..DUE TO EMOTIONAL TRAUMA SUFFERED FROM PITTSBURGH STEELER SUPER BOWL LOSS.

Last week I discussed what would be the effect on oil prices if Egypt’s revolution was the first of many in the Middle East? During this last week I reviewed a study my firm compiled several years ago involving a theoretical Iran/Israeli conflict scenario and the closing of the Strait of Hormuz. I reviewed a list of energy companies who source their oil and natural gas outside the Persian Gulf and whose share price would be lifted if the flow of oil from the Persian Gulf were threatened. I am reporting back to you: these stocks have already surged due to higher oil prices. I have concluded that purchasing these stocks at their current price has a high level of risk (in the event Egypt and other Middle East countries’ unrest do not worsen). For this reason, we recommend not buying at this time- instead closely watch the developments within Egypt.  CLICK HERE  for one critical development to watch. 

The greatest accomplishment is not in never falling, but in rising again after you fall.

Vince Lombardi

Further information about my emotional state is available at the top of The Weekly Commentary. I think Vince Lombardi’s motivational quote comes to mind: wait until next season, Steelers – rise again!

The economy continues to give us mixed signals. Here is a detailed list of these signals:

Positives:

1) ISM manufacturing and services indices solid
2) ABC confidence rises 3 pts and is 1 pt within the best since Sept ’08
3) German unemployment rate falls to 7.4%, the lowest since Mar ’92.
4) Canada reports blowout jobs #, 630k adjusted for US population size
5) Debt of Spain, Italy, Portugal, Greece and Ireland rallying in anticipation of expanded EFSF program
6) Avg hourly earnings rise twice expectations in Jan payroll report
7) Jan retail comps better than expected

Negatives:

1)Treasury yields break out across the curve, yes economy improving but inflation pressures building
2) Bernanke ignores market signals and company commentary on potential input cost pressure pass thru and he continues full speed ahead
3) China state sector manufacturing PMI falls to 5 month low
4) Euro Zone CPI up 2.4%, most since Oct ’08

Let’s use the Iranian rising of 1979 as a model. It had many elements involved, from Communists, to liberals to moderate Muslims, and of course the radicals. All of them were united in hating the Shah, but not in anything else.

The Western press did not understand the mixture and had its closest ties with the liberals, for the simple reason that they were the most Western and spoke English. For a very long time they thought these liberals were in control of the revolution.

For its part, the intelligence community did not have good sources among the revolutionaries but relied on SAVAK, the Shah’s security service, for intelligence. SAVAK neither understood what was happening, nor was it prepared to tell the CIA. The CIA suspected the major agent was the small Communist Party, because that was the great fear at that time — namely, that the Soviets were engineering a plot to seize Iran and control the Persian Gulf.

Meanwhile, Western human rights groups painted the Shah as a monster and saw this as a popular democratic rising. Western human rights and democracy groups, funded by the U.S. government and others, were standing by to teach people like Bani Sadr to create a representative democracy.

Bani Sadr was the first post-Shah president. He was a moderate Islamist and democrat; he also had no power whatsoever. The people who were controlling the revolution were those around Ayatollah Khomeini, who were used by the liberals as a screen to keep the United States quiet until the final moment came and they seized control.

It is important to understand that the demonstrations were seen as spontaneous, but were actually being carefully orchestrated. It is also important to understand that the real power behind the movement remained opaque to the media and the CIA, because they didn’t speak English and the crowds they organized didn’t speak English, and none of the reporters spoke Farsi (nor did a lot of the intelligence agency people). So when the demonstrations surged, the interviews were with the liberals who were already their sources, and who made themselves appear far more powerful than they were — and who were encouraged to do so by Khomeini’s people.

It was only at the end that Khomeini ran up the Jolly Roger to the West.

Nothing is identical to the past, but Iran taught me never to trust a revolutionary who spoke English; they will tend to be pro-Western. When the masses poured into the streets — and that hasn’t happened in Egypt yet — they were Khomeini supporters who spoke not a word of English. The media kept interviewing their English-speaking sources and the CIA kept up daily liaison meetings with SAVAK — until the day they all grabbed a plane and met up with their money in Europe and the United States. The liberals, those who weren’t executed, also wound up in the United States, teaching at Harvard or driving cabs.

Let’s be very careful on the taxonomy of this rising. The Western human rights groups will do what they can to emphasize its importance, and to build up their contacts with what they will claim are the real leaders of the revolution. The only language these groups share with the identified leaders is English, and the funding for these groups depends on producing these people. And these people really want is to turn Egypt into Wisconsin. The one thing I can guarantee is that is not what is going on.

