Straits of Hormuz

Charts: Because of bad news from the Euro-crisis, in early going, the S&P 500 crashed down through the 1270 breakout level we talked about yesterday. The index crossed above and below 1270 six times in a hard fought battle for support throughout the morning. At midday support finally held and this technically driven market crawled fitfully up for a modest gain. So the nascent bull market is still intact.

Volatility has come down sharply, which is bullish. The spot VIX measures implied or expected volatility for the next 30 days, this is what traders simply call the VIX. For you and me (long only stock investors, not options traders) it is a forecasting tool and it is once again becoming useful. The spot VIX has over the past couple months screeched downward, again this is good. The February VIX is elevated, this is bad. The VIX's for the next few months ahead are all higher because of the vast amount of Euro debt that needs to be rolled over in Q1. These coming debt auctions will give us all a stomach churning white knuckle ride.

Volatility has come down but it is still very high. I look at my own portfolio today and reach for the Maalox bottle. Railroad supplier Koppers Holding (KOP) is down 2%. My other railroad supplier Wabtec (WAB) is up 2%. There is no news to explain the divergence, just nerves. We are all very scared. Where's my Maalox?

Fundamentals: American employment is strengthening because the extended unemployment benefits are set to expire in 2 months. There are 3.4 million unfilled jobs openings right now in America. They remain unfilled because of these benefits. When the benefits go away, unemployment will plunge. Obama wants to extend the bennys another year. This would be incredibly toxic to the now strengthening recovery. From a political perspective, Obama is running circles around the Republicans. He is eating their lunch. His competence is a danger to the stock market.

The Pentagon's Long War: Iran used to be able to rattle its saber and oil prices would go up. This would obviously help Iran. Now Iran rattles its saber and world oil prices go up, but the price Iran gets for its oil goes down. It is giving oil away to Greece for free, getting nothing more than IOUs. China is demanding lower and lower prices from Iran as sanctions bite deeper and deeper.

Iran is more desperate than most military experts think. Iran is saying it will close the Straits of Hormuz if the US 5th Fleet sends one of its two aircraft carrier battle groups into the Strait. Also, Iran is saying if there are any more sanctions, then it will close the Strait. Since it made that threat there have been more sanctions.

Military experts calculate the strength of the Iranian Navy compared to the 5th Fleet and say it would be suicide for the bad guys to attack the good guys. Furthermore, if there were such an attack the US would take out Iran's nuclear program and the rest of the world wouldn't bat an eye. All of this is true.

But Iran can do other things besides a frontal attack on the 5th Fleet. Namely, it can sow the Strait with mines. If a few oil tankers were to run into Iranian mines and blow up there is a good chance that the 5th Fleet would do nothing more than dispatch mine sweepers. This would lead to a slow motion ratcheting up of the conflict, not a decisive blow against Iran. This would be very bad. We all forget that the US Navy fought a mini-war with Iran's Navy over the course of three months in the late 80s. That war started because of mines and it was just the low key affair I am describing.