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And BOOM! It wasn’t even 24 hours into the new year before the Iranians began to cause trouble, by launching an attack on the US embassy in Iraq and then the follow through by the US on Friday. The airstrike targeted Iranian General Soleimani and his sidekick, military commander Abu Mahdi al-Mohandes.

Global markets reacted quickly. Oil prices surged by nearly 4% (think Middle-East tensions, unrest and disruption to supply), before settling in at + 3%, treasuries and gold surged as investors looked for the “safe haven assets” and equities (around the world) fell. By the end of the day, the Dow lost 234 points or 0.81%, the S&P gave back 23 points or 0.71%, the Nasdaq fell by 71 points or 0.8% and the Russell lost 5 points or 0.35%.  

Suddenly, no one was talking about US/China trade, nor impeachment, nor earnings, nor central bank policy. It was all about the rising geo-political tensions now brewing in the Middle-East. The conversation continued all weekend, with news story after news story, Iran upping the ante, threatening the WH and America by promising “crushing and powerful retaliation and a direct attack on American soil,” raising the temperature and the angst around the world.  

Sunday morning news programs had analysts/politicians/foreign correspondents, etc. all chiming in on “exactly what that meant.” Are we talking physical attacks on the US in one swipe or are we talking about numerous attacks on the US over a period of time? Are we talking about murdered Americans across the Middle-East or around the world? Some even dismissed that and suggested that we could be in for a wave of “cyber-attacks.” And then Donny threatens Iran with the destruction of 52 key sites across the country. Why 52? Because if you recall, the Iranians held 52 Americans hostage during the Iranian Hostage Crisis of 1979. And for those of you too young to remember it, and for those of you not even born yet, it was a very tense time in the world.

In an emergency meeting of the Iraqi Parliament, Prime Minister Adel Adbul Mahdi accused Washington of violating Iraqi sovereignty and called for an end to US troop presence ASAP, asking lawmakers to push for a vote on this resolution, and they did. On Sunday, the Iraqi Parliament voted to end the presence of “foreign troops” (think US) in the wake of the “attack.” Welcome to the new decade!

Look, we have said this over and over. Geo-political events create a lot of short-term noise, some louder than others. That causes markets to retreat. But they do not, in the long run, price stocks. The events manage to cause disruption in the markets and in normal pricing. This then creates opportunity for the long term investor that has a cast iron stomach.

So yes, all weekend, questions that arose on Friday morning continued to be asked and debated by the media and the pundits. What does this mean for the markets and for global political/economic stability?   On Friday we did see oil spike in early trading as the news permeated the airwaves but it managed to retreat a bit as the day wore on. Gold rose $27/oz or 1.74% while Silver and Palladium rose 5 cents or 0.27% and $28 or 1.47% respectively. Treasuries rallied as well, sending yields lower. The 10-year yield went from 1.88% to 1.787%, as the flight to safety takes hold.  

Let me be clear, this is NOT a good situation. We have seen “flare ups” before in the Middle East, which has caused global angst. But the biggest risk now is that THIS event spins out of control, drawing other Middle-East countries into the fold, creating yet another big issue for the world and the markets. If this escalates we could be in for a much more volatile time ahead.    

Defense stocks, which I noted would be in play on Friday, will continue to be the play, as the other sectors come under fire as the nervousness and angst settles in. The XAR ($113.14), S&P aerospace and defense ETF and other defense sector ETFs found plenty of buyers. On Friday, after the news hit the tape, the XAR surged by another 1.8% while the broader market (S&P) fell by 0.71%. If you draw the trend line for this name, we could see the XAR rally another 7 points or 6% before it finds any resistance at all, unless cooler heads prevail.  

The HACK ETF ($42.30), a cybersecurity play, is also sure to find plenty of buyers in the wake of the most recent threats. But it’s a name and a sector that investors should be aware of as we move into the world of 5G technology. HACK is an ETF that corresponds to the Prime Cyber Defense Index, an index which tracks global companies that are “direct service providers or key drivers” for the Cyber Security Industry.  Names like CSCO, SPLK, PANW, FTNT, AKAM, etc. are all in the list of holdings.  

Again, while this story is now grabbing all of the headlines, what does it really mean for US/China relations? (zero). Does it somehow stall any trade deal? (It should not). Will it affect coming earnings? (no). Should we be concerned that this event will somehow change the mindset of the FED? (not yet). Are rates going up or down as a result of this strike? (no). This is a geo-political event that, YES, has some broader implications for political stability, etc. but has very little implications for the ongoing story about the global economic environment. Now, is it an “excuse” to take money off the table? For some people yes, you can see that by the action in the global markets so far this morning.

