1 Gnostam LLC PO Box 960 Inverness, CA 94937 February 27 th , 2012 Newsletter Performance Through Independent Research ANOTHER OIL SHOCK: The Persian Gulf allies of the United States have been increasingly concerned with the growing size and complexity of Iran's ballistic missile programs. The recent IAEA inspectors report UN experts disclosed a 42 percent rise in the number of operational centrifuges enriching uranium inside the Natanz facility, located in central Iran, in the last four months, from November 2011 Work inside a second, previously secret enrichment plant has also been stepped up, with 698 centrifuges operating inside the Fordow installation near Qom city, 156 km from Tehran, a 69 percent increase on the number recorded during the last inspection in October, the UN watchdog said. Iran had declined to offer full cooperation to IAEA inspectors during their visit to the country earlier this month. In particular, the inspectors were prevented from visiting a military location at Parchin, where experiments that would Fig. 1 Above Where the missile launching facilities are.
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Performance Through Independent Research
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ANOTHER OIL SHOCK: The Persian Gulf allies of the United States have been increasingly concerned with the growing size and complexity of Iran's ballistic missile programs. The recent IAEA inspectors report UN experts disclosed a 42 percent rise in the number of operational centrifuges enriching uranium inside the Natanz facility, located in central Iran, in the last four months, from November 2011 Work inside a second, previously secret enrichment plant has also been stepped up,
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with 698 centrifuges operating inside the Fordow installation near Qom city, 156 km from Tehran, a 69 percent increase on the number recorded during the last inspection in October, the UN watchdog said. Iran had declined to offer full cooperation to IAEA inspectors during their visit to the country earlier this month. In particular, the inspectors were prevented from visiting a military location at Parchin, where experiments that would
Fig. 1 Above Where the missile launching facilities are.
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Gnostam LLC performance Graphs
Gnostam was established in February 2004. Since inception the annualized rate for return for a client portfolio managed by Gnostam LLC has returned a total 9.24% to February 17th 2012. Please refer to table below for actual year performance numbers.
Figure 2. Gnostam Performance
GNOSTAM PERFORMANCE NUMBERS
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only be relevant to mastering the detonation system of nuclear weapons are understood to have been conducted. The latest report by the IAEA is likely to deepen Israel's fears about Iran's intentions, particularly the build-up of centrifuges at the Fordow facility, which is dug into a mountainside and could be immune from military attack. The IAEA reported that 8,808 centrifuges were functioning inside Natanz, compared with 6,208 on its last visit, although the report cautioned that not all of the machines
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may have been working. So we are facing a standoff between Iran over the latter's nuclear program, states around the Persian Gulf fear that Iran would retaliate for an attack on its nuclear program by launching missiles at regional oil installations and other strategic targets. Examining the threat posed by Iran's missiles to Saudi Arabian oil installations, based on an assessment of Iran's missile capabilities, a detailed analysis of Saudi Arabian oil
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infrastructure, and a simulated missile campaign against the network using known Iranian weapons, finds no evidence of a significant Iranian missile threat to Saudi infrastructure. These findings cast doubt on one aspect of the Iranian threat to Persian Gulf oil while offering an analytic framework for understanding developments in the Iranian missile arsenal and the vulnerability of oil infrastructure to conventional attack. It is tempting to think that the current sabre rattling is all about a Israel and its allies preparing a preemptive strike against Iran’s
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nuclear weapons site shown in the map below. According to informed sources in the weapons merchant business —in both Israel and Saudi Arabia– the military leaders are looking to launch the attack in June, with the al Saud family covertly supporting a strike against Iran’s nuclear facilities, even though there is no guarantee that the strike would knock out the Iranian nuclear weapons capability.
The answer to why the al Saud regime would not be upset at an attempt by Israel and its allies attack on Iran’s nuclear
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Portfolio Changes and Recommendations for New Year 2012
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STOCKS TO HAVE IN THE PORTFOLIO: Simple ideas ~ Pipelines and Natural Gas storage. We need to have a substantial exposure to these. My favourites in the Natural Gas Domestic Pipeline and storage are:
• Plains All American, [PAA]; • Southwest Energy, [SWN];
In domestic transport:
• Canadian National Rail [CNI]; • Rail America, [RA].
In Water Supply:
• American Water States [AWR].
In Technology:
• Cadence Systems, [CDNS]; • VM Ware, [VMW].
SELLERS OF SOME OF THE TANKER STOCKS: Rates have come down because of excess supply. As the amount of crude that is carried through the straits of Hormuz, [currently between 35-40% of seaborne traded crude], and the industry right sizes for the new demand conditions [increase in seaborne trade mainly to Asia from Persian Gulf], it may be profitable again to invest in shipping stocks like FRO. MANUFACTURING IN THE UNITED STATES: Much has been made about the US about manufacturing revival. There is now data that
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supports China has became the largest manufacturing nation by output in 2010, [United Nations Statistics Division], using Real Manufacturing Value-Added figures. The U.S. represented roughly 20% of global manufacturing at about $1.83 trillion and China was nipping at its heels with $1.79 trillion. This gives credence to the concerns about the U.S. facing stiff competition in the manufacturing arena.
Considering that the U.S. achieved that $1.83 trillion in output on the backs of 11.5 million workers, while it took 100 million Chinese workers to generate slightly less output, this shows how Chinaʼs rapid economic expansion over the past two decades, has been mainly fuelled by low-cost labor. In 2009, China accounted for only about 12% of the worldʼs manufactured goods. This advance suggests that the global economic downturn enabled China to benefit from increased demand for less expensive goods.
