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The Rising Risk of a Market Melt Up

The risk of a major market melt up just took a quantum leap upward with the European Central Bank?s surprise 25 basis points in interest rates a few minutes ago. The move had not been expected from normally sleepy and moribund European monetary authorities for a few more months.

The ECB?s action has major positive implications for the world economy. It gives a shot of adrenalin to a global synchronized economic recovery, which was already in the cards for 2014. The effect on all asset classes will be huge.

Of course, the Euro ETF (FXE) crashed by $1.70, as one would expect, one of the largest moves of the year in the foreign exchange markets. We already took profits on a short position we strapped on in the Euro the last time it ran up to $1.38, which turned out to be the peak of a multi month move. But it has also spilled over into the other currencies, expanding into a much broader move into the US dollar.

The Japanese yen (FXY), (YCS) has just puked up 60 basis points, where we have a major short position and were looking to add. As a result, we have already gained 58% of the potential profit for a position that we added only two days ago. The Australian dollar (FXA), where I am also attempting to go long on a bigger dip, has lost 50 cents. Gold took it on the nose, again.

The other blockbuster event, which transpired this morning, was the release of the early read of US Q3 GDP, coming in at a red hot 2.8%. This was much higher than expected, with many estimates hovering around the 2.0% level. This means that the 0.5% we lost in the Washington shut down will turn out to be just a speed bump. We should make it all back, and much more, in the run up to Q1, 2014.

But wait! There?s more!! The price of oil has plunged by $20 in six weeks, thanks to the massive oversupply coming out of US fracking fields, and the movement of US-Syrian hostilities to a back burner. Even an Israeli attack on a Russian resupply of missiles at a Syrian port failed to generate any interest in Texas tea. Two months ago, this would have been worth a one day, $5 spike.

The US Energy Information Agency calculates that a $20 cut in the price of oil adds 0.4% to US GDP, and cuts unemployment by 0.1%. Newly enriched consumers spend more money and corporations with lower costs earn more profits. In other words, it cancels out the negative effects of the Washington shutdown in one fell swoop.

The University of California argues that ten out of the last 11 recessions were triggered by oil price spikes. The inverse is true as well. Collapsing oil prices create economic booms. Guess which way we are headed?

US Q3 earnings reports are generating extremely favorable comparisons, up about 10% YOY in aggregate. We have an extremely favorable calendar right now, as November and December are traditionally strong months for risk markets. Maybe it?s also that holiday grog. We also have the 2014 ?Great Reallocation? out of stocks and into bonds to look forward to, which has probably already started.

It all adds up to a first class market melt up, which could start at any time. Indeed, given the torrid market performance since the summer, and its Teflon like behavior during the October Washington shutdown, some strategists are claiming that a melt up has already started. The net net of all of this is that the world looks like a much friendlier place, and I am much more inclined to add risk than I was only a few minute ago when I dragged my sorry ass out of bed.

Below, please find the posture you should take in the markets listed by asset class.

*Stocks – ?buy the dips, running to a new yearend highs, especially in technology,? industrials, health care, and consumer cyclical
*Bonds – ?sell rallies, heading to the top of the 2.50%-3% 10 year yield range
*Commodities – start scaling in on dips in copper, iron ore
*Currencies – sell yen on any rallies, buy the Australian dollar on a China recovery
*Precious Metals – stay away, the world wants? paper assets
*Volatility – stand aside, will bounce along bottom
*The Ags – stay away until next year, great weather is killing prices, but too late to sell short

Crude Oil Demand

FXE 11-7-13

FXY 11-7-13

FXA 11-7-13

WTIC 11-6-13

Wall Street Bull

The Best ETF?s of 2013

I?m sure you all spent the better part of last January explaining to your clients that they should be pouring all of their money into alternative energy, social media, and biotech ETF?s. What! You didn?t? You obviously failed to get the memo. Well, neither did I.

Yes, I know this sounds like the makeup of the Sierra Club Pension Fund, if such a thing exists. Take a look at the top performing non leveraged ETF?s in 2013 and you will see a list that is dominated by these peripheral sectors, many of which were close to bankruptcy only a year ago. Who knew? The explanations for success vary with each industry.

