Friday, January 8, 2010

Pak-Ghanistan Update: Spies Everywhere; and Market Comments

The investigative reported Gerald Posner has reported bad news about the bombing in Khost, Afghanistan that recently killed seven CIA agents in the article, Did Pakistani Spies Help CIA Bomber?:

Early evidence in the December 30 bombing that killed seven CIA agents suggests a link to Pakistan, two senior Afghan sources, including an official at their spy agency, told The Daily Beast. The pair said that U.S. has already taken a chemical fingerprint of the bomb used by a Jordanian double agent in the attack, and that it matches an explosive type used by their Pakistan equivalents, the Directorate for Inter-Services Intelligence, or ISI.

The bomb’s provenance was an immediate concern after the attack, which took place in a remote base in eastern Afghanistan called Camp Chapman, because of its compact power. Most suicide attacks involve a bulky vest or belt. “It is not possible that the Jordanian double agent received that type of explosive without the help of ISI,” a senior government aide to President Hamid Karzai told me.

This underscores how confusing the local politics are. In Afghanistan, who might be the native "freedom fighters" vs. imported foreign jihadists or mercenaries is impossible for us to know. And after all, the U. S. brought in its own types of mercenaries in the form of the French in our war of independence.

The more complex and global al-Qaeda gets, the more the U. S. assets and efforts get stretched. Unlike in 2001, this is occurring at a time of tremendous stress on the U. S. economy and governmental finances. Make no mistake, no matter what the preliminary December jobs numbers turn out to be today (and recall there are two surveys reported together, the establishment and household surveys), there is now an underlying pro-inflation bias in our economy for years to come that will be bad for bondholders, good for gold and bad for the real economy. Would the al-Qaeda movement survive both bin Laden and Zawahiri leaving the scene one way or the other? I dunno, but we need to prepare for war without end.

As an aside, the Israeli-based generic company Teva (actually 30% of its business is from branded products) announced yesterday at a company meeting in New York that its 5-year goal is 14% compounded growth in sales and profits. Its Value Line chart shows massive underperformance relative to the general stock market in 2009, despite having an up year to record highs. I thus went back into the stock. It is global, defensive, raises the dividend, has successfully completed transition to a new CEO, and could be taken over by a global pharmaceutical giant. Unfortunately for its downside, it has more or less no tangible net worth, having grown in large part by acquisitions, so I couldn't sleep at night with much of my own "tangible" net worth in the stock, but in most scenarios, I expect that the company will likely meet or exceed its expectations and that its P/E is quite reasonable at about 12.5X projected 2010 earnings. Thus a mid-case scenario is for 15% total return counting dividends on a 5 year buy and hold strategy. Of interest is that this exceeds by central expectation for gold prices, which with a huge capability for variability I target at 7% per year, as that is a long-term rate of nominal GDP growth. (Interestingly, GLD as of now GLD will open right around $110, which is the equilibrium price I suggested a month ago when I called a short-term top in gold prices. I believe that long-term buy-and-holders can enter here, though the price premium in the ETF in GTU is a bit disconcerting and reflects just a bit more optimism than I prefer to see. Also interesting is that GLD and SPY are roughly tracking each other in what I view as a potential long-term equilibrium relationship as well.)

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