dismantled and the Al-Qaeda network is growing. Put another way, at the moment Al-Qaeda is beating the CIA in Pakistan.

The pro-American leaders of the ISI and the Pak Army are on the verge of losing their jobs. They are both a heartbeat away from being overthrown by mid-level officers who are now rabidly anti-American because of the way Obama handled the killing of OBL. The Pak Army could easily experience a so-called "Colonel's Coup."

CIA drone bases within Pakistan are no longer receiving food, water, and other supplies. Probably new drone bases are being built in Afghanistan. In a hundred little ways the Pak Army and ISI are reducing cooperation with the Pentagon and the CIA. Any hope for the Pak Army to invade North Waziristan is long gone. A friend is slowly becoming an enemy.

When Obama made his speech about killing OBL he literally took a bow, nodding and bending to the camera with a smug look on his face. He did this to get a bounce in the polls. But he destroyed America's most importance alliance. The Pak Army has 130,000 soldiers currently engaged in combat with the Taliban. If they stopped fighting in the near future the result would be nightmarish.

There is no point in being Chicken Little and saying the sky is falling. However, I remind you that Britain's empire fell because it went to war with its strongest allies, the Boer Republics in South Africa. At the time the British Parliament was saying all the same things about the Boers that our Congress is saying about Pakistan.