Global investors will begin to price in the new level of risk, as investing is about managing risk as much as it is about managing returns. So this elevated level of angst will cause global markets to re-price, producing a “sale” in some names while causing others to surge.  

Yesterday, Middle-East markets got clocked. And this morning we see weakness again across the board.  Asian markets ended lower:

Japan -1.9%, Hong Kong -0.79% and China -0.39%, while the ASX ended the day flat.

European markets are headed lower today as well as the sun rises over the continent. Other news across the zone is doing little to stop the bleed. In Spain, the Socialist leader Pedro Sanchez, failed to form a gov’t but will have another shot at it tomorrow. The economic data today includes German retail sales for November and Eurozone composite PMI for December, neither of which will steal the headlines away from the geo-political tension.  

US futures action suggests the weakness to continue. At 4 am, US futures are under pressure again. Dow down 180 points, S&Ps are off by 18 points, the Nasdaq is lower by 60 points and the Russell is losing 10 points. But again, let’s be clear, global markets all surged into year-end, and they all felt a bit “fluffy” so this latest geo-political event just creates an opportunity for the “Risk Off” trade. The algos will suggest names to sell as well as suggest which names to buy. Do not be surprised to see some of the highest flyers get hit the most. And here in lies the silver lining: be patient, let this play out for another day or two. No need to rush.

Do not make an emotional decision based on this event. Make that decision based on whether or not you think this events “changes” the story for you. If it does, call me, if it doesn’t then try the Chicken Soup (recipe below).

Today’s economic data includes: US Markit Services PMI – exp of 52.2 (expansionary).  

Look for the S&P to continue to back off. On Friday I said that it should find support somewhere in the 3200/3225 range. It found support at 3222 before rallying back a bit. But as the rhetoric continues to create angst and the headlines remain concerning. The path of least resistance is lower. (I still think we find support in the 3200/3225 range). The markets today are driven by the algos. As we have seen the moves can be swift and painful. But there is plenty of support for equities, this is not a time to abandon the plan. The move higher in the past three months will create an opportunity for a pullback as the tone gets more nervous. And just as the algos pull the market higher, they will also push it lower. Expect buyside interest to cancel inline bids and move lower creating a void in prices which will only exacerbate and exaggerate any move.  

Oil continues to surge. At midnight it was up 2.6% at $64.71/barrel, but has since backed off and is up $1.10 or 1.7% once again piercing the April high of $63.90. Expect oil to remain a bit erratic as this story unfolds and speculation builds over what the next move is for the Iranians. I still do not think this spike lasts. As a trader I love the volatility, but as an investor, I suspect we will see oil come back to the $60/$62 range. But do not be surprised, continued talk of threats and retaliation will keep oil on edge, but not to worry, the world is awash in oil. the Saudis will gladly increase supply if the Iranians try to disrupt it. (Think long simmering feud).  

Gold is also on the move (as expected). It was up $27 or 1.7% on Friday and is up another $25 or 1.6% this morning. It makes sense. It’s the safety trade. In times of stress and angst, people want gold. I also suggested that as long as this continues, we could see gold test the September highs of $1,570/oz. And as of this morning we did. it is currently trading at $1578/oz. with no end in sight. Expect the surge to continue as long as the rhetoric remains charged.

Take good care


Chicken Soup

It’s a bit stressful out there – so as your mother always says: “Have some chicken soup – it’s good for you.”

For this you need: 1 whole chicken, 1 beef shank, onions, carrots, celery, water, s&p, beans (cannelloni or cecci).

Rinse the chicken and remove the innards from the cavity. Rinse the beef shank – place both in the pot and fill with water. Now add the chopped veggies. Season with s&p and bring to a boil. Once it boils – turn the heat to med low and let it simmer for about 1 ½ hrs. Turn heat off – remove the meat and allow to cool. Add in a can of the beans of your choice.

When cool – remove the skin and debone the chicken. Using two forks – shred the meat and return to the soup. Remove the beef from the shank bone and slice into small bite size pieces and return to the pot. Now – place the pot in the fridge and allow to cool overnight – the fat from the chicken will rise to the top and form a “skin.”

Remove from the fridge and take the fat off and discard. Re-heat and serve alone or with rice or with elbow macaroni. Have plenty of fresh grated Parmegiana cheese.

Buon Appetito