Alternative energy is the easy one to understand, which I have long regarded as a cheap call option on the price of oil. The rising price of Texas tea boosts the breakeven cost of alternatives, and it jumped from $86 last December to as high as $112.50 last month. This enabled many companies to move well into profitability for the first time. Costs have imploded, thanks to huge supply of solar cells coming out of China. The rocket fuel came when the administration imposed punitive duties on below cost Chinese exports.

As a result, solar energy is now cheaper than buying electric power from the local grid, especially in the Southwest, where the sun shines, with bills dropping below 8 cents per kWh. I have flown over the Southern California deserts in a small plane to inspect some of these plants and they are truly gargantuan, stretching on for square miles.

They are helped by a Golden State law requiring that 30% of all power be obtained from alternative sources by 2020. Some 30 other states have passed similar legislation, with an additional six providing voluntary guidelines. This is in addition to 67 foreign countries with such mandates.

Biotechnology is an easy sell, and is why the Health Care Sector (XLV) is one of my favorites to play in the wake of any settlement of the Washington shutdown. Obamacare is about to deliver 30 million new paying customers to the industry. Those who already have health insurance coverage are aging and getting sicker at an unprecedented rate. The obesity epidemic helps, the result of our national addiction to cheeseburgers.

The rate of technological development is accelerating far beyond anyone?s imagination, throwing off ever more big ticket, highly profitable products. Much of this is going on in the San Francisco Bay area within sight of my office. Some of these cures cost $100,000 a year, for life. And guess what? Consumers in increasingly wealthy emerging nations like to stay healthy as well.

The social media boom is the riskiest, and most speculative, of this list of great performers. You would think investors would be wary in the wake of the Facebook (FB) IPO debacle. In fact, CEO Mark Zuckerberg, engineered one of the greatest investors relations turnarounds in history, and the shares finally responded, more than doubling. It turns out that the company really does make money after all, lots of it.

Keep in mind that this year?s homeruns often become next year?s strikeouts, so I wouldn?t be chasing these up here.

TOP 10 ETF?S OF 2013

Guggenheim Solar ETF (TAN) +130.8%
Market Vectors Solar Energy ETF (KWT) +93.4%
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) +82.4%
Market Vectors Global Alternative Energy ETF (GEX) +66.8%
The PowerShares Wilderhill Clean Energy Portfolio (PBW) +62.5%
The First Trust ISE Global Wind Energy Index Fund (FAN) +55.7%
The Market Vectors Biotech ETF (BBH) +55.7%
The Global X Social Media Index ETF (SOCL) +57.3%
The PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) +56.9%
The PowerShares Gold Dragon China Portfolio (PGJ) +57.2%

WTIC 10-9-13So Goes the Price of Alternative Energy

 

TAN 10-9-13

KWT 10-9-13

QCLN 10-9-13

House - Solar Panels

Take a Look at Occidental Petroleum (OXY)

I have kept oil companies in my long term model portfolio for many years now. But there are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics class, which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, fighting rebels and bandits, crawling out of the desert starved, lice ridden, and half dead.

I concluded in my paper that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10 (USO).? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk.

He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians?

I told him everything I knew, including the two weeks spent in an Algiers jail for taking pictures in the wrong places. His parting words were to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities, I stumbled across (OXY) once more (click here for their). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005.

(OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, to 2.90%, more than ten year Treasury bonds Need I say more?

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. A lead in fracking is a huge plus. I think (OXY) will continue to make money, no matter what the price of oil does. That?s why it lives in my long-term model portfolio.

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

OXY 9-20-13

WTIC 9-20-13

Can You Spot the Double Agent?

Faberge Egg

A Faberge Egg

Bailing on My Oil Short

We got the dollar drop over the weekend that I was expecting. There was no way that the war was going to start before Obama gave his speech on Tuesday and congress votes yea or nay later on.

So when the missiles failed to show by the Monday morning opening, they took Texas tea down a full buck. The Charlie Rose interview with Bashar al-Assad, where he blamed it all on the rebels, also cast more doubt on the prospect of immediate hostilities.

