Patience Young Grasshopper

Game Plan – Highly Selective Market Swings via ETF Baskets. Basket Trading is the ONLY THEME for FEBRUARY (or until correlations break 1).

Campaign - Searching for a successful test of S2′s, watching for major break through Nov. lows.

PRIORITY- VIX double bottom. Watch spread between VIX and Variance Futures

Week of Feb. 02

WED:Looking at the S&P, I see a massive diamond pattern representing a significant bottom. These are rare patterns, kind of like the Loch Ness Monster of charts. I inverted the scale so the chart is upside down, and the diamond becomes clear mainly because I’m used to seeing this pattern at major tops. Not only is the diamond visible, but the H&S is also obvious. This feels like the early false starts of a rally, where weak/fast money is going to be shaken out.

JPM continues downtrend. Is it possible for SPY and SKF to rally again together? Bizarre.

BAC at Jan lows. Double bottom or failure or whipsaw or all of the above!!!! This market.

The range contraction in SPY’s tells the story (see below). There is no reason to trade until there is a resolution out of this range, which I think resolution will be to the upside. Plus, embrace the inspirations and their source…fear only the old…accept the new. When you’re on, you can walk on water. So let’s get it on…there’s a big ocean I have to cross without drowning!

XHB possible for more upside.

Strength in Nasdaq.

Chip stocks showing leadership:

MRVL, MCHP, NVDA

Visit internet names:

YHOO, AMZN, CRM, EBAY, EXPE, GOOG, NFLX, AKAM, DRIV, ARBA, GSIC, CYBS

Revisit:  JNS

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APPLE, BAIDU, BAC, C, WFC, DIS etc…

On March 19th, 2008, I made a little long term play when I called the bottom of the market at the very time and price right here on the blog, with a few well-timed follow ups, like this one. By the time we posted this article about the 11 top financial stocks to own for a high return portfolio, I was so confident the market reversal was confirmed the idea of trading a neutral book was ideal, because I knew a great many rocks will rise with the tide, only to sink really fast when the tide dissipates. Recall this journal entry Market Operations of a Proprietary Trader“, when in early January of ’09, the portfolio I put together has now returned in the high triple digits. Then we started to get extremely bullish on the Chinese flyers but the volatility in those names kept our positions smaller than what we wanted.

I’ve been in this business my entire professional life, in all aspects of it, from buy side to sell side and everything in between. The March ’08 low that we caught right here, I consulted a very close personal family member. He knew my abilities to spot long term reversals. He asked me “Pej, give me 3 stocks for me to put $250,000 in right now and not look at the portfolio until the end of 2010. I immediately told him APPL, BIDU, and FFIV. I said, “make it an even $300,000, and that extra $50k will be my first layer of risk. Meaning that for a small % of his profits on the $250,000, I was willing to take the first $50,000 in risk.

Every now and then we had a conversation about one of the stocks, but the idea of selling was NEVER discussed. When Apple launched the iPad, we talked. When BIDU split we had a conversation, and when FFIV broke $100 we talked about the leadership position it had gained using a dual role-up and patent acquisition strategy. It was collecting unreal amounts of royalties and building excellent products for a market that was growing exponentially. Today, as of the close of trading, if you look at the market over the last year, meaning the primary indices, Dow, Nasdaq, etc…, the market has gone nowhere really, and only the arcade type daytraders were really sitting in front of their monitors acting like “traders”. While the real traders had called the game and left the stadium. We knew money was only to be made in holding long-term, well thought out and highly researched stocks kicked out by an algorithm that would somehow automate the things I want such as the rate of earnings growth acceleration as a % of YoY earnings. That measurement is telling me how quickly the stock is headed for going parabolic or if I should expect slow and steady.

Even positions I was in, if my number came out suggesting the stock was close to going parabolic and the total float had turned over completely, then I would prepare to trade around that stock, like BIDU and its split, APPL’s run to $300 and FFIV’s break above $100. These were all temporary parabolic moves in these stocks that required all the skills and abilities the best trader could muster to extract maximum profit from trading around that core position. Other than that, the real traders were finding new aspects of their life they never knew about, or new hobbies, while the day trading monkeys continued to sit in front of their screens, hunched over, up one minute, down the next, their mood positively correlated to their P&L. You know, the retards that needed to look at the same chart over and over in different time scales every day all day long.

That tiny little $300,000 portfolio is worth $1,490,568.97 today. And the best part is it’s all long term capital gains at 15%. But not a single long-term share has been sold and whenever I’ve traded the core positions, I’ve always ended up with more of the stock than I had when I started selling into the parabolic move. In other words, I was accumulating the stock. I think even though BIDU split, it will go to $300 again and split again. I think APPL will be forced to split. And I think FFIV might actually declare a fat dividend because they’re just manufacturing cash.

Point is, the idea of being a stock picker, and this being a stock picker’s market, and day traders are having a hard time, day trading firms are shutting down, all that is true. Being a stock picker is not easy though, not even for the intelligent ones. It took me 18 years of studying to learn what I know today but I’m at a level where I can’t have a conversation with somebody about the markets because they’re talking such basic non-sense while acting like these experts throwing around big words and watching CNBC. Not only do these sad sad people make me feel really sorry for them, I do, I truly feel sorry, for they are wasting their lives staring at that screen hunched over all day long with CNBC in the background, thinking it’s not affecting you but in fact it actually is affecting your subconscious which ultimately rules your rational side. And God have mercy if they’re related to me. I want to take a bat and beat their brains in. It’s despicable.

Imagine someone that goes to a top 10 undergrad school, then goes to a top 5 Ivy League graduate school, then ends up spending the next 10 years doing nothing other than say, DJ’ing at nightclubs. $250,000 in education fees, or some would call an investment, and the return is a DJ? WTF? Am I missing something here? Then this DJ person all of a sudden decides they’re going to be a trader. Like I wake up one day and say “from today forward, I’m going to be a professional doctor”. It’s the same thing. This isn’t like the Real Estate business where anyone can get a license and broker property. This is real, hard science, PhD level quantitative work. And if you suddenly realize you’re going to be a trader in your late 30′s when your master’s was in something from another world, you have no training whatsoever, then as “I am now a Doctor as of today”. Life doesn’t work like that.

