What to Watch for during the Week of July 28

The world markets will be attuned to the U.S. markets the week of July 28th for many reasons. This coming week will be packed with corporate earnings reports, data from the U.S. government, and geo-political news from Europe.

Corporate Earnings Reports

This week in the U.S. there are 140 companies within the S&P 500 that will be reporting earnings. Last week we saw the market appear pleased by the earnings reports of Apple and Microsoft in the middle of the week; only to sell-off after a less than stellar second quarter earnings performance from Amazon towards the end of week 

Investors will want to see the trend which has been forming with the 2014 second quarter earnings season, with regards to the S&P 500. Sixty-three percent of S&P 500 companies that have reported so far this second quarter have beaten revenue estimates and 69% have beaten their profit estimate. S&P 500 companies that have reported to date have grown revenue by 3.5% while earnings have grown by 6.5%. At the end of this week, investors will know if this trend will continue with the remaining 50% of S&P 500 companies still to report.

U.S. Government Data

Starting today July 30th the U.S. has release GDP numbers for the second quarter. Analysis to follow.

The big number, the nonfarm payrolls and nonfarm private payrolls, will be reported before the markets open in the U.S. on Friday, August 1, 2014. This number could move the market one way or the other with either an uptick or downtick in the unemployment rate.

Europe

Europe takes a back seat to the U.S. this week because of the crucial U.S. government data being released. Investors will be interested if the E.U. and the U.K. tighten existing sanctions against Russia. Lower than expected data on German confidence sent European markets south towards the end of last week; even after the U.K. posted in-line information on output.

Latin America

Argentina is faced with default once again; the first since 2001 but overall this will represent the third time in 30 years that the country of Argentine defaulted on their debt. If Argentina fails to make a $539 million payment today Wednesday, July 30th the missed payment will set the default ball rolling. The problem stems from their 2001 default agreement when 90% of the investors agreed to the plan. The remaining 10% proceeded to take Argentina to court to collect their money. Argentina and the 10% holding out have met continuously since a U.S. Court ruling two months ago but have failed on coming to a mutual agreement on payment.

Outcome

This week could set the tone, for trading and investing, for much of the remainder of the summer. The markets have been able, to date, to think past the sanctions placed on Russia, cries of a market bubble, and the continued reel-in of the Quantitative Easing policies of the U.S. Federal Reserve. Everyone will have little clearer picture of the corporate world after this week.

British Pay

The stagnation of British pay, and for that matter pretty much most workers pay in developed capitalist economies is concerning. So much so, that the falling real incomes, after factoring in inflation, and the inevitable deteriorating living standards of millions of workers is likely become one of the main electoral issues during Britain’s forthcoming general elections next year. But while Labor politicians will probably stand on their soapbox professing to have a solution to the plight of a growing army of working poor, the problem may be far too entrenched for any erudite politician to solve. 

Indeed, the falling real incomes for households on middle to low income, which amounts to over a third of the nation’s population, is more than just a passing storm, or a shift from one economic paradigm to another, but in the words of Former US Treasury Secretary Larry Summers, “a long-term, “secular” stagnation of the developed capitalist economies.”

The slowing growth of British wages had started well before the financial crisis of 2008. A recent think tank report, titled “Growth without Gains,” revealed that the general population’s living standards had deteriorated long before the onset of the previous recession. The report showed that despite Gross Domestic Product (GDP) growth of 11 percent between 2003 and 2008. Median wages were stagnant and per capita disposable income fell at the household level in every region outside London. Moreover, there has been a rapid shift in the way income has been distributed from wages to profits. Just 12p of every £1 created by the UK economy finds its way to the wages of workers in the bottom half of the earnings distribution, a drop of one quarter over the past 30 years, according to the report. 

