Today's Coffee - The Geopolitical Factor

Geopolitical issues are headlining the news again, as the dry winds of summer rekindle brush fires across the world. It seems almost orchestrated how unrest has resumed in Palestine, Lebanon, Pakistan, and the never ending fire of Iraq seems set to return to a furious state again. At the same time, hardline rhetoric has supplanted discussion of negotiation between Iran and the U.S. In Nigeria, rebel assaults and kidnappings have increased. Conflict is following a trend of escalation that seems sure to continue. These issues are important to the dynamic stock market, and should not be discounted as just noise. The geopolitical factor is one that is increasing in importance as a driver of stock price and it's time to pay attention.

Iran has warned Israel that another invasion of Lebanon would be met differently than the passive reaction Iran undertook last time around. Hezbollah seems inspired to overthrow the Lebanese government. At the same time, another Iranian ally, Hamas, is engaged in a new round of civil war with the Fatah Party. This time around, Israel is actively assisting Fatah, arresting Hamas leaders and bombing Hamas targets. They should just paint a bull's-eye on the forehead of Mahmoud Abbas, as Palestinians are likely to develop a bitter for taste for a leader that is assisted by Israel. Wall Street Greek makes bold predictions of all sort, and I anticipate Mahmoud Abbas' days are numbered. That's not a good thing for Palestine.

In Pakistan, an Islamic revolution under the cover of democratic movement threatens to unseat an important American ally. Imagine an Iranian style revolution in a nuclear Pakistan. Wall Street Greek believes it is inevitable. For now, Musharraf's army is powerful enough to stave off such efforts, and his resolve has been forceful enough to put down his enemies. Still, there is likely some dissent within his ranks, and risk of a situation altering bomb or bullet finding its way to the Pakistani leader is high. Al Qaeda has targeted him before, and has had success in eliminating the leaders of other opponents in such fashion.

In Iraq, Muqtada al-Sadr has reemerged from the cover of his snake hole. With September commonly mentioned as a date to mark the beginning of a withdrawal, the summer portends to be a bloody one. One has to wonder why American troops would be pulled, unless they were considered in harms way should we undertake a mission against Iran sometime to follow.

The IAEA issued a rather ominous report yesterday, stating that Iran now had nuclear knowledge, and that the world's focus should shift to stopping the ancient civilization from proceeding to industrial scale production. The United States stepped up the rhetoric, stating that a greater intensity of pressure should be applied than the United Nations is seeking. The U.S. is now engaged in naval exercises in the Persian Gulf, while Iran continues to issue threats.

With earnings season behind us, geopolitical concerns and next week's GDP revision seem likely to start a bearish trend after Memorial Day. Its duration is very likely to find high correlation to the direction of GDP revision and the state of geopolitical affairs.

Existing home sales:

Existing home sales showed inconsistency with yesterday's new home sales rise, as I anticipated. We wrote, "Wall Street Greek believes new housing benefits from a higher propensity to offer incentives and cut prices, so existing sales should not show the kind of upside surprise seen today in new housing." Existing sales for April fell to an annual pace of 5.99 million, down from 6.12 million in March. In fact, the rate was the lowest seen in four years. Existing home sales dominate the housing market, and are therefore more important than new home sales as a barometer for overall housing health. My how the outlook can change in just one day, in the eyes of the popular press that is. We have held to our conviction here. I wish you all a great holiday weekend.

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