July 13, 2009

Global Market Comments
July 13, 2009

Featured Trades: (SPX), (NATURAL GAS), (IRAQ), (MO)


1) Every once in a while I stumble across a chart which is so clear, so vivid, so unequivocal in its implications, that it lifts the investment fog. This is that chart. Drawn up by stockchart.com's Arthur Hill, it shows that we are going to spend the rest of our summer probing for the bottom right hand shoulder in a screamingly obvious 'head and shoulders' pattern. It gives a range of possible bottoms from 850 all the way down to 666 by the end of August. The chart fits my own fundamental scenario like a hand in Michael Jackson's glove (see 'The Worm Has Finally Turned' . Soaring unemployment, terrible earnings reports, collapsing commodity prices, a catatonic consumer, real estate of every flavor in free fall, and tidal waves of government spending are not what bull markets are made of. Did I mention the weather is terrible? Every feeble, half hearted, low volume rally we saw this week pushed us closer to the cliff. The charts of every stock and commodity market in the world rolling over in lockstep, like a thirties Busby Berkeley musical, gives you all the smoking gun confirmation you need.  Hold on to those shorts as if your life depended on it.

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2) When I put out my sell recommendation on natural gas at $4.30, the virtual trucks backed up to dump abuse on me from technical analysts, day traders, and wannabe pundits who were convinced that CH4 was the buy of the century. I also received a ton of e-mails from geologists, wildcaters, and gas men from all over the country with stories of even more, vast, unreported, shale discoveries. One in British Columbia I didn't even know about. When it comes on betting my own money, I much prefer listening to engineers who spend countless hours driving pickups down dusty, potholed, washboard roads to get their data, than the online diletants, any day of the week. Best to watch the pain and suffering in the natural gas space from afar.

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3) OK, I'm going to have to come down hard on this one. The administration is proposing banning smoking in the military. About time! The Pentagon spends $846 million a year on cigarettes, and another $6 billion treating smoking related diseases. I became a cigarette addict myself when the military gave me all the free 'coffin nails' I wanted in Southeast Asia 35 years ago, and it took me ten years to kick the nasty habit. Some 59,000 men died in Vietnam, and I'm sure many more than that died from the lung cancer that followed. Few people know that the Bureau of Prisons banned smoking three years ago, precisely to reduce spiraling health care costs. The riots that followed went unreported. The military in fact banned obesity 30 years ago. If a soldier is over his benchmark weight, his pay gets docked, and if he doesn't go on a diet, he gets kicked out on a medical. While they're at it, they should stop giving combat soldiers and pilots amphetamines. Is it any coincidence that the meth disaster that is unfolding in the Midwest coincided with the return from Iraq of thousands of troops? Not good for Altria (MO).

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4) I have not been called a war criminal for at least 35 years. But that's what was screamed at me when I muscled my way through a crowd of chanting anti war protesters on my way to a briefing from General David Petraeus, Commander of the US Central command. Every senior military officer in the San Francisco Bay Area could be found in the packed, steamy hall, including at least 20 generals and admirals. Petraeus, a four star with a PhD in international affairs from Princeton's Woodrow Wilson School, ran through a thoroughly researched PowerPoint presentation that laid out how he was going to get our 130,000 troops out of Iraq by 2011. Only a caretaking force providing close air support from remote bases will be left behind to back a large civilian presence. A dramatic change in counterinsurgency strategies has brought the daily number of attacks from 160 down to 10, and monthly suicide bombings from 130 to 10. The goal is to 'Iraqrotize' the country so it can stand on its own feet, both politically and militarily. Iraq now has a reliable military of 550,000 men, but last year's collapse in oil prices is creating budgetary problems. Afghanistan will be a much harder nut to crack, requiring more troops, money, and time. Priority one is to wipe out the poppy fields in the South from which the Taliban derives its financing and local support. Rising wheat prices will help this effort. Some 70% of the violence is in 10% of the country in the mountains that border Pakistan. The good news is that Pakistan is fighting its own war, not our war, for its own interests. Their nukes are secure and safe. Petraeus is bringing to bear incredibly sophisticated technology, including sensors mounted on the ground, in towers, balloons, drones, aircraft, and satellites, many of which are controlled remotely in the US and Europe. Bandwidth is his most valuable weapon. I follow the war in Iraq closely, not only because of the family I have in harm's way, but also because of the $1 trillion in immediate costs and $2 trillion in long term costs we have already run up, on top of the 4,200 American and 100,000 plus Iraqi lives lost.  I hope Petraeus is able to achieve his ambitious goals.

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Seen on a Marine commanding officer's door in Baghdad: 'In my absence, figure out what your orders should have been, and then go out and execute them,' according to General David Petraeus.

Petreas.jpg picture by madhedge