November Job's Report

Extremely strong top line from November's job report: 321,000 with upward revisions to previous reports. Although this is a fantastic sign, two things stuck out to me: Civilian Labor Force Participation Rate & Wage Growth. 

The Labor Force Participation Rate was unchanged and has been essentially unchanged since April. This is very troubling. Why are more people not participating in the labor markets? Are we lacking in quality jobs? The number is around the 36 year low. Troubling to say the least. 

http://data.bls.gov/timeseries/LNS11300000

• Europe is facing deflationary pressures, and the ECB may not be able to be proactive enough to do anything about it. 

• We have seen some slowing of growth in Asia. 

• The weakening of the  Yen may cause Japanese pension funds to bring money into the US. 

• Increased Geopolitical risks will cause instability across Europe as well as the Middle East. 

• Economists believe Saudi Arabia and UAE can break even around $70 Crude (See Bloomberg Article).

• Russia is low on foreign currency reserves and facing a deep recession.

• The US has experienced job growth, albeit its job quality is questionable. 

• In terms of Financial Markets, investors from around the globe will continue to invest in the US as it shows the most stability and opportunity for growth. 

• Never underestimate Political Instability.

Right now, look for exposure to large cap stocks. As a hedge, try to utilize this great tool via Ishares, Correlation Tracker. Personally, I have increased exposure into Utilities as a hedge and have considered buying put options in the SPY as a hedge. However, if there is a pullback, cash on hand may be a better alternative than engineering financial insurance. Looking at macroeconomic trends, a pull back could be a great opportunity to lower your cost basis. There most likely isn't a better country poised for a profitable future. Other Risks: 

• US multinationals are still pulling a large portion of their revenue and profit from Europe and around the World. 

• US companies with larger exposure to international markets will have more trouble meeting guidance. 

• Perhaps this is an opportunity, if and when it happens. 

• The strengthening dollar could limit US exports. 

• The US is a consumer based economy. If there was a choice between substantial increases in consumer spending and strengthening of the dollar, I'll take consumer spending. 

• The polar vortex could limit winter sales. 

• Disappointing spending levels from black "Wednesday-Friday."

In terms of wage growth, things are  not looking much better. Over the year, average hourly earnings have risen by 2.1 percent. This might sounds pretty good, but lets compare to inflation. The CPI is up 1.7% year over year through October (CPI Index). 40 basis points is nothing to celebrate, in my opinion. 

Yes, jobs are being created but Wall Street, the Federal Reserve, and especially elected officials need to realize that Fiscal Policy is the obvious step. QE has provided once-and-a-lifetime financial returns. There is no doubt that the Financial Markets are where they are today due to the actions of the FED. The FED stepped up when Washington stepped aside. Without the FED, the employment situation would be incredibly worse than it already is. The FED has done more than enough. Politicians cry foul at the FED but have not stepped up to provide any long term solutions. In fact, instead of drafting something productive, they are spending their time trying to make the FED's decision process more public and increase their reporting visibility in front of Congress from its Semi Annual mandate (WSJ Article). The last thing we need is for Politicians to increase their impact on our central bank, which by law, needs to be independent. 

It is well known that the US is in a high yield bubble. As investors chase yield, standards have been limited to say the least. Still, the greater question is, does anyone actually care? 

The US is poised to continue to experience economic growth that will outpace that of other countries.

On a final note, the media has blown up the impact that US consumer will face with the fall of oil. Many US consumers have already locked in the price of heating oil, although this drop could be more important than gasoline prices.  (Oil Prices). The average US consumer spends ~ 4% on gasoline compared to spending ~ 13% on food. In case you have been looking for inflation, it is already seen in food prices. Food has risen 3.1%, outpacing inflation. This is a serious problem and the street is blowing gas prices out of proportion. 

Economic Events

Next Week we have some very interesting earnings and economic data.

Economic Announcements

Monday: Pending Home Sales

Tuesday: FOMC Meeting Begins, Case-Shiller HPI, Consumer Confidence, Durable Goods Orders.

Wednesday: FOMC Meeting Announcement.

Thursday: GDP and Jobless Claims.

Friday: Consumer Sentiment.