Don?t kid yourself. There is going to be a war. Over the weekend, I did manage to get a peek at the classified proof of the sarin gas attack, thanks to some senior military sources at the Pentagon.

It includes recordings of radio transmissions from Syrian generals ordering the use of poison gas to teach a lesson, and other recordings of radar tracks showing the missiles flying from a Syrian army base to a Damascus neighborhood. You are not going to get a better smoking gun than that.

The Russians were not given access to this data to keep sources, methods, and the advanced state of our monitoring technology, secret. Besides, relations with the Ruskies have been pretty rocky lately. This is why President Obama said at the St. Petersburg press conference that he was elected to end wars, not start new ones, based on false information, a jab at the originators of the 2002 second Gulf War.

However, it?s time to use this window to cut our losses on our United States Oil Fund September, 2013 $39-$42 in-the-money bear put spread, which is now out-of-the-money, if just a touch. Think of it has folding your hand and losing your ante when the dealer has an ace showing in Texas hold?em.

Everything that can go wrong with a trade happened with this one. My initial assumption that Egypt would go to sleep in the wake of the army massacre of 1,000 protesters proved correct. At first, my oil short made money, as oil fell from $108 a barrel to $105, taking the (USO) down with it.

Then Secretary of State John Kerry made his blockbuster, saber rattling speech, ramping up speculation about a new war in Syria by a quantum leap. Oil soared to $112.50. Since then, it has been all back and fill, based on the totally unpredictable headline?du jour, with most of the movement occurring in an untradeable daily gap opening.

There are only nine trading days left to expiration on this position. We would make money with an expiration at this level with the (USO) a mere 25 cents in-the-money.

But the risk/reward of continuing has gone asymmetric against us, meaning that we are risking a lot of money here to make just a little bit. It is not worth it. If things suddenly go against us, like missiles actually flying, a 1.18% loss could turn into a sickening 10% one very quickly. And with nine days to expiration, there is not enough time for conditions to turn right for us once again.

It easier to take a loss when your overall profit reaches another all time high. As of now, the?Trade Alert?service of the?Mad Hedge Fund Trader?is up a hefty 41.48%, thanks to my major short in the Japanese yen. I would hate to lose a quarter of this on a single rogue trade, thanks to some Middle Eastern warlord.

I already have plans on how to spend this money, like buying a second Tesla, the four wheel drive SUV model X, which will probably set me back another $100,000. I am not going to let oil pee on my parade.
When war does break out, and then escalates, and we get the spike up to $118 that many are predicting, then you?ll see me re emerge as a seller once again. If anything, the underlying supply/demand dynamics are getting worse, with the precipitous size of the Wall Street long position in oil rising, while underlying demand is melting away like an ice cube in the desert. For explanations of the fundamentals here in eloquent and florid detail, please read ?Why I Sold Oil? by?clicking here?and ?Why I?m Keeping My Oil Short? by?clicking here?at.

On to the next trade.

USO 9-9-13

WTIC 9-6-13

Tesla Model X A Tesla Model ?X?

Which One Did You Say I Should Buy?

Wow! That was some speech! Secretary of State, John Kerry, was certainly rattling the saber last night when he laid out the irrefutable evidence confirming the use of chemical weapons in Syria. Defense Secretary, Chuck Hagel, then upped the ante by asserting that US military forces are ?ready to go.? Oil (USO) hit a two and a half year high at $109, and gold (GLD) finally resumed its ?flight to safety? character by spiking up $30.

I happened to know that the Joint Chiefs of Staff have been war gaming for Syria for over a year now, and have presented President Obama with a list of graduated levels of response. What is new is the movement off assets to the immediate area, like a major carrier task force, which will park 100 miles offshore in the Eastern Mediterranean for the foreseeable future.

My pick is for a no-fly-zone, which the administration should have executed a long time ago. It is cheap and can be implemented remotely, with no risk of casualties. Drones will come in useful too. F-16 fighters now carry smart missiles with a 70 range. If a pilot in Syria takes off, then poof, they?re gone in 30 seconds.

