Newsletter Archives - Mad Hedge Fund Trader

Here Comes the Next Peace Dividend.

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, you don't think I talk to all of those generals because I like their snappy uniforms, do you?

The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head a la Gaddafy. It couldn?t happen to a nicer guy.

The geopolitical implications for the U.S. are enormous.? With Syria gone, Iran will be the last rogue state hostile to the U.S. in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.

Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires

When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.

The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.? Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a deathblow to their trade.

Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall off its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America?s part.

The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the U.S., but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The U.S. will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the U.S. dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the U.S. government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause U.S. GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.

Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the U.S. at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the collapse of Iran was going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I?m ?Mad?, just check out Apple?s chart below.

Case Shiller Data Points to Real Estate Bottom.

Newsletter

Cheers went up from the real estate industry this morning when the Standard & Poor?s/Case Shiller data was released. It showed the first year-on-year increases in prices since 2006. Calls went out from real estate agents around the country announcing that the bottom was in and that you better buy now before prices shoot up.

Not so fast. Let?s look at the data first. Phoenix delivered a first class dead cat bounce with a +13.9% YOY gain. It was followed by Minneapolis (+5.7%), Miami (+4.4%), Washington DC (+3.9%), and Dallas (+3.7%).

But the recovery was uneven, with some parts of the country still suffering catastrophic declines. Atlanta is still drowning in subprime foreclosures and was off a gut churning -12.1%. New York City was cheaper by -2.1%, where the downsizing of the financial industry prompted by Dodd-Frank was having an impact, while Las Vegas was down by -1.8%. Apparently, all real estate is still local.

It is becoming increasingly clear the national indexes bottomed in the first quarter of this year, and have been picking up steam since. Much of the upturn has been driven by hedge funds which have soaked up homes in major markets for rental and future securitization.

In California, they have accounted for 60% of all buyers. Once they figured out the model and got their management companies in place, they have been a fixture on court house steps statewide, picking up every distressed property as it came up for auction. This is their way to play the current ultra-low level of long-term interest rates, with 30 year money still available at a subterranean 3.6%.

I would not rush to return your broker?s phone call. With the present demographic headwind expected to last another ten years, don?t expect any dramatic appreciation soon. Inventories are still gigantic. Some 80 million downsizing, empty nesting baby boomers are trying to sell homes to 65 million Gen Xer?s who earn half as much. There are 6 million homeowners late on mortgage payments or in foreclosure. There is a shadow inventory of a further 15 million that is available on the first uptick in prices. And who knows what the banks still really own.

If we go into recession next year and the stock market declines 25%, a strong possibility, this year?s recovery could go up in so much smoke. Best case, we keep bouncing along a bottom for five more years. Worst case, we see a secondary banking crisis, lose a few of the largest banks, leading to an additional 25% decline in home prices.

The sushi really hits the fan if we see Fannie Mae and Freddie Mac disappear, which are now in receivership and account for 95% of all conforming home mortgages. And don?t forget that the home mortgage deduction is costing the federal government $250 billion a year in lost tax revenues, and will become target number one in any budget balancing effort.

Rent, don?t buy, unless you intend to keep your new abode for at least a decade.

Is it the Bottom, or Not?

How U.S. Job Losses Will End

Newsletter

I was researching comparative Asian wage data the other day and was astounded with what I found. Textile workers earn $2.99 an hour in India (PIN), $1.84 in China (FXI), and $0.49 in Vietnam (VNM). This is an 18-fold increase in labor costs from $0.10 an-hour since Chinese industrialization launched in 1978.

This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places. What?s more, the Indian wage is up 17% in a year, meaning that inflation is casting a lengthening shadow over the sub-continent?s economic miracle. A series of strikes and a wave of suicides have brought wage settlements with increases as high as 20% in China.

This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods. Chinese wage growth at this rate takes them up to half our minimum wage in only five years.

This has already happened in South Korea (EWY), where wage costs are 60% of American ones. As a result, Korea?s GDP growth is half that seen in China. These numbers are also a powerful argument for investing in Vietnam, where wages are only 27% of those found in the Middle Kingdom, and where Chinese companies are increasingly doing their own offshoring.

This is why I have pushed the Vietnam ETF (VNM) on many occasions. I know every time I do this I get torrents of emails from that country bitterly complaining how difficult it is to do business there, and how the hardwood trees are still full of shrapnel left over from the war, and why I shouldn?t buy a 50 acre industrial park there.? But, the numbers don?t lie.

