Middle East Conflict Expands; Implications for the Markets

By the Curmudgeon with Victor Sperandeo

Iranian & Proxies Attack on Israel Foiled:

Saturday night, Iran and its proxies launched a major air attack on Israel - the first time the Islamic Republic has ever done so. Iran's Foreign Ministry said that Iran had conducted the attack against Israeli military bases. The ministry claimed that it conducted the strikes in "self-defense."

There were over 300 air threats, of which 100 were ballistic missiles launched from Iran. Another 30 cruise missiles were launched from Tehran, along with drones. In total, around 170 drones, more than 30 cruise missiles and more than 120 ballistic missiles were launched at Israel by Iran overnight Saturday, the IDF said.

Drones and missiles were also reportedly launched from Yemen and other countries around the region. Two rounds of rockets, around 40 in total, were fired on Israel from Lebanon, with Israel responding with counterattacks in real-time.

Israeli sources told ABC News that cruise missiles had been launched from Iraq towards Israel. Al-Arabiya reported that the U.S. was intercepting drones over Iraq and Syria.

Israel, the U.S., the UK, and Jordan worked to intercept the drones and missiles over Syria, Jordan, Iraq, and Israel, according to foreign reports. France also assisted in shooting down several aerial threats.

Objects are seen in the sky above Jerusalem after Iran launched drones and missiles towards Israel, in Jerusalem April 14, 2024. Photo credit: RONEN ZVULUN/REUTERS

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Incredibly, none of the drones breached Israeli airspace. IDF spokesperson Rear Admiral Daniel Hagari said that only a small number of ballistic missiles entered Israel’s airspace, but they were shot down by Israeli aircraft, David's Sling, or the Arrow missile system. The Iron Dome, which defends well against Hamas and Hezbollah's simple rockets, is less relevant for drones and fancier long-range missiles, so was not deployed.

Source: IDF

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The IDF said that the wide number of rocket sirens in Israel was to protect residents from pieces of rockets shot down outside of Israel, where the remains of the rocket's landing spots were unpredictable. Minor damage was caused to infrastructure at an IDF base in southern Israel.

Sadly, a seven-year-old girl from a Bedouin village near Arad was seriously wounded after she was hit with shrapnel from an Iranian rocket destroyed by the Israel Air Force. She is now hospitalized at the Soroka Medical Center in Be'er Sheva, in critical condition with life-threatening head injuries.

Tweet from Mohamed A. El-Erian:

As the world nervously waits to see what happens next in the Middle East, it is now crystal clear that the region has shifted over the last six months from what some deemed as a relatively contained disequilibrium to a perilously unstable disequilibrium involving an increasing number of parties.

It is a shift that brings with it heightened risks of more injuries and deaths, mental and physical damage, disruptions of livelihoods, and dangerous unpredictability.

And all this occurs against the background of already profound human tragedies.

Victor’s Opinion:

The Iranian attack was mainly for show, to save face for the deaths of Brigadier General Mohammad Reza Zahedi, a senior commander in the elite Quds Force of the IRGC and his deputy General Mohammad Hadi Hajriahimi and five others in the attack on Iran’s Consulate in Syria. That attack was attributed to Israel, which has neither confirmed nor denied it (as usual).

The attack on Israel was also a show of force by the proxies of Iran. Iranian-backed groups in Iraq, Syria, Lebanon, and Yemen were all involved. Iran has spread its proxies throughout the region. These groups pose an increasing threat to Israel and Israel’s partners and allies. Here’s a guide to Iranian proxies, courtesy of the Jerusalem post.

The drones fired at Israel were like sending geese with light bombs attached. One could have taken them out with an “M 134 handheld mini gun” aka a Gatling Gun. Maybe even a 12 gauge over-under shotgun using 00 buckshot could have downed these clay pigeons.

The drones fly at a maximum speed of about 180 miles per hour (a Chevrolet Corvette ZR 2019 goes faster), and since they flew from Iran (1,435 miles from Israel) they could easily be targeted. The missiles were also easily targeted by Israel’s protective shield missile systems as the Curmudgeon noted above.

Again, in my view the attempted air attack on Israel was purely for Iran to save face and for its Middle East proxies to show they were aligned with the Islamic Republic’s mission to destroy “the Zionist entity.”

Will Israel Retaliate?

U.S. President Joe Biden has told Israeli Prime Minister Benjamin Netanyahu that Washington would not support retaliatory strikes against Iran after the latter launched a barrage of missiles and drones against the Jewish state over the weekend, Axios reported on Sunday.

“You got a win. Take the win," Biden told Netanyahu.” This is logical as higher oil prices are bad for Biden’s re-election.

Israel's war cabinet meeting ended Sunday without a decision on how Israel will respond to Iran’s attack, an Israeli official said. The government is determined to take action – and the military has been asked to provide options, the official added.

Victor and the Curmudgeon firmly believe Israel should declare victory and NOT pursue a retaliatory strike on Iran or its proxies, which would only further alienate Israel’s allies.

We are both ardent supporters of Israel, but think diplomacy is the proper path forward to pursue at this time. The twin objectives are to release the hostages taken on October 7^th and to destroy Hamas (easier said than done).

Victor’s Market Comments:

Gold, Silver, Oil and Gasoline futures hit 12-month intra-day highs on Friday, but then reversed. They closed mostly down on the day, except oil, which was well off its highs. That’s technically called a” high low reversal day.” Technically, all of the above have made a short-term top.

Therefore, the rally in the precious metals and oil was fun, but I think it’s over. I will still keep my investment positions but sell all trading positions in gold and silver. Commodities should also sell off. However, I’m positive on the grains as a new long. They are oversold and coming into a very strong period seasonally.

Stocks will rally Monday, in my view, and I’m still bullish stocks, but neutral on bonds.

Victor on Inflation and Fed Rate Cuts:

The recent inflation uptick in the CPI is fabricated, mostly from “owners equivalent rents.” Meanwhile, Zillow shows YoY rents are down, so this has NO real meaning for the Fed, which focuses on the PCE price index/price deflator.

I believe the CPI will be manufactured by the BLS to decline and unemployment rate slightly up ticking, ahead of the November U.S. elections. It’s pure politics to help Biden, Democrats, and the establishment Republicans win.

As a result, there will likely be 25 bps rate cuts at the July and September FOMC meetings.

Did you hear Larry Summers suggest the Fed might RAISE RATES? “You have to take seriously the possibility that the next rate move will be upwards rather than downwards,” Summers said on Bloomberg Television's Wall Street Week with David Westin. He indicated that such a likelihood is somewhere in the 15% to 25% range. IMHO, there is zero chance of that happening ... ZERO!

The Fed’s monetary policy is all about keeping power rather than worrying about higher U.S. inflation.

End Quote:

The so called “left” has power in the U.S. and as 1984 author George Orwell said:

“We know that no one ever seizes power with the intention of relinquishing it." …………………. George Orwell

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Stay calm, be well, success and good luck. Till next time…..

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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