E Market Briefing For Jan. 6, 2020

Power-vacuum risks - are really at the heart of concerns regarding the tension in the Persian Gulf region (more broadly than just Iran vs. US). I have noted for years the Iranian efforts to undermine an independent or mixed Iraqi environment; where the only thing positive that Saddam did in the old days, was be the glue that kept Shia and Sunni apart (varying from how Qaddafi kept a cork in the bottle of North African emigration (a US debate on whether his removal was justified; as evil as he was).  

For now we focus on a Persian (mostly Shia) / Arab (mostly Sunni) fight; of course that rivalry (or hatred) was insufficiently grasped long ago by a couple Administrations; nor was the handling of it post-the-Iraqi war. The 1st George HW Bush 'got it', which is why he halted Scwarzkopf's move to Baghdad short of total victory; because we would have 'owned' Iraq. It apparently didn't get grasped by his Son; and making matters worse, the occupation failed to put the police and army on 'our' payroll, similar to an approach used by General Macarthur in Japan or Patton in Berlin, after the war (feed their families, and they likely won't revolt against you).  

Where that leaves us 'now' is an Iran that did permeate banking (the first of all areas they moved into, and which incentivized small businesses to be loyal) in Baghdad; and I noted objection to this years ago. And then of course the very same militias that attacked our troops around Basra, and introduced deadly IED's that penetrated our heavy armor, were the Iran-supported Shia that ultimately evolved into a component of the Iraqi security forces (because they let Shia in the Government); at the same time they 'sort of' fought with us against ISIS, which of course were/are mostly Sunni. Is it a basis of why the US shouldn't expect to tame them?

And perhaps (aside the pay-off money and political aspects with Iran) it was the participation of Shia militia fighting ISIS that held-off the US (we had a chance) going after vermin like Soleimani; which might reflect on the complacent surprise that we responded to Iran's expansionist efforts in Iraq, while ignoring Iran suppression of their own citizens. Hence how the zealots running Iran killed or imprisoned thousands of their citizens, and tried to influence Iraq that way too; with some opposition recently.  

The point is that a power-vacuum already allowed Russia and Iran vast expansions of their influence in the region (especially Syria); partially as we disengaged; and perhaps they quickly got a bit too cocky. After all, if these terrorists were brazen enough to drive thru Baghdad, in a 2-car convoy (presumably Soleimani just arrived from Beirut, likely planning a similar challenge in Lebanon, which might be what we hear next week).. so they felt a degree of comfort in their Iraqi surroundings. For years I've mentioned the risk of Iraq becoming a vassal state or satellite of Iran; so that's really the challenge that has now taken center stage.  

Bottom-line: Senators will get a classified briefing on all this early in the new week; and will likely better-grasp what led up to this. Probably this was less a diversionary effort related to the Impeachment or Election as some speculate; but rather a lack of understanding of how seriously the Iranians were really provoking the situation in Iraq, after we ignored their earlier provocations against our 'drone' or Gulf shipping, or the Saudi Oil facilities attacks, as everyone recalls occurring just a few months ago.  

The market does not see this as such a long-term condition as it 'might' be. If the Oil futures market is correct, this isn't going to explode widely. But the United States also is convening (Lindsay Graham's remark isn't irrelevant) that 'if they wish to remain in the Oil business, they now need to stop harassing the U.S. and covertly or overtly hitting our allies'. That's a pretty direct threat beyond sanctions, do totally destroy their economy; and it's intended to deter them; but might not. Tactically it is assumed Iran doesn't want to physically provoke an invasion (nor do we have any desire to occupy the place, which would require millions of troops and be more comparable to WW 2 than anything recently seen).  

If President Trump is counting on deterrence; it's however a big gamble as it's broadly assumed they will respond; as this goes beyond tit-for-tat. And that means the Oil futures may be underestimating the risk; aside of course the domestic energy independence, which is rather helpful now (I argued for it for many years, while politicians suppressed Oil). This isn't a case about 'climate change'; it's a reality of petro-politics and keeping the money 'in' North America; rather than flowing to the Middle East.    

In-sum: the hierarchy of risks becomes more intense with regard to Iran but that's already been at the top of our geopolitical concerns. And sure, when you get people thinking it's Goldilocks time in markets; it's really a frothy period (at least in pricey FANG momentum leaders). Premature to draw conclusions about how this progresses, much less sorts out' sure. I'll touch on it a more in Video 2 (both videos Friday). And as this report is on Saturday (with more news covered in a couple graphics) I'll not do a Sunday special update unless matters deteriorate in dramatic way. In a sense my greatest fear is that Iran might try to hit an American official or military officer, as their version of a quid-pro-quo. We'll hope unable.

In-sum: the concern will be if so-called 'plausibly deniable' attacks by a slew of Iranian proxies occurs, anywhere in the world, rather than direct regional confrontation; now that the U.S. is deploying serious elements of the 82nd Airborne to the region (Kuwait mostly; with US Marines now in Italy preparing to fly to protect our Beirut Embassy if ordered).  

This is less a political question of our wanting Iran to be dismembered in a sense (regime change which they believe we've sought for 40 years; a fact we're justified in after what they did with the Hostage Crisis or more) and really what happens elsewhere. Probably many responses ahead; in a sense because the 'official' that was targeted isn't viewed by radical Islamist's as one serious monster responsible for the deaths of hundreds of Americans as well as others. So to an extent the brazenness of Shia reflects their belief they were winning the proxy war with the U.S. as Iran expanded a degree of influence in Iraq and Lebanon. 

