Friday, August 08, 2008

Stocks Up - Partly Because - No Way Out

One of the key reasons the stock market has turned is because Iran has no way out. Despite all the talk about the mishandling of the war on terror by Bush, the democratic platform plank in regard to Iran is almost exactly the same. Democrats are willing to apply harsh sanctions on Iran in the absence of a deal. A deal should include the prevention of Iran from acquiring a nuclear bomb, the end of support for terror and the end of threats against Israel. The minor difference is in who gets to take the lead in negotiations. The Europeans now have the lead but democrats want US leaders to share in the lead. Both parties are a little bit vague about the permitted rules in regard to Iranian refining under IAEA supervision for peaceful purposes.

In any event, Iran does not win by suffering through severe hardships the next 5 months until Obama might be in the White House. If Obama comes to understand the key importance of Iran in the war on terror and with plenty of time before the next elections, Obama might even be tougher on Iran than expected.

The majority leader of the Senate Foreign Relations Committee and the minority leader are preparing to jointly submit a bill calling for tight US sanctions on Iran. Many traders are scared half to death about an impending three house weep by democrats, but many policies criticized by left wing democrats will be continued in the next administration.

A few months ago, when the In-trade web site put the odds for Obama over McCain at 70 to 30, I took McCain for only 6 to 5 odds. It was obvious that the 70 to 30 spread would tighten. I could have made good money by opening an In-trade account and betting a wad. Instead I bet a friend a small amount for entertainment value. I have almost made up the point spread. In-trade is now bumping around 60 to 40. If you want to make $8 off a $40 investment, I am confident that the spread will tighten to at least 52:48 by the end of the republican convention. I actually expect the final payoff to be 49:51 or even 48:52. Forty dollars will get you $51 in three months.

The vote in the house and senate may be "nationalized" by a vote or votes on energy. Democrats have the advantage in the details of the bill that is brought forth. Republicans have the advantage in that none of the budget bills for next year have been passed. Furthermore, a continuing resolution must be passed or the moratorium on drilling will automatically expire. In the wrangling ahead, it could be that a very short term extension, such as a 10 day extension, might be passed. Again, the extension will have to include the moratorium on drilling or it will die. Back in 1995, a republican congress refused to pass a continuing resolution. Emergency services were continued under executive order but theoretically the government was out of money and closed down. Bill Clinton was successful in blaming the problems on republicans. This time, if republicans are behind in the polls for all three houses, they will have little to lose by forcing the government to close, until there is a straight up or down vote on drilling.

A regular reader whose opinion I respect, says, no way! He does not believe republicans have the chutzpah to close the government. Because it would be a republican president who would get the most camera time, I think it is possible. What do you think?

Mike Huckabee and other republicans talk about a negotiated balanced energy bill, but the case for a straight up or down vote is reasonable. Drilling off shore should not not prevent or require the mandate of checking ones tires. We can check our tires and drill. We should not be forced to spend the oil royalties from lease revenue on exorbitant wind mill subsides. There should be a vote for or against drilling and a separate vote for or against wind mill subsidies. I know that is not the way congress normal works but one can hope.

In any event, the market is acting as if there will ultimately be a vote that encourages investments in US energy production. Between now and the vote, in the absence of a major hang up in the talks with Iran, the trend in oil prices should be down.