Reading Between The Lines On Iran

Iran has thumbed its nose at the deadline last Friday for its answer at the Vienna talks to facilitate Iran handing over 80% of its uranium to Russia and France for peaceful processing. They are thought to be working on a new proposal whereby they get to keep about a ton of the LEU, just enough to continue their bomb making work. They will present this brainstorm tomorrow.

If you look between the lines of the published comments of European and American foreign ministers and generals, people who know a lot more than they can explicitly say, you can do a little informal intelligence gathering. An article out today on European angst over Iran's usual stalling tactics quotes some of the FM comments as "Iran cannot play and play and play with us" and "dialogue cannot last forever". They seem to have had a vision of a scheduled light at the end of the "talk" tunnel. The French foreign minister said "Iran is wasting time because now is the time for talking. One day it will be too late."

As for more formal intelligence gathering, nobody does it better than Stratfor. From their latest Iran report out today (Israel, U.S.: Negotiating Iran With Russia)

An Iranian state television report from Oct. 26 caveated that Iran would be demanding significant amendments to the proposal. Those amendments are unlikely to satisfy the P-5+1 negotiating team, and so the negotiations will continue -- or so Iran hopes.

Iran may be taking note of a critical meeting occurring in Moscow Oct. 28 between U.S. National Security Adviser James Jones and Russian Security Council Chief (and former Federal Security Service head) Nikolai Patrushev and Foreign Minister Sergei Lavrov. Patrushev is believed to have extended the invitation to Jones in the past week, and STRATFOR sources in the Kremlin have indicated that in this meeting, Lavrov will be trying to get a better read on U.S. intentions regarding Iran.

Before heading to Moscow, Jones said Oct. 27 that the United States will respond if the negotiations with Iran fail to produce concrete results. He reiterated that Iran "now needs to follow through on its commitments" and that "nothing is off the table" in terms of U.S. options in dealing with Iran. While maintaining an expected level of ambiguity, Jones is clearly signaling that the U.S. administration is prepared to take a tougher stance on Iran and will not allow this diplomatic phase to continue indefinitely -- a pledge that Obama recently made to Israel.

Israel, meanwhile, is keeping quiet, but is also busy laying the groundwork for more decisive action against Iran.

As for the published lines from the quiet Israelis to read between, well there are very few. But there is the considered view of Middle East experts, as noted in my previous posts, that "when the Israelis go really quiet, that's when you have to start worrying" (about a military strike, that is). The empty space being published seems to have a lot to say.

Iran Update

Today has been given to Iran for a decision deadline on the nuclear fuel enrichment deal being worked on in Vienna. An initial response by Iranian officials is a "no", but a final answer has not been rendered. This could sharply dial up the risk of the military option being used very soon, especially considering what's going on with the S-300s. In a news release just today, Tehran On The Brink Of Procurring S-300 Missiles , the deal is back on for Russia to ship the deadly anti-aircraft missile system to Iran to deploy around all its nuclear sites. Russia had agreed to stop the deal given the delicate nature of negotiation attempts. Currently, it would be relatively routine for Israel, even if acting alone, to successfully bomb Iran's facilities. How effective that bombing would be is another question. But the S-300s, if deployed, would mean serious damage to the Israeli air force if and when they were to do a strike.

The talks, as Israel claims, may be just stalling and deal making (and breaking) to give Iran both its nuclear bomb program and the S-300s to guard it with. Our optimistic impulse is to cheer the initiative being worked on now. It sounds good. It would have Iran hand over 75% of its low enriched uranium to Russia and France for higher enrichment and processing to a form suitable only for power plant or medical use but not for bomb making, then sold back to Iran. There would be no need for Iran's enrichment program with its possible bomb threat. But as the above news release says,

..., this apparent breakthrough may come at a grave price if in exchange for its “flexibility” Iran finally gets the S-300’s from Moscow. Washington is currently praising Tehran for finally responding to Barack Obama’s outstretched hand and will not be in a strong position to do or say much if Moscow rewards Tehran with S-300’s.

