Wednesday, July 30, 2008

Deadline Looms Large

In a speech this morning, Iran's supreme leader, Ayatollah Ali Khamenei said that Iran will not take a single step back in regard to its "just" nuclear power program. Khamenei said that the arrogant super powers would take a step forward. The implication being that the demands of the UN + 1 would be increased.

There was a quick response of disappointment from Italy and then a few moments ago a US spokesperson confirmed that the "just" laws of the UN would be enforced and the dead line is firm. In the two weeks after the last meeting, Rice and others have warned of "dire consequences" should Iran fail to respond. Iran is being asked to answer a single question with a yes or a no. So far, Iran has stalled.

The bluff being made by Khamenei is that Iran can split China and or Russia away from the UN coalition. Will Russia and China support the severe sanctions proposed by the US and Europe?

Germany just danced around the sanction rules by agreeing to build natural gas equipment for Iran and shipping the completed structure to Iran in one piece. On the other hand, it is well known that Pepsi and Coke among others have received exceptions for providing food products. The past sanctions have included a few holes. The difference in the proposed sanctions and the current ones will be a naval blockade. Iran, with more oil reserves than all but two countries in the world, is about to suffer a severe gasoline shortage. The enforcement and response to severe sanctions are a serious matter.

In a Tuesday meeting, Obama expressed his opinion that Israel will attack Iran if the sanctions do not work. One always must look for the wiggle room in political statements. Obama did not say which sanctions. The third round of sanctions are in force, if Iran does not respond by Saturday, the negotiators have said a fourth round will be forthcoming. If the pattern of the past holds, the US will immediately impose new US sanctions and the UN sanctions will follow.

Another deal was just made between the US and Israel. Israel acquired a new sophisticated radar system from the US, one designed to protect the country against the latest missile technology of Iran, and the US acquired the promise that Israel will not attack. The details are not known so, once again, there is wiggle room. The statement by Obama could be read to imply that an attack by Israel is imminent but it is not.

Key Point For Investors

Investors must look forward. The market will move up before a deal is complete. Furthermore, by the time the negotiators agree to sit at a public table, the "fix" will be in. My memory for details has failed but one of the greatest negotiators of all time once admitted that he never sat down at the table until after he knew the terms of the deal. Time is running out. The 123 deal between Russia and the US was submitted to congress on May 13. The congress has only 90 session days to consider the deal. The deal becomes law if not considered. The deal will need to be on the top of the pile when the congress returns from the August break. Khamenei's bluff will be called. He wants to split Russia from the 5+1 but Russia will make trillions of dollars off nuclear power if the deal goes though. In recent weeks, Russia has agreed to supply China with nuclear fuel and it has joined in a Kazakhstan pipeline that will bring natural gas to China. The relationships of the world powers are certainly more important than deals with Iran.

Iran faces harsh consequences if it does not respond by Saturday. The talks are in a frantic stage. The push back yesterday was from Amadenijhad. Today, the supreme leader rejoined the conversation. By talking over the top of the negotiations, he in effect asked Bush to push our negotiators to make some move. Of course the details of these talks are top secret. Very few people have the "need to know" details.

In the past hour, airline stocks have responded to the harsh words. The airlines are a supper sensitive gage to the progress of the negotiations. Again, it is the common belief that oil prices dropped from $147 to $123 because Bush issued an executive order to allow OCS drilling. The reality is that this executive order did nothing. The congressional hold on drilling was in place before and after the executive release. The timing of the order was the key point. The timing was done to coincide with new supplies coming on line and with progress in the talks with Iran. OCS drilling is a worthy objective but it is a minor objective compared with the deal with Iran.

One possible scenario is that the US dollar will strengthen sharply when the last hurdle to a deal is cleared. Should the dollar retrace its decline of the past few years, the price of oil would fall to about $70 on that issue alone. I suspect the full dollar re-tracement will take at least a year, however, the supply demand situation is such that $70 could come true even without a full re-tracement.

As a group, the major airlines lost only $150 million this past quarter, ignoring one time special items. This performance is many times better than the fears expressed by market pundits just a few weeks ago. Since then the price of oil has fallen 15%.

This afternoon the price of oil has jumped. The story reported on CNBC is that the jump is a result of the Presidents threat to veto the house speculation bill. Sure! A bill that is still in committee that Bush is obviously against, a bill that would do little but add a bit of volatility to the oil markets, has caused the price of millions of barrels of oil to jump $3! The above paragraphs give you the bulk of the real story. If there is a sign of progress before Saturday, the markets will do well. Again, the deal is a multi-trillion dollar deal. None of us should expect it to be completed easily.

Odds are good that more dickering will be required next week. Are the democrats trying to find out about the success or failure of talks with Iran before deciding to vote on OCS drilling? They really do not want to vote but they fear they must! The Deadline Looms Large!