MARKETVIEWS.TV
Interview
with Ike Iossif
Ike
Iossif (President/C.I.O. of Aegean Capital
Group, Inc.) talks about oil, the dollar,
defense and gold stocks.
By
Dan Bistline
Sunday
11/17/2002
12:30 PM PST
D.B.
Hi Ike, back in April of 2001, you were among the very few to warn
about the possibility of a terrorist attack on U.S. soil
(see
Weekly
Updates Q2-2001, and
Patriotism
Proves a Poor Investment Guide, by Aaron
L. Task) So, I thought it may be a good idea to ask you to
share your thoughts about the current situation with Iraq. The
equity markets, and the oil markets seem to indicate that war with
Iraq has been averted, what do you think?
I.I.
First of all let me make something very clear, I am not a
National Security expert, however, because I invest on behalf
of foreign investors on a global basis, I am forced to look at
geopolitical factors in formulating a global investment strategy,
thus, I must have an opinion on geopolitical matters. What I'll
discuss with you is simply my opinion -as a portfolio manager- and
it is based upon our research, it should not be regarded as an
"expert" opinion, and it does not reflect a judgment
whether certain actions taken by the U.S. and others are
justified, or, unjustified. As a portfolio manager, I am only
interested in how certain actions, and geopolitical
developments may affect the fortunes of my clients.
It
is my opinion, that war with Iraq is almost inevitable, not
because Iraq poses a present and clear danger to our National
Security but because a) the situation in Saudi Arabia poses a
clear and present danger to vital economic interests b) Iraq will
eventually pose a real danger 5 years down the road, and c) the
National Security Strategy document released by the Bush
Administration on September 20, unmistakably indicates a clear
departure from previous approaches, it speaks of "American
Internationalism" and it advocates global and permanent U.S.
military and economic domination. (you can download the
President's National Security Strategy document by clicking here)
Let's
elaborate on these themes one by one:
A)
The situation in Saudi Arabia poses a clear and present danger to
vital economic interests. At the moment two out of the three
countries in the Middle East with the biggest oil reserves -Iraq
and Iran- are ruled by regimes that are unfriendly to the U.S. and
Western interests. That leaves with only one country that is
currently friendly to the U.S., and accommodates our vital
economic interests, Saudi Arabia -which happens to have the most
oil reserves. However, Saudi Arabia is becoming increasingly
unstable for the following reasons: 1) Fifty percent of Saudi
Arabia's population is under 18, most are educated in religious
schools that advocate hate towards the West in general, and
against the U.S. in particular 2) unemployment exceeds 16% and it
is rising 3) Saudi Arabia is not a democracy, it is ruled by a
corrupted absolute monarchy. The last time we had a combination of
lot's of angry young people with nothing to do, in a country ruled
by a corrupt monarchy was in Iran, and we all know what followed .
The point is, the Saudi regime could fall, just as the Shah
regime fell in Iran in the late '70s. Such a development will
place all three countries with the biggest oil reserves -Iraq,
Iran, Saudi Arabia- under the control of regimes that are hostile
to the U.S. This is an unacceptable outcome, and one that neither
the U.S., or its Western allies can afford to allow it to
happen. So, the U.S. has two choices, either get involved in
a potential civil war in Saudi Arabia in its effort to support the
current regime, or, take control of the Iraqi oil fields, and thus
denying unfriendly regimes in Tehran, Riyadh, and Baghdad to harm
our economic interests. Moreover, by taking over Iraq, the U.S. is
closing in on Iran by having military bases in Afghanistan,
Uzbekistan, Turkmenistan, Azerbaijan and Iraq, thus making it
easier to overthrow Iran's regime later on. In other words, the
reasons for going into Iraq now, have nothing to do with National
Security, and Iraq's development of WMD. It has to do with the
possibility of losing Saudi Arabia's oil fields, and the need to
counterbalance that. If indeed the administration was
worried about Iraq developing nuclear weapons and passing them on
to Al Qaeda, then we would already be at war with North Korea.
North Korea already has a robust nuclear weapons program and it is
strapped for cash. Why would Al Qaeda wait for Iraq to develop a
nuclear weapon, when they can buy one RIGHT NOW from North Korea?
Therefore, regardless of what Iraq does, or, does not do, the U.S.
will find a reason to invade in order to secure the flow of oil,
in the event the current regime in Saudi Arabia falls.