The ?Safe? Trade Beats All

Newsletter

I certainly hope you took my advice to load your portfolio with corn and gold and to dump your equities five years ago. What? You didn?t? Then you have almost certainly suffered on the performance front.

According to data compiled by my former employer, the Financial Times, corn was the top performing asset class since 2007, bringing in a stunning 146% return. Who knew that global warming would be such a winning investment strategy? It was followed by gold (GLD) (144%), US corporate debt (LQD) (44%), US Treasuries (TLT) (38%), and German bunds (BUNL) (26%). This explains why my long gold/short Morgan Stanley (MS) has been going absolutely gangbusters today.

If you ignored my advice and instead loaded the boat with equities, chances are that you are now pursuing a career at McDonalds (MCD), hoping to upgrade to Taco Bell someday. The worst performing asset classes of the past half-decade have been Greek equities (-87%), European banks (-70%), Chinese stocks (-41%), other European equities (-21%), and UK stocks (-11%). If you were in US equities, you are just about breaking even (1%).

Corn is, no doubt, getting an assist from what many are now describing as the worst draught since the dust bowl days of the Great Depression. But there is more to the story than the weather. Empowered with long term forecasts from the CIA and the Defense Department, I have been pounding the table for years that food would become the new distressed asset. These agencies have been predicting that food shortages will become a cause of future wars.

For a start, the world population is expected to increase from 7 billion to 9 billion over the next 40 years. Half of that increase will occur in countries that are net importers of food, largely in the Middle East and Africa. You can also count on the rising emerging nation middle class to increase demand for both the quantity and quality of food. Obesity among children is already starting to become a problem in China.

Managers who have been wrong footed through being overweight equities and underweight bonds will get some respite in coming years. It will be mathematically impossible for government bonds to match their recent performance unless they start charging negative interest rates. My best case scenario has them going sideways to down in the years ahead.

Not so for gold, which will continue to see steady demand from emerging market central banks and their new middle class. Five years ago, gold trading carried a death penalty in China. Today, there are shops on every street corner flogging the latest issue of one ounce Chinese Panda coins.

As for corn, the sky is the limit. If you don?t believe me, try eating a one ounce Chinese Panda.

Is Corn the New Gold?

Reach for Yield With Sovereign Debt

Newsletter

During my recent meeting with the senior portfolio managers of the big Swiss banks, I kept hearing the same word over and over: yield, yield, yield! The search for yield by end investors has become so overwhelming that it now trumps all other considerations. So I am starting a series of major pieces on the world?s best yield plays. Those include emerging market debt, REIT?s, master limited partnerships, and junk bonds.

The trick is to enhance your yields without taking insane amounts of risk to get there. In the summer of 2007, investors were accepting vast increases in principal risk in the junk market for a mere 100 basis point increase in interest payments over Treasuries. A year later, that spread exploded to 2,500 basis points. Needless to say, the portfolio managers who made that call are now driving taxis in some of New York?s least attractive neighborhoods.

I have had great luck steering people into the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY), which is invested primarily in the debt of Asian and Latin American government entities, and sports a generous 4.87%? yield (click here for their site). This beats the daylights out of the one basis point you could earn for cash, the 1.75% yield available on 10 year Treasuries, and still exceeded the 3.98% yield on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ?BBB?, or better, US corporates.

The big difference here is that PCY has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in the region going back to 1820 is in the back of their minds.

You would think that a sovereign debt fund would be the last place to safely park your money in the middle of a debt crisis, but you?d be wrong. (PCY) has minimal holdings in the Land of Sophocles and Plato, and very little in the other European PIIGS. In fact, the crisis has accelerated the differentiation of credit qualities, separating the wheat from the chaff, and sending bonds issues by financially responsible countries to decent premiums, while punishing the bad boys with huge discounts. It seems this fund has a decent set of managers at the helm.

With US government bond issuance going through the roof, the shoe is now on the other foot. Even my cleaning lady, Cecelia, knows that US Treasury issuance is rocketing to unsustainable levels (she reads my letter to practice her English). The ratings agencies have been rattling their sabers about further downgrades of US debt on an almost daily basis, and it is just a matter of time before this, once unimaginable, event transpires again. When it does, there could be a stampede into the debt of other healthier countries, potentially sending the price of (PCY) through the roof.
Since my initial recommendation, my total return on (PCY) has been 50%, not bad for an insurance policy. Money has poured into (PCY, taking assets up nearly tenfold to $2.13 billion over the last four years. Another name to consider in this area is the iShares JP Morgan USD Emerging Markets Bond (EMB)

I lived through the Latin American debt crisis of the seventies. You know, the one that almost took Citibank down? Never in my wildest, Maker?s Mark fueled dreams did I think that I?d see the day when Brazilian debt ratings might surpass American ones. Who knew I?d be trading in Marilyn Monroe for Carmen Miranda?

