Thursday, May 27, 2010

Iran - All (Nu)Clear


With the recently announced deal with Turkey, Iran just outmaneuvered the US, not to mention the UN and everyone else who has been calling for more tough actions. Iran has agreed to ship 1,200 kg of low-enriched uranium (LEU) to Turkey, where it would be held. In exchange, it is entitled to 120 kg of uranium enriched to 20 percent to use in a Tehran medical research reactor that produces isotopes for cancer treatment. It is interesting that Iran rejected a similar deal in October where it was to ship 1200 kg of LEU - about 70% of stock pile at that time, but now after 6 months, Iran has continued processing and has accumulated double that quantity. It is now ready to ship out the 1200 kg, which would still allow it to keep roughly half the uranium at home...just in case. Granted the deal has many escape clauses, but at this point, the world does not have any choices.

Like it or not, Turkey and Brazil have succeeded where the five permanent members of the UN Security Council had failed. But instead of applauding the deal, the US and EU are pushing towards a fourth U.N. Security Council sanctions resolution against Iran's nuclear weapons program. Iran has already proved to the world that the sanctions will not stop its progress and has sent a strong message that, in fact every time sanctions are passed, it will speed up enrichment. Even as the sanctions creak along, at this point, it amounts to pretty much just going through the motion. Russia and China are looking for any excuse to jump off the wagon and protect their interests in Iran. They have already rejected key proposals in stopping Iran's access to international financial markets and continue to arm it with weapons. The GCC too have come together to support Iran's show of goodwill in accepting this deal and the push for sanctions this time around looks like it will clearly not have any impact.

Any effort to dealing with Iran's nuclear capability will have to include realistic expectations. Expecting Iran to give up control of its full LEU capacity is not plausible, especially when the nuclear program enjoys the support of at large part of the Iranian population. Any plan should include small steps of confidence building and Instead of threatening Iran the United States and Europe should welcome initiatives which aim to establish a platform for engagement. But with the US and EU always pushing Iran's back against the wall, Iran is left with very little options other than to continue pursuing nuclear technology. Before criticizing Iran, let’s be clear that what Iran is doing is perfectly legal within the UN framework. Iran is a signatory to the NPT and has the rights to pursue nuclear technology for civilian energy programs. Fact is, Iran has made several compromise offers in the last few years that would address any REAL concern about weapons proliferation. Iran has offered to open its nuclear program to US participation, and to sign the Additional Protocol which allows more intensive IAEA inspections (no other nuclear country has done all that) and yet the US and the West consistently ignore Iran's compromise offers and insist on an unachievable goal of "zero enrichment in Iran" which is a disregard of Iran's sovereign rights as recognized by the NPT.

The reality is that there are only two options: Iran gets nuclear weapons, or someone uses pre-emptive military force to break Iran's nuclear fuel cycle and paralyze its program, at least temporarily. There is no possibility the US will use force, despite its confused and ever-changing policy right from Bush to Obama about the military option always being "on the table." That leaves Israel attacking Iran the only option which will make it vulnerable to potential retaliation and legitimize full blown attacks from Hezbollah, Hamas, Al Qaeda and Iran. To be honest, Israel also does not look all that strong since it could not even make a dent to Hamas after it attacked it for weeks last time. In fact Hamas and Hezbollah came out stronger after they were able to withstand the full might of the Israeli army. This is one reason why even Obama has refused to be a part of any Israeli plans to attack Iran since he understands the myth of Israeli army's strength in the Arab world was put to bed when Israel went to war with Hezbollah in 2006.

Its time to wake up folks... The US, Israel and the world have to prepare to deal with a nuclear Iran. Every western country says they will do all they can to prevent this, but given the current political realities in the US, Middle East and EU, it is time for everyone to brace reality and start formulating strategies on how to deal with Iran once it goes nuclear. At this point the only thing the US and EU can do is provide security assurances to neighboring countries and promises of retaliation if Iran uses its nuclear weapons first. The simple fact of Iran possessing nuclear weapons would alone dramatically alter the Middle East balance of power. Iran does not actually have to use its capabilities to prove anything. North Korea is case and point where they torpedoed and sank the South Korean Navy ship, and Kim Jong Il has directed North Korea’s military and civilian population to prepare for war, and the only thing the US and world can do is stand by and deem the behavior "Odd".