Together with the Tor M1 and the older super long-range S-200 (provided by Russia in 1994) and the S-300 missiles Iran could build a solid multilayer anti-aircraft defense shield that could defend its nuclear facilities against a possible U.S. or Israeli air attack and inflict serious damage on any attacking force. Without the S-300’s Iran does not have any credible air defenses and its nuclear facilities are vulnerable to such attacks (Interfax, October 21). The possible price for showing “flexibility” to get the S-300’s by sending 1.2 tons of low-enriched uranium abroad may not be as significant as it seems. In 2008, Russia shipped to Iran some 82 tons of low-enriched uranium as nuclear fuel for the Bushehr nuclear power reactor and it is stored under the protection of an IAEA seal (RIA-Novosti, February 25). Iran could dip into that source to easily replace the uranium it may agree to send to Russia under the IAEA draft deal as soon as its nuclear facilities are protected by a credible air defense system from a devastating outside attack. The over-enthusiastic Obama administration might face a nasty surprise.

The nasty surprise may come from the Israelis. In my September 3 post "Silence May Not Be Golden For Iran" I said:

consider the observation of Andrew Apostolou and other analysts interviewed a few months ago on Israel's willingness to strike Iran.

"But it's unlikely, they say, that Prime Minister Benjamin Netanyahu will reach that conclusion in the coming weeks or months...Israel is locked in a wait-and-see mode, planning to let U.S. diplomacy exhaust itself. Matthew Silver, a historian at Emek Yezreel College in the Galilee, agrees: "Netanyahu figures, "Okay, let Obama talk to the mullahs. It's a preordained failure." That the Israeli prime minister is making loud noises about a possible military strike, Apostolou says, suggests one won't come anytime soon. "If the Israelis really wanted to scare the Americans, they'd say nothing. When the Israelis go really quiet, that's when you have to start worrying.

As my chart shows in that post, the Israelis have gone quiet since he said that. So much so that you see it noted in headlines and in stories on Iran lately. In a NY Times piece out today "Draft Iran Deal Has Israel Worried" we have:

Thus far, officially Israel largely remained mum on the talks in Vienna and Geneva.

The only reaction from an Israeli government official so far came from Defence Minister Ehud Barak, who late Thursday criticised the International Atomic Energy Agency (IAEA) proposal as insufficient.

'The agreement, if it is signed, will postpone uranium enrichment in Iran by about one year. But if the enrichment is not halted, then the only end result is that Iran will have received legitimacy to enrich uranium on its soil,' Barak told a conference in Jerusalem.

'Therefore, a halt of enrichment in Iran ... coupled with immediate harsh sanctions free of any illusions and with eyes wide open' was needed, and without 'all parties taking any option off the table under any conditions', said the Israeli defence minister.

"Iran should know" they emphasized "that all options are on the table". Iran has been reported as vowing to continue enrichment even if they send the uranium to Russia. This does not sound like a peaceful resolution of the situation coming up. Russia processing Iran's bomb material just sounds too much like the fox guarding the hen house to begin with. If they decide to go ahead with the S-300 missiles, they would be delivered immediately. I get the impression the Israelis may not wait around until Iran gets a boat load of the new missiles ready to shred their planes before they do the air strikes.

Is VIX 20 Important?

Much ado has been made lately about the market's fear index, the VIX, arriving at 20 - as low as it's been since the start of the credit debacle and way down from the end-of-the-world 80 it was at just a year ago. But it's just another round number like Dow 10000, so should we care? Well, yes. If you look at how fear has traversed this market, you see something significant: (click to enlarge charts)


The 20 level has served as a ceiling for improving emotions all during this debt-induced mess. In fact, you can look at a VIX chart covering the entire debt balloon era that got under way in the late 80s, and see the significance of this 20 level:


It is a line in the sand dividing the nice, stable bull move years, shown in green, and the nasty, gyrating topping actions and bear move years, shown in red. At the left, we had the '90 recession, then a quick and painless trip back into the green. As the debt balloon grew, we ran into the savings and loan crisis of the 90s and the dot-bomb top and bear market and a much bigger sea of red. But we got back to the nice green for a little while. Then, the next debt complication, the housing bust, sends us hurdling back into the red. Now we are back at the dividing line. Are we going to emerge back into the calm green seas or see a spreading sea of red? There is a pattern in the progression of fear as our debt level goes parabolic - the fear spikes go higher and the seas of red grow bigger. Unless we can now break and hold the sub-20 territory and defeat this progressing pattern, we may be at a very dangerous turn point in the stock market.