Time to Trade Her

For Her?

Watch Out for the Coming Risk Reversal

Newsletter

It is a fact of life that markets get overstretched. Think of pulling on a rubber band too hard, or loading too many paddlers at one end of a canoe. Whatever the metaphor, the outcome is always unpleasant and sometimes disastrous.

Take a look at the charts below and you can see how extended markets have become. Stocks (DIA), (QQQ), (IWM) have reached the top of decade and a half trading ranges. Bonds (TLT), (LQD) are at three month lows, and yields have seen the sharpest back up in over a year.

In the meantime, the non-confirmations of these trends are a dime a dozen. Every trader?s handbook says that you unload risk assets like crazy whenever you see the volatility index (VIX) trade in the low teens for this long. The Shanghai Index ($SSEC), representative of the part of the world that generates 75% of the world?s corporate profits, hit a new four year low last night. Copper (CU) doesn?t believe in this risk rally for a nanosecond. Nor is the Australian dollar (FXA) signaling that happy days are here again.

I am betting that when the whales come back from their vacations in Southampton, Portofino, or the South of France, they are going to have a heart attack when they see the current prices of risk assets. A big loud ?SELL? may be the consequence of a homecoming. A Jackson Hole confab of central bankers that delivers no substantial headlines next week could also deliver the trigger for a sell off.

You may have noticed that European Central Bank president, Mario Draghi, has come down with a case of verbal diarrhea this summer. His pro-bailout comments have been coming hot and heavy. When the continent?s leaders return from their extended six week vacations, it will be time to put up or shut up. The final nail in this coffin could be A Federal Reserve that develops lockjaw instead of announcing QE3 at their September 12-13 meeting of the Open Market Committee.

To me, it all adds up to a correction of at least 5%, or 70 points in the S&P 500, down to 1,350. I?m not looking for anything more dramatic than that in the run up to the presidential election. I am setting up my bear put spreads to reach their maximum point of profitability in the face of such a modest setback. A dream come true for the bears would be a retest of the May lows at 1,266, however unlikely that may be.

For the real crash, you?ll have to wait for 2013 when a recession almost certainly ensues. Stay tuned to this letter as to exactly when that will begin.

?The Real Crash Isn?t Coming Until 2013

The Volatility Death Spiral Continues

Newsletter

Mr. Market sometimes speaks in mysterious tongues, and you really have to wonder what he is struggling to tell us by taking the Volatility Index (VIX) down to a subterranean $13 handle on Friday, a new five year low.

A number of advisors have been recommending that investors load up on the (VIX) in recent months to give them downside protection from an imminent market crash. Those who followed such advice were hammered, their clients no doubt striking them off invitation lists for summer barbeques.

In the past month, the (VIX) has cratered from $20 to $13. Just last October, it touched $49, when I urged readers to pile in on the short side. I came out in the mid-$30?s weeks later.

Those who traded the triple leveraged (TVIX) fared even worse, this blighted ETF plunging from $5 to $2.50 during the same period. The (TVIX) is doing the best impression of an ETF going to zero that I know of. A year ago it was trading at $110. This is why I plead with traders to avoid triple leveraged ETF?s like the plague. These things are designed for day trading by hedge funds only. Eventually, they all go to zero.

I am even seeing this in my own portfolio. A week ago, I sold short the September, 2012 (SPY) $147 calls at $0.38. A week later, the (SPY) has risen by 1.2% but the call options have done a swan dive to $0.34. This can only happen when they are crushing volatility.

I quit recommending (VIX) plays in March when I realized that there is some sort of arbitrage going on in the hedge fund community that is punishing (VIX) owners. I haven?t figured out the exact mathematical dynamics yet, but it has to involve selling short the cash stocks and shorting (VIX) contracts against them. Whatever they lose on the cash short is more than made up by the profits on their (VIX) short.