Incredible Week

What an incredible week in financial markets. I think the Movement in the VIX (measure of volatility) puts everything in perspective. On January 2, 2014 the VIX hit a high at 14.59 in the trading day. On Wednesday October 15, 2014 the VIX hit a high of 31.06. To put things mildly, volatility has picked up. But, volatility Is just that, volatility. This pullback has brought down valuations and increased yields on many stocks. The fundamentals are in the market. Although the buy on the dip mentality was a great strategy for the first 9 months of 2014, it might not be the best for the end of the year. We are seeing massive 300 point rallies in the Dow daily. Of course it is difficult to time the market, but be extremely careful when entering. I would advise buying in multiple orders over the course of a couple weeks in order to get a more realistic cost basis.

In terms of fundamentals, we are seeing somewhat of a reversal in the difference between the real and the financial economy. The table below summarizes:

This week gave some really interesting and mixed earnings. A few notes on the table. Netflix did lower guidance and got guillotined for it. Google did take a hit as well. Bank of America would like to say they have put the past behind them and Goldman absolutely destroyed earnings but did have several accounting revisions to go alone with negative quarter over quarter investment banking growth. But, the real economy revealed to me the strength of the US economy. When companies like Honeywell, GE and United Rentals are making money, the market has to react positively. An interesting Earnings release to me was Dominos who beat earnings. I have them in the real economy because food is a necessity yet it could still be considered discretionary so take with that what you will. The mix of financial earnings sheds light on the industry. Regulation has fundamentally changed the face for many of these banks. In the meantime as people continue to refinance like crazy, I am bullish on SunTrust, WellsFargo, and PNC.

The Fed is still a topic of major concern. Instead of talking about the stimulus discussion I would like to point out Yellen’s comments on economic inequality in the United States. This story came out on Friday so the market hasn’t had too much time to react. But, I believe that this is a fantastic sign from the FED. It is clear that Ms. Yellen understands the difference between the real and the financial economy. While the financial economy has recovered, it is clear the real economy hasn’t and Ms. Yellen believes the same. Highlights from her comments include the following:

• The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression," she said. "By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then."

• The wealthiest 5 percent still hold two-thirds of all assets, and that while there have been significant gains at the top of the spectrum, things have been stagnant for the majority."I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity." The Fed chief said that wide wealth disparities can make it harder for the poor to move up the income ladder, and also warned of the burden of student loan debt, which quadrupled between 2004 and 2014.

• On Friday, Yellen said "some degree of inequality" is natural and indeed "arguably contributes to economic growth, because it creates incentives to work hard, get an education, save, invest, and undertake risk.” However, that same inequality can limit access to economic resources for those lower on the ladder, "thereby perpetuating a trend of increasing inequality."

Fundamentally, regardless of political ideology, if you are not at a bare minimum paying attention to inequality in the US, you are out of your mind. Yellen’s realistic and frank view on such a pressing issue is extremely refreshing to me. If the FED really wants to make a splash, it should begin to buy student loan portfolios instead of the mortage-backed securities in QE1 and QE3. Relieving students of even a fraction of student debt will immediately stimulate growth because young people want to spend money. Young people want to buy houses and cars, to have kids, buy clothes, and do the things most people liked to do when they were young professionals. Now that we have an entire generation crippled by student loan debt, who is going to buy the next round of houses and stimulate the economy? Follow “this link” for her entire speech as well as very interesting statistics.

On a side note, follow “this link” for a great article about a leveraged ETF betting against treasuries. Most people will read this and hope they didn’t have exposure. But, is now finally the time to buy?

Earnings Announcements

Monday: Apple, Chipotle, IBM, Rent-A-Center, Texas Instruments, and Halliburton.

Tuesday: Coca Cola, Ethan Allen, Harley Davidson, Interactive Brokers, Kimberly-Clark, Lockheed 
Martin, McDonalds, Mercantile Bank, Sonic Corporation, Verizon Communications, and Yahoo.

Wednesday: Abbott Labs, Allegiant Travel, Cheese Cake, Citrix Systems, DOW Chemicals, Evercore Partners, Ingersoll-Rand, and Xerox.