You want to be a trader? A hedgie? A rock star? Then go to school, get your Masters or better yet, a JD/MBA, and then lateral into I-Banking as a portfolio manager for either a large hedge fund or for your own hedge fund that is soon to be a large hedge fund. Don’t sit in front of your laptop or array of 4 monitors and a room with 6 TV’s of CNBC blaring non sense that wanna-be traders take as gospel. Plus, I bet if that’s a description of you, you’re doing it for a firm that probably stopped serving you pizza on Friday’s because they want to “cut expenses” at a time when they’re pulling in record profits, like $65mm for example, and they still take Pizza Friday’s away.

There’s so much to go and so many good stocks to pick and park. This is not a trading market, nor a swing traders market, nor someone that trades on margin and is therefore pushing against time. Especially because CNBC every day says “this is a stock picker’s market”. What that really means is “tune into to CNBC for market updates, but don’t expect any investable ideas because we’re not stock pickers”. At the same time, that message implies that if YOU think you’re a stock picker, then by God you’re a stock picker and this is your time to thrive, so go out there and make your employer rich. Time is not on your side if you have a leveraged position that’s underwater. You’d be better off just closing the trade and re-investing that money. Don’t pay margin rates to brokers that can borrow directly from the Fed for 50 basis points and lend it out to you for 900 basis points.

The $300,000 account worth over $1.4mm now is a cash account, no margin, and none will ever be used to juice it up. The only time margin was used was when I wanted to put on a synthetic hedge against one of the 3 positions so I wouldn’t have to sell the stock. A stock trading at $35 will probably dive to the low $20′s before shooting up for $100. Why? The machines have picked up the primitive behavioral features of man and finance. And they’re learning and adapting at an unbelievable pace. You HAVE to know how to program not so YOU could write the code, but so you could delegate the task to a very good programmer and be literate enough to understand the code or you’re just a fool giving your model to a programmer. You have to compartmentalize pieces of the algorithm, since you’re building it on C based language like Java or anything that’s object oriented. That way, no single programmer will ever have more than the piece you give them

Good luck and good trend trades. Don’t look at the headline indices, watch for event driven moves in the geo-political arena, or in other words, watch for sectors that jump because of a new regulatory change in an emerging or frontier market. Even in US markets, right now the Obama administration, aside from trying to untangle the Iraq, Afghanistan, Pakistan, or “AfPak” and “AfPakAq” as the military brass always reduces everything to an acronym. If Obama, in his 2nd term, has a chance to really unwind some of the Bush moves to remove our civil liberties, then you’ll see institutional capitalists come back into the investment arena with their money. Until then, sideways the market shall remain. I hadn’t looked at the headline indices for about 2 months. When I checked them yesterday, it appeared we had done nothing but zig-zag up and down. I imagine that put a lot of “retail day traders” out of the game. Oh well, so is the business of playing with other people’s money.

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Advice for New Companies and Entrepreneurs

I was recently asked about the role of Angel Investors in this brave new world of capital markets post “D-Day”, which I refer to when talking about the collapse of 2008 in capital markets and the ongoing rewriting of the new rules. We can call it BD for before death, and AR for attempting rebuild. Or we can tap into the infamous Schumpeter and his Creative Destruction theory. I guess that would be BCD and ACD. “Before Creative Destruction and After Creative Destruction”. I like the latter more. BCD and ACD it is. The question was what, if  any, is the new role of Angel Investor’s and are they still relevant or have they fallen off the radar like the large number of hedge funds and VC firms.  Read on for my response….

 

On the contrary, there are fewer barriers to seeking out Angel Investors because they’re stepping in to fill the void left by Venture Capital and Private Equity Investors. Also, there are NO Investment Banks left with the model of Lehman or Bear, which acted like Merchant Banker’s, investing on behalf of many proprietary in-house hedge funds as well as hedge funds which they managed large chunks of capital for. Yes the big five of Goldman, Morgan, JP Morgan, Barclay’s, and Societe Generale continue the same practice today, but with much less risk, extremely risk averse at the moment facing locked up commercial paper markets, seized construction debt demand, no mezzanine or expansion capital as the majority are downsizing via layoff’s and buy-outs; then there are the locked up municipal markets. The dual action of the Fed and Treasury appear to be aimed at increasing consumer credit. So you’re seeing the appearance of easier to get credit cards from the likes of HSBC, Discover, even American Express. In other words, the primary spigot of demand stimulus is via the consumer by giving them access to more debt, especially the higher risk borrowers. Now that’s a solution that just pushes the day of reckoning to some day in the future. Brilliant!

Hedge Funds, although you see them  a deal more at the cash call window borrowing cheap dollars, the number of hedge funds operational with more than $5 billion in capital shrank by approximately 80% in 2009 and 2010. That trend hasn’t yet bottomed.  The anticipated sum total removed from investing in private start up companies is: $100B  just from hedge funds; Another $300B lost from PE and VC combined. Which leaves the Super Angel to fill the void left behind, and entrepreneurs with real models and no exit plans in mind.

“Super Angel’s” are previously successful entrepreneurs, like Peter Thiel, a co-founder of PayPal and now manager of the extremely successful Clarion Capital hedge fund based in San Francisco. There are many more like him, including family offices and investment entities that represent the likes of Jeff Bezos (himself a former highly successful hedge fund trrader from DE Shaw) and other multi-billionaires and huge multi-millionaires that like to take early stage risk in start-up companies. As Super Angels, they bring more to the table than just money. They bring an invaluable network as well as a complimentary universe of companies that live off of each other’s products, generating a hybrid form of “organic revenue”.

If anything, Angel Investing has become a more favorable outlet and resource for the entrepreneur starting up a company or seeking early stage funding. But you’re not going to get $100mm for 1% like Facebook did from Microsoft. Super Angels are extremely smart and have been in this from the early ’90′s to the present. As such, they are quite aware of their worth, and the worth of your company. If these “Super Angels” are interested in your project, they won’t try to wrest control from you in exchange for their capital (a practice wildly popular with the VC’s of yore).