It?s easy to see how successful this would be. While August (VIX) traded at a lowly 13.40%, September volatility is still up at 18%, and January, 2013 is trading at a positively nosebleed 25%. That spread provides a lot of room to take in some serious money.

So what is the 13% really trying to tell us? Here are some thoughts:

*It is discounting multiple tranches of quantitative easing by central banks around the world that take all asset prices up for the rest of the year.

*It reflects the complete abandonment of the stock market by the individual investor, which is why trading volume has collapsed.

*It also indicates how exchange traded funds are taking over, sucking volume out of the stock market. The (VIX) doesn?t reflect activity in ETF?s.

*It could be discounting an Obama win in the presidential election. Stocks have delivered a 72% return since the Obama inauguration, the third best in history after Franklin Roosevelt and Bill Clinton. Mixed stock and bond portfolios have delivered the best returns on record, with both asset classes appreciating dramatically for 3 ? years, something that never happens.

It could be that the (VIX) at this level has it all wrong, and that a stock market selloff is about to send it soaring. Those who have rigidly held on to that belief until now have been severely tested.

For those who have fortunately avoided the (VIX) trade so far, let me give you a quick primer. The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index. You may know of this from the talking heads on TV, beginners, and newbies who call this the ?Fear Index?.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.

Ready to Take the Plunge on Volatility?

Get Ready to Buy the Bond Market

Newsletter

The Treasury bond market has just suffered one of the most horrific selloffs in recent memory, taking the yield on ten year paper up from 1.38% to an eye popping 1.83% in weeks, a three month high.

Yields have just risen by an amazing 38%. This has dragged the principal Treasury bond ETF (TLT) down from $132 to $120. Those who were pining to get into this safe haven at a better entry point now have their chance.

Rumors for the plunge have been as numerous as bikinis on an Italian beach. Some have pointed to a suspected unwind of China?s massive $1 trillion in Treasury bond holdings. Others point to the incredibly thin summer market trading conditions. Add to that a relentlessly heavy new issue calendar by the government. After all, they have a $1.4 trillion budget deficit to finance this year. That works out to $4 billion a day.

Long term strategists point to more fundamental reasons. The spread between the ten year yield and the S&P 500 dividend yield is the narrowest in history. Even after the recent slump, equity yields still beat bonds by 20 basis points. This has never happened before. The smarter money began shifting money out of bonds into stocks months ago.

However, I think that an excellent trading opportunity is setting up here for the brave and the nimble. There is a method to my madness. Here are my reasons:

*US corporate earnings are slowing at a dramatic pace. Some 40% of those reporting in Q2 delivered revenues misses. They made up the bottom line by firing more people. This is the worst performance since early 2008. Remember how equity ownership worked out after that?

*The high price of oil is now starting to become a problem and will inflict its own deflationary effects. If we maintain the 24% price hike we have seen in recent months, that will start to present a serious drag on the economy.

*Fiscal Cliff? Has anyone heard about the fiscal cliff? This 4% drag on GDP growth, another name for a recession, is looming large.

*Don?t forget that the rest of the world economy is going to hell in a hand basket. The China slowdown continues unabated, and a hard landing is still on the table. Europe is in the toilet. Japan?s growth is on life support.

*The Chinese aren?t selling. They told me so. They are merely reallocating a larger portion of their monthly cash flow to Europe where yields are a multiple higher. They are doing this because I told them to. This helps support the Euro. Keeping the currency of its largest trading partner strong to preserve exports is in its best interest.

*QE3? Remember QE3? Even if the Federal Reserve doesn?t implement this expansionary monetary policy, Europe will. And the Fed will probably join in 2013 when we head into the next recession.

*Paul Ryan for VP? If elected, his death wish for the Federal Reserve will send asset prices everywhere plummeting, including stocks and bonds. Since Romney?s fumbled announcement, Treasury bond yields have soared by 25 basis points.

There are many ways to play this game. Just pick your poison. The obvious pick here is to buy the (TLT) just over the 200 day moving average at $119. You could buy an October $120-$125 (TLT) call spread in the options market for a quick bounce. If you really want to get clever, you can sell short the $110-$115 call spread, which has a breakeven in terms of the ten year Treasury yield of 2.10%.

The safe haven trade is not gone for good. It?s just enjoying a brief summer vacation.