While, this helps explain income inequality there are other fundamental reasons at play which could explain the slow growth of pay of workers in the low-middle income bracket. They are as follows; Globalization. While there are many upsides to globalization and free trade, such as competitively priced goods and fewer wars as nations seek to trade rather than wage wars on each other, there have also been some downsides. Without doubt, free trade has undermined the real wages of blue collar workers, countless examples can be cited of workshops being setup in low wage regions, thereby displacing factory, process workers in the UK, or forcing them to accept lower wages. Furthermore, there is growing evidence of white collar incomes being adversely affected by increasing competition from a new generation of young educated workers in developing nations. For example, Deutsche Bank cost-cutting in New York and London has been brutal in recent years. But the bank has increased its employee head count in India to 6,000 and has recently employed 125 analysts in Mumbai.

Capital’s obsession with returning greater shareholder value at the expense of rewards from ordinary workers has also contributed to lower pay rises for medium to low income workers.

Despite the fact that Technology has raised productivity in every sector it has also replaced the tasks undertaken by many other low skilled workers. Certainly, we are living in times when the digital technological revolution is evolving beyond that of the last decade. The fusion of nanotechnology, information technology and mechanics is propelling robotics to new heights. Drones are becoming more sophisticated, resulting in pilotless aircraft, which are currently being deployed by the military for surveillance and aerial combat missions. So drones can now do the job of piloted military jet at a fraction of the cost, which logically means less demand for pilots. On the civilian front, Amazon is currently requesting permission from the authorities to use drones for parcel deliveries and robots will soon probably replace people in their dispatch warehouses. Put simply, robots do the work more efficiently than humans, they are cheaper, they work 24/7 and they don’t require a pay rise. Then there is the autonomous vehicle, driverless vehicle, which is now a technical reality, apparently this will mean no more human error road accidents, which could cut the road mortality rate and insurance premiums. But it also means putting the professional driver out of business. Technology is revolutionizing education; predictions are that within next few decades half the universities won’t exist. Workers will require education and skills more than ever in the brave new world, but they will acquire it online, at a fraction of the cost. This could mean less work, or lower paid work for education workers.

So labor’s bargaining power will continue to erode, as the true supply of labor exceeds its demand, thereby keeping wages low.

Perhaps we are moving towards what Jeremy Rifkin describes in his book, “The zero marginal cost society,” like Marx, Rifkin thinks capitalism will consume itself. The argument runs something like this: increasingly intelligent machines will generate products at nearly zero marginal cost—in other words; the cost of producing each additional unit falls to essentially nothing. And when that happens, everything becomes free, profits disappear and… capitalism eats itself. 

What this could imply is dwindling income for governments, as their tax revenue continues to shrink. Less public finance means eroding public services in health, education and defense. So a gentle slow march into poverty for millions.

But people are resourceful and when they start realizing that the market economy is declining, along with the public sector there is likely to be a growth in the third sector, voluntary and community based jobs and self-employment. The downside is that this type of employment often pays less. 

With regards to trading, the world’s most sophisticated form of gambling, as a means of escaping the sinking ship; it could be for those who have a strong constitution, a healthy sense of cynicism, able to manage risk, numerate, literate analytical and cunning. But you need to keep in mind that trading is a zero sum game with more losers than winners and the house always wins. Mrs. Jones might be best suited to baking cakes for the local raffle. However, a trader’s academy for people who believe they already have the material to work with might be a winner.

UK's June Inflation

The Office for National Statistics (ONS) had another surprise for the markets on Tuesday, this time it was the Consumer Price Index (CPI), which grew by 1.9 percent in the year to June 2014, up from 1.5 percent in May. The latest June CPI, an official measurement of inflation, is now hovering close to the Bank of England’s (BOEs) annual inflation rate target of 2.0 percent, so all bets are now on an imminent interest rate rise in the UK. Indeed, the market’s reaction to the surprising jump in June’s CPI figures was predictable; there was a flight of hot money into sterling in search of a higher return, thereby pushing the exchange value of the UK pound further against the USD to a session high of $1.7133. The UK pound also appreciated against a basket of other currencies. Moreover, the price of UK bonds fell sharply on the bond market as traders fled UK bonds in anticipation of a rate rise before the end of the year. So markets have now priced in an interest rate increase, from a record low, to 0.5% interest base rate by the end of the year. 