The Pentagon had likely come to that conclusion too; hence something needed to shift that 'chemistry' (although in the very long run few expect us to stay there; but Iran will always be there; so there's a problem with that awful regime for a long time, unless wishful-thinking prevails with all the radicals tossed-out (highly desirable but unlikely). Also there's rumor that Soleimani was orchestrating a 'coup' against the ruling government in Baghdad and/or Beirut (which is essentially ungoverned; maybe the former Nissan Chief having fled Japan, wants to 'assemble' one); again no details. But seriously look at a map and Iran's intent if obvious (and it includes as mentioned long ago; a trans-desert pipeline to the Med.)  

In any case the world and the outcome are more risky. Soleimani goes back to the Iranian Revolution; and was around even when the hostage crisis occurred. There's a case to be made that 'proportional responses' (which even Trump had previously stated as a reason not to attack after the drone shoot-down) were deferred this time for a reason; and that's a surprise that may be expanded on next week with a Briefing to the Hill.  

Speaking of next week; it's also CES. Starting Monday, I'll resume (as I already began a week ago) shared snippets from the 'trade show', with embedded comments. These will be interspersed within other topics, as CES now takes back-burner status compared to Middle East crisis, and market behavior that may occur for other reasons too. I make this point so new members understand graphics often won't correlate to adjacent commentary. Furthermore I'll try to provide less text and mostly focus on matters by video, especially regarding analysis or technical comments about the market. More below. Hunker down to enjoy the weekend!  


(Next week we'll focus a lot on CES; although clearly other concerns take precedent.)
 

Weekend (final) MarketCast 

 

Midday (intraday overview) MarketCast 

Daily action - saw S&P pattern evolve as suggested early on and even in last night's expanded comments: that being down; then run-in those who tried to sell and/or short weakness, prior to a defensive weekend as intraday rebounds were trimmed due to an absence-of-bids mostly.  

The incredibly strong overall uptrend in the S&P has possibly not gone to quite the extreme some think; even as a 'black swan' exogenous Iran event occurred. Meanwhile, we also got the Fed minutes, with officials signaling that interest rates wold basically remain on-hold through 2020; which was/is the primary factor underpinning this stock market.  

Combine FOMO (fear-of-missing-out) chasers (we warned against S&P or FANG chasing) and the possibility (odd as it may seem) that a wider war might 'not' occur with Iran; but a trade deal may 'expand' further with the Chinese, and you have contrary thinking that might suggest higher yet; albeit not instantaneously. Definitely depending how things go.  

The dispatch of thousands more troops to the Middle East this weekend, is either to make a point to Tehran, or just contingency preparations. I'm not exactly fond of the Saudi's (often noted); at least as relates to highly controversial aspects of that relationship. It's mostly based on Oil; so the threat to 'put Iran out of the Oil business', might just be what it takes for Iran to hold-off on closing the Straits of Hormuz; opting for more covert 'revenge'; plus China (who gets lots of Oil from the region) may press to Trump not to hit too hard, since Asia relies on Mideast Oil. We actually don't but the infrastructure to offset and distribute 'that much' oil to China is not yet mature enough; but it could be over time.  

This is why U.S. energy-independence was and is so important. It also minimizes the typical knee-jerk reaction about consumer oil prices (as if that's all people worry about), and acknowledgement of opening reserve sources if needed. Sure; but we actually don't need to unless we're just the last resort having to supply Europe and Asia with American crude as well as LNG. Perhaps this crisis enhances a larger deal with China.

Conclusion: the United States is 'not exactly' already enmeshed in new quagmires; but it can become that. The Europeans may or may not pull out of the Iranian Nuclear Deal; but while not in a rush; they just might. I would look to France for leadership in that direction; as they have been a bit too chummy with Tehran (and thus have some leverage there).  

Short-term global antagonists (as includes not just Iran, but North Korea or even China) see Trump's rather decisive move; so they probably don't want to test that further for now. Some are stunned by it in fact. 

My take: this was all profound, but not equivalent to taking-out Admiral Yamamoto as he was flying in the Pacific; well after we sank their main aircraft carriers, at the Battle of Midway (which reversed the course of the Imperial Japanese Navy, and marked the war's turning point as well as the stock-market bottom of the entire War at that time in 1942). 

But this was the guy who set Iran's policies in the region, so yes risks for sure are out there; and we'll see as the Shia fanatics absorb all of this. If Trump's calculations are only short-term (they have limited staff depth in the current Washington scene), it would not be stunning if (Art of a Deal perhaps?) he ultimately (back-channel perhaps) offers Iran 'an out' that's good for all sides. That's only if Trump sees that this could hurt him and I think there's reason to believe such thoughts already are circulating both in Washington and at the UN perhaps; even if nobody talks about it. For now there's definitely not a diplomatic opening to approach Iran, yet.

Smart political analysts believe Trump's instincts are more peaceful than many of his confidants or entourage, including Secretary Pompeo. Here I don't believe Trump seeks Obama's (curious) Nobel Peace Prize; but I do see all this as so 'counter' to his posture of 'getting out' of the Mideast entanglements, that he might settle for goals nobody contemplates.

I made a remark early Thursday; hours before 'targeted assassinations', when the Iran's head-of-state Khameni that "Trump can't do anything"; that Khameni should be careful; because that's throwing down a serious gauntlet to Trump; who just might show Iran exactly what he can do. We don't want to see open war with Iran; suspect we may not; and while for sure it's wise to order all (non-essential) Americans out of Iraq for now, it might just be that the 82nd Airborne will be aimed at securing stability in Iraq, not necessarily any expeditionary adventures with Iran.  

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