Bullish or Bearish on Bombs?

I do a lot of research in stock trading and mutual funds. In the market, everyone tries to guess which way particular stocks are headed. When you guess right, you get rich. When you guess wrong, you can get wiped out. Such are the risks and rewards of playing the market.

Traders can choose between two general strategies when looking at a possible stock trade: fundamental investing and technical analysis. Fundamental investors compare a stock's price with the financial performance of the underlying company. This can be as simple as comparing price with sales or profits or dividend yields, or you can get into arcane ratios such as enterprise/sales or cash flow versus liabilities. Experienced analysts factor in the company strategy and whether it is likely to succeed in the long run. Essentially, the philosophy behind fundamental investing is to find companies that should be worth more than they actually are, or else should perform well in the future, and then buy the stock and hold on until the stock lives up to its potential.

Technical traders, on the other hand, are relatively uninterested in the underlying company. Stock prices are dependent on the behavior of traders alone, they say, and you can learn everything you need to know about a stock by looking for patterns in its actual price movements, or in volume, or in abstract derivatives of both. Essentially, you predict future behavior by interpreting past behavior alone, without looking at the nebulous potentialities of the fundamental investors.

Of course, the wise trader will employ both methods. A pure fundamental investor risks buying a stock that stalls or declines regardless of its potential, and being too afraid to cut his losses when the stock could recover any day now! And the technical trader risks being blindsided by market meltdowns caused by crisis in the underlying company. Conversely, the fundamentalist will often avoid stocks that rack up huge gains from momentum alone, while the technician will be left behind when a company introduces the next miracle technology or new way of doing business.

In analyzing geopolitics, we often face a similar choice. The present crisis over Iranian nuclear ambitions is a case in point. Looking at a historical trend, there can be no doubt that Iran wants nuclear weapons and will successfully develop them if given enough time. Similarly, there is a clear historical record of Iran's violence against her neighbors and other countries, whether it be the takeover of the U.S. embassy, the bombing of the Buenos Ares Jewish Community Center, or the continuing support for Hizbullah, Hamas, and Shia militias in Iraq. That record leads us to the reasonable conclusion that a nuclear umbrella would free Iran to do more of the same.

On the other hand, the Iranian regime is notoriously harsh and unpopular with the people. Iran has a large middle class and student body, and a history of revolution. In the past years there have been persistent reports of armed attacks against regime installations, leading many to predict an imminent overthow of the mullahs (Michael Ledeen famously amog them). The recent crash of a jet carrying the senior leadership of the Iranian Revolutionary Guard, and the multiple assassination attempts against President Ahmadinejad, have only made people more hopeful that the end is near.

Complicating the picture are the large costs of a military strike against the nuclear program, to say nothing of the danger of regional chaos. The relative attractiveness of waiting for the Iranians to rise up is hard to argue with. But it is nearly impossible to predict a discontinuous change in the course of Iranian politics, and every day we wait puts the mullahs that much closer to their goal.

Do we bow to the weight of seeming historical inevitability and strike Iran, setting off a firestorm in the process? Or do we put our hope in the Iranian people, and run the risk of waking up one morning to a new era of nuclear blackmail?

Dare we put our trust in miracles?

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