The latest June CPI figure, released by the ONS on July 15, confirmed that British inflation has now surged to a five month high last month. The main reason behind the sharp rise in the May to June inflation rate has been price increases in food & non-alcoholic drinks; however, the figure is now little changed on the year to June. A variety of product groups notably fresh vegetables, bread and cereals, contributed to the monthly inflation rise in foods. Also the price increases in clothing, particularly women blouses and shoes, also added to the rise in June’s inflation figures. The relatively good weather throughout the May-June period could have resulted in retailers deterring price discounts as the sector decided to cash in on the cloth shopping spree, brought about by the fine weather. Air transport also registered a big month to month hike in prices, according to the ONS. Air fares rose between May and June 2014. The movements were primarily driven by changes in fares on European routes, according to the ONS report. The ONO June CPI report also added, that prices in the housing, water, electricity, gas & other fuels sector continue to have the largest upward effect on inflation, which have contributed around a quarter of the total June CPI figure. Alternatively, motor fuels currently have a downward pull on inflation. Average petrol prices were around £1.30 in June this year compared with £1.34 a year earlier.

But the June CPI figure of 1.9 percent did come as a bit of a surprise for the market. A recent poll conducted by Reuters indicated that economist had forecasted a small rise of inflation to just 1.6 percent. However, the question puzzling economist is whether the June CPI figure is just a monthly blip or further evidence of the UK’s upward trajectory for inflation this year, which would also mark the end of Britain’s historic period of low interest rates. "It currently looks a very close call as to whether the Bank of England will raise interest rates at the end of this year or hold off until early-2015. Indeed, there will undoubtedly be many swings in interest rate expectations over the coming weeks and months," said Howard Archer, economist at IHS Global Insight.

Indeed, the common belief that economists can’t agree on anything important is probably more than ever relevant to them forecasting the UK inflation rate and interest rates. One school of thought is that the June CPI figure is merely noise and that reading too much into a monthly set of figures is really a distraction when trying to forecast the UK inflation trajectory. This reasoning may hold water, after all clothing and air fare prices are usually volatile and one month’s inflation data alone cannot completely change the overall trend. Adding support to this view was an official from the ONS who said that there were signs that the good weather last month may have deterred retailers from cutting prices. Elizabeth Martins, an economist with HSBC, also added that the clothing effect was likely to be smoothed out in July's data. 

Moreover, the recent data shows that producer costs continued to fall last month and that there was barely any rise in what they charged customers in the so-called "factory gate prices". There’s also unlikely to be any wage type inflation, as the latest figures on pay are widely expected to show wage rises continuing to lag well behind inflation, in other words falling in real terms. Furthermore, the steady appreciation in sterling since the beginning of the year will be lowering the price of imports, thereby exerting downward pressure on inflation. "In the near-term, inflation is likely to remain subdued with the producer price inflation figures highlighting a lack of pipeline price pressures while remarkably low wage rate numbers also point to little near-term inflation threat. The strength of sterling will also help limit the upside for inflation," said James Knightley, economist at ING Financial Markets.

But not all economists see it that way. Referring to June’s CPI data, Chris Williamson, chief economist at data specialists Markit said, "The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike," said Chris Williamson, chief economist at data specialists Markit. Apparently, Markit’s survey is showing activity picking up.

However, if housing prices cool down in the months ahead, then probably the CPI June figures are just a temporary blip on the radar, meaning that future inflation rates could be within the BOE inflation target of 2 percent and therefore, no interest rate hikes in 2014 would materialize. The likely fall in real wages, the appreciating pound, the spare capacity in the economy and the frail euro zone recovery may put a damper on future inflation figures. So maybe the market has jumped the gun in anticipating pending interest rate rises.

What's Behind The Dow Jones All Time Highs?

Stock markets in the US have hit record highs in recent days. With the Dow seemingly making new highs regularly. This is happening at a time when many believe that share prices are on high valuations and may be fully valued, so should we be looking for a reversal of the index?

