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. 

Political Perception

Confidence. Confidence enables people to do things they would have never have imagined -- for better or worse. When consumers are confident about a positive future they invest, spend, and consume products and services. When businesses are confident, they do invest, they hire, and they spend money. Without confidence, the economy slows very quickly. Since the sub-prime crisis 2008 hit, and even before, there has not been effective leadership from either side of the aisle. Effective leaders are able to use actions to bring confidence back to the economy. Democrats and conservatives have both failed in this task.

The capital markets are no longer a scapegoat for the lack of growth. Interest rates are still at an all time low and financial markets continue to rise at an inflated rate, making IPOs and seasoned offerings extremely attractive to businesses. The fed's work of pushing interest rates this low has been necessary but is now bringing forth serious problems in the eyes of investors. Investors are not confident about where rates are going to go. No one really has an idea at all. Of course rates cannot go much lower but the question of when and how much rates will rise is still up in the air. Interest rates are experiencing very intriguing patterns. Even after the announcement of faster than expected tapering by the fed, yields on the 10 year treasury have fallen in recent weeks as investors flock to the safety of the treasury. Why are investors flocking to the Treasury and TIPS? Because they are not confident about rates, future inflation, and the overall economic outlook.

Geopolitical turmoil has no doubt played a role in the lack of business confidence as well. But, this influence has been seen more in the bond than equity market. Currently, as Russia appears to be leaving the Ukrainian borders, confidence seems to be restored. But, China's bold move attempting to block IBM servers from China should be, at a bare-minimum, alarming. The middle east continues to be a cause for concern as there has not been any serious progress in the region. Overall, geopolitical concerns are not putting a huge damper on the mainstream or at least Wall Street's perception of the world.

In order to bring back confidence in the economy, and experience real  growth in the real economy, the US has to make strategic moves in the Short-Term and Long-Term. To achieve these goals, proposals need to be bipartisan to have any hope of being passed in Congress. The 112th congress has been the least productive congress ever, passing only 561 bills (1).

In the Short-Term the Fed, which I understand is not a governmental agency, needs to issue clearer guidance on its goals. Investors and more importantly businesses need to have a much more concrete understanding of how interest rates are going to move. Bernanke was clear with his goal of 6.5% unemployment but Yellen has been adamant that the 6.3% unemployment level of April is not good enough (2). For this, I applaud her as she understands that underemployment and discouraged workers have been a far more alarming problem for sometime now. She is able to see there is a clear divide between the growth of the real and financial economy. Still, she needs to be more clear on rates and tapering programs. Her guidance is far too vague.

Additionally, Congress needs to forget about a deal to reach a deficit reduction plan as CBO projections has shown positive outlook for deficit reduction (3). More importantly, it needs to develop a short-term plan to stimulate businesses to grow GDP and in turn reduce the deficit as a percentage of GDP. This could be done by simplifying the US tax code. Giving businesses incentives to bring foreign profits back to the US and put it to work by spending and creating jobs. As of March 2014, the largest US corporations are holding nearly $206 Billion in cash offshore (4). Last but not least, US infrastructure needs development.

Everyone is aware of the outdated roads and bridges of the country. This investment will help to bring jobs to the US people but it won’t make the US more competitive. In addition to investing in renewed roads & bridges, the US needs to invest in technology. New fiber optic cables, faster internet, communication channels, and high tech manufacturing plants will make the US a better place to conduct business.

In the Long-Term, the US government needs to invest in Education first and foremost. The US has fallen behind the rest of the world in Math and Science, but even in reading and writing. The jobs of the future will require advanced understanding of Math and Science but students also need an education in the liberal arts. By investing in the overall education of US students, the US workforce will be more competitive and US companies will no longer have to import talent from abroad to fill its needs. Investment in Education needs to begin at a young age and follow through until post graduation of high school and university.

nvesting in the college education of US students is essential. Right now, when college students are graduating they are graduating with a sub-par education as well as a huge amount of student loans. Since education is no longer top-notch in local public universities, many graduates still do not have the skills they need to contribute in the workforce and subsequently need to obtain graduate degrees, further adding to their debt burden and further diluting the high school and undergraduate education. As these students are paying back their loans they will not be buying cars, houses, or going out to eat. Rather, they will be scraping by in order to pay back their creditors.

Bringing the cost of education down needs to be done by both the federal and state government. If the US can transform its education system in a way that brings down the cost of public college while also increasing their prestige and resources, private colleges will be forced to bring down their prices in order to stay competitive and enroll students at a market equilibrium price. The government is the only institution that is able to disrupt this out of control reign of terror that private colleges have been able to wage on the american public. The cost of attending a US public college rose 2.9% in 2013, outpacing inflation by its slimmest level since the 1970s (5). A new generation of well educated American students will propel the US into a new golden age.

Without significant reason to believe the US will put political ideology aside to invest in the short and long term success of the nation, confidence from businesses and consumers will continue to be anemic. With clear goals in place, an an optimistic outlook for their implementation, the real and financial economies can both flourish, as they should, in unison.

1 http://www.washingtonpost.com/blogs/the-fix/wp/2013/07/17/the-least-productive-congress-ever/
2  http://data.bls.gov/timeseries/LNS14000000
3 http://www.cbo.gov/publication/45086
4 Cash abroad rises to $206 Billion. Richard Rubin.
http://www.bloomberg.com/news/2014-03-12/cash-abroad-rises-206-billion-as-apple-to-ibm-avoid-tax.html5  
5 College costs slow while outpacing inflation. John Hechinger http://www.bloomberg.com/news/2013-10-23/college-costs-slow-while-outpacing-inflation.html