Although the financial markets are expecting immediate action, we may not get it. When traders started speculating about military strikes, you want to run a mile. Obama is first and foremost a pacifist and needs more than overwhelming evidence to fire a single shot. He even hesitated over taking out Osama bin Laden. He also is a lawyer, so he won?t move until the needed international legal framework is in place, such as a United Nations resolution.

The great irony in all this is that the current crisis has absolutely no impact on the actual supply and demand of oil. Syria doesn?t produce any. It is a net importer of oil. All of the other major crude producers in the Middle East are backing US action, except for Iran, a marginal producer at best. Pure emotion is driving the price here. That is why oil and gold have been going up in tandem, until recently a rare event.

If anything, there is a severe imbalance developing in the crude markets that will soon send prices sharply southward. Thanks to a triple barrel push of improving economic data, Egypt, and then Syria, Wall Street has built up a record long in the oil futures market of some 1.9 million contracts. That works out to an incredible 95 days of daily US consumption, or 256 days of imports. That is a lot of Texas tea sloshing around the books of hot handed traders.

We are just coming to the close of the strongest driving season in 31 years, and demand will soon ebb. And guess what? The economic data is now softening. Unwind just a portion of the speculative long position in oil, and we could quickly return to the $92-$95 range that prevailed before the multiple crisis.

Don?t just stop at oil. Syria?s president, Bashar al-Assad is setting up a buying opportunity for the entire range of risk assets, including longs in US stocks and short positions in bonds, yen, and the euro.? If we get no Fed taper in September, as I expect, it could be off to the races once again.

WTIC 8-26-13

USO 8-27-13

GLD 8-27-13

Corpses

Meet Your New Trading Strategy

Bashar al-Assad

Meet You New Market Timer

Why I Sold Oil

I think that oil peaked last week with the Egyptian Army?s ferocious and bloody attack on the Muslim Brotherhood. I hate to sound cynical here, but count the daily bodies in the street, which has been trending down sharply since Thursday?s, 1,000 plus tally. Fewer bodies mean lower oil prices.
This has most likely broken the back of the fundamentalist opposition movement for at least the time being, which has accounted for the $20 spike in oil prices over the last two months.

This returns us to the longer term fundamental trend for oil, which is sideways at best, and down at worst. The US is flooding the world?s oil markets with energy in all its many forms. The driver here is American fracking technology, which will continue to upend the traditional energy markets for decades to come. It?s just a matter of time before fracking goes mainstream in Europe, especially in the big coal countries of Germany, Poland, and England. Then they can thumb their noses at Russia, a major gas supplier over the last thirty years. China will follow.

In a crucial news item that wasn?t reported nationally, the California legislature voted down a measure to ban hydraulic fracturing in their state. It was defeated in a democratically controlled body. As the Golden State is the most anti energy state in the country, this gives the state a flashing green light to move forward against environmentalist opposition. There is a ton more of new supply coming. This is what the weakness in the price of natural gas is telling you (UNG).

We also received a new negative for oil this month, the collapse of the emerging market currencies, stock markets, and bonds, especially the Indian rupee. This reduces their international purchasing power in US dollar terms, thus raising the cost of oil in local currency terms. You see, oil is priced in dollars. As the emerging markets have seen the largest growth in demand for oil in recent years, this can only be bad for prices.

In terms of my own trading portfolio, I want to have a ?RISK OFF? position, like an oil short, to hedge my two existing ?RISK ON? positions in the Euro (FXE) and the yen (FXY) shorts. US stock markets could be weak into September, and they will take oil down with them.

The energy inventory figures released on Wednesday were another tell. Oil came in line with a 1.5 million barrel weekly draw down. But gasoline showed a precipitous 4 million barrel drop in supplies, meaning that more people are driving to their summer vacations than expected. Texas tea should have rallied at least $1 on the news. Instead it fell $1.50. It is an old trading nostrum that if a contract can?t rally on surprisingly positive developments, you sell the daylights out of it.

