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Farrell: Is Bad News Good for the Markets?

Wednesday, 16 Jun 2010 | 11:42 AM ET

Is this guy for real?

Rolf Burkl works for the German market research group GfK. He said with considerable understatement, "The debt crisis has certainly created uncertainty. There is a fear that political leaders no longer have the situation under control." No longer have it under control? When did they ever? He has to be kidding. (NY Times, Tuesday, June 15)

Budapest politicians clearly were out of controlwhen they compared Hungary to Greece and then backtracked immediately. They looked like they were running around trying to figure what was going on. Gee, all they had done was focus on a local political issue and thought the international repercussions would be non-existent.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

France's leaders should have put a sock on the guy that questioned his own country's AAA rating.

The French Prime Minister, Francois Fillon, suggested the euro would fall to parity with the dollar. Germany kept insisting the Greek crisis would be contained (I love that word) more because Merkel had a regional election and didn't want a bailout before the voting. Now, for the first time in a long time, the Merkel government looks threatened. (Financial Times, June 15)

Oddly, the third world guys seem to have it together.

Afghan President Hamid Karzai
Massoud Hossaini | AFP | Getty Images
Afghan President Hamid Karzai

Hamid Karzai of Afghanistan may seem to be semi-deranged at times but I suspect there is a motive under his scheming.

Support for the war in Afghanistan is waning in the US and he is reported to have said that he no longer trusts the US to stay the course. He is probably angry that an international review panel says the ballot box was stuffed last election. It is therefore the fault of the US that his authority has been undermined.

Interestingly, there are lots of stories in print about the trillion dollars in natural resources undeveloped in Afghanistan. Last Sunday's NY Times ran an article that said "The previously unknown deposits - including huge veins of iron, copper, cobalt, gold, and critical industry elements like lithium - are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world."This is not new. The study that the article refers to was published in 2006. It probably got resurrected because General Petraeus was quoted as saying there was "stunning potential."

That is undoubtedly true but the logistics are daunting. Afghanistan is underdeveloped to put it mildly. The country has little infrastructure and is only now building its first rail link to the outside world. A copper project has been started by the China Metallurgical Company and they have pledged over $3 billion. Some drilling has been done but a railway, power plant and smelting facilities still have to be built (source - Strafor Intelligence Survey.) There is a media blitz going on and perhaps the face of Afghanistan is about to change.

So if the face could change, Karzai is going to be looking to strike his own deal. With the Taliban, with the Chinese, with anyone who will play his game. I would think he would strike the best deal with China. China has $2.5 trillion in reserves and could flood the country with development money. Nothing like development money to win the hearts and minds of the insurgents. And the Chinese are already there with the copper project. And this is the country our young are fighting and dying in. Who in the US has this under control?

And who but President Lula da Silva has Brazil under control? Our "steadfast" ally, recipient of American aid for years, struck a deal with Iran (along with Turkey) regarding nuclear waste against Americas interests. They voted against the US sponsored sanctions towards Iran in the UN last week (as did Turkey.) He is cozy with Cuba and that lunatic Chavez in Venezuela because he thinks it will help him. I believe he takes the US for granted. He's right and will get away with it.

Recep Tayyip Erdogan of Turkey is at the crest of his popularity in the Arab world after his denunciation of Israel. It looks like he is making (a successful) bid to usurp Iran as the Islamic protector. The Economist Magazine, and the US Secretary of Defense, Robert Gates, both think Turkey was pushed in that direction by the European Union's refusal to admit them to the sacred conclave. Hell, they should be thanking the Europeans after what has happened!

And Israel seems to feel the US is no longer necessary for their interests.Refusal to give ground on the East Jerusalem construction could have been their stubbornness, or it could have been our underestimating the importance of the issue to the Israeli government dealing with crushing local issues. Foreign policy has to take all factors into account. The latest Israeli/Turkish naval mess shows as well that US influence in the dispute is limited.

We run the danger of misplaying the hand we were dealt with the Gulf oil spill crisis.

I feel the President is being unfairly accused of being disinterested, but that's the way it is playing out.

Care must be taken to not alienate our closet ally, Britain, over this. Pressure can be brought on BP but "putting our foot on their neck" is not likely to help find an answer. BP's dividends to UK residents are 4 billion pounds a year. Calling for BP to cut the dividend or establish a trust fundor whatever are dubious legal claims, and totally insensitivity to the UK's biggest companies' importance to England. We are not in control. We are scrambling. It's ok to scramble, just don't appear to be.

I love movies and with my partner Anthony Marciano's help, I found the quote I was looking for from "American President" with Michael Douglas (my new best friend after the Cannes Film Festival), Annette Benning, and Michael J. Fox, "People want leadership, Mr. President, and in the absence of genuine leadership, they'll listen to anyone who steps up to the microphone. They want leadership. They're so thirsty for it they'll crawl through the desert toward a mirage, and when they discover there is no water, they'll drink the sand."

I am not political. I am an observer. I thought Hank Greenberg of AIG at the end of the day failed his firm and stockholders and the American people miserably. His was a clear lack of true leadership. Jimmy Cayne of Bear Stearnsfailed the leadership test. General Patraeus passes with flying colors as did Colin Powell. To me (and maybe I'm just being sensitive) I have trouble understanding the administration asking for another $50 billion in short term stimulus and appointing a special commission to figure out what to do about the deficit. Ok, your turn Mr. Obama. You were elected to lead. A splinter movement like the Tea Party, be it good or bad, right or wrong, arises in the absence of leadership.

The stock market wants to go higher though. It is sloughing off bad news. Be it a headline in the Wall Street Journal that says Spain is in trouble financially(and Spain is a $1 trillion economy), Greece being downgradedby a rating agency (little late guys), or German sentiment taking a downturn, the market forges ahead. I guess bad news is just the formula for a rising market.

The stock market on Tuesday closed above the 200 day moving average(1108 at the start of the day) at 1115. I would love it to shoot up to 1150, but without volume (Oh God, here he goes again with the volume thing) I fear we will round trip this advance. But 489 of the S&P 500 stocks were up Tuesday. Let's enjoy that.

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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.

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