Since 2009 at the height of the financial crisis the Dow has risen from its lows in March of 6,589 to its current level of around 17,000. Much of this has been fuelled by an era of easy money via the Federal Reserve’s Quantitative Easing programme and low interest rate policy. The hunt for yield resulting from this easy money has forced investors to take on more risk and buy shares where yields have been considerably higher than that which can be obtained in ‘safer’ fixed interest investments. 

It has not just been a hunt for yield that has driven shares higher. During the crisis most companies put their balance sheets in order, refinanced their debts at much lower interest rates, used positive cash flows to reduce debt and forced through lower costs in their operations. The result of these actions has been that profit margin falls were limited during the slowdown and small increases in revenue came through to profits more quickly. Signs of a recovery led investors to anticipate that revenue increases would pick up and that these newly efficient companies would see profits rise sharply. Valuations of shares rose to reflect this optimistic view. 

On May 22nd 2013 the Chairman of the Federal Reserve, at the time, Mr Ben Bernanke, warned that the Federal Open Market Committee (FOMC) were considering reducing the rate of which they pumped fresh money into the markets. The prospect of greatly reduced liquidity very quickly took the froth off the market and some high valuations were reduced sharply. It also affected the level of interest rates as markets acted before the liquidity dried up and this in turn caused some weakness in the US mortgage market. Since the recovery still relied on strong consumer spending and confidence this put the recovery at risk and the FOMC delayed any decision to reduce the rate of quantitative easing. Perhaps, as Mr Bernanke was near the end of his term of office the tapering of financial easing did not take place until his successor Janet Yellen had been announced. Tapering was started at the end of 2013 and has continued since at a rate of $10 billion per FOMC meeting and is expected to be completed by the time of the meeting in October 2014 with a final reduction of $15 billion at that time. 

The Federal Reserve are very keen to bring financial management back to normal but are equally very keen to embed the recovery firmly. The hesitant levels of growth seen this year imply that there is still a long way to go for a strong recovery to be seen. The FOMC is keen to stress that, even when quantitative easing has been completed, interest rates will stay low until such time as the recovery becomes clearer. Evidence for the recovery will be seen in higher wages, lower unemployment but most importantly with an increase in business investment. 

Ahead of tapering share prices may have got ahead of themselves and valuations became stretched but so far this year earnings have continued to expand albeit slowly. This has happened even though there was a sharp slowdown at the beginning of the year due to severe weather.

There are no clear signs of stress in the economy and companies remain cautious. Companies are not getting carried away with their prospects and remain slow to expand activities. There are, however, signs of some confidence reflected in the increase there has been in mergers and acquisitions, although some of those are so that the company can take advantage of lower tax regimes, the majority are for better strategic reasons. Inflation remains low and money growth does not imply an inflationary tendency. Spare capacity remains at high levels at under 80% with closer to 87% being regarded as full capacity so that there remains significant room for expansion of economic activity. GDP growth may have risen to where it was before the crisis but still has a long way to go to reach where it should be some five years later. So there seems to be plenty of room for optimism that the recovery could have some way to go.

Growth in America will be driven by SMEs (small and medium size) companies but large companies are also benefitting from a small but discernible recovery in Europe and a continuation of growth in China. These two areas have been a considerable concern for global investors but it is beginning to look as though the worries are unwinding. It is true that Europe remains a large problem and concerns have not been clarified regarding China but the authorities in each economy continue to seek growth that is appropriate to their objectives.

The unwinding of liquidity through tapering was expected to harm emerging markets as spare funds were withdrawn from the sector to repatriate to the US where returns may be expected to be higher and safer. This impact has been much less than was feared and confidence in a global recovery is slowly recovering.

There are many who believe that we are on the verge of a major long term bull market in equities and that once tapering has been completed the economy can move forward again. At the moment the recovery is driven by increased consumer spending fuelled by rising debt. This is the very thing that led to the crisis in the first place and cannot be encouraged, however, central bankers, including the Federal Reserve are taking the view that these problems can be controlled without the use of higher interest rates and that controls on lending and other regulatory measures are the best way forward. If they are right, then interest rates may rise when the economy is stronger but may not have to go up far. Interest rate increases will hit spending very quickly as consumer debts remain high so it is very believable that rates could stay low.