Below, you will find another chart that you should wake up and take notice of, the Powershares DB US Dollar Bullish Index Fund (UUP). Commodities traditionally are weak when the dollar is strong. Both the chart and the fundamentals suggest that we are close to a multiyear low for the greenback and are about to enter a prolonged period of dollar strength. This is also grim tidings for oil.

Finally, there is that last resort, the charts. Check out those for the (USO) and oil and it very much looks like we have a triple top in place. That is the straw that breaks the camel?s back. Time to sell.

The only way I am wrong on my oil call is if the Chinese economy is about to take off like a rocket. They are the marginal big swing player in this market. But there is absolutely no sign of that happening in the economic data. If anything, the collapse in emerging markets suggest that conditions in the Middle Kingdom are about to get worse before they get better.

USO 8-21-13

WTIC 8-21-13

NATGAS 8-21-13

UUP 8-22-13

Camel Ouch! That Hurt!

Why I Love/Hate the Oil Companies

The first thing I do when I get up every morning is to curse the oil companies as the blood sucking scourges of modern civilization. I then fall down on my knees and thank God that we have oil companies.

You?ve got to love ExxonMobil (XOM), which constantly trades places with Apple (AAPL) for being the world?s largest company. This is why petroleum engineers are getting $100,000 straight out of college, while English and political science major are going straight on to food stamps.

I recommend (XOM) and other oil majors as part of any long-term portfolio. The price of oil has gone up in my lifetime from $3 a barrel up to $149, and then back down to $107 today. The reasons for the ascent keep growing, from the entry of China into the global trading system, to the rapid growth of the middle class in emerging nations. They?re just not making the stuff anymore, and we can?t wait around for more dinosaurs to get squashed.

Oil companies aren?t in the oil speculation business. As soon as a new supply comes on stream, they hedge off their risk through the futures markets or through long term supply contracts. You can find the prices they hedge at in the back of any annual report.

When oil made its big run a few years ago, I discovered to my amazement that that (XOM) had already sold most of their supplies in the $20 range. However, oil companies do make huge killings on what is already in the pipeline.

Working in the oil patch a decade ago pioneering the ?fracking? process for natural gas, I got to know many people in the industry. I found them to be insular, God fearing people not afraid of hard work. Perhaps this is because the black gold they are pursuing can blow up and kill them at any time. They are also great with numbers, which is why the oil majors are the best managed companies in the world.

They are also huge gamblers. I swallow hard when I see the way these guys through around billions in capital, keeping in mind past disasters, like Dome Petroleum, the Alaskan oil spill, Piper Alpha, and more recently, the ill-fated Macondo well in the Gulf of Mexico. But one failure does not slow them down an iota. The ?wildcatting? origins made this a faith based industry from day one, when praying was the principal determinant of where wells were sunk.

Unfortunately, the oil companies are too good at their job of supply us with a steady and reliable source of energy. They have one of the oldest and most powerful lobbies in Washington, and as a result, the tax code is riddled with favorite treatment of the oil industry. While social security and Medicare are on the chopping block, the industry basks in the glow of $53 billion a year in tax subsidies.

When I first got into the oil business and sat down with a Houston CPA, the tax breaks were so legion that I couldn?t understand why anyone was not in the oil racket. Every wonder why we have had three presidents from Texas over the last 50 years, and are possibly looking at a fourth?

Three words explain it all: the oil depletion allowance, whereby investors can write off the entire cost of a new well in the first year, while the income is spread over the life of the well. This also explains why deep water exploration in the Gulf is far less regulated than California hair dressers.

No surprise then that that the industry has emerged in the cross hairs of the debt ceiling negotiations, under the ?loopholes? category. Not only do the country?s most profitable companies pay almost nothing in taxes, they are one of the largest users of private jets.

It is an old Washington nostrum that when things start heading south on the domestic front, you beat up the oil companies. It?s the industry that everyone loves to hate. Cut off the gasoline supply to an environmentalist, and he will be the one who screams the loudest. This has generated recurring cycles of accusatory congressional investigations, windfall profits taxes, and punitive regulations, the most recent flavor we are now seeing.

