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Fuel to the Fire
New York: February 27, 2012
By John Stephenson

In a matter of weeks, investor sentiment has turned from worry to growing optimism. The Dow Jones Industrial average briefly touched the 13,000 mark, a level it last saw back in 2008, before the global financial crisis hit. Stock markets around the world have been moving higher, along with commodities such as gold and oil. This newfound optimism stands in stark contrast to the market's mood as recently as last December when doom and gloom pervaded trading floors. With Greece's debt crisis threatening to undermine the eurozone, many investors feared several simultaneous meltdowns that would drag the global economy over the cliff.

But today, investors are ebullient, sending markets higher. The key catalyst for the change in sentiment was the December decision by the European Central Bank (ECB) to provide virtually unlimited amounts of three-year money to European banks at rock bottom rates of only 1 percent. Banks eagerly lapped up the central bank financing and by the end of 2011, European banks had borrowed a staggering €489 billion. The good times are likely to keep on rolling, because this coming Tuesday, the ECB has scheduled a second offering of three-year loans for European financials. This wave of cash has helped propel European stock markets to double digit returns since the beginning of the year despite evidence that the continent is slipping into recession.

The Bank of Japan has been adding fuel to the fire by announcing that it will push an additional ¥10 trillion ($123 billion) of new money into its economy. To jump-start Britain's lacklustre economy, the Bank of England has announced plans to pump ₤50 billion ($79 billion) of fresh cash into the economy, while the U.S. Federal Reserve is on record saying they expect to keep short-term interest rates close to zero at least through late 2014.

With central bankers around the world signalling the all clear, stocks and commodities have been heading higher. Oil has surged to almost $110 as easy money and worries over an Iranian conflict intensify. Oil spiked on Friday as a report from the United Nations' nuclear watchdog said that Iran has increased its production of high-grade uranium over the past six months. The report made it clear that Iran is moving rapidly to produce nuclear fuel at a deep underground site that both the United States and Israel have said is virtually invulnerable to attack. The production facility is in a mountain near the holy city of Qum.

The West's response to the escalating crisis so far has been to try and isolate Iran diplomatically and to cut Iran off from the international financial system, announcing coordinated sanctions aimed at its central bank and commercial banks. In retaliation for the sanctions, Iran vowed to block the Strait of Hormuz, a vital oil transit point. On February 19th, Iran's government ordered a halt of oil exports to Britain and France and signalled that the ban on oil shipments could be extended to other members of the 27-nation European Union.

With the stakes so very high, Israel has been warning the United States that they can no longer sit back and wait for Iran to develop nuclear weapons. Over the weekend, the Washington Post ran an opinion piece claiming that U.S. Defense Secretary Leon Panetta believes that an Israeli strike against the Iranian facilities is likely in the next several months. According to the Post, Mr. Panetta "believes there is a strong likelihood that Israel will strike Iran in April, May or June before Iran enters what Israelis described as a 'zone of immunity' to commence building a nuclear bomb." When asked about the Post's piece by reporters, Mr. Panetta did not deny the claim.

With the pressure mounting, oil has been on fire lately and will likely move much higher in the weeks ahead as strong demand and sluggish supply run smack into the geopolitics of oil. Savvy investors looking to profit from the uncertainties in the weeks ahead, should consider an investment in the energy service sector or the Canadian oil sands producers that have long-lived oil reserves in the ground in a stable country.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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