The participating Iranian forces have been divided into two groups, blue and orange, with the blue group representing Iranian forces and orange the enemy. Velayat 90 is involving the full panoply of Iranian naval force, with destroyers, missile boats, logistical support ships, hovercraft, aircraft, drones and advanced coastal missiles and torpedoes all being deployed. Tactics include mine-laying exercises and preparations for chemical attack. Iranian naval commandos, marines and divers are also participating.

 The exercises have put Iranian warships in close proximity to vessels of the United States Fifth Fleet, based in Bahrain, which patrols some of the same waters, including the Strait of Hormuz, a 21 mile-wide waterway at its narrowest point. Roughly 40 percent of the world's oil tanker shipments transit the strait daily, carrying 15.5 million barrels of Saudi, Iraqi, Iranian, Kuwaiti, Bahraini, Qatari and United Arab Emirates crude oil, leading the United States Energy Information Administration to label the Strait of Hormuz "the world's most important oil chokepoint."

 In light of Iran's recent capture of an advanced CIA RQ-170 Sentinel drone earlier this month, Iranian Navy Rear Admiral Seyed Mahmoud Moussavi noted that the Iranian Velayat 90 forces also conducted electronic warfare tests, using modern Iranian-made electronic jamming equipment to disrupt enemy radar and contact systems. Further tweaking Uncle Sam's nose, Moussavi added that Iranian Navy drones involved in Velayat 90 conducted successful patrolling and surveillance operations.

 Thousands of miles to the west, adding oil to the fire, President Obama is preparing to sign legislation that, if fully enforced, could impose harsh penalties on all customers for Iranian oil, with the explicit aim of severely impeding Iran's ability to sell it.

 How serious are the Iranians about the proposed sanctions and possible attack over its civilian nuclear program and what can they deploy if push comes to shove? According to the International Institute for Strategic Studies' The Military Balance 2011, Iran has 23 submarines, 100+ "coastal and combat" patrol craft, 5 mine warfare and anti-mine craft, 13 amphibious landing vessels and 26 "logistics and support" ships. Add to that the fact that Iran has emphasized that it has developed indigenous "asymmetrical warfare" naval doctrines, and it is anything but clear what form Iran's naval response to sanctions or attack could take. The only certainty is that it is unlikely to resemble anything taught at the U.S. Naval Academy.

 The proposed Obama administration energy sanctions heighten the risk of confrontation and carry the possibility of immense economic disruption from soaring oil prices, given the unpredictability of the Iranian response. Addressing the possibility of tightened oil sanctions Iran's first vice president Mohammad-Reza Rahimi on 27 December said, "If they impose sanctions on Iran's oil exports, then even one drop of oil cannot flow from the Strait of Hormuz."

 Iran has earlier warned that if either the U.S. or Israel attack, it will target 32 American bases in the Middle East and close the Strait of Hormuz. On 28 December Iranian Navy commander Rear Admiral Habibollah Sayyari observed, "Closing the Strait of Hormuz for the armed forces of the Islamic Republic of Iran is very easy. It is a capability that has been built from the outset into our naval forces' abilities."

 But adding an apparent olive branch Sayyari added, "But today we are not in the Hormuz Strait. We are in the Sea of Oman and we do not need to close the Hormuz Strait. Today we are just dealing with the Sea of Oman. Therefore, we can control it from right here and this is one of our prime abilities for such vital straits and our abilities are far, far more than they think."

 There are dim lights at the end of the seemingly darker and darker tunnel. The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security.

 Furthermore, there is the wild card of Iran's oil customers, the most prominent of which is China, which would hardly be inclined to go along with increased sanctions.

 But one thing should be clear in Washington - however odious the U.S. government might find Iran's mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation's existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself. Given their evident cyber abilities in hacking the RQ-170 Sentinel drone and their announcement of an indigenous naval doctrine, a "cakewalk" victory with "mission accomplished" declared within a few short weeks seems anything but assured, particularly as it would extend the military arc of crisis from Iraq through Iran to Afghanistan, a potential shambolic military quagmire beyond Washington's, NATO's and Tel Aviv's resources to quell.

 It is worth remembering that chess was played in Sassanid Iran 1,400 years ago, where it was known as "chatrang." What is occurring now off the Persian Gulf is a diplomatic and military game of chess, with global implications.

 Washington's concept of squeezing a country's government by interfering with its energy policies has a dolorous history seven decades old.