But imagine what the world would look like if Exxon and its cohorts were German, Saudi, or heaven forbid, Chinese. I bet we wouldn?t have as much oil as we do today, and it wouldn?t be as cheap. Hate them if you will, but at least these are our oil companies. Try jamming a lump of coal into the gas tank of your Prius and tell me what happens.

XOM 8-16-13

WTIC 8-15-13

oil Love Them, Hate Them or Both?

Why You Should Care About the Iran Rial Collapse

The Iranian Rial (IRR) has just suffered one of the most cataclysmic crashes in the history of the foreign exchange markets. It is off a mind numbing 90% since the beginning of 2011. One dollar now buys 24,834 Rials. Watch out Zimbabwe!

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, do you 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, now that the US is openly supplying weapons to the rebels. 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 Gaddafi. It couldn?t happen to a nicer guy.

The geopolitical implications for the US are enormous.? With Syria gone, Iran will be the last rogue state hostile to the US 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 anti-government 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. The new Secretary of State, John Kerry, will stiffened his rhetoric and work tirelessly behind the scenes to bring about the collapse of the Iranian economy.

The oil embargo is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain in this oil producing country. 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 have been kicked out of the SWIFT international settlements system, a death blow to their trade. That is what the Standard Chartered money laundering scandal last year was all about. Sure, you can sell oil one truckload at a time for cash. Try doing that with 3 million barrels a day of which should fetch $270 million. That?s a lot of Benjamins. Forget the fives and tens.

Let?s see how docile these people remain when the air conditioning quits running because of power shortages. With their currency now worthless, it has become impossible to import anything. This is causing severe shortages of everything under the sun, especially foodstuffs, which in some cases have more than doubled in price in months.

What does the government in Tehran say about all of this? Blame it on the speculators. Sound familiar?

Iran is a rotten piece of fruit ready to fall of its own accord and go splat. The Obama administration is doing everything it can to shake the tree. No military action of any kind is required on America?s part. Think of it as victory on the cheap.

The geopolitical payoff of such an event for the US would be almost incalculable. A successful Iranian 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 oversupply 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 US, 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. Commercial office space in Houston may not do so well either, as imports account for 80% of the oil majors? profits.

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 US 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 US 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 US government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause US GDP growth to reaccelerate from a tepid 2% rate to a more robust 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 30,000, the Euro collapses to parity, gold rockets to $3,000 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 in a crash.

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 right up these well-trained and motivated. 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 US 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 and boost their own budget allocations. The head of the miniscule effort they have was assassinated by Israeli intelligence last year (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!). What nuclear infrastructure they have is being decimated by computer viruses as I write this.

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, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-November.

WTIC 8-2-13

Iranian Women

Bashar al-Assad Here?s The Next Big Short

RialNot Worth So Much Today

Why We Need Six New Saudi Arabia?s

I recently spent an evening with Ambassador Richard Jones, the Deputy Executive Director of the International Energy Agency in Paris, who had some eye opening things to say about the energy space. The IEA was first set up as a counterweight to OPEC during the oil crisis in 1974, and has since evolved into a top-drawer energy research organization.

World GDP will grow an average 3.1%/year through 2030, driving oil demand from the current 84 million barrels/day to 103 million b/d. That means we will have to find the equivalent of six Saudi Arabia?s to fill the gap or prices are going up, possibly a lot. His conservative target has crude at $190 in twenty years. Some 39% of that increase in demand will come from China and 15% from India.

A collapse in investment caused by the financial crisis means that supply can?t recover in time to avoid another price spike. More than 1.5 billion people today don?t have electricity at all, but would love to have it. The best the climate negotiations can hope for is for CO2 to rise until 2020, and then plateau after that, because once this greenhouse gas enters the atmosphere it is very hard to get out.

This will require a massive decarbonization effort reliant on nuclear, hydro, alternatives, and carbon capture and storage. Up to half of the needed carbon reduction can be achieved through simple efficiency measures, like ditching the incandescent light bulb, driving more hybrids, and closing dirty, old coal fired power plants. Natural gas will be a vital bridge, as it is cheap, in abundant supply, and emits only half the carbon of traditional fossil fuels. The total 20-year bill for the rebuilding of our new energy infrastructure will exceed $10 trillion.