They are also “fair”, which is absolutely unheard of when dealing with VC’s and PE investors. Now is the time to emphasize seeking out Super Angels and avoiding VC’s which have become quite the timid “late round, pre-IPO” or “What’s your exit plan?” type of investor, very unfriendly to passionate entrepreneurs with fire’s burning inside as they believe in their products rather than the late 90′s when entrepreneurs started companies with the “exit strategy” at the top and they worked backwards from there. Also, in the early days of Google and Apple’s iPod/iPad, many smaller companies created products with the sole intent of selling it one of the aforementioned mega-giants. Thing’s have changed. Applets sometimes blow up and make a lot of money with almost zero investment other than time. Moreover, the costs to start-up a company have fallen by about 80%. You no longer need expensive server farms, in-house computing power for occasional bandwidth spikes, and Desktop PC’s running over-priced Microsoft software. It’s in fact quite impressive when Linux is integrated into the fabric of the start-up and the founders are smart enough to turn to the Cloud for handling their Server needs and bandwidth spikes.

Super Angels, like the founders of start-up’s today, don’t have “exit” on their minds but instead growth and profitability. Early stage strat-up’s have no other place to turn than these early stage investors for seed or 1st round capital. For 2nd and 3rd rounds, if you make it there, and beyond, VC’s then come into the picture. Once they see the high value of an experienced Super Angel having invested early and guided the company to where it is now, these newly timid and under-funded VC’s will find it irresistible to invest and often you’ll see multiple deal terms from competing shops thrown at you if not outright buyout offer’s from strategic investors looking for the bolt-on acquisition. This is when the wisdom and guidance of your Super Angel will help to negotiate a small insider sale of stock to create some liquidity for the founders and the early stage investors. Small is the key word though. The VC’s still want to see their capital go into the growth of the company, but will accept founder and seed stage stock included in the final terms if negotiated properly, especially if your company is already profitable. Insider sales to VC’s during late stage rounds was impossible in the past (mostly).

If you get to round 3 and 4 or higher, founders will find themselves in highly advantageous positions to negotiate the best terms possible by turning to your Super Angel(s) for much needed advice and wisdom, gained from their experience and especially valuable at this stage in your company’s life cycle. So look for them, seek them out, and you’ll be glad you did.

Besides, these Super Angel’s are, for the most part, your only source for seed and 1st round capital, and don’t be surprised if they ask for some founder’s shares if they’re in the seed round. And don’t be stingy if they do ask, having these high value early stage investors on your side from the beginning will be worth exponentially more later on down the road when you need to complete those large late stage funding rounds. Plus, when you don’t need to complete a formal funding round and just need some follow-on capital in the sub $1million range to fund the purchase of hardware, launch a strategic marketing round, or hire a high value employee, you can return to your Super Angel for the cash, an extremely valuable option when you need to move quick on something.

The only time the above doesn’t apply is when you’re a wildly profitable private company and don’t need investment capital. Groupon, LinkedIn and a few others were forced to go public to avoid the SEC getting in their face. The reason the private market for equity exists in non-public companies is because of Facebook. The company wanted to cash out some insider shares without having to go public, so they sold some large chunks to a few investors. Those investors then went out and formed syndicates with dozens of other investors putting in capital in exchange for Facebook shares marked up significantly from the price they paid for it. The rule is stay under 100 investors. These syndicates forced Facebook to actually buy some stock back to liquidate a couple of these entities that had way too many investors and pushed them over the 100 investor mark. The others, like Groupon and LinkedIn, didn’t have a choice, they tried to follow in Facebook’s footsteps and by the time they realized the “trick”, they had hundreds and hundreds of investors, and they didn’t have the money to buy back the stock so they had to do a “shotgun IPO”. Some successful, some not.

You never want to be forced into a situation like that so be careful. Facebook had this alternative because they make a lot of money and sit on a lot of cash. Google could have done it too when they went public but they were throwing off so much free cash from their operations that they had to go public just for transparency and because early investors wanted liquidity! But not before Sergei and Larry created 2 classes of stock to assure they maintained control of the company with their “super shares” vs. the “common shares” that went public. That’s the advantage you have if going public when you’re incredibly and unbelievably profitable, where an IPO is not even really needed but some early investors wanted to cash out of their investments that had appreciated by 75,000%. Google is a very smart company and it’s because of Larry and Sergei’s “Super Shares” that the stock trades so expensive and they won’t split the shares to create liquidity. For them, the less investors, especially the hot money type like daytraders, the better.


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So good luck and I hope this helps the budding entrepreneur that’s holding back because they’re afraid no investment capital is available. But make sure you have a solid idea with the path to profitability clear; if you’re not already profitable. It would be much more preferable if you were the latter, even if it meant just covering your overhead with a couple dollar’s left over for some Latte’s. But forget about the asinine ideas we used to see in the late 90′s from entrepreneurs that smoked way too much 420. Like the guy that wanted money to build a rocket to fly himself to the moon with plans to paint the rocket with expensive advertising that would “multiply the seed capital ten-fold”. I’m not kidding. I was at an entrepreneur “shot-gun” presentation (where each presenter gets 10 minutes on stage, 5 minutes to present and 5 to answer questions if there were any) at a huge hall filled with VC’s. My partner and I were in the seats and at first started to just laugh quietly at some of the ideas being presented but this escalated into total hysterical laughter.

We began laughing so hard, not just from a few ideas, but from almost 80% of the presentations.; that we passed the point of hysterical laughter and were trying not to suffocate while wiping our tears from laughing so hard. Our laughter was genuine and although at first we got a lot of “shh’s” from the crowd, it actually ignited laughter in the suit wearing, big shot “VC from Sand Hill Road” crowd; Until eventually the cue for whether the audience was interested in the ideas being presented was how high the decibel level was in the room from people laughing so hard. That’s a good way for entrepreneurs to get their heads out of their behinds and realize the day’s of getting money for any stupid idea are history, and the bar is now set at companies that are either profitable, or have a clear path to profitability and have maximized the low cost resources available to them to start the company rather than spending enormous sums on hardware they no longer need, or software that can be replaced by Linux. 