 When Japan invaded Vichy French-ruled southern Indo-China in July 1941 the U.S. demanded Japan withdraw. In addition, on 1 August the U.S., Japan's biggest oil supplier at the time, imposed an oil embargo on the country.

 Pearl Harbor occurred less than four months later.

Source: http://oilprice.com/Energy/Oil-Prices/War-Imminent-in-Straits-of-Hormuz-$200-a-Barrel-Oil.html

By. John C.K. Daly of Oilprice.com

Oversold weakness heading into Thanksgiving weekend has resulted in a heavy reversal with good sales for Black Friday.  The question remains as to whether Holiday sales will continue at this pace.  And moreover, we remain focused on debt restructuring in Europe, with various rumors regarding an IMF bailout of Italy and the possible bond issuance of the five AAA rated countries to help subsidize such restructuring.  Gaps on the charts seem to have been filled, and we may have a consolidation week before we see more short covering.  The Plunge Protection Team may be in action to support a Santa Clause rally, in congruence with funds taking advantage of cheap pricing.  Light volume continues, and we may have another 10 days of decent action before we hit the Xmas doldrums.  As always we will be on the lookout for selling options during expected times of inactivity.  We will keep our clients posted.

Best,

Arman Vahdatinia

President, Chief Market Strategist.

Arman Vahdatinia

The Italian budget vote passes, but the main concern is as to whether Berlesconi will be subject to a vote of confidence or will be subject to resign.  This next step may take days or even weeks, and if he were voted out the significance of change in the right direction may provide enough steam for the markets to rally.  Although the chances of this happening are very slim as he has lost majority in the lower house, but maintains majority in the Senate.  We will keep our eye on Italian bond yields as they're teetering at 7%.

Best,

Arman Vahdatinia

President, Chief Market Strategist.

It turns out the rumor of China buying Italian bonds was nothing more than just a rumor.  No new developments out of Europe, and positive corporate earnings allowed stocks to post another day of gains.  Nothing more than consolidation until we find out what Europe's fate is, and we await a skewed reaction to option ex on Friday.  The choppy action in the Eurocurrency is evidence of the rapid change in sentiment, as the larger pattern still remains bearish.  With Gold ticking back up after holding support around $1800, another wedge pattern is evident where we can get a larger break to the upside if there is no resolve with Europe.  Treasury yields are not necessarily correcting in a dramatic fashion which leads me to believe that there is still room for further deterioration as investors flock to safety in light of the SNB's currency intervention.  The Fed stated today that it would buy about $16 billion over the next month as part of its reinvestment of maturing assets, as the central bank may decide to swap short term treasuries with long term securities to cut borrowing costs.  We also note that PIMCO has increased its treasury holdings to its highest level since Dec. 2010 after going flat, which in hindsight backfired given the run this year.  On the energy front, API data reported a draw of 5 million barrels of crude as gasoline inventories rose 2.7 million barrels, pretty much a wash.  We await tomorrows more reliable DOE data to give us a better signal to get in.  I re-iterate the importance of being a trader rather than an investor in many of these markets as the day to day news continues to fluctuate ahead of our FOMC announcement next week.

No trades in light of my upcoming trip, feel free to give me a call if you need any specific advise intraday.

We had a mixed day leading into Bernanke's speech, and at the end of the day we didn't receive any new data.  A third round of stimulus is to be discussed in the upcoming FOMC meeting on the 20-21st, and ultimately it will depend on whether the Euro tanks before then.  Trichet's speech early this morning was of caution with respect to the euro zone's economy growing more slowly than had previously been expected, stating that the central bank see's "significant downside risks" in an environment of "particularly high uncertainty."  Given the breakdown to my 1.3870 target i mentioned in Tuesdays report, the door is now open to test the 1.35/1.36 region within the next two weeks.  Keep in mind that we have currency option ex tomorrow, so we may get a quicker than anticipated slide or we will teeter around 1.40 until next week.  On the energy front, Crude is running into major resistance at the $90 level, and if Europe unravels at the seems I still anticipate prices to go back below $80.  DOE data reported a draw of 4 million barrels of crude, with gasoline inventories rising 200k barrels.  And ending the day with Obama's job proposal worth $450 billion in stimulus we have yet to see how the market will react.

Will wait for further weakness to get short.  Most likely won't see an opportunity until Sunday evening.
Best,

Arman Vahdatinia

President, Chief Market Strategist

1-877-338-EXPO [3976] ext. 25

www.ExpoFutures.com

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