Those Treasury Bond Yields Were Getting Mighty Thin

Time to Pick Up Some Gold

Newsletter

Gold has clearly evolved into a call option on global quantitative easing. Don?t think of it just as the stuff your dentist puts in your teeth or the thing your girlfriends gets you to wrap around her finger anymore. I don?t think that the Federal Reserve will implement QE3 at its September 16-17 meeting, or even next year. This shocking realization will be bad for gold prices.

However, Europe is a completely different kettle of fish. Having just spent two months there, I can tell you with great certainty that the economic conditions are far more extreme than any economic data releases are indicating so far.

So the ECB has to launch its own QE through a second tranche of the LTRO or some other vehicle of at least ?500 billion ? ?1 trillion. While most of this money will be used to buy high yield European sovereign bonds, some will spill over into the gold market, and that will be good for prices.

I can?t tell you how bad things are in Italy. I just visited the main middle class shopping district in Milan. The sales were offering discounts of 70%, 80%, and 90%. They were literally throwing inventory out the door. I?m talking pants for $5 and overcoats for $25. I ended up buying four suitcases, those at 50% off, and filing them up with clothes for everyone I know. I got clothes for the kids, cloths for distant relatives, even clothes for people I don?t like. And it barely made a dent on my credit card.

The attraction of the September 2012 $148-$151 call structure is the following. The $151 strike is just below rock solid support for gold that has held for several months. The September expiration allows us to take out 90% of the profit before the Fed gives us the bad news on no QE3 next month. Gold could well keep moving sideways until then, which is why I am not rushing out and buying out-of-the-money calls. This all happens going into the traditional seasonal strength of the Indian wedding season, Christmas in the West, and the Chinese Lunar New Year.

By leveraging up an out of the money call spread in a limited risk position, I get an outsized return. This is a bet that gold will move up, sideways, or down no more than 3% over the next four weeks. If this happens, the call spread will rise in value from $2.42 to $3.00, a gain of 24%. This is why I went for a heavy 10% weighting.

Better Bring an Extra Suitcase

The Slippery Slope for Oil

Newsletter

If volatility and lack of direction in the equity market are driving you nuts these days, thank your lucky stars you?re not in the oil market. Only last night, a Japanese supertanker plowed into a US Navy destroyer, causing prices to spike. That?s assuming that you had time to notice while sifting through numerous, contradictory leaks from Israeli intelligence about whether they will, or will not, imminently attack Iran. Oh, and don?t forget, demand from Europe is disappearing up its own tailpipe.

My take is that the administration is pursuing the correct policy on Iran. With Europe joining the embargo on June 30, and its major means of trade financed with the dispatch of Standard Chartered, Iran?s economy is now caught in a vice. With minimal domestic refining capacity, the country is drowning in its own oil, but facing several gasoline shortages. Some essential foodstuffs have doubled in price. These are key ingredients needed for the Arab Spring to spill into Iran. Then the country falls into our lap like an overripe piece of fruit, without a shot fired.

It could well be that none of this makes any difference to the price of crude. Like every other asset class, it has become hostage to the likelihood of another round of quantitative easing from the Federal Reserve. West Texas Intermediate has moved an impressive $18 off of its $77 low on the prospect of QE3 alone. All that is left is for Ben Bernanke to pull the trigger.

Our first chance at a hint will be at the Jackson Hole confab of central bankers on August 26. After that, we have to wait until the September 18-19 Open Market Committee Meeting for relief. It is safe to say that if Ben delivers, oil could be trading at triple digits very quickly. If he doesn?t, then we could be plumbing new lows shortly.

That put us in the same risk/reward dilemma for oil as with the equity markets. Note the imbalance. If we get QE3, then we can entertain $6 of upside. If we don?t, you are looking at $25 of downside. Hint: strapping on risk/reward trades like this is not how hedge fund managers get rich.

That makes me a happier buyer on the next big dip than a chaser up here. Names to focus on? ExxonMobile (XOM), Occidental Petroleum (OXY), and Cabot Oil & Gas (COG), as well as the master limited partnerships like Kinder Morgan (KMP), Enbridge Energy Partners (EEP), Trans Montaigne Partners (TLP), Linn Energy (LINE).

That?s all for today. It is hard to write brilliant, seamless prose when you?re brain dead and mindless from nine hours of jet lag. Besides, the whales are still on vacation at Southampton and the South of France, so my traditional sources of hot tips will remain dry for another week or so. Damn! I should have taken an extra week off to investigate economic conditions in the Greek Islands. With a Depression on, I hear that hotels that normally go for $2,000 a day can be had for $2,000 a week.