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Final Cascade?

Back in May, dear Capitalists, Marketwiz came public with an aggressively bearish pound on the table. Those of you that embrace and absorb the rare but valuable posts that come from this site and its sister site at LinkedIn where the same conversations are posted in Proprietary Traders Worldwide, readers were told to get long volatility by either setting up brackets to catch a cascade sell-off or more preferably, get long volatility by buying deep out of the money puts. Extremely low readings on the VIX and significant liquidity in the system unaccounted for, while Treasury Yields hit ALL TIME LOW’S, beg these strategies to be utilized.

Either strategy rewarded the experienced market operator significantly as the cascade picked up steam this past week and looks set to have enough momentum building from forced selling triggered by margin liquidations, portfolio insurance, automatic hedging, automated liquidations at key benchmarks, astrological sell signals; Everything has come together for one ugly August as expected. It’s not over yet and we’ve seen markets tumble 10% or more in as little as a few days, so the next couple of trading weeks will be significant.  The most important point to keep in mind is those of you reading this are the only ones either trading or monitoring the markets. If you’re a part of the latter, that’s a very smart position to be in. If the former, then you forget about what the Hampton’s and South Beach, and Southern California are like right now. The opposite of desolate, abandoned Wall Street.

In the major institutional periodicals, which Financial Advisers, Money Managers, Stock Brokers and worst of all, arcade daytraders read, everywhere you look it says “consider selling 10% every X number of points the market falls until you can find ‘emotional equilibrium’”.  The term, although bizarre and for Behavioral Finance junkies, I have a hunch it means “get to a point so you can sleep again at night” instead of making CNBC your only window into the world.

We’ve been heading down this slippery slope for  while and what happens at the end of slippery slopes? The slope ends and you hit terminal velocity as you fall. The market fell off the slope and at this point, it’s no longer about the individual retail investors looking at their shrinking portfolios and throwing in the towels. No way. That happened in 2008. Those bruised and battered retail investors have not re-entered equities. Especially when real estate is crumbling and it seemed like the world was coming to an end at the time, institutional memories are long. They don’t forget what happened 2 or 3 years ago, especially if there was severe pain involved, which we know there was. Now it’s commission based retail advisers finally puking and telling their clients, or what few they have left, “ok, get the hell out of everything” after having been preaching the “if we just hold on” gospel far too long.

No more blabbing. We tend to get carried away with articulating simple points. That simple point is thus:

Right now, rely on your bearish indicators, especially areas of multiple convergence zones of numerous variables, including MA’s, EMA’s, RSI, false highs, etc…  Those are the points where you should have sell orders marked to trigger and when you see the market sell with volume concurrently rising, even rising significantly at a key price level, that is where you cover and reverse. The reversals should be short-term and considered counter-trend trades. There’s a floor down there somewhere. But when we hit it, it’s not going to be the typical monster 1000 point rally like we saw in March of 2009. It’s going to be like a deflated basketball hitting the ground. A dull “thud” and nasty whipsaw action.

The only strategy that has been and continues to work is that of absolute return, or Alpha capture trading. Those that can are actually long Alpha and short-biased on their overall trading lines, even heavily short Beta. If you know how to put together a semi-neutral portfolio with those characteristics, then you know what you’re doing and don’t need my input. Those of you that don’t know what the heck I’m talking about, count the number of years you’ve been trading. If it’s less than 7 years, turn the lights off no matter how much in the hole you are this month. There won’t be a comeback. The hole is destined to get bigger. Cut your losses now and sit on that capital like it’s your last storage of ammunition and all your supply lines have been cut so you need to preserve it and make it count when you do deploy it.

Get smart, get neutral, or get out. And remember the market leaders. Those are the ones at the top of your buy list, not the ones sitting at the bottom of their 10 year lows. If you need me to name them, that’s a cue to cash out for now.

On a completely different note, I am actually getting prepared to begin accumulating positions in several of my “General’s”, which I will share with you as the timing presents itself. So in light of the above comments, there are reasons to begin considering methodical and tactical accumulation. I will explain later. But if you are paying too much for your trading, here’s a great company with full multi-product, multi-market access and commission rates that are some of the lowest I’ve seen for retail investors. Of course, it’s different for Institutional Traders, but for you retail traders, these prices are hard to beat:


SpeedTrader.com

More to come very soon….stay tuned as always on Investment Capitalist.

Enough with the Requests It’ll be a short while..

My dearest readers, I never can tell how many and when the readership goes up and down, but sometimes, the number of emails that come through asking if “I’m alive”, suggests it’s been too long since my last post.

I’ve just moved to UC San Diego in my ultimate pursuit of a JD-MBA. So I’ll post sporadically, more philosophical, more long term and definitely no short-term volatility trading. Not unless there’s an outlier (i.e. Black Swan), which begs our attention.

Otherwise, it’s back to college schedule trading.

Your Wiz,

Market.

Saudi’s Begins to Accept Persian Hegemony in the GME

In a characteristically well written article by STRATFOR; assumptions extensively postulated by Investment Capitalist over the past 5 years are now becoming well fortified realities. Investment Capitalist’s in-depth analyses of the Greater Middle East (GME), its’ history, borders and allegiances created alongside the UN Charter post-WWII;  Especially in a “post-Osama” Obama world manifested with a simple 5 minute news conference declaring the sole global superpower eliminated its greatest threat from a cave dwelling goat herder hiding in 4th world safe houses deep inside Afghanistan and Pakistan, supposedly protected by the Pakistani Secret Police while his multi-billionaire family grew more wealthy and powerful in a post 9/11 world as The Bin Laden Construction Empire was one of many resourceful and Arab companies rebuilding Iraq’s infrastructure. Bush Sr. owned an interest in that vast empire, but he supposedly sold it after 9/11 due to a “conflict of interest”. Ya right. Coming from Wall Street, I can park a block of stock as big as I wanted without being noticed. That’s just me, with enough power to bench press 225 pounds. Imagine what the Bush family could do in Dubai.