Richard, who comes from a long diplomatic career in Kuwait, Kazakhstan, and Israel, certainly didn?t pull any punches. I have been a huge fan of the IEA?s data for 35 years. Better use any weakness in oil prices to accumulate long term positions in crude through the futures, the ETF (USO), the offshore drilling companies like Transocean (RIG), and oil and gas plays like ExxonMobil (XOM)? and Occidental Petroleum (OXY). When oil comes back, it will do so with a vengeance.

WTIC 6-21-13

NATGAS 6-21-13

Camel21-1 I?ll Take Another Six Please

Why I Love/Hate the Oil Companies

The first thing I do when I get up every morning is to curse the oil companies as the blood sucking scourges of modern civilization. I then fall down on my knees and thank God that we have oil companies.

This is why petroleum engineers are getting $100,000 straight out of college, while English and political science major are going straight on to food stamps.

I recommend (XOM) and other oil majors as part of any long-term portfolio. In my lifetime, the price of oil has gone up from $3 a barrel up to $149. The reasons for the ascent keep growing, from the entry of China into the global trading system, to the rapid growth of the middle class in emerging nations. They?re just not making the stuff anymore, and we can?t wait around for more dinosaurs to get squashed.

Oil companies aren?t in the oil speculation business. As soon as a new supply comes on stream, they hedge off their risk through the futures markets or through long-term supply contracts. You can find the prices they hedge at in the back of any annual report.

When oil made its big run a few years ago, I discovered to my amazement that that (XOM) had already sold most of their supplies in the $20 range. However, oil companies do make huge killings on what is already in the pipeline.

Working in the oil patch a decade ago pioneering the ?fracking? process for natural gas, I got to know many people in the industry. I found them to be insular, God fearing people not afraid of hard work. Perhaps this is because the black gold they are pursuing can blow up and kill them at any time. They are also great with numbers, which is why the oil majors are the best-managed companies in the world.

They are also huge gamblers. I swallow hard when I see the way these guys through around billions in capital, keeping in mind past disasters, like Dome Petroleum, the Alaskan oil spill, Piper Alpha, and more recently, the ill-fated Macondo well in the Gulf of Mexico. But one failure does not slow them down an iota. The ?wildcatting? origins made this a faith-based industry from day one, when praying was the principal determinant of where wells were sunk.

Unfortunately, the oil companies are too good at their job of supplying us with a steady and reliable source of energy. They have one of the oldest and most powerful lobbies in Washington, and as a result, the tax code is riddled with favorite treatment of the oil industry. While Social Security and Medicare are on the chopping block, the industry basks in the glow of $53 billion a year in tax subsidies.

When I first got into the oil business and sat down with a Houston CPA, the tax breaks were so legion that I couldn?t understand why anyone was not in the oil racket. Every wonder why we have had three presidents from Texas over the last 50 years, and are possibly looking at a fourth (Jeb Bush)?

Three words explain it all: the oil depletion allowance, whereby investors can write off the entire cost of a new well in the first year, while the income is spread over the life of the well. This also explains why deep-water exploration in the Gulf is far less regulated than California hairdressers.

No surprise then that that the industry has emerged in the cross hairs of the debt ceiling negotiations, under the ?loopholes? category. Not only do the country?s most profitable companies pay almost nothing in taxes, they are one of the largest users of private jets.

It is an old Washington nostrum that when things start heading south on the domestic front, you beat up the oil companies. It?s the industry that everyone loves to hate. Cut off the gasoline supply to an environmentalist, and he will be the one who screams the loudest. This has generated recurring cycles of accusatory congressional investigations, windfall profits taxes, and punitive regulations, the most recent flavor we are now seeing.

But imagine what the world would look like if Exxon and its cohorts were German, Saudi, or heaven forbid, Chinese. I bet we wouldn?t have as much oil as we do today, and it wouldn?t be as cheap. Hate them if you will, but at least these are our oil companies. Try jamming a lump of coal into the gas tank of your Prius and tell me what happens.

XOM 6-19-13

WTIC 6-18-13

oil

Love Them, Hate Them or Both?