Thursday: 3M, Alliance Bernstein, Amazon, American Airline, Cabela’s, Catepillar, Dunkin Brands, Dr Pepper Snapple, Jet Blue, Nucor, and United Continental.

Friday: Abbvie, Colgate-Palmolive, P&G, State Street, United Parcel Service, and Wyndham Worldwide. 

Friday Funday

Very turbulent week in the Financial Markets. In an effort ton condense events and highlight strengths and weaknesses please see below. This post will be followed by a more in depth analysis of the Geopolitical risks touched on in "Negative Signs." The investment thesis of three weeks ago, increasing international exposure has backfired on many investors (this author included). Investors had projected much stronger outlook, but were potentially overly positive based on the appreciation of the dollar. Still, there could be hope for European travel as the dollar appreciates, European vacations will become much less expensive for US travelers. Still, this is a lofty projection. The US is still probably the best place to be overweight in both the long and short term due to a continued environment of Low-Interest rates, corporate earnings, and stability.

Positive Signs: 

• At face value, positive signs in the labor market – below a twenty year average. However, Wage growth and labor participation rates are troubling.
• Recovery in the housing market always a strong sign (within reason).
• Corporate earnings are growing – Q3 earnings expected to grow 5.5% due to currency volatility. 12 month projections at 8.5% (Wells Fargo Equity Strategy). Real measure will be top line growth.
• Increased volatility will help traders and create opportunities for long term investors.
• Correction is a great time to lower cost basis and enter the market on the dip. The pullback also proves that there is at least a shred of rationality in the market.
• US Equity markets may still be the only game in town.
• Drop in oil prices will hurt energy stocks, but will benefit discretionary spending just in time for the holiday season many retailers depend on. Crude prices have dipped to July 2012 lows.
• A global slowdown will continue to encourage investments in the US. The money that flew out into international funds, attempting to take advantage of a stronger dollar could potentially flow back into US equities. • Companies are focused on adding shareholder value.
• Stronger than expected Alcoa Earnings.

Negative Signs: 

• Macro Weakness – Global slowdown stretching beyond Europe, additionally China is worrying many investors. IMF has significantly cut its projections.
 • European slowdown is a larger threat than originally expected. Germany has only fueled the fire and has not been able to offset negative data from Europe.
• Inflation is not hitting targets.
• Negative currency headwinds for US Corporate earnings have been extremely difficult to hedge.
• 95% of Profits in the S&P have gone to Buybacks and Dividends. Buybacks should be conducted when equities are seen as undervalued, very difficult to make that case for the majority of S&P companies. When money returned to stockholders exceeds profits, companies are dipping into their piles of cash instead of investing in real assets that will actually stimulate the economy.
 o Bloomberg: The S&P 500 Buyback Index is up 7.5% this year through October 3, compared with the 6.5% advance in the S&P 500, after beating it by an average 9.5 percentage points each year since 2009.
• Continued proof the FED continues to propel the market. On Wednesday, the Dow jumped nearly 300 points when FOMC minutes revealed the FED was concerned by the global slowdown. Investors saw the fed as more “Dovish” than “Hawkish.” The underlying concern of the FED, a global slowdown is the same news that pummeled the market on Tuesday, proof investors are more concerned about FED policy than Macro risks.
• Geopolitical Risks: Ukraine-Russia, Potential exit by EU members, trend of secession in EU after Scotland’s independence bid (Northern Italy, Catalonia), ISIS, Turkish instability, Iran continues to be Iran, Assad continues to be in power, and Palestine still has not received an equitable solution.
• Health Risks: Ebola. How will this affect the markets? Airlines could be hurt. Next Week’s

Economic Calendar:

• Trading closed on Columbus Day
• Wednesday: Retail Sales and Atlanta Fed Business Inflation Expectation.
• Thursday: Philadelphia Fed Survey and Industrial Production.
• Friday: Housing Starts and Consumer Sentiment.

Next Week’s Earnings Calendar: 

• Tuesday: J&J, Citigroup, and Wells Fargo. 
• Wednesday: Bank of America, PNC, and BlackRock.
• Thursday (Huge Day): Blackstone, American Express, Philip Morris, UnitedHealth Group,         Goldman Sachs, First Citizens Banc, United Rentals, BB&T, EBAY, NetFlix, and Marriot Vacations Worldwide.
• Friday: Google, Morgan Stanley, GE Bank of NY Mellon, Independent Bank Corp, SunTrust Banks, and Capital One Financial.