With the utmost respect for the brave men and women of the armed forces of these Great United States and her allies serving in the Iraqi and Afghani theatres, including thousands who gave up their lives, and the many more thousands crippled for the rest of theirs, not for “freedom” but for the ideologies of a small cadre of post-neoconservatives from “The New American Century” think tank with Imperialist objectives. Think back to when the mighty Persian Empire would go to war; she would build a “coalition of forces” with military units from countries around the world under her control. Sound familiar?

Unlike Bush Sr., Jr. was unable to build such a coalition of nations so he built a “coalition of the willing”, with that bold threat “You’re either with us or you’re with the terrorists!” Wow.  The mighty military industrial complex and a military with stockpiles of weapons with expiration dates on them needed to move. And of course, the infamous Halliburton with her no-bid, cost-plus contracts implicitly designed to induce higher costs. So a heavy truck with a flat tire would be torched instead of repaired. Ah, but lest we forget the real purpose of war: the hundreds of thousands or millions of unemployed low skilled workers graduating from high school with no college aspirations and no economy to soak them up; better to ship them out than let them raise hell within our borders.  Then when it’s time to return, they’ve got advanced technical training, GI Funds and can fill mid-level positions quickly during the early stages of an economic recovery.

Apparently, a magnificent castle nestled against a giant mountain in Pakistan, which had remained “hidden” out in the open was, for the first time, discovered by America’s vast electronic detection network with satellites that can observe from space the zit on the face of a man riding a motor Vespa whose license plate is the size of a painting. And just like that, Osama is dead, Obama is the Great King of Kings and it’s time to cut our losses and return home to a recovering economy in need of workers before labor inflation kicks in. Leaving behind the world’s most important historical region dating back to the beginning of civilization. In their wake, America leaves behind a tremendously more powerful Shiite Theology in control of the GME, for which it has been the prime mover for over 3000 years, minus a couple pockets of a few centuries here and there.  The only difference?  This is the first clerical regime, which Carter so mistakenly said “better a Theology than Communism”. What a moron.

Only Republican’s “got it” when it came to Iran. Even Roosevelt understood, I’m talking Teddy, not FDR although the latter got it too even though a Democrat, but he was being guided by Churchill who really got it. America was the only nation demanding reparations for Iran at the Paris Peace Conference after WWI devastated a neutral Persia. It was also American technician’s by the thousands who helped improve Iran’s port infrastructure so the 8 month backlog of ships could dock and unload in 3 days instead of 8 weeks. American technician’s also trained Iranian fighter pilots to become the best in the world, which some US Air Force Colonel’s referred to as better than their instructors. Iran was the only country in possession of the F-14 Tomcat other than the US herself.

It was American accountants that helped Reza Pahlavi settle Iranian debts and implement a system of checks and balances to prevent raging corruption after the Qajar Dynasty collapsed on itself. Most people don’t know Iran’s central bank, Bank Melli, was actually in London for almost 100 years. Never a vassal like India, Iran was considered a “protectorate” split into northern and southern zones of influence by the Russians and British. At one time, prior to the Bolsheviks taking Moscow, Russian Cossack Brigades controlled several cities in Northern Iran and were stuck there after the Bolsheviks rose to power. At that time, Trotsky and the rest immediately cancelled all debts owed by Iran to Imperialist Russia, returned territory taken by force, and withdrew their forces. It was at Iran’s behest some officers stayed behind to train Iranian officers. One of which was Reza Khan, who became Reza Pahlavi, founder of the Pahlavi Dynasty.

Again, in WWII, a neutral Persia was invaded to feed the Soviet front with supplies as the allies were at the brink of losing the war if Moscow fell. Persia risked a full blown invasion by Germany pouring down through the caucuses if she entered the war on the side of the allies. While neutrality meant not allowing the National Iranian Rail System to be used as the most effective way to deliver supplies to an increasingly battered Soviet Union that was getting crushed on all fronts until Hitler’s fatal mistake of turning to Leningrad, then Stalingrad instead of continuing to Moscow. This error bogged an unprepared, Blitzkrieg trained military down in one of the worst winters on the planet, not having learned from Napoleon’s invasion of Russia which destroyed his entire army without a real battle ever being fought.

The National Iranian Railway was the most direct route  to the Soviet front until Stalin’s massive counter-offensive in the dead of winter began the march to Berlin. Reza Pahlavi was forced to abdicate the Peacock Throne to his young son just shy of his 23rd birthday. He had little choice. Persia, known as the first true Aryan nation, not like the KKK in America or the Blue Eye Aryan’s of Hitler’s youth. It’s written that the cold war started at the Tehran Conference ending WWII, and also ended in Tehran with the overthrow of the Shah in 1979 and America’s humiliating 444 days of hell until the first few minutes of Reagan’s Presidency when the hostages lifted off the tarmack in their plane to go home. Once again, the mighty Persians dictated who the leader of America would be. Then there was Iran-Contra. Strange but true.

Israel was the primary arms supplier to Iran during the 9 year Iran-Iraq war, which Iran was the defender only to obtain the initiative after the first year and begin to defeat a confused and shocked Iraqi army unaccustomed to Iranian astuteness with their own terrain. With victory in hand, the unfaithful Ayatollah Khomeini, a non-Persian cleric chose to fight his Arab brother in a blood feud that cost millions upon millions of lives, mostly religious zealots who sent their children to the front as a necessary sacrifice they willingly made, knowing their children would never return. These were the uneducated masses behind the 1979 revolution. A war that ended when the US stepped in to prevent Baghdad from being conquered in 1988, which would have returned Iran’s former territory prior to the sudden creation of Iraq at the same time as Israel. Referred to in the Diplomatic Corp. as “enemies of convenience”. Prior to US’s intervention, the Iranians were pounding targets deep within Iraq forcing Saddam to send most of his air force to Jordan for safe keeping!

Persia, which has predominantly maintained her borders except what the Qajar Turks sold off in the 19th century as restitution for injustices brought upon by Imperialist Russia, the real threat to American Capitalism whence it became Soviet Russia in the hands of Stalin rather than Trotsky with Marxist ideals.  To put it simply, Iran is once again the dominant power in the GME. A fact which all of her Arab neighbor’s must contend with, as they have for three millenia.  What obfuscates the matter is a theological government with an autocratic structure ripe with repression of its masses, human rights violations, and a regime structure for which even the deepest insider cannot fully comprehend. Are the mullahs in charge or has a clever Ahmadi-Nejad declared open war with the clerical power base in Qom by proclaiming loud and wide that “the Supreme Leader Ayatollah Khamenei must be exorcised for he is possessed by the devil”? I couldn’t make this stuff up.