There is no justification yet for analysts to forecast much higher revenues and profits but the basis is there for that to happen. Markets’ climb a wall of worry’ in a recovery and the time to be concerned is when investors stop worrying and become euphoric. We do not appear to be there yet.

A New Bank for the BRICS

As five leaders, representing nearly half of the world’s population, descended on the Brazilian city of Fortaleza to attend the sixth BRIC’s (Brazil, Russia, India, China and South Africa) Summit, scheduled for July 15-16, elaborate security measures were being put in place, street drains within proximity were meticulously inspected, local police had cordoned off the area to traffic and military jets prowled above the skies ensuring that the no fly zone within proximity of the Summit’s venue were observed. But it wasn’t the security activities around Fortaleza (Fortress) that grabbed the headline, but rather what was being discussed inside the Summit. 

As the leaders sat around a table, they were discussing the potential end of, what they perceived to be, the way mega business, aided and abetted by the US and its allies, had an unchallenged ability to exert a wielding influence over the world’s economy since the end of WWII. The International Monetary Fund (IMF) and the World Bank, both institutions established almost 60 years ago by the world’s most powerful nations in the aftermath of WWII, is increasingly being viewed by the group of BRICS nations as pretty much the facilitators for US and allied economic supremacy. While the World Banks and the IMF, both share the same aim of ending extreme poverty and boosting shared prosperity this seems less realistic today with rising inequality, even among developed nations. Moreover, these altruistic goals are perhaps a smokescreen for their true function, according to critics who believe that these financial institutions are merely tools of corporatocracy, a society or system governed by corporations. “When the IMF or World Bank lends money, strings are invariably attached, and those strings tend to reflect the values and interests of Washington and its allies,” said an analyst at the Institute for Development Studies in Sussex, UK.

So the BRICS plan, to resist a society ruled by big business and White House policies, is to launch its own development bank, called the BRICS bank and a monetary stabilization fund called the Contingent Reserve Arrangement (CRA). Indeed, adding flesh to the bones, BRICS nations were able to conclude at the Summit in Fortaleza the financing structure of the BRICS bank and CRA. Both BRICS financial institutions will rival the World Bank and the IMF and are scheduled to be launched at the conclusion of the Summit. The choice of city is expected to be made soon along with the leadership of the bank, which will be rotated every five years.

The CRA will have 100 billion, with China being the largest contributor of 41 billion USD; Brazil, India and Russia, with all contribute 18 billion USD each and South Africa will add 5 billion USD to the fund. The BRICS Development Bank will begin operation with a capital of 50 billion dollars with contributions of 10 billion and guarantees of 40 billion from each of its members. The BRICS Bank has ambitious expansionary plans. It intends to expand 100 billion dollars within two years, and up to 200 billion in five years. The Development Banks projected capacity for financing projects is anticipated to total 350 billion USD by 2019. This is certainly by no means small beer. 

Therefore, assuming the BRICS Development Bank and CRA are successful, it would be reasonable to assume that these newly formed financial institutions could then end the monopoly stranglehold that the IMF and the World Bank’s has over financing large scale international development projects. Additionally, for the economies involved in the architecture of BRICs financial institution, being able to circumvent the World Bank and the IMF for development aid and apply to their own group’s BRICS Development Bank may be a real boon. The BRICS economies might be able to benefit from the no strings attached financing of the group of countries new BRICS Development Bank. Previously, much World Bank development aid concerning hefty infrastructure projects in developing countries tended to be tied down to the approval of finance, which was subject to contracts being awarded to US and western corporations. Moreover, interest payments on the loans made also resulted in payment outflows from the BRICS economies. In view of this, it then becomes fairly apparent that the creation of BRICS Development Bank, in theory is likely to be a boost to BRICS companies, their bank and its economies. 