As the big banks announce earnings, the XLF will be the ETF to watch. Bank earnings should hopefully provide some guidance on the strength of the real economy. However, potentially more telling will be AMEX, Philip Morris, and UnitedHealth Group. Additionally, Marriot Vacations is always very interesting to watch.

On an ending note, Leon Panetta has hit the airwaves this week. Panetta feels that the political polarization in the US is a bigger threat to National Security than many terror organizations. I couldn't agree more with Panetta on this one. Very, very insightful man who I would highly recommend listening to. Looking forward to reading his book over winter break. 

Strong Numbers, weaker support

The S&P fell 1.599% from Monday's close of 1977.80 to 1946.17 as talks of the long awaited "pull back" continued. To many investors, this "mini correction" was welcomed. Whenever there is a price adjustment in the market, it implies that investors are at least somewhat rational and reminds investors of the issues the market faces: economic growth, geopolitical factors, and corporate earnings. Additionally, from a trading perspective, volatility has picked up. The VIX hit an almost 2 month high at 16.71 on Wednesday before normalizing back to 14.55 on Friday's positive job numbers.

As we all know, the greater the volatility, the greater the risk, and the greater the rewards. The view on the street is that volatility will continue to pick up as we move into Q4 and traders closely eye earnings as well as significant Fed “speak” including FOMC minutes next week.

The Fed is in a really interesting spot now that the unemployment rate has moved down to 5.9%. The 248,000 increase in non-farm payroll employment numbers is fundamentally a good thing. Unemployment is at its lowest level since July 2008. However, no numbers can come through the wire without receiving some criticism. Friday's numbers were highly affected by an upward revision from July and August numbers, which the market had already expected would be revised. New job creation numbers of 142,000 did unfortunately miss the 200,000 mark the street was looking for. But, the biggest thorn in the side in this report is wage growth.

Increases in earnings only hit 2%, annually. This is negative as consumer spending is unlikely to increase without a significant jump in earnings growth. This speaks to the new era of corporate America. Corporations have been able to do more (increase Bottom Line earnings) with less employees for the past 3 years. Now that that they have hired some workers, they do not feel the need to increase wages as they understand supply and demand is still in their favor.

Although the unemployment rate might be 5.9%, that is not how it feels in the real economy. Employees still understand that mobility in the labor market is not what it once was and are hesitant to leave. The foundation for the 5.9% unemployment remains troubling as underemployment and labor force participation continues to plague the economy. But, the continuation of unequal wealth distribution is more troubling than anemic growth in income. The US has been playing the same story for the past 4 years, the rich get richer and the 99% get, something less than that. These other factors will weigh in on the Fed's decisions regarding short term changes in interest rates. The 5.9% unemployment can be deceiving to the naked eye, but did not start the market from executing a demand for buy orders. The buy on the dip mentality has continued to support the market the past two weeks of trading.

Until the US can realize that Education is an essential long term investment, public health is a right, and political polarization continue, economic growth will never hit its potential as our competitive advantage weakens. Alan Krueger brought up an interesting point on Bloomberg: proposing that now is an ideal time to implement an increase in the minimum wage. While I agree that an increase in minimum wage could benefit the economy, I think giving businesses incentives to spend in the US by buying real assets such as property, plant, and equipment, would have a more sustainable impact on the economy.

Dragenomics

Now that we are in a post Alibaba IPO world, with 3 consecutive quarters of Equity performance, and a falling Euro relative to the dollar, it is time for every investor to take a step back and evaluate their positions. As we enter October, the historic month mutual funds sell their positions to cash out; it is clear the correction that has been predicted for the past year and a half has not occurred. The past two years have been a bad time to avoid equities. The buying on the dip mentality has worked, and although we have seen dips there has not been a correction. A strong defensive portfolio, with significant equity exposure, is the only way to continue to generate above average returns. Interest rates cannot fall much lower, and when the rise comes, bond managers will continue to be hit with redemptions. The bond king himself, Bill Gross, shocked investors on Friday by leaving PIMCO, the company he started. His work in bond futures was flat out inspiring. See “Gross Used $45 Billion in Derivatives ” for more. But, Gross’s departure is not a fundamental threat to the financial markets.