The corruption and cronyism in Tehran is at a peak never before reached, with hundreds of billions of petro-dollars creating a vast global network of military authority to challenge the “Great Satan” as they refer to America, for which the “Little Satan” as America refers to Iran, uses to terrorize and challenge US regional goals around the world giving the US the excuse she needs to militarize those areas.  And this is all driven by a vast Conspiracy according to Ahmadi-Nejad, who also claims 9/11 was inside job, as if that’s a shocker.  For 3000 years, Iran was the primary ally and protector of the Israelite’s, first freed by Cyrus the Great, referred to as the “anointed one”,  from slavery in Babylon and more recently, Reza Pahlavi the founder of the Pahlavi Dynasty was referred to as “the last anointed one” in the Old Testament and Iran continues to maintain the 2nd largest Jewish population in the Middle East other than Israel. Not to mention it’s the only Democracy and America’s only real ally against Arab fanaticism or Sunni Islam. A sham democracy yes, but nevertheless a struggling one waiting for the crippled “Velayateh Faqih” to die and never be replaced with another “Supreme Leader”.

Friend or Foe? With the destruction of Saddam and the Taliban, the allowance of Nuclear technology by the American’s and a sudden withdrawal while Iran is at it’s peak military strength suggests friend. But a lesson learned from the Nixon Doctrine, which was to arm Iran to the teeth with anything they wanted without the need for prior approval, led to a disturbingly incapable logistics and procurement network of arms incompatible with each other and an over-zealous King dying of cancer but deeply passionate about his countrymen, to the point of returning the two jets he left Iran on when he abandoned the country to this emotionless, corrupt cleric who the Shah should have allowed his all-mighty military, at one point stronger than France’s military, to crush. Even Saddam offered to assassinate Khomeini for the Shah since the Shah sent his military to aid Oman during an uprising that almost overthrew her Arab rulers. Sending only Persian soldiers, they kept their distance from the Omani Arabs and their women, and shipped in their own food, much like America did when she occupied Saudi Arabia.

The still unanswered question of why the Shah left puzzles many academics and historians. Abbas Milani, in his new book “The Shah”, which took him 10 years to write, suggests the Shah was timid and insecure, leaving the country with expectations of returning like he did after the 1952 Mossadeq coup that returned the Shah after a “vacation”, as was pronounced in 1979. Apparently, he left thinking the American’s had a plan to bring him back, but this time, Carter lied and the Shah took the bait.  Reality finally struck when General Oveissi, his most trusted General, put the Great King of Kings in a helicopter to fly over Tehran so that he could see with his own eyes the sea of masses who were for the first time chanting “Death to the Shah”. Until then, a “King who Reigns” was inseparable from Persia. A Persia without a King wasn’t Persia at all. Thus, the Shah was in denial, for whatever reason, I won’t get into as enough people have. But I will remind you that he was once truly loved, and would get in one of his many fast cars and drive around Tehran alone in his sporty convertible allowing his people to see him as equals, to the point where he would go into a market and buy some fruit alone, a practice that ended after two unsuccessful assassination attempts.

This Shah became so detached after 13 years of Prime Minister Hoveyda’s isolation of the Shah that he didn’t realize what he was losing and the historical ramifications, not to mention his historical responsibilities. As Thomas Jefferson wrote, freedom can only be preserved with the fresh blood of the masses who fight for it. The Shah chose to run, not fight, and the Great Military machine he built was left stranded with no choice but to return to barracks after their leader left them demoralized and humiliated.  Built to defend its borders from external threats, at one time gifting 25 F-5 Jet Fighters to the King of Jordan after Iran was flush with cash and generous to gift other Princes in the region, even those deposed decades earlier as he felt a kinship of sorts with them.

Quite a difference than 1962 when the country couldn’t even procure a desperately needed $5mm loan. 10 years later, Iran was a lender nation, quelling rebellions in Arab states to which Iran owed no allegiance other than Princely loyalty. Enough of my ranting about the past. Instead, I defer to the article by Stratfor which discusses not only the present but the future of the GME.

The US- Saudi Dilemma: Iran’s Reshaping of Persian Gulf Politics

By Reva Bhalla

Something extraordinary, albeit not unexpected, is happening in the Persian Gulf region. The United States, lacking a coherent strategy to deal with Iran and too distracted to develop one, is struggling to navigate Iraq’s fractious political landscape in search of a deal that would allow Washington to keep a meaningful military presence in the country beyond the end-of-2011 deadline stipulated by the current Status of Forces Agreement. At the same time, Saudi Arabia, dubious of U.S. capabilities and intentions toward Iran, appears to be inching reluctantly toward an accommodation with its Persian adversary.

Iran clearly stands to gain from this dynamic in the short term as it seeks to reshape the balance of power in the world’s most active energy arteries. But Iranian power is neither deep nor absolute. Instead, Tehran finds itself racing against a timetable that hinges not only on the U.S. ability to shift its attention from its ongoing wars in the Middle East but also on Turkey’s ability to grow into its historic regional role.

The Iranian Position

Iranian Defense Minister Ahmad Vahidi said something last week that caught our attention. Speaking at Iran’s first Strategic Naval Conference in Tehran on July 13, Vahidi said the United States is “making endeavors to drive a wedge between regional countries with the aim of preventing the establishment of an indigenized security arrangement in the region, but those attempts are rooted in misanalyses and will not succeed.” The effect Vahidi spoke of refers to the  Iranian redefinition of Persian Gulf power dynamics, one that in Iran’s ideal world ultimately would transform the local political, business, military and religious affairs of the Gulf states to favor the Shia and their patrons in Iran.