There is a confluence of projections from very independent means of analysis (fundamental, technical, sentiment, fractal, web bot) that all agree on this impending turn point condition. From technical analysis, we have a rising wedge formation:


This is a strong bearish formation and is the inverse of a falling wedge that can be seen in this year's VIX chart above.

And from Planet Yelnick, an Elliott Wave site, we have:

By far the most interesting discussion in the STU was around the banking index, which shows a fairly clear top. This would be huge as the bank stocks have been like the Nifty Fifty, or in this case the High Five: a small number of stocks = a major part of the rise. This sort of situation is bearish: a bull market runs up on a broadening base while a bear rally runs out of steam on a narrowing base. Their sudden weakness presages more than a drop in the Dow; it signals a return of the credit crisis.

A return of the credit crisis? Egad! Back into the sea of red we go. Loans are, in fact, hard to get. Farmers can't get loans, which is making things difficult for companies like Deere. This could aggravate food shortages and prices. But this could be the least of our problems if we don't see the bankers starting to help main street more.

The popular bears' argument about the huge debt overhang and dollar problem is well known. But did you know that two of the biggest table thumpers for a glorious new bull climb have recently moved to the edge of the bears' camp on this issue? On CNBC's Mad Money, Jim Cramer was confronted with a viewer's question asking him if the parabolic debt explosion worried him. His instant, impassioned response was yes, it worries him and, unless it is immediately dealt with successfully, it will cause a new bear market within 18 months. And Larry Kudlow has recently started to proclaim that he is a "short term" bull but he sees the dollar debasement changing things out about 3 months. That's probably the two head cheerleaders for team Dow going over to the other side, only disagreeing on when. I don't feel cheered.

Is there any hope? Yes. We can do what Ross Perot tried to explain to the American people back in 1992 in his presidential campaign. If we had reformed our government the way his Reform Party tried to, we would be living in a much different world today. It would have been relatively painless back then at the left end of the VIX chart above. But now it is a scary time indeed.

The Market's Psychological Map

We are at an interesting point on the map of our feelings on the economy and markets. Stock market sentiment is not all that giddy with the rally still not getting that much respect. Fund managers have been holding their nose and dipping their buckets into the stream because their benchmarks are leaving them looking like fools. Buying just because everyone else is tends to happen closer to an abrupt end to a move than to a surprise beginning.

It is the consumer's sentiment that I want to take a look at:


This chart tabulates, not the raw sentiment numbers, but preceding 6 month change in sentiment over the years. As you can see, we are now at a fast 6 month rate of improvement not seen for 15 years. And the only other two times in the past 20 years this was seen was a big turn point in sentiment back down.

An interesting comparison can be seen comparing our current recession to the previous one. The fast run-up to the turn level happens at the end of the recession, as you might expect. But then you had a debt hangover induced stock market and sentiment dive to the mid-to-late 2002 market lows after we had celebrated the end of the recession. We're seeing the same pattern played out with the latest recession, which most are saying ended mid year. We have ballooned our debt to way higher, more unstable levels since the 2002 episode. If the pattern repeats, we are at a point where we soon have a psychology turn and some kind of debt hangover induced stock market trouble. This could be commercial real estate loans, a dollar debacle. It could be a variety of things.

I have been a market bull since April despite many bear signals, some of which I've summarized here while concluding that I favor turns north from consolidations (based mostly on technicals). But now the technicals are starting to suggest a turn back down. Those who follow fibonacci curves point to the typical 50% retracement level that happens after big moves. That comes to 1100-1200 on the S&P 500. The ETF Profit Strategy Newsletter called the start of the rally with a March 2 alert for a move by the Dow to the 9000-10000 area. They are now seeing a big move down. Doug Kass started going long in February a few weeks early and called the tippy top bottom of the crazy gyrations on TV within a week of the event. He has been going short for weeks and is now at his highest net short position since February. I am going from bull to neutral until we sneak past this twilight zone.