As expected, BABA surged on its first day and raised over $25 Billion. Kudos to the bankers for leaving the valuation in line with those of other Chinese internet companies. The bankers were able to issue additional shares and raise an extra $2 Billion than expected, courtesy to the Green Shoe option. Although the growth rates at BABA are ripe, the corporate governance structure leaves a lot to be desired in my eyes. The most interesting aspect of the BABA IPO was actually indirectly related to BABA. Investors had been worried that institutional investors would have to liquidate tech positions in order to buy BABA. Investors were correct that the markets did experience a sharp downturn. However, the losses did not spiral out of control and have recovered from Thursday’s Lows. The NASDAQ, S&P, and Yahoo (Major BABA Shareholder) inched down 1.48%, 1.37%, and .66%, since the September 19^th adjusted close, when BABA went public. BABA is due to posts earnings in November, it will be very interesting to see how the market reacts. I would argue that poor BABA earnings could increase sentiment as we begin to close out the year. Even with a poor fourth quarter, Investors have a lot to be happy about.

Year to date as of Market Close 9/26/2014 the S&P, NASDAQ Composite, and DJIA are up 7.3%, 8.00%, and 3.02%[1]. These numbers are welcomed given an ambivalent federal reserve and relatively stable, yet potentially stretched valuations. The S&P, NASDAQ, and DJIA have P/E’s (TTM) of 19, 24, and 16.[2] While these valuations are nothing to salivate over, equities are still the only game in town. So, in some respects valuations are justified. Additionally, as the 10YR T-Bill is 2.54%, investors need to get yield somewhere. Going into next week, the number to look for is undoubtedly job numbers on Friday October 3^rd. These numbers could dictate how the market will react in October, as Mutual Funds begin to sell positions and analysts begin to size up the holiday season. So, the question everyone is think: Where is the hedge right now?

In my opinion, the best way to trade in this market is sticking to Index ETFs. Buying puts on these positions are and extremely cheap way to insure your portfolio. To lower the cost of the puts, sell some stretched calls. Yes, you will be limiting your upside but I do not see many macroeconomic events that could radically push returns further. Looking towards 2015, it is time to evaluate the Euro – Dollar relationship. After Draghi’s announcements on interest rates[3] the Euro has been falling quickly against the dollar. The Euro is at its lowest price relative to the Dollar since March of 2013. This movement gives investors a few potential ways to profit. Obviously the pure currency trade is an option. But, for long term value investors, I believe there are better way to profit over the course of the next year. As the ECB begins to pump billions into the Euro Zone, there is potential that this quasi “quantitative easing” will give European financial markets the boost they have been craving. But, just like in the US, the ECB has had trouble hitting their inflation targets. This could mean a prolonged easy money period for Europe. Draghi actually announced that target interest rates on deposits will fall from -.1% to -.2%. This means that the velocity of money could be faster in Europe than the US as banks will prefer to lend their excess reserves rather than pay to house them with the ECB.

Still, there is a large question mark regarding when the European economy will take place. So, the dividend paying, European stocks look attractive. The IDV (Disclosure, this author has a position in the IDV) with a yield of 4.88% (9/27/2014) seems to be a way to find yield with international exposure.  The MSCI EAFE could also be a strong option. European stock with high yield could be tempting for European Managers to buy as they will eventually need to find yield and growth. If this does happen, large cap dividend paying stocks will most likely benefit. Lastly, US companies still have operations in Europe. Those companies with the largest sales volume in Europe might rally the most. It is important to remember we are in a globalized world. US companies with large European operations could offer the exposure needed to profit from easy money in Europe without as much of the risk. 

---

[1] http://online.wsj.com/mdc/public/page/2_3022-usclosingstk.html?mod=topnav_2_3021

[2] http://online.wsj.com/mdc/public/page/2_3021-peyield.html

[3] http://www.bloomberg.com/news/2014-09-04/ecb-unexpectedly-cuts-interest-rates-as-outlook-darkens.html

The Islamic State - The Sunni Force Catching Steam

IS – are the radical Sunni group that has already taken over a significant piece of Syria and Iraq. In Syria, as Sunni Muslims, they oppose Shia President Assad. Isis has supported the Syrian Rebels as the conflict within Syria continues.