B)
Iraq will eventually pose a real National Security threat 5 years
down the road. The worst thing that can happen is for Iraq to
fully comply with the U.N. resolutions, while Hussein is still in
charge! The reasons is this: such compliance will lift all
sanctions against Iraq, which means Hussein will again have
billions of dollars from the sale of Iraqi oil, to re-constitute
his weapons programs and indeed develop a nuclear bomb within the
next 4-5 years. The problem is that Hussein will never change,
he'll always be the criminally insane murderous thug that he
is, thus, if you leave him in power with access to oil
money, he'll find a way to re-constitute his weapons programs.
That means Iraq is perceived as a present and future enemy.
According to the National Security Strategy report, the U.S.
has now embarked on an aggressive military and foreign
policy, which embraces pre-emptive attacks against perceived
enemies. If Iraq is perceived as a present and future enemy, then
according to the latest doctrine adopted by the Bush
administration, an attack on Iraq is just a matter of time, and it
will come sooner, than later.
C)
the National Security Strategy document released by the Bush
Administration on September 20, unmistakably indicates a clear
departure from previous approaches, it speaks of "American
Internationalism" and it advocates global and permanent U.S.
military and economic domination. A victorious war with
Iraq will allow the U.S. to create permanent military bases
in that country, from which it can affect political outcomes
in the Middle East, including deposing the current Iranian regime.
Such a development is called for, under the implementation of the
"American Internationalism" doctrine. It
should be noted that the administration has offered no "exit
strategy" from Iraq, for a very simple reason, the U.S.
will NOT be exiting Iraq any time soon. U.S. forces will be there
to stay, just as they are in Japan and Germany half a
century after the end of WWII. Moreover, an invasion and
occupation of Iraq, will create such chaos, that will make it
impossible to leave, even if we wanted to! The Administration's
beliefs that its actions will result in a "democratic, and
peaceful" Iraq, that will also be friendly to Western
economic interests by way of cheap oil, are based on fantasy,
arrogance, and ignorance. Within the next 2-3 years, Iraq will
be on the brink of a civil war, oil will be between $60 and $80
per barrel, and young Muslims from all over the world will be
forming long lines at terrorist recruiting camps, to become
suicide bombers!
Thus,
for all the above reasons, I believe that a confrontation with
Iraq is inevitable. Iraq's goal is to avoid a war during the
winter, because it knows that the U.S. is highly unlikely to
embark on a war in the desert during the summer, thus, it will
have to wait until next year. I do not think this is acceptable to
the U.S., because within a year the Saudi regime, and the Saudi
oil fields may be history, a risk that U.S. policy makers believe
they simply can't take.
D.B. If the Administration succeeds in
removing such risk, wouldn't that be viewed by the markets as a
significant positive development with bullish
ramifications, and
where does that leave the price of oil??
I.I.
An invasion and
occupation of Iraq, will create such chaos, that will make it
impossible for U.S. troops to reduce their presence, even if policy
makers wanted to. Iraq will be a black hole, forcing the U.S.
to throw good money after bad for years to come, while neglecting
much needed domestic investment in areas such education, and health
care. The Administration's beliefs that its actions will
result in a "democratic, and peaceful" Iraq, that will also be
friendly to Western economic interests by way of cheap oil, are
based on fantasy, arrogance, and ignorance. Within the next 2-3
years, Iraq will be on the brink of a civil war, oil will be between
$60 and $80 per barrel, and young Muslims from all over the world
will be forming long lines at terrorist recruiting camps, to become
suicide bombers!
D.B. $60-$80 per barrel? How do you
envision that happening?
I.I.
Initially -as we get closer and closer to the invasion- there would be a spike up, but
eventually -if everything goes as planned- the price of oil will come
down for 2-3 months, and then it will rise back up to the $36-$38
level. Then we ought to see a sideways market lasting about 6-8
months, following that consolidation, we should see a steady
multi-year rise in prices. Consequently, investors need to
focus on the prospects for oil companies. The doctrine of
"American Internationalism" will allow American and other
western companies -in all fields- to expand in areas where
now they are prohibited from. Large oil companies such as
Chevron, Exxon, Occidental will be huge beneficiaries of this
doctrine if it is fully implemented. And if it is not, they will
still benefit from higher oil prices! Thus, over the next few
weeks I'll be building a 7% position in our trading accounts,
and a 10%-12% in our investment accounts in oil and natural gas
companies, which I intend to keep for several months, and years.
D.B.
What do you like in the sector?
I.I.
My top pick would be OXY, I also like RD, CVX, XOM,
SII, BJS, TOT and couple of second tier companies such DNR and COP.
D.B.
