Wednesday, February 7, 2007

Frank Barbera at Large (Part I of II)

Frank Barbera at Large (Part I of II)SocialTwist Tell-a-Friend
February 7, 2007

Fari: What are some of the key drivers shaping your view of the capital markets as we move ahead in the early months of 2007 ?

Frank: I believe the geo-political risk in the Middle East is definitely paramount in my view, as the situation in Iraq has deteriorated into a sectarian civil war, between Sunni’s and Shiites, and could potentially be threatening a larger regional conflict. In this vein, I would not be surprised to see the US and Israel lash out at Iran, or vice-versa, at some point in 2007. In my view, an expanded conflict with Iran would threaten the security of the worlds Oil supply through the very narrow Strait of Hormuz. This type of conflict may be highly problematic, in that the gulf region contains much of the world’s energy infrastructure, and Iran is well armed with ballistic missiles that are within striking reach of that infrastructure.

Fari: What evidence do you see that points you in this direction of heightened risk for expanding war?

Frank: Well, the US recently appointed an Admiral, Admiral William Fallon, as head of CENTCOM, the command center for the Middle East. It is a highly unusual move to appoint an Admiral to oversee direction of a war, that at present is defined by two land wars, Iraq and Afghanistan. Normally, a General from the Army would be in charge where ground wars are concerned, yet an Admiral was just appointed. Some believe that this hints Iran could be the next combatant and where Iran is concerned, a naval conflict would definitely be square one. For the US, in order to keep the troops in the Iraq re-supplied, control over the Persian Gulf is essential, and that is the domain of the Navy. The US has also sent minesweepers, Patriot Missile batteries (anti-missile – missiles) and more surface ships to the region which now host two carrier battlegroups and an anti-submarine attack helicopter carrier, the USS Boxer. These types of hardware hint at larger problems ahead, -- and I might add, I hope I am wrong, perhaps this is just a bluff to intimidate Iran, but the parts and pieces, are imposing.

Fari: So how would this affect the markets ?

Frank: Well, I think any further tension in the Persian Gulf could definitely force Oil prices higher, and at the very least set a floor in place between $55 and $60. In my view, that is bullish for Oil Stocks and Oil Service companies, most of which are really priced right now for $40 Oil. Yes, it is true that Energy Stocks are reporting sequentially lower earnings this year as a result of the rather savage sell off seen late last year. That said, I think Energy stocks are quite attractive, especially the drillers which have long term contracts locking in, in many cases, much higher day rates. Mind you, I would be careful over the next week or two with a lot of these stocks as we are smack in the middle of earnings announcement season, and in some cases, we could see some significant dips. But overall, I would be looking to be a buyer on weakness. I also think that near term, Crude Oil could pull back toward $55 from current levels near $60 and that could pressure individual names. In my view, where Schlumberger (SLB), or a TransOcean (RIG), or a Global Santa Fe (GSF) is involved, weakness in the near term would be a gift.

Editor's Note: Part II will be published on Friday.

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