This group claims to be a caliphate – meaning they are attempting to create an Islamic state led by a “supreme leader” under Abu Bakr al Baghdadi. This proclamation is eerily reminiscent of the earlier work of the Taliban from the 1990s. This new group is ambitious, organized, and possibly more important, they are capitalized. IS has Money as they have taken control of many lucrative oil fields of northern Iraq and military equipment from the Iraqi security forces. Where there is money, there is power. Additionally, they have taken over several banks. IS’ caliphate proclamation is frightening as it could easily attract the discouraged youth in the region who could potentially buy into the propaganda and begin the process of becoming jihadists. 

At least, this is the Western view of the matter. IS has a strict interpretation of the Koran: Women need to cover their faces and eyes, IS will take and arm for theft, and have a subjugated status on religious minorities. The view towards religious minorities has been very terrifying for the Iraqi Christians who for the most part, have fled the country.

The group is able to exert their power using little Force, which has allowed them to cover an extremely impressive, albeit disturbing, amount of territory. The group already has significant influence in North and East Syria as well as Northern and Western Iraq.

Iraq is an especially appealing area for the group as they have oil, and a political system ruled by Shias. Yet, the Sunnis in these countries for the most part have been unscathed. The group essentially leaves villages and cities alone as long as they obey their rules. Unlike the rule of Syrian rebels, there was wide spread looting and violence. Yet, under IS, this does not occur. In fact, they offer to protect the citizens who have fallen victim to theft.

According the Erika Solomon of the Financial Times, “Isis (IS) appears to be perfecting a model mixing fear, divisiveness and soft power tactics to slowly seize control from under the feet of other rebel groups. A group that is able to gain territory rapidly, win to a certain extent the admiration of the occupied population, while obtaining great wealth, could certainly create a force to be reckoned with. The group has actually brought some sort of stability to a region that hasn't had any in at least 10 years.

Very recently, IS has made moves to invade Lebanon. Now, they will not be joining forces with Hezbollah. However, there is evidence to support that IS is attempting to invade now as Hezbollah is supporting hamas against Israel. To put things delicately, the Middle East is experiencing rapid change. The U.S. is flooding resources into the Israeli-Palestinian conflict and the Ukraine-Russian disputes, that is has looked the other way on this one. But, I am sure this situation is being closely monitored from a counter terrorism perspective, even if it is not publicized. 

This week in International Affair

As tensions between Israel and Gaza continue to escalate to near 2009 levels, markets have not reacted to the news. Rather, markets were much more intrigued by what Janet Yellen had to say to congress. She didn't stir the boat enough to reverse one of the most robust financial recoveries of all time. She note however that biotech and social media valuations seem "substantially stretched." Shocker. Still, markets continue to rise. In my mind, there is no doubt that the US is truly on the road to recovery and in the future the business outlook is strong.

But, I do find it rather perplexing that the street isn't recognizing the conflicts in the Middle East and Ukraine at the moment. Besides a very quick taper, the street has always been worried that a potential war could bring the market down. Yet, it would be very easy to argue that Israel and Hamas are essentially, if not formally at war. Isis continues to take over Iraq. Meanwhile, Pro Russian Separatists in Ukraine are shooting planes out of the sky.

Hamas has decided to take advantage of the latest conflict as they were essentially out of options. With Egypt out of the picture, running out of money, resources, and morale they did what they do best: make conflict. Although the actions of Israel are perennially destructive, unlawful, and cruel, the Palestinian nationalists have not taken the high route in this mess. Rather, high ranking members of hamas have taken shelter beneath hospitals and schools, in order to shield themselves. One would think that would mean game over in terms of air strike, due to basic human law. Yet, when it comes to Israel, as we all know, they do not need to play by the rules. When the US bows down to their actions, and allows Israel to continually disregard international laws, agreements, and human right, they have no incentive to play by the rules.

Unless the US government will not take the proper stance against Israel. Because of this, Israel and Palestine will continue to fight until Israel will inevitably get what they want -- they always do.

