The Iran Factor

I continue to feel that the biggest threat to the market now is the Iran situation. I wrote about this on May 21 and June 25.

The chances of an air strike keep growing. Iran is almost begging to be attacked, and it may get the holy war it wants.

It would not take more than a few nuclear missiles to destroy all of Israel or finally give Islamic terrorists the weapon they’ve always wanted to use against the U.S.

The mere threat of those capabilities by a nuclear Iran would change the dynamic of Western relations with the Middle East. One gleaming nuclear missile aimed at Jerusalem would embolden terrorists because their nations would own the oil we need and be able to trump the military edge we currently have.

Negotiations are taking place, but how many hundreds of times have you heard that in regards to the Middle East? Look how they went last week. Iran said it was ready to play nice and then launched missile tests — in the same week!

The repercussions of a strike on Iran would be huge. Iran already said it would seal off the Strait of Hormuz, through which 40% of the world’s oil passes. That would bring the U.S. Navy onto the scene in a matter of hours if not minutes. When a missile test can add $9 to the price of a barrel of oil as it did last week, just imagine what a full-scale naval battle off the coast of Dubai would do.

That’s just in the sea. Iran’s military would attack Israeli cities, and so would Iran-sponsored terrorist groups. The resistance against U.S. forces in Iraq would intensify, too.

As far as the stock market goes, the oil price spike would be paramount. It could chop 10% off the broad indexes, making all of the technical analysis and timing thoughts moot.

This is one of the areas of stock analysis that’s so hard, because it has nothing to do with analyzing anything. What do Iranian nuclear ambitions and Israeli strike plans have to do with the iPhone, Crocs shoes, or Starbucks coffee? Not a darned thing, but the way the situation goes could affect the prices of all stocks.

Do you know if and when Israel and the U.S. will bomb Iran? I don’t. Do you know how quickly the U.S. could re-open the Strait of Hormuz if it’s closed? I don’t. Do you know whether Iran would retaliate with such abandon as to destroy crucial oil reserves? I don’t.

What we do know is that this stand-off is five years old, and there’s been no war yet. Also:

  • The Iranian missile test was lame, using old equipment and possibly NOT including the long range missile claimed. ArmsControlWonk.com ran a blog post titled “Same old Boring Shahab 3″ in which it compared the diameter of the missiles to their length and found them to be identical to the ones shown in 1998, which have a known range of 746 miles. In sum, there was nothing in the missile tests to alter current U.S. policy.

  • Diplomacy is still the official strategy. U.S. Defense Secretary Robert Gates said the U.S. is “working hard to make sure that the diplomatic and economic approach to dealing with Iran, and trying to get the Iranian government to change its policies, is the strategy and is the approach that continues to dominate.”

  • Israel bombed an Iraqi nuclear facility in 1981 and the stock market held up fine. (Although oil was cheaper then.)

Thomas Fingar, director of the National Intelligence Council, identified what makes this situation difficult when he explained Wednesday that “Iran has real security needs” and that “we are part of the reason Iran feels insecure.”

The Boston Globe noted “President George W. Bush’s failure to place a senior U.S. official at the negotiating table and to offer Iran the sort of comprehensive security agreements Iranian officials have hinted they require.” It suggested that “until a U.S. president makes an offer that truly tests Iranian intentions, there will be more chest-thumping in the world’s most volatile region.”

Which doesn’t make our job any easier.

In the end, all we can do is base our decisions on what we know. What we know is that oil prices are already high, they’ve taken a toll on the stock market, good companies are on sale, and MACD and RSI are right where they were before previous market recoveries.

If the talks go south, the bombs start falling, the price of oil spikes, and the stock market tanks, remember that you had no way of knowing ahead of time it was going to happen.

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