Ultimately, the west has to understand that you cannot get a foreign country to do exactly what you want unless you can exert sufficient military or economic force to compel them. In the case of Iran, no country has that level of economic force and the disadvantages of military action far outweigh the advantages. George Bush understood this, Obama understands it and so, unfortunately, do the Iranians. That is why the world is dancing around the issue of Iran's nuclear program for years without anyone being able to take any kind of action. On the other hand, Iran is still merrily enriching uranium at levels that are approaching weapons-grade, and it isn't likely to stop anytime soon. No one should base their future plans on anything except dealing with a nuclear Iran.

Tuesday, May 11, 2010

Speculating Fear


There are all sorts of reasons over what caused the crash last week, but real question is how can the market go, on a random Thursday afternoon, completely insane? Everyone is looking for someone to blame. But what made the crash on May 6th so absolutely shocking is the market dropped close to 1000 points in a few minutes… I mean in a few MINUTES!!!! Between 2 p.m. and 3 p.m. the Dow lost over 900 points before dramatically bouncing back about 600 points.

One thing is for sure, as the trading volume soared, data systems across the stock market began to get clogged. By 2:37 p.m., the overload seemed to have taken its toll on the NYSE's ARCA electronic-trading system. The bid/ask prices got out of control and the price of stocks were going insane. Accenture went from trading at around 40 dollars a share all the way down to one cent before bouncing back. Nasdaq detected what it felt was questionable information in the data and sent out a message saying it would no longer route quotes to ARCA. This step—known as declaring "self-help"—doesn't happen often among the major exchanges. By evening however, all exchanges in a rare coordinated manner put out a statement saying "All trades executed between 2:40 PM and 3:00 PM that increased more than 60% or decreased more than 60% away from the consolidated last print in that security at 2:40 or immediately prior" will be cancelled." Obviously this decision will not be open to appeal but while Nasdaq and others canceled trades on more than 200 largely NYSE-listed companies whose shares fell or rose more than 60 percent, investors unlucky enough to have sold depressed shares of other companies that fell less have little recourse and those who made money by buying at the bottom and made less than 60% can rejoice at others expense. Exchanges have never been blamed for losses, but my guess is this will be tested in courts this time around.

So far, a lot of people have been blamed. But even after a couple of days, there is no real rational explanation as to what went really wrong and caused the drop. There are theories, but no real answers yet!!

So what are the theories circling around?

  • Fat Finger Issue - It has been widely suggested that a "fat finger trade" was responsible for triggering the panic. A trader entered a "b" for billion instead of an "m" for million in a trade involving Procter & Gamble. No confirmation yet but after a few days, this explanation possibly looks untrue
  • Computer Glitch - There were many erroneous trades due to bad pricing, but the systems of course do not know that and did one thing lead to another and the systems get out of control?? Anybody’s guess at this point
  • Stop Orders - There were 1000's of stop orders which got triggered due to the market breaking certain levels. Did a series of stop loss orders trigger a downward spiral maybe?
  • European Debt Crisis - Greece definitely contributed to markets going down, but it is unlikely to be the sole cause that led to the all out assault on the markets
  • Just plain Fear and Panic - There is also the possibility that this was a real financial panic. There are huge concerns about what is going on in general with the debt levels and the currency markets are fluctuating wildly. The Dow was already down several hundred points even before the massive plunge took place. The reality is that there is a lot of fear in the financial markets right now. But if it was a real panic, then why did the Dow bounce back so quickly?
  • HTF - More than 60% of today’s trading is done electronically, so could High Frequency trading have been the cause for what happened? But if it was just high-frequency traders bailing out, why wouldn't [that drop] happen on every stock? It just doesn't add up.
  • Hacking - Implausible without proof, but possible. It does sound farfetched, but hey, till now the exchanges have never been held responsible for the losses. So did someone hack into NYSE and purposefully create this mayhem not to mention walking away will a ton of money and a big smile as others are scrambling around to understand what went on.

As more details of last Thursday's collapse become clear, the picture is one of a highly rare confluence of events, some linked, some unrelated, that exposed weaknesses in the stock market large and small. But the only interesting thing here is the catalyst that stopped the fall. Whatever caused the market to crash stopped after a point which led to the reversal. So what was the catalyst?? I doubt anyone can really get to the bottom of this for a long time to come.