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January 25, 2006

Forks in the Road
by Rob Kirby

This essay was originally published January 23, 2006.

Canada goes to the polls today, January 23, 2006 - in a national election. Recent polls indicate that the 12 year reign of the governing Liberal Party of Canada is in jeopardy of ending - with the opposition Conservative Party holding a decided edge in public support entering today's election. However, regardless of who wins - it is widely projected that a minority [coalition] government is a likely outcome. This could be of future significance in the investment realms since the Conservatives are generally viewed to be more ideologically aligned with the current Bush administration in the U.S. of A. With geopolitical events and considerations occupying an increasing amount of the investment decision making process - we shall watch the outcome of this election with interest.

Meanwhile, and perhaps adding to an already congested geopolitical backdrop, global financial powerhouse UBS - announced on Sunday, Jan. 23, 2006 that they would - go their own way, so to speak - and no longer conduct business with Iranian [or Syrian for that matter] interests:

Swiss banking giant UBS AG said Sunday it has stopped doing business with Iran because of the company's economic and risk analysis of the situation in the country.

UBS will no longer deal with individuals, companies or state institutions such as Iran's central bank, said company spokesman Serge Steiner. A similar policy is also being implemented in the case of Syria, he said......

But Iran Won't Yield

Fearing repercussions [like the freezing of assets] in the wake of their insistence to restart nuclear fuel enrichment, it was announced on Friday,

"Yes, Iran has started withdrawing money from European banks and transferring it to other banks abroad," said a senior Iranian official, who asked not to be named.

Comparing Model Years

I wrote a piece recently attempting to quantify the potential [likely] effects [demand for Euros] of a proposed Iranian Oil Bourse - which I guesstimated at 100 or so billion worth/yr. For comparison sake - here's a look at what the effect of the "infamous" UN Oil For Food Program [oil for Euros began Oct.31/00] had on the U.S. dollar [vs. Euro]:

As we can see right from the UN's web site, the program began in 1996 and,

Funding: In the initial stages of the programme, Iraq was permitted to sell $2 billion worth of oil every six months, with two-thirds of that amount to be used to meet Iraq's humanitarian needs. In 1998, the limit on the level of Iraqi oil exports under the programme was raised to $5.26 billion every six months, again with two-thirds of the oil proceeds earmarked to meet the humanitarian needs of the Iraqi people. In December 1999, the ceiling on Iraqi oil exports under the programme was removed by the Security Council.

Furthermore, as to the scope of the entire program,

Delivery: As of 28 May 2003, some $28 billion worth of humanitarian supplies and equipment had been delivered to Iraq under the Oil-for-Food Programme, including $1.6 billion worth of oil industry spare parts and equipment. An additional $10 billion worth of supplies were in the production and delivery pipeline.

Let's remember folks, oil for Euros started in the fall of 2000:

31 October 2000: The Security Council's 661 Committee authorises the UN Treasury to open an UN Iraq account in euro. It also requests an in-depth report within three months on the costs and benefits for the Programme and other financial and administrative implications of the payment for Iraqi oil in euro.

Now, look at the symmetry with the beginning of "oil for Euros" with the ascent of the Euro vs. the dollar on the chart above. THAT DAMAGE WAS DONE WITH A RELATIVE PITTANCE - NO MORE THAN 10 BILLION WORTH OF EURO DEMAND PER YEAR.

Slippery When Wet

This developing drama between Iran and the West has all the makings for potential price shocks in the energy complex. Let's hope that the heated rhetoric subsides and cooler heads prevail.

Road To Ruin?

Canada's Sprott Asset Management published their annual [2006] "look ahead" which was aptly named, Road To Ruin, Part II - I recommend it as sobering catharsis to those of the "giddy" Kudlow or Cramer persuasion. The link to the pdf file was not working at the time of writing but should be available soon through the Sprott Asset Management homepage [Reports - Markets At A Glance].

Ford Beats The Street

Ford released their Q4 results and beat analysts' consensus expectations by posting a profit of .26 per share - x items*.

*Special items reduced earnings by 6 cents per share in the fourth quarter. The pre-tax effect of these items includes: a charge of $1.3 billion for impairment of Jaguar and Land Rover fixed assets; personnel reduction actions of $962 million; and the sale of The Hertz Corporation for a total profit of $1.5 billion, $1.4 billion of which was recorded in the fourth quarter. In addition, the company's repatriation of foreign earnings pursuant to the American Jobs Creation Act of 2004 resulted in a permanent tax savings of about $250 million. Largely as a result of these factors and costs associated with Visteon-related restructuring, special items reduced full-year income by 15 cents per share. Finally, full-year net income from continuing operations was reduced by 9 cents primarily for a cumulative change in accounting principles related to recent accounting guidance on the recognition of environmental obligations.

Spinning Wheels?

Despite the welcome surprise Q4 earnings, Ford announced on Monday, January 23, 2006 - a new "Way Forward" - a plan designed to reduce 6 billion in costs in their North American car assembly operations by 2010. Highlights of the plan include the idling of 14 manufacturing facilities - eliminating 25,000 - 30,000 salaried employees. By instituting these actions, Ford hopes to achieve North American automotive profitability by 2008.

Pedal To the Metal or Fun, Fun, Fun, Till Daddy Takes The T-Bird Away

While serious concerns remain - that much of Western mainstream media refuse to acknowledge or report - let us take solace in the fact that interest rates remain at historically low levels, credit and liquidity both continue to remain abundant, the dollar remains the world's sole reserve currency, equity markets remain buoyant [albeit with increasingly sporadic hiccups] and deficits don't matter - for now.

Rob Kirby
Kirby Analytics