Investor Perspective: The Threat from Iran

Copyright © 2009, Greenwich Financial Management Inc., a registered investment advisor.

History always repeats itself, said Karl Marx, the first time as tragedy, the second as farce. In contemporary Iran, it’s vice versa: the farce is making way for a tragedy.

After a dubious election that he claims he won by a “wide margin,” President Mahmoud Ahmadinejad has elevated the position of the Revolutionary Guard into a vanguard that seeks to control every aspect of politics and society. The Guard has moved in to arrest and threaten all those who question state policies, which apparently includes critics of prison torture and rape.

Today, the New York Times reported that talks aimed at having Iran hand over its nuclear enrichment process to other countries have bogged down. I fear that Iran's intentions in these talks are, as in the past, to buy more time to develop its weapons and to sow discord among Western countries.

President Ahmadinejad is to lying what Michael Phelps is to swimming. In mendacity, only he can top himself. A long-time Holocaust denier, the President now insists that Iran is seeking alternative energy sources at its formerly secret nuclear enrichment facility near Qum. You don’t usually place such peaceful facilities in hardened underground bunkers.

As the legitimacy crisis deepens in Iran, the adventurism of Ahmadinejad’s policies increases. With even Russia criticizing the secret enrichment site, Iran recently tested its longest range missiles as part of exercises its military dubs “The Great Prophet IV.” Like those Hollywood sequels (“Rocky V”), this series is getting stale.

It’s unclear what can be done to protect against this threat. President Obama has moved to shift our regional anti-missile strategy away from a presumed Soviet threat and toward an Iranian shield. See Mobile.POLITICO.com: Missile defense winners and losers. Israel possibly could launch a preemptive strike against Iranian facilities. However, the regional backlash would be great and even short-term success uncertain.

Rousseau said that we have two aspects to our role in society, as “bourgeois” and as “citoyens.” As citizens, we must take whatever positions help preserve peace. As bourgeois, though, let’s consider how to profit.

The notion of the following trades is to get ahead of the news. In the full blossom of a crisis, unwind these for a profit. Prices given are per share as of the close of trading on 10/20/2009.

Long positions:
>Gold, silver and other precious metals, and select precious metal stocks, such as Barrick Gold (“ABX," $37.85).
>Oil reserves and refinery capacity. I like Exxon Mobil (“XOM”) and Valero Energy (“VLO,” $20.11).
>Defense stocks. I particularly like Raytheon (“RTN,” $45.54), maker of the Patriot surface-to-air anti-ballistic missile. See Raytheon MIM-104 Patriot. Lockheed Martin (“LMT,” $71.99) is crucially involved in the Aegis missile defense system and PAC-3 missile interceptor.

Short positions:
>Resorts, cruise lines, casinos.
>Airline stocks. A good short position might be American Airlines (“AMR,” $7.66)

Pair trades:
>Long US high grade corporate bonds, short emerging markets and junk bonds.
>Long large capitalization stocks, short small capitalization.
>Long Dow index; short Russell 3000.

A number of crisis scenarios, or a more general aversion from risk, could make some of the trades above profitable. On the other hand, if everything proceeds peacefully, if “the wolf dwells with the lamb,” then these positions are overly defensive.

Note: Clients advised by Greenwich Financial Management Inc. may hold long or short positions in securities mentioned in this article or in derivatives of those securities. The author of this report has no personal holdings or interest in the referenced investments and has received no compensation for providing the above research from any of the listed companies. The information is not sufficient by itself to make an investment decision. The suitability of such investments for particular individuals has not been assessed.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.

Legal Issues in Insider Trading Cases

Following up on the Galleon insider trading story, there is a good article in today's NY Times, "A Thin Line Separates Trading and Legal Research," by Alex Berenson, 10/20/2009, discusses some of the legal challenges in prosecuting these cases.

Some of the challenges relate to fiduciary duty, as articulated in the famous Dirks v. SEC (1983) case. Several tippers in the Galleon-related cases would clearly have a fiduciary duty to their own company not to reveal inside information. This would potentially include, for example, the executives at Intel, McKinsey and IBM. Further, Mr. Rajaratnam under one theory knew or should have known that he was receiving confidential inside information, based on the corporate role played by these executives, and thus could be considered a "temporary insider." See, for example, the landmark case of SEC v. Texas Gulf Sulfur (1965). The government must support the argument that Mr. Rajaratnam knew that he received material inside information misappropriated by a corporate insider, in breach of that insider's fiduciary duty. However, some of the wiretaps, if admitted as evidence, could go toward showing that state of mind in Mr. Rajaratnam's own words. On the other hand, Mr. Rajaratnam's defense attorney will seek to show that he was being a diligent security analyst, putting together information and clues from a variety of sources, under the so-called "mosaic theory."

The Times article lays stress on the lack of many direct cash payments alleged in the Galleon case. However, I believe this emphasis is misplaced, as the government merely has to show some potential benefit for the tipper and tippee, which could include such things as reciprocal tips, career assistance, valuable social introductions, and so forth.