If we are to have some debt overhang induced market trouble, our emotional state would suggest it may start soon. The consumer confidence survey level is over that unstable 70 mark:


If we are considering our emotional state, we may want to take a read on what the web bots are seeing. A misconception about bots is that they predict big events on particular dates. But with the markets, the software actually reads feeling changes and, I suppose, puts together some kind of centroid of all it reads for a time approximation. George Ure and Clif High are the "two guys in a hole in the woods in Oregon" creating what they call "The Web Bot Project". In commenting on the bots' recent prediction about October 25 (see my previous post "Web Bot Weirdness") George Ure says this at his site urbansurvival.com

"What is October 25th? The way the data reads, we are less likely to see a single event driving things (although that's possible) so much as we are expecting an emotional tipping point. So, for example, the kinds of news events that might feature the beginnings of a showdown between 'the people' on the one hand versus 'the banksters' on the other. The forces have been building there..."

It will be interesting to see how our feelings might change going into November. If the seers who have been calling things to a tee lately are right again, we are all going to get a little cranky. Even Larry Kudlow, the irrepressible CNBC optimist and bull, has lately started sounding more like Peter Schiff, lashing out at those who are debasing the dollar and drowning our prosperity in a sea of debt and federal meddling. Lynch the banksters!

Is Headwaters Emerging From The Cellar?

If you want to be in a dangerous market with a dangerous stock, take a look at Headwaters (HW). This company was a good looking prospect back when oil began its relentless climb in '04 and '05. They have proprietary technology for CTL (coal-to-liquids) that converts coal to gasoline. In North America, we have an abundance of coal, so CTL is a serious alternative energy. But, unfortunately, it's not an alternative to CO2. Depending on what study you look at, CTL greenhouse gas emission is about a wash relative to crude refined gasoline. And burning coal instead of chemically converting it puts out about double the amount of CO2.

So it's an alternative energy with problems and needs government help. In response to this, Headwaters didn't like being dependent on that government help for a single product and diversified into home building products such as stone and trim materials, and also a coal combustion byproduct cement. Well, catastrophe happened to all of that as the government help expired and housing went bust. The stock has been smashed down to single digits and they currently sport a negative $14 per share earnings on a $5 stock. So buy now? Well, a turn may be forming. The price/cash flow is a very cheap 2, their bottom line has actually turned positive as of the June quarter, and the chart is telling me a serious turn wants to happen: (click to enlarge)

This stock has not done much of a recovery bounce still being down over 30% on the year. But it has just broken back above its 200 dma and a 50/200 cross has just formed. It's also breaking the classic pennant formation with convincing volume on more than just a one day spike. On the negative side, it's way too noisy and will probably follow any market weakness that's ahead. But it could do a quick 20% or more before a weak market overwhelms it.

There are two main crude oil alternatives to carry America across the bridge to a post-fossil future - natural gas and clean coal. I've been writing about the dire need for a massive switch to nat gas for years now including a post here "The Bridge Is Out". It does my heart good to see people like Richard Kinder of Kinder Morgan Energy Partners (KMP) and Jim Cramer of Mad Money along with a growing lobby in Washington starting to beat the drums for nat gas to compete with what Cramer calls the Black Lung Coalition for the big coal companies.

I think nat gas is the better choice because it is much cleaner and is the best weapon we have to immediately cut way down on all pollutants including CO2. Whether you believe CO2 is a real problem or a political hoax, the fact is any oil replacement that's a CO2 problem is not going to get implemented. Thus we have the huge carbon capture problem with any coal solution. Headwaters is tackling this problem by forming a joint venture with the University of Utah in carbon capture. If they ever come up with a clever way of dealing with CO2 (other than parking it in underground caverns), CTL could become a rocket ride for all American stocks involved. They use CO2 in secondary oil field recovery and in CBM recovery. But maybe they could start using it to make soda pop for the martians and shoot it into space or something. Rentech (RTK) in America and Sasol (SSL) in South Africa are two other CTL stocks. Sasol has been powering about half their country's planes with coal derived fuel for years now without carbon capture, but that probably could not happen in America.