From Iran’s point of view, this is a natural evolution, and one worth waiting centuries for. It would see power concentrated among the Shia in Mesopotamia, eastern Arabia and the Levant at the expense of the Sunnis who have dominated this land since the 16th century, when the Safavid Empire lost Iraq to the Ottomans. Ironically, Iran owes its thanks for this historic opportunity to its two main adversaries — the Wahhabi Sunnis of al Qaeda who carried out the 9/11 attacks and the “Great Satan” that brought down Saddam Hussein. Should Iran succeed in filling a major power void in Iraq, a country that touches six Middle Eastern powers and demographically favors the Shia, Iran would theoretically have its western flank secured as well as an oil-rich outlet with which to further project its influence.

So far, Iran’s plan is on track. Unless the United States permanently can station substantial military forces in the region, Iran replaces the United States as the most powerful military force in the Persian Gulf region. In particular, Iran has the military ability to threaten the Strait of Hormuz and has a clandestine network of operatives spread across the region. Through its deep penetration of the Iraqi government, Iran is also in the best position to influence Iraqi decision-making. Washington’s obvious struggle in trying to negotiate an extension of the U.S. deployment in Iraq is perhaps one of the clearest illustrations of Iranian resolve to secure its western flank. The Iranian nuclear issue, as we have long argued, is largely a sideshow; a nuclear deterrent, if actually achieved, would certainly enhance Iranian security, but the most immediate imperative for Iran is to consolidate its position in Iraq. And as this weekend’s Iranian incursion into northern Iraq — ostensibly to fight Kurdish militants — shows, Iran is willing to make measured, periodic shows of force to convey that message.

While Iran already is well on its way to accomplishing its goals in Iraq, it needs two other key pieces to complete Tehran’s picture of a regional “indigenized security arrangement” that Vahidi spoke of. The first is an understanding with its main military challenger in the region, the United States. Such an understanding would entail everything from ensuring Iraqi Sunni military impotence to expanding Iranian energy rights beyond its borders to placing limits on U.S. military activity in the region, all in return for the guaranteed flow of oil through the Strait of Hormuz and an Iranian pledge to stay clear of Saudi oil fields.

The second piece is an understanding with its main regional adversary, Saudi Arabia. Iran’s reshaping of Persian Gulf politics entails convincing its Sunni neighbors that resisting Iran is not worth the cost, especially when the United States does not seem to have the time or the resources to come to their aid at present. No matter how much money the Saudis throw at Western defense contractors, any military threat by the Saudi-led Gulf Cooperation Council states against Iran will be hollow without an active U.S. military commitment. Iran’s goal, therefore, is to coerce the major Sunni powers into recognizing an expanded Iranian sphere of influence at a time when U.S. security guarantees in the region are starting to erode.

Of course, there is always a gap between intent and capability, especially in the Iranian case. Both negotiating tracks are charged with distrust, and meaningful progress is by no means guaranteed. That said, a number of signals have surfaced in recent weeks leading us to examine the potential for a Saudi-Iranian accommodation, however brief that may be.

The Saudi Position

Not surprisingly, Saudi Arabia is greatly unnerved by the political evolution in Iraq. The Saudis increasingly will rely on regional powers such as Turkey in trying to maintain a Sunni bulwark against Iran in Iraq, but Riyadh has largely resigned itself to the idea that Iraq, for now, is in Tehran’s hands. This is an uncomfortable reality for the Saudi royals to cope with, but what is amplifying Saudi Arabia’s concerns in the region right now — and apparently nudging Riyadh toward the negotiating table with Tehran — is the current situation in Bahrain.

When Shiite-led protests erupted in Bahrain in the spring, we did not view the demonstrations simply as a natural outgrowth of the so-called Arab Spring. There were certainly overlapping factors, but there was little hiding the fact that Iran had seized an opportunity to pose a nightmare scenario for the Saudi royals: an Iranian-backed Shiite uprising spreading from the isles of Bahrain to the Shiite-concentrated, oil-rich Eastern Province of the Saudi kingdom.

This explains Saudi Arabia’s hasty response to the Bahraini unrest, during which it led a rare military intervention of GCC forces in Bahrain at the invitation of Manama to stymie a broader Iranian destabilization campaign. The demonstrations in Bahrain are far calmer now than they were in  mid-March at the peak of the crisis, but the concerns of the GCC states have not subsided, and for good reason. Halfhearted attempts at national dialogues aside, Shiite dissent in this part of the region is likely to endure, and this is a reality that Iran can exploit in the long term through its developing covert capabilities.

When we saw in late June that Saudi Arabia was willingly drawing down its military presence in Bahrain at the same time the Iranians were putting out feelers in the local press on an almost daily basis regarding negotiations with Riyadh, we discovered through our sources that the pieces were beginning to fall into place for Saudi-Iranian negotiations. To understand why, we have to examine the Saudi perception of the current U.S. position in the region.

The Saudis cannot fully trust U.S. intentions at this point. The U.S. position in Iraq is tenuous at best, and Riyadh cannot rule out the possibility of Washington entering its own accommodation with Iran and thus leaving Saudi Arabia in the lurch. The United States has three basic interests: to maintain the flow of oil through the Strait of Hormuz, to reduce drastically the number of forces it has devoted to fighting wars with Sunni Islamist militants (who are also by definition at war with Iran), and to try to reconstruct a balance of power in the region that ultimately prevents any one state — whether Arab or Persian — from controlling all the oil in the Persian Gulf. The U.S. position in this regard is flexible, and while developing an understanding with Iran is a trying process, nothing fundamentally binds the United States to Saudi Arabia. If the United States comes to the conclusion that it does not have any good options in the near term for dealing with Iran, a U.S.-Iranian accommodation — however jarring on the surface — is not out of the question.

More immediately, the main point of negotiation between the United States and Iran is the status of U.S. forces in Iraq. Iran would prefer to see U.S. troops completely removed from its western flank, but it has already seen dramatic reductions. The question for both sides moving forward concerns not only the size but also the disposition and orientation of those remaining forces and the question of how rapidly they can be reoriented from a more vulnerable residual advisory and assistance role to a blocking force against Iran. It also must take into account how inherently vulnerable a U.S. military presence in Iraq (not to mention the remaining diplomatic presence) is to Iranian conventional and unconventional means.