What we have to find out is who is behind this. It could be the military wanting to stage a coup to keep Gamal Mubarak out of power. They would be doing this to preserve the regime, not to overthrow it. They could be using the demonstrations to push their demands and perhaps pressure Hosni Mubarak to leave voluntarily.

The danger is that they would be playing with fire. The demonstrations open the door for the Muslim Brotherhood, which is stronger than others may believe. They might keep the demonstrations going after Hosni leaves, and radicalize the streets to force regime change. It could also be the Muslim Brotherhood organizing quietly. Whoever it is, they are lying low, trying to make themselves look weaker than they are — while letting the liberals undermine the regime, generate anti-Mubarak feeling in the West, and pave the way for whatever it is they are planning.

Our job now is to sort through all the claimants and wannabes of this revolution, and find out who the main powers are. These aren’t spontaneous risings and the ideology of the people in the streets has nothing to do with who will wind up in power. The one thing to be confident of is that liberal reformers are the stalking horse for something else, and that they are being used as always to take the heat and pave the way.

Now, figure out who is really behind the demonstrations and we have a game (Source: Stratfor).

Commodity inflation is surging. Political tensions are mounting. Investor sentiment in the U.S. is running at near-record levels, a bearish indicator if ever there was one.

Who cares? We’ve got a bullish Super Bowl Indicator. This measure—which holds that a win by an old-school NFL franchise over one from the former AFL is bullish, while the opposite outcome is bearish—normally has market mavens on the edge of their seats. Not this year. This time, it’s loaded dice. Everybody’s dealt a flush. Even the suckers can’t lose.

Both the Packers of Green Bay and the Steelers of Pittsburgh trace their lineage to the bronze age of the National Football League, bless their occasionally concussed heads. We can predict the outcome before the refs even flip the coin: The bulls emerge triumphant. Rah! Stocks, now at 31-month highs by some measures, could shoot still higher.

Yes, there will be some obstacles. Bulls will charge out of the stadium only to face a wall of worry. Commodity inflation is seemingly unabated. Cotton prices have jumped 20% in the past month alone. Wheat is up 9% in that time; pork bellies, 21%. The results of inflation like that can’t be pretty.

Partly in response to soaring food prices, civil unrest has swollen in Egypt and beyond. But somehow, U.S. stocks keep climbing, hurdling the wall with room to spare. The Dow Jones Industrial Average popped 2.3% last week, to 12,092, its highest close since the pre-crisis days of June of 2008. The Standard & Poor’s closed Friday at 1310.87 for its best week in two months. The Nasdaq Composite advanced 3%, ending at 2769.

“Technicians will tell you we’re due for a correction, but from a valuation standpoint, we’ve got room to run,” says Philip Orlando, chief equity strategist at Federated Investors, which has $350 billion of assets under management.

Bullish sentiment, as measured by the American Association of Individual Investors, has been above its historic average for 22 consecutive weeks, the second-longest stretch ever. Though trading volume has been thin lately, that may not last for long. Thomas Lee, equity strategist at JPMorgan, thinks most investors are waiting for a dip in the market in order to put new money to work.

Lee points out that while inflation in agricultural commodities is a global headwind, it’s less so in the U.S., where the overwhelming portion of food-price increases—perhaps as much as 96%—stems from factors such as labor, packaging and merchandising, rather than raw-materials costs.

So rather than worry about commodities costs, the market has simply rejoiced in raw- materials stocks. Weyerhaeuser (ticker: WY) is up 25% year to date; Marathon Oil (MRO), 24%. In just the past week, materials and energy stocks as a group have jumped nearly 5%, says research shop Capital IQ.

To be sure, some things did make the bulls grimace last week, prominent among them the state of the labor market. Jobs growth for January, according to the nonfarm payrolls report released Friday, amounted to just 36,000, fully 100,000 fewer than economists—those notably reliable forecasters—had anticipated. But many bulls chalked that up to little more than the weather, and suggested that ensuing readings will show more strength.

Perhaps most remarkable is how unfazed the market has seemed to be by the violence in Egypt. It’s been little more than a distraction.

”Look, if there’s some geopolitical developments that make us nervous, we might take some chips off the table,” Orlando says. But right now, his firm is about 12% overweight in equities, and he reports having a smile on his face “as the market continues to grind higher” (Source: Barrons Online).