The US has continued to see a substantial decline in manufacturing employment over the past several decades (from about 20 million in 1979 to roughly 11.5 million today). Global outsourcing, increased worker productivity, technological advances and the further mechanization/automation of the manufacturing process have reduced the labor intensiveness of the industry. This has reduced costs and enabled the U.S. to increase production at a more profitable pace. But the shift in jobs to the service and technology sectors can only drive economic growth but so far. There remains a need to produce tangible goods that support infrastructure and strengthen the core of domestic economic productivity.
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Range of Sahab-‐3 missiles from Iranian missile launch sites
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enrichment facilitie iss that Saudi Arabia is dominated by Sunnis; whereas Iran’s leaders are Shi’ite. The al Saudi Arabia’s rage against the Shi’ites exceeds its dislike of its Jewish neighbors.
If along with launching missiles on the nuclear site in Iran, Israel will also occupy southern Lebanon in order to take control of Hezbollah missiles that Iran has stationed there to launch aerial attacks on Israel in the event of an Israeli airstrike on Iran. This would be a serious cause for unrest in the region, and likely resisted diplomatically by the US.
The U.S. will not be simply an innocent bystander in the event of a Saudi supported Israeli attack on Iran. It is somewhat likely that US troops will be withdrawn from Afghanistan in the wake of the recent killing of two Americans in a NATO facility.
To this end we should watch for any U.S. administration announcement of victory in
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Afghnaistan in the next few months which would make the troops in Afghanistan available to support the Israeli attack on Iran in some way.
Is any of this plausible? The Economist reports that there is a perception that Iran is enriching uranium. It writes that Iran is ”acquiring the technology it needs for a weapon. Deep underground, at Fordow, near the holy city of Qom, it is fitting out a uranium-enrichment plant that many say is invulnerable to aerial attack.”
And certainly the price of oil has spiked since last February despite tepid demand and an increase in supply. Oil’s price is up 20% in the last year — Brent Crude sold for $104 a barrel in February 2011 and was a whopping $125 a barrel, as of February 24, 2012.
Supply and demand do not explain a 20% leap in the price of crude. After all,
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demand growth has been very slow. For example, in 2011, world oil demand crept up a mere 0.8% and that demand is expected to rise a mere 0.9% in 2012 to 89.9 million barrels a day, according to the International Energy Agency.
Meanwhile, the IEA reports that supply is up and is likely to rise in 2012 as well. For example, in January 2012, global oil production was 90.2 million barrels/day — a million barrels/day higher than the year before. Meanwhile, IEA forecasts a considerable increase in OPEC and non-OPEC supply in 2012. And even if Iran stops producing, supply should not be affected. How so? Reuters reports that Saudi Arabia plans to “increase its output to cover any shortfall to the world supply from Iranian exports.”
And Reuters reported Saturday that Saudi Arabia had increased exports to “just over 9
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million barrels a day last week, compared with an average of about 7.5 million in January.” Meanwhile, Iran currently produces 2.2 million barrels of oil per day — supplying “2.24% of the daily oil consumption in the world,” according to
Nevertheless, an attack on Iran raises the level of political uncertainty quite considerably. For example, if there are countries that are supplying arms to Iran — such as Russia and China – they may feel compelled to take sides against Israel’s backers.
This would probably be good for those betting on a rise in the price of oil and gold. But it would not be so good for the global economy — after all a rise in oil prices would boost gasoline prices and put the brakes on an economic recovery in the U.S.
Certainly, rising gasoline prices tax consumers’ budgets. According to AP,
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Persian Gulf areas at risk in the event of an armed nuclear conflict with Iran
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“every one-cent increase in the price of gasoline costs the economy $1.4 billion.” If the price of gasoline rises by, say, $2 a gallon, that would reduce GDP by about $280 billion — representing 2% of GDP.
Politically, such a war has the potential to boost President Obama’s chances for reelection. From an investment standpoint even though I consider any armed attack against Iran as unlikely, what will likely face investors is a “lower” return scenario for their portfolio’s in
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2012. Any conflict in the middle east is highly de-stabilizing, and very difficult to contain, especially potential nuclear threat from Iran. The central theme for investing in 2012 is clearly a continuation of staying with pipeline investments in the domestic US, [our number one pick for 2012 is Plain All American, PAA], while gaining some incremental exposure to the big oil reserves of Brazil through Petrobras. In technology we favour Cadence systems
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PEAK OIL PRODUCTION 2011-‐2012. Time to develop our domestic gas resouces and gas transport infrastructure
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[CDNS] and the very expensive but very profitable VM Ware, [VMW]. Because of the massive quantitative easing by Central Banks around the world, coupled with the decrease of peak oil production and the increasing age of population in the developed world, the flight to hard assets will continue. After all demographically in
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the developed world we face a very substantial increase in ages 40-65. As this decreases and people enter retirement, we will face more conflict in advanced economies on how to pay for retirement.
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Demographics of aging mean that developed nations deficits will increase
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Gnostam LLC PO Box 960 Inverness, CA 94937 USA E-‐mail: [email protected] www.gnostam.com
Disclaimer:
The information and any statistical data contained herein have been obtained from sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or short positions or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The securities mentioned in this report may not be suitable for all types of investors. ALL investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions.
Past performance is no guarantee of future results, and current performance may be lower or higher than the performance data quoted.
Investment Disclaimer All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made. All products sold are subject to market risk and may result in the entire loss to the client's investment. (For example: excessive withdrawals may result in the depletion of your account). Please understand that any losses are attributed to market forces beyond the control or prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject,