Web Bot Weirdness

I try not to pay much attention to perma doomer analysis because they tend to keep you out of the market all the time if you take everything they say seriously. The web bots are such analysis. Critics say they constantly predict bad things so that every time something bad happens, they are right like a stopped clock. I won't debate the merits of web bots here. You can check Wikipedia's write up on it if you're not familiar with web bots. Suffice it to say that they are specific enough in their predictions and have enough hits vs misses to lead one to suspect that there is something to the methodology.

They seem to do better at predicting the financial markets and related human psychology storms (their original intent) than earthquakes and natural disasters. Last summer, they were predicting a transition period for September 22 to 27 into a turning point around October 7 into a financial market crash. In an article "Web Bot Report Foresees October 7 Turning Point" posted September 8, 2008 summarizing a September 2 radio show, we have this:

The Web Bots see September 22-27, 2008 as precursor dates to the main turning point date of October 7, 2008. Closely watch events during September 22-27, 2008 for hints as to what to expect on October 7, 2008.

Cliff said whenever "it" happens, and whatever "it" turns out to be, "it" will be a date in history you remember like 9/11, we will remember 10/7.

The Web Bots foresee that October 7, 2008 to February 19, 2009 will be filled with emotional intensity, and the length of the release period will be extraordinary. The Web Bots have never picked up any event lasting this long. In comparison, 9/11 length lasted about 10 days. This event will be four months of high emotion.

The Web Bots foresee consumer society collapsing by mid November 2008.

As we know now, this is precisely what happened. We don't remember the 7th specifically like 9/11, but we remember the early October crash in general and the "emotional intensity" and crazy VIX fear index running to unprecedented highs that was a psychological event of four months that ran through February to the March 6 market low. This psychology left its trace in the market: (click to enlarge)

The precursor week ended a good looking rally in the mid and small caps that had been leading the market, and after October 6, the market was toast as we were on the edge of the precipice of systemic breakdown.

This same article also predicted an earthquake that did not happen, but they got the psychology/market part right to a tee. The web bots are now predicting a strong happening centered around the October 25, 26 time frame. I have seen this as being Israel striking Iran and also as a global banking and financial market crisis with a dollar collapse that runs from November '09 to November '10. After the detailed and correct bot prediction of last year, this gives me pause in continuing to be aggressively long anything but gold, silver, oil, and military holdings - and perhaps better than anything, cash. I am gradually collecting profits on my high beta climbers. Gold, oil, and some of the homeland security stocks are climbing as good or better than the rest of the market right now anyway. However, if we have a repeat of last October, this event could cause fund redemptions and a brief hit being dished out to gold along with everything else.

Given the other evidence I've posted on here about Israel, It looks like the bots could be seeing a war breaking out causing turmoil in the markets. As I pointed out in an earlier post, Middle East experts believe we should worry when the Israelis go really quiet with their attack talk, and they have as I charted in the post. I've noticed article after article with titles like "Israel dialing down tone" "Israel mum" etc. It would be wise to be defensive over the next 2 months or so. Doug Kass, who called the March bottom perfectly and was getting long a few weeks ahead of that bottom, began going short a few weeks ago and is now reportedly at his highest net short position since February.

Gold Stocks - The Sector To Overweight

Have you ever looked at a chart like the one below and wondered what was I thinking when this item was at the lower left corner? (click to enlarge)


I guess one should have placed all eggs in the basket of a manipulated commodity that doesn't even go by the sound fundamentals of valuation. If you would have done such a dangerous thing, you would have been richly rewarded.

Was the above portfolio the risky juniors miners and penny stocks? No. This portfolio is an equal weighting of the 16 gold stocks that are the bulk of my buy list: AEM, AU, AUY, ABX, BVN, CDE, EGO, FCX, GG, GSS, GFI, HMY, HL, IAG, KGC, LIHR, NEM, NG, PAAS, RGLD, SSRI, SLW. As the chart suggests, this group is just now coming out of a lull off a long term support trend-line if you discount the aberration of the credit crunch of late 2008 and early 2009. Considering that gold is at an all time high now, these mid to large size gold stocks look poised for a strong catch up move to catch gold, which is itself breaking out through its one year resistance level.

The strong out-performance of gold stocks over the past 10 years is a trend that is very likely to continue if not strengthen. The debt pressure on currencies in general and the USD in particular isn't going to go away anytime soon. It is about the only sector that will probably climb no matter what the economy does or what Israel and Iran do. Whether the S&P 500 continues a good climb or is derailed by geopolitical or currency problems, the gold sector should continue to out-perform it.

