No Agreement with Iran

Jim Brown
 
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After three days of intensive talks the meeting of the six UN nations and Iran ended without an agreement. The daily news reports of prospective deals angered several nations not a party to the talks.

Numerous alternatives were mentioned in the talks with Iran but the general consensus was that the U.S. and others were going soft on Iran and about to give up in the negotiations just to be able to say they got a deal. The U.S. especially was seen as giving in to Iranian demands to release sanctions in exchange for token promises from Iran. Apparently President Obama is so desperate for a political win he is willing to give up on numerous points that previously were cast in stone.

Israel's Prime Minister Benjamin Netanyahu became openly heated in discussing the potential deal and the loss of backbone by U.S. negotiators. He warned the six nations the details of the proposed deal were "bad and dangerous" and "Iran would get the deal of the century" if the six nations relented on their prior demands.

Netanyahu blasted the proposed deal in a press conference prior to his meeting with John Kerry and the hostility was so strong Kerry cancelled his press conference that was scheduled to follow. Later Kerry said the U.S. was "neither blind or stupid" when it came to Iran's nuclear ambitions and was fully committed to Israel's security.

The Israeli leader called Iran's new president Hassan Rouhani "a wolf in sheep's clothing." Rouhani is famous for bragging about all the time they gained to work on their nuclear projects while he was the Iranian negotiation with the six UN nations in the last decade. Why should he be any different now? Netanyahu said Israel would immediately move to make members of the U.S. Congress aware of the security issues that could come out of a weak deal.

Israel's deputy defense minister, Danny Danon, issued an unmistakable warning on public radio saying, "If we have no choice we will act -- that is why Israel has an air force." Netanyahu also warned that allowing Iran to continue working on nuclear enrichment would not be tolerated and Israel would act on its own if necessary to prevent a nuclear Iran.

U.S. Senator Michael Bennett warned the repercussions of the Obama administration reaching a weak deal with Iran were enormous. "If in 10 years an atomic bomb hidden in a suitcase explodes in New York or a nuclear missile hits Rome, one could say it is because of concessions that were made" to Iran.

The meeting ended without an agreement but all sides agreed to meet again in coming weeks. Israel and France are going to employ a full court press on the remaining five nations in an attempt to avoid a weak deal that allows Iran to continue uranium enrichment at any level. With Iran's history of deceit and misdirection the deal has to be a 100% halt or any lowered enrichment targets could be used as a stealth program to continue enriching.

Crude prices failed to react to the meeting ending without any agreement. If a deal was struck that removed Iran's sanctions on oil sales that would immediately put another two million barrels per day back on the market and further weaken prices.

Saudi Arabia moved another step away from relations with the U.S. as a result of the Iranian negotiations and the demand by President Obama to recognize the LGBT community in Saudi Arabia. Saudi Arabia has become increasingly distant from relations with the U.S. since President Obama took office. They are hostile with the U.S. because we did not attack Assad in Syria. They are hostile because of our weak handling of Iran and for trying to impose U.S. values on the Muslim world.

Saudi has been investing heavily in Pakistan's nuclear program. Reportedly Saudi Arabia has nuclear weapons "on order" from Pakistan and they are ready to be delivered if the U.N. nations wimp out on a deal with Iran. Saudi can't allow itself to be outgunned in the region with Iran its number one enemy. If Iran is going to progress to the weapons stage Saudi wants to be ready to defend itself. Saudi already has nuclear capable ballistic missiles it bought from China. They only need the warheads to be attached to become fully capable.

The Israeli chief of military intelligence told a conference in Sweden last month that Saudi Arabia "would not wait one month" if Iran acquired a nuclear weapon. "They already paid for nuclear weapons, they will go to Pakistan and bring back what they need." Apparently Saudi believes as long as the weapons are warehoused in Pakistan they "don't actually have nuclear weapons" and can remain somewhat neutral on the issue. Once they take delivery of the weapons the intensity of the debate changes and they become an even bigger preemptive target for Iran.

The outcome of an Iran-Saudi Arabia war would be earth shaking. Crude production capability on both sides would be impacted and the price of crude would rocket higher. Iran has always said the Saudi Arabian oil terminal Ras Tanura, where Saudi exports most of its oil, would be the first target in any Iranian attack.

While any confrontation between Middle Eastern nations may be months or even years away the probability is about 100% that a war will eventually occur. The timetable could be counted in weeks if Iran continues to enrich uranium because Israel has postponed an attack to halt their nuclear program twice according to analysts. Israel held off because they thought the U.N. nations would eventually use the sanctions to shutdown Iran's nuclear program. If the U.N. nations agree to a weakened deal where Iran continues to enrich I would expect an attack within weeks.

As the next round of meetings begins the impact on oil prices is going to be strong. Analysts believe there will be a compromise where Iran will win and that will increase the security premium on crude. However, the potential for new Iranian crude coming to market will weigh on prices so the outcome should be severely increased volatility as prices whipsaw in the cross currents.

With economics improving in the U.S. and the rate cut by the ECB the dollar should continue to show strength and that could weigh on oil prices and commodities. The potential for a cut in QE would also strengthen the dollar so Brenanke's speech on Wednesday evening and Yellen's confirmation hearing on Thursday will be critical events for crude and the equity markets in general.

Market

The markets continued to trade in a narrow range just below the recent highs. The big caps are benefitting from a rotation out of small caps as fund managers prepare for an eventual correction. It may not be until January but they are taking profits in the Russell 2000 stocks and putting their cash in the highly liquid big caps.

Thursday's close was a 2-3 week low depending on the index. This shows the market is vulnerable to profit taking on the right headline. However, with the strong jobs report and good numbers on multiple economic reports over the last two weeks there is a potential for a continued melt up as we move towards thanksgiving.

I would remain cautiously long but be ready to exit if we see new lows on the major indexes.

Jim Brown

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