The United States may be willing to recognize Iranian demands when it comes to Iran’s designs for the Iraqi government or oil concessions in the Shiite south, but it also wants to ensure that Iran does not try to overstep its bounds and threaten Saudi Arabia’s oil wealth. To reinforce a potential accommodation with Iran, the United States needs to maintain a blocking force against Iran, and this is where the U.S.-Iranian negotiation appears to be deadlocked.

The threat of a double-cross is a real one for all sides to this conflict. Iran cannot trust that the United States, once freed up, will not engage in military action against Iran down the line. The Americans cannot trust that the Iranians will not make a bid for Saudi Arabia’s oil wealth (though the military logistics required for such a move are likely beyond Iran’s capabilities at this point). Finally, the Saudis can’t trust that the United States will defend them in a time of need, especially if the United States is preoccupied with other matters and/or has developed a relationship with Iran that it feels the need to maintain.

When all this is taken together — the threat illustrated by Shiite unrest in Bahrain, the tenuous U.S. position in Iraq and the potential for Washington to strike its own deal with Tehran — Riyadh may be seeing little choice but to search out a truce with Iran, at least until it can get a clearer sense of U.S. intentions. This does not mean that the Saudis would place more trust in a relationship with their historical rivals, the Persians, than they would in a relationship with the United States. Saudi-Iranian animosity is embedded in a deep history of political, religious and economic competition between the two main powerhouses of the Persian Gulf, and it is not going to vanish with the scratch of a pen and a handshake. Instead, this would be a truce driven by short-term, tactical constraints. Such a truce would primarily aim to arrest Iranian covert activity linked to Shiite dissidents in the GCC states, giving the Sunni monarchist regimes a temporary sense of relief while they continue their efforts to build up an Arab resistance to Iran.

But Iran would view such a preliminary understanding as the path toward a broader accommodation, one that would bestow recognition on Iran as the pre-eminent power of the Persian Gulf. Iran can thus be expected to make a variety of demands, all revolving around the idea of Sunni recognition of an expanded Iranian sphere of influence — a very difficult idea for Saudi Arabia to swallow.

This is where things get especially complicated. The United States theoretically might strike an accommodation with Iran, but it would do so only with the knowledge that it could rely on the traditional Sunni heavyweights in the region eventually to rebuild a relative balance of power. If the major Sunni powers reach their own accommodation with Iran, independent of the United States, the U.S. position in the region becomes all the more questionable. What would be the limits of a Saudi-Iranian negotiation? Could the United States ensure, for example, that Saudi Arabia would not bargain away U.S. military installations in a negotiation with Iran?

The Iranian defense minister broached this very idea during his speech last week when he said, “The United States has failed to establish a sustainable security system in the Persian Gulf region, and it is not possible that many vessels will maintain a permanent presence in the region.” Vahidi was seeking to convey to fellow Iranians and trying to convince the Sunni Arab powers that a U.S. security guarantee in the region does not hold as much weight as it used to, and that with Iran now filling the void, the United States may well face a much more difficult time trying to maintain its existing military installations.

The question that naturally arises from Vahidi’s statement is the future status of the U.S. Navy’s 5th Fleet in Bahrain, and whether Iran can instill just the right amount of fear in the minds of its Arab neighbors to shake the foundations of the U.S. military presence in the region. For now, Iran does not appear to have the military clout to threaten the GCC states to the point of forcing them to negotiate away their U.S. security guarantees in exchange for Iranian restraint. This is a threat, however, that Iran will continue to let slip and even one that Saudi Arabia quietly could use to capture Washington’s attention in the hopes of reinforcing U.S. support for the Sunni Arabs against Iran.

The Long-Term Scenario

The current dynamic places Iran in a prime position. Its political investment is paying off in Iraq, and it is positioning itself for negotiation with both the Saudis and the Americans that it hopes will fill out the contours of Iran’s regional sphere of influence. But Iranian power is not that durable in the long term.

Iran is well endowed with energy resources, but it is populous and mountainous. The cost of internal development means that while Iran can get by economically, it cannot prosper like many of its Arab competitors. Add to that a troubling demographic profile in which ethnic Persians constitute only a little more than half of the country’s population and developing challenges to the clerical establishment, and Iran clearly has a great deal going on internally distracting it from opportunities abroad.

The long-term regional picture also is not in Iran’s favor. Unlike Iran, Turkey is an ascendant country with the deep military, economic and political power to influence events in the Middle East — all under a Sunni banner that fits more naturally with the region’s religious landscape. Turkey also is the historical, indigenous check on Persian power. Though it will take time for Turkey to return to this role, strong hints of this dynamic already are coming to light.

In Iraq, Turkish influence can be felt across the political, business, security and cultural spheres as  Ankara is working quietly and fastidiously to maintain a Sunni bulwark in the country and steep Turkish influence in the Arab world. And in Syria, though the Alawite regime led by the al Assads is not at a breakpoint, there is no doubt a confrontation building between Iran and Turkey over the future of the Syrian state. Turkey has an interest in building up a viable Sunni political force in Syria that can eventually displace the Alawites, while Iran has every interest in preserving the current regime so as to maintain a strategic foothold in the Levant.

For now, the Turks are not looking for a confrontation with Iran, nor are they necessarily ready for one. Regional forces are accelerating Turkey’s rise, but it will take experience and additional pressures for Turkey to translate rhetoric into action when it comes to meaningful power projection. This is yet another factor that is likely driving the Saudis to enter their own dialogue with Iran at this time.

The Iranians are thus in a race against time. It may be a matter of a few short years before the United States frees up its attention span and is able to re-examine the power dynamics in the Persian Gulf with fresh vigor. Within that time, we would also expect Turkey to come into its own and assume its role as the region’s natural counterbalance to Iran. By then, the Iranians hope to have the structures and agreements in place to hold their ground against the prevailing regional forces, but that level of long-term security depends on Tehran’s ability to cut its way through two very thorny sets of negotiations with the Saudis and the Americans while it still has the upper hand.

The U.S.-Saudi Dilemma: Iran’s Reshaping of Persian Gulf Politics is republished with permission of STRATFOR.

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