I would imagine that another huge beneficiary of the doctrine of
"American Internationalism" should be the defense
sector, correct?
I.I.
Absolutely. People need to be aware of the fact that the
proponents of the "American Internationalism" doctrine
are holding key policy positions in the Bush
administration. These people are: Paul Wolfowitz/
Deputy Defense Secretary, John Bolton/ Undersecretary
Of State, I. Lewis Libby/ Chief of Staff to Vice
President Dick Cheney, Dov Zakheim/ Comptroller for
the Defense Department, Stephen Cambone head of the Pentagon's
Office of Program, Analysis and Evaluation, Eliot Cohen and Devon
Cross members of the Defense Policy Board. They are among the
authors of a report titled " Rebuilding America's
Defenses" issued in September of 2000 by the "Project
For The New American Century" (you can download the
report by clicking here)
That report has become the "blue print" of the current
U.S. foreign and military policy. The report calls for a worldwide
peace imposed and maintained by the U.S., a plan labeled as
"Pax Americana," or "American peace." To
implement such a plan, the U.S. would need to dramatically expand
its global military presence and its military budget. According to
that report, the U.S. would have to increase defense
spending from 3 percent of gross domestic product to as much as
3.8 percent. Incidentally, for next year, the Bush administration
has proposed a defense budget of $379 billion, which is 3.8
percent of GDP! Assuming the Bush administration and the
Republicans remain in power defense budgets will increase in order
to implement the plan. Accordingly, I favor the defense sector. Over
the next few weeks I'll be building a 7% position in our trading
accounts, and a 10%-12% in our investment accounts, which I
intend to keep for as long as the Republicans control both the
Executive and the Legislative branches of government.
D.B.
Which companies do you like?
I.I.
NOC, ATK, TDY, RTN, AIR, ARXX, AVL, BA, CW, GD. I really like TOD,
EASI and UDI.
D.B.
How is all that going to affect the U.S. dollar?
I.I.
The dollar is a whole different story, at least for the next 12-18
months. I believe it is going lower. The FED's recent decision to
lower rates by 50 bps, was intended -in my opinion- to accomplish
two things a) instill confidence and b) lower the dollar. A lower
dollar will bring inflation, which may help American companies to
restore some pricing power and improve profits. In addition,
the U.S is frustrated with Japan's and Germany's reluctance to
enact serious structural reforms. Both Japan and Germany have put
off much needed reforms counting on their exports to the U.S. to
bail them out. The truth is, we can't have a robust global
economic recovery when two of the world's three largest
economies are dragging their feet. A lower dollar, will reduce
their exporting ability and force them to make serious structural
reforms at home. Thus, I do not expect the U.S. to make any
serious effort to support the dollar, as long as the decline is
orderly.
D.B.
If the dollar declines, how is that going to affect the equity
markets?
I.I.
Theoretically, it should have an adverse impact on equities
for the next 6-9 months, assuming it continues to decline,
however, in a perverse way, it will help bonds which in turn, may
help stocks!. It
should be noted that foreign holdings of US Treasuries, agencies,
corporate bonds and US equities are presently at or near record
highs, which means that foreigners have NOT sold, yet! A 5%
reduction to exposure in U.S. assets by foreigners can have
a drastic impact across a number of classes of assets. The
International Monetary Fund estimates that 18.3% of all US
long-term securities were foreign owned at the end of 2001; that
works out to roughly $4.9 trillion in dollar-based assets held by
foreigners. Just a 5% reduction in exposure to U.S. assets would
involve the sale of approximately 245 billion worth of U.S.
securities, that's something that can't be ignored.
D.B.
What currencies do you like?
I.I.
New Zealand dollar, and the NOK, especially the NOK, because of
Norway's oil reserves. Any temporary disruption in oil supplies
from the Middle-East should bode well for Norway.
D.B.
How are you positioning your accounts?
I.I.
Over the next few weeks I'll be building a 10% position in
international bond funds
D.B.
I guess you must like gold.
I.I.
Yes, I do as a part of a diversified portfolio. I currently have a
7.5% position in our investment accounts, and a 5% positions in
our trading accounts, I intend to increase both by 2.5% if gold
closes above $330 per ounce, and the XAU closes above 71.
D.B.
What are you holding now?
I.I.
MDG, NEM, and GLG. I'll add GG and ASA.
D.B.
Is there a "top pick" for next week?
I.I.
Well, the stock I like the most, is a Canadian oil and gas
company, Tallisman Energy, symbol TLM, I like it as long as it
holds above 33.
D.B.
thank you Ike, we'll talk again next week.
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