Here Comes Ground and Pound

This is an update on the Iran war and markets at the end of the first week of the war.

Picking up where we left off mid-week - having killed Iran's religious leader Trump is now demanding unconditional surrender of the Islamist regime. Therefore this coming week Iran's religious warriors will all lay down their arms and become insurance salesmen. And if you believe that, then you've been watching Faux News for too long and your brain is imploded.

This is all deja vu of Operation "Iraqi Freedom" circa. 2003. In that war, Saddam Hussein was caught and killed in the first year of the war. But then Iraq descended into a sectarian civil war that continued for over a decade. After the Ba'athist (Hussein) regime collapsed, the brutal ISIS terrorist group formed to fill the power vaccuum. Who ended up in control of Iraq? Ironically Iran now largely controls Iraq. In Afghanistan - the longest war in U.S. history - the U.S. spent trillions to replace the Taliban with the Taliban over the course of 20 years. U.S. involvement in Afghanistan only ended five years ago. This week Bill Maher asked what do liberals not understand about "liberation"? What Bill Maher doesn't understand about dementia, is that you're always the last to know.

Unfortunately, Iran doesn't want this war to end any time soon because they know that they will be attacked all over again by the U.S. and Israel. This is the second major attack in less than a year. So what incentive is there to declare a ceasefire, start rebuilding and then have it all blown up again? ZERO. This is now a cage match between a country that has been economically oppressed for 50 years and a corrupt draft dodger president who believes that he can reshape a country from an Islamist theocracy into a democracy in four weeks or less.

Which means that the world will now feel the pain of this conflict via the oil markets:

“The Iranian regime is battling for its survival,” wrote Robin Brooks, senior fellow at the Brookings Institution. “Since it has no hope of matching the U.S. and Israel militarily, its only play is to spike oil prices as much as possible, in the hope that popular sentiment in the U.S. turns against this war.”

“We are counting down to the next wave of shut‑ins, driven by export bottlenecks and refinery constraints...In the case that supplies from those larger Gulf producers get shut in, prices could jump another $30 per barrel, Kaneva estimates. There’s precedent for them to go even higher. In the early days of Russia’s attack against Ukraine, prices jumped to $127. Arguably, this war is more dangerous to the oil market than the Russian one. In 2022, Russian production kept flowing. This time, the taps are starting to be shut off."

Which gets us to the financial markets:

This past week, the World ex-U.S. which was the consensus Wall Street trade right up until the war started, has taken the brunt of the damage.

But what we see in the lower pane is that the VIX is bid far above where it would be simply based upon the S&P 500 decline. Which means that the big overnight global gaps that are getting bought with both hands in the U.S. market are nevertheless feeding back into U.S. options volatility, meaning the cost of hedging soared this week:

It was the worst week for Emerging Markets since the pandemic.

But EMs are still overbought and above the 50 week moving average (blue line):

Korean stocks which are a risk I've discussed several times this year, almost collapsed into bear market this past week.

This the market to watch this coming week:

In the U.S. the private credit meltdown spread to Blackrock, the world's largest financial asset manager by AUM.

IBD took exposure down again this week as of Friday as growth stocks got obliterated.

The Big Picture

"IBD is recommending exposure in the 20%-40% range"

Friday's jobs data were a total disaster.

Unforeseen of course:

"February marked the third time in the past five months that payrolls declined, following a sharp revision showing a drop of 17,000 in December."

In summary, Iran has the right strategy to win this war, and contrary to popular belief Trump is not a military genius.

Believe it. Or not.