VSEC a Stock of Interest

VSE Corp. will likely benefit from either a military confrontation soon between Iran and Israel or from an ensuing regional arms race if Iran is allowed to become a nuclear menace. They stand to be an up stock in a down market if war breaks out. This is how the stock behaved at the last Middle East war:

It was resilient in the 9/11 sell off and soon began reacting to the impending Iraq war. They offer "brains-of-the-operation" support such as electronic warfare software support. If there is no war, we will enter into what Hillary Clinton has phrased in a recent speech as a "defense umbrella" relationship with allies in the region, offering missile systems and American know how. This is what the recent revamping of American missile strategy in the area is all about. VSE already sells into this market. They revamp old U.S. warships for use in foreign navies.

This is a gem of a stock even with no hot or cold war help. Price/sales is 0.2 and price/cash flow from operations is 7.3 running a current PE around 10. This is good valuation for what Morningstar terms "aggressive growth" in their "stock type" classes. Looking at their results over the last 10 years, I would term it "kick ass". Obama's defense cutback promises have probably placed the stock on sale. But, like most political promises, this one may have to be severely compromised.

Russian Enrichment Plan For Iran a 2006 Redux

The Geneva talks on Iran's nuclear program has produced an idea that has everyone buzzing. This would have Iran hand over about all of its uranium to Russia and maybe France and some other nuclear nations in the region. The idea is that these plants could do an enrichment to a form useful only as nuclear fuel or isotopes for medical treatment. Then the uranium is to be handed back to Iran for peaceful use. This would do away with the need for Iran to do their own enrichment if, as they claim, they only want peaceful use of uranium.

This is not a new idea. It was proposed by Russia when Iran restarted their Natanz plant in early 2006. And Obama isn't the first president to consider the idea as a January 26, 2006 article Bush Backs Russia Plan For Iran explains. Back then, Bush wanted it, Putin wanted it, Iran wanted talks about it. That's sort of where we're at now. The result was Iran did not hand over their uranium, kept developing their program, and nearly got hit with a military strike later that year. Wary of Iran's strong history of stalling tactics, lying about their intentions, and the shrinking window of bomb making preemption, Obama and U.S. officials have been stressing the urgency for Iran coming clean. I've read that the informal deadline for this is December. This happens to agree with certain military preparations including the frantically stepped up production of the MOP originally scheduled to be available in about 3 years but recently moved up to December of this year. MOP (Massive Ordnance Penetrator) is a vastly improved bunker buster bomb being created after congress did not approve nuclear bunker busters. According to the article:

In early July 2009, the Defense Department told a Congressional committee that the MOP was the "weapon of choice" for an “urgent operational need” enunciated by both the U.S. Pacific Command, tasked with North Korea, and the Central Command, tasked with Iran. In doing so, the Pentagon accelerated the program by three years.

The urgency is further demonstrated by the bypassing of a further testing phase:

In describing the accelerated program, Lt. Gen. Mark Shackelford, who heads weapons acquisition for the Air Force was quoted as saying, “These are purchases beyond just those needed to test the capability," adding, "In other words, build a small inventory.”

The talks in the 2009 version of this "let-other-countries-enrich-your-fuel" overture are scheduled for October 19 in Vienna (it was February 2 in Vienna in 2006). Let's hope they come up with a workable solution.

Investing In Trouble

If there is to be trouble in the Middle East, as it appears likely now with the Iran situation, how do you go about investing over a period like this? Do you turn a blind eye to the danger and convince yourself that, like most things you worry about, it will never happen? Or do you go heavily short? Probably the wisest thing is to be mostly in cash until this elevated danger period resolves itself. If Israel doesn't do a strike over the next 3 to 6 months, they probably have decided to go the nuclear deterrence route and will simply wait for any future Iranian attack that might happen to justify a complete eradication of Iran as we know it. If they are going to preempt, even if conventional weapons are used on nuclear reactors, it would still be a nuclear war in the Middle East with radioactivity problems, unlike the relatively simple, sanitary strikes of the past. All good reasons to be in cash.