On the other hand, the implications for US and allied corporate titans may not be so favourable in so much as it could also extinguish an era of plum public contracts being awarded on a silver plate to these corporations. There might also be the added risk that the BRICS Development Bank could deliberately or by chance promote policies within BRICS nations and beyond that are at odds with those of the White House. So it’s reasonable to assume that the BRICS bank could act as a facilitator in the shifting of economic and political power from the West to the East.

However, the extent to which this power and political shift plays out depends on the BRICS Development Bank’s effectiveness as a means of financing infrastructure projects within the group’s countries and beyond. If the BRICS bank is just another replica based on the IMF and World Bank model, with its criticized shortcomings, then its influence may not be as significant as anticipated by its architects. Like any institution, it is run by human beings who often have self-serving interests, combine this with little transparency and practically no press freedom in a number of BRICS countries and it might just be the perfect cocktail for a few oligarchs becoming even more powerful at the cost of many. That would be worse than corporatocracy.

But that’s maybe just a cynical view, on the upside the BRICS Development Bank has maybe got the world’s financial architects thinking about the need for change. If that is the case, then let’s hope that what emerges is for the greater good.

Sterling Strength

The strength or otherwise of the price of a currency depends as always on the balance between demand and supply. As there are many factors that can influence these two elements in determining a currency’s price it becomes complicated and, often, a mystery to the casual observer. The price of a currency is that measured when comparing it with another currency. It can, therefore, be different according to which one it is being compared with. These are known as currency pairs. As the world’s reserve currency is the Dollar, it is used as the yardstick with which a currency is valued. The value of pairs which do not include the dollar such as Euro/Pound are calculated by reference to the price of each against the Dollar.

The balance of payments or the difference between a country’s total exports and total imports is a major influence. Demand for exports incurs demand for the currency and demand for imports incurs a need to sell the currency in order to purchase the imports.

The level of interest rates in one country compared to that of another could create demand for the currency offering the higher interest rate. For an investor, however, the higher interest rate may be offset by the risk of losing value in the currency due to other reasons such as inflation. A high rate of inflation could undermine the value of the currency as competitiveness is reduced by the high cost of production. The loss of capital value could more than offset the gain from higher interest rates for such an investor.

A large economy in the developed world with high levels of government debt funded from the issue of government bonds such as US treasuries or UK gilts could create demand for the currency as such debt has been regarded as safe. Recently, of course, the surprising fragility of some sovereign debt has made investors much more wary. It does, however, stress the need to be confident in the strength of the issuer of debt before buying the issue. There are agencies such as Moody’s and S&P and Fitch which examine the strength of a country’s finances and accord ratings so that investors have confidence in the risk being taken for the return obtained. These, too, have been revisited following recent sovereign debt problems.

Speculators can have a big influence on the price of a currency. If investors feel the price of a currency is a one way bet on it rising or falling they can ‘pile’ in to push it further in that direction. Until action is taken to reverse the trend a currency can become very over or under valued. The central banks are big players in the currency market and, as they have the ability to create money, can move the currency with threats of intervention and by actual intervention. They could, in theory, carry on spiking the speculators for as long as it takes to reverse the trend and this can be seen to work unless the trend has been created by investor’s determination that something fundamental needs to be done. ‘Safe’ havens such as the Swiss franc can be under pressure in times of crisis and the Swiss central bank has had to intervene to show speculators that the price is not one way. Investors can suffer a capital loss quite quickly.

Currently, the Euro has been strong without apparent good cause. The Euro area has severe financial problems among the peripheral countries, interest rates across the region are low, economic growth is low or non-existent and yet the currency rises. This causes problems for exporters, reduces inflation such that there is now a fear of deflation. Both, of which, have kept economic growth weak. The central bank appears to be taking inadequate steps to reverse this situation and investors in the currency have enjoyed a, near certain, strong currency. This could reverse very quickly if there were, what is regarded as, firm action to boost economic recovery with quantitative easing or a version of it.

Sterling has also been strong against the Dollar and most other currencies. Investors have a growing confidence in the success of the UK government