The Iraq conflict has been put on the back burner by the main stream media. But, the group has been able to remove the last Christians from Mosul. Additionally, Iran is attempting to spread a theory that ISIS is actually an American plot to protect Israel. I don't understand why they think there is a conspiracy about protecting Israel. US foreign policy's greatest achievement has been protecting Israel, there is no doubt about this. Still, the threat to Iraq is real, and is overshadowed by the pro Russian separatists. Nothing new there either. Who doesn't like a good pseudo cold war Russian imperialism story?

In my opinion, the market right now, is close to euphoria. The only thing the street cares about right now is the Fed's balance sheet, and to a certain extent valuation. Other than that, it looks like the world could go yo hell and trader would still be buying. Buying stock right now is still the only game in town, but I am looking for non cyclicals and dividend paying defensive stocks. 

Iraq War – Did the U.S. jump the gun?

On March 20, 2003, operation Iraqi freedom began as the brain child of President George W. Bush. As if the “War on Terror” was not enough, the US needed to enhance its presence in the Middle East. In many respects, the “War on Terror” by and large, made sense and was very justifiable. The US was attacked, in one of the worst terror attacks of all time, and had to go after Osama Bin Laden. There was a sound reason to fight a war. But, when it came to the Iraq war, if the government had been more transparent in their goals, they would have been able to achieve more success and possibly more support from the realists of the world.

There were never any weapons of mass destruction in Iraq. The UN couldn't find any pre invasion so there was not much of a surprise the US came up empty handed as well. The Iraq War was fought to help protect oil interests and attempt to finally finish off Saddam Hussein. Now, if the US came out with these goals early they could have been much more effective in their attempts to protect oil refineries. Instead, the troops overstayed their welcome, continued to aggravate Islamic extremists and pacifists alike, while wasting Trillions of dollars. Still, the worst cost of war came to the soldiers who came back without limbs due to the IEDs. The US has had to welcome home veterans plagued with PTSD and physical problems that will follow them for the rest of their lives. The least the US government could have done was to at least be honest in their intentions.

When troops were finally pulled from the new commander and chief, Barack Obama, he received criticism from the left and right alike. Critics felt the government was not strong enough to sustain itself and any progress made would have been lost completely. News flash: if the US stayed for another 10 years the government would not have been strong enough to sustain itself. Attempting to implement democracy in the Middle East is like trying to get a vegetarian to try a turkey burger. Democracy will not be successful because the region as a whole is unstable. Unless the US could somehow broker a peace deal between Sunnis and Shiite, the Iraqi government will be far from democratically sound.

More than 10 years later, the US is actually presented with a reason to use military forces to intervene in Iraq. The oil supply of Iraq is being threatened. Isis is going to take over Iraq as they continue to gain support throughout the region. The US needs to keep boots off the ground, and utilize drones to protect the oil supply. Oil prices will continue to spike as the levant continues to gain support. Although Iraq is only the 6^th largest exporter of oil to the US, prices will rise as uncertainty adds to the oil market in general. To compound issues further, Russia is now forcing the Ukraine to pre-pay for oil after contract disputes as well as territorial disputes between the countries unfold further.

As the conflict continues, who will be hit the hardest and who stands to profit? These are the questions that traders around the world will be trying to answer. Right now, TransCanada is looking pretty tempting. See below for highlights.

TRP Highlights

Yield 3.8%

Div 1.77

P/E (ttm as of 6/19/2014) 21.58

Beta .59

Dividend CAGR	7.57%
Required ROR	12%
Dividend 1 YR	2.065344
Model Price	46.60379

Using a basic dividend growth model, the model suggests the market has priced TRP at an equilibrium price based on dividend history. Still, the nice yield might not continue to add value to the stock performance when interest rates rise. But, until then this play looks poised to continue growing.

On a side note, things have really come full circle with Iraq. The situation has actually opened up a dialogue with Iran. Who would have thought it would take another international crisis for the two sides to have serious talks? Even though the idea that Iran and the US would form a partnership is extremely unlikely, it is promising for US relations in the Middle East. As long as Iran continues to support Assad, the two will never see eye to eye.