But if you must be exposed to the markets during this time, what do you hold? Well, you could look at how the markets reacted to the two big Middle East blow ups of the past - Saddam's Iraqi invasion of Kuwait on August 2, 1990 and the invasion of Iraq in March, 2003. These two episodes are similar in some ways to what an Israeli strike on Iran would be. In 1990, Iraq was the 4th strongest military force in the world behind only the U.S. Russia and China. It was not known if they would use bio and/or chemical weapons as they had just done in their war with Iran. And the fate of oil supply was anybody's guess. It was a scary military adventure. Iraq's military was much weaker in 2003, but Saddam still promised "the mother of all battles" when George Bush, Colin Powell, and the administration made their case before the U.N. for the invasion.

The two investment vehicles that come to mind for such things are gold and oil. This is how these behaved relative to the S&P 500: (click to enlarge images)


Both gold and oil were in bear markets in the early 90s and the general action was a strong climb for about 3 months and then a return to what they were doing before, which was their bear market. So unless you happened to know the timing of the attack, it was problematic to be a holder of gold or oil during this time. It was a different condition for the 2003 event:


Both gold and oil were in the early stages of their present bull market. It became obvious in late 2002 that there was going to be an invasion "at a time of our choosing" as Bush explained it to the world. So the reaction of gold and oil dated from late 2002 and was again a 3 month or so interruption of what they were doing before, which was a bull market. So it was not a problem to be holding these investments - they would do a climb with or without an attack.

That's pretty much the same situation we have with gold, oil, and Iran today. Gold in particular is probably going into a hypergrowth phase, according to the fractal analysis anyway, and falls into that nice category of "will climb with or without an attack". Oil is a little more of a problem because it is so sensitive to the economy. Trouble in the Middle East could put the fragile recovery back into a mark down of the price of oil. The threat of a Gulf tanker disruption could briefly spike oil, but that may be an erratic, unpredictable gyration depending on how successful they are at keeping the Gulf open (and that would be a major military project in any attack). The fabled horror scenario of a closed Gulf may not happen. But even if there is no oil shock to the economy, there may be a trade shock because Russia, China, and others are forming trade partnerships with Iran, which may come under severe strain if the U.S. is complicit in any attack.

There is an area of the markets that may be better than oil or even gold, and that is the military stocks. Aerospace/defense tends to run in cycles of about 7 years, and we are early in the next up phase. The arms stocks typically jump when any major global fight is picked. They reacted immediately as the market tanked after 9/11:


Raytheon's action was typical - a strong reaction at 9/11 when it was obvious that there was gonna be big trouble, and a more subdued reaction in late 2002 when the details became more clear. The 1990 action was similar. Even if fisticuffs don't break out between Israel and Iran, and Tehran is allowed to become a nuclear power, this development would cause all the nations in the region that had no real reason to spend heavily on high tech defense to begin doing so. It would instigate something of a regional arms race - very good for the arms makers. But this would be very bad for world peace - a Mutual Assured Destruction arms race in the Middle East with the fastest growing member a suicide bomber by religion. This is another major reason for preemption.

Another possible good investing area - the WMD stocks. When the coalition forces went into Iraq in 2003 and found no dreaded stockpiles, WMD went off the radar. But Iran has bio/chem weapons. They have been dramatically building up the stockpiles of rockets and other arms from Iran in Lebanon, and one such depot was disrupted recently with a release of some chemical weapons, killing several people. If Iran is attacked, the retaliation would likely include threats and possible use of WMD, refocusing attention on them similar to what 9/11 did. Many of the related stocks gained sharply:

Percent-wise, these stocks tended to out gun the gains in gold stocks or about anything else. Versar is typical of several such companies that are now in much better fundamental condition than they were in 2001. VSR has vastly stronger eps running a current PE at 13, price/sales at 0.4 and much improved cash flow. The cash flow dipped into the red a year ago, but is turning back up strongly with zero debt. I put this one into my fund at $3.80 mainly as part of an Iran lineup , but I'd be buying it even if all were peace and love in Iran.

There are ways to "invest" (or maybe we should call it profiteer) in trouble, but a high cash position is still wise. I'll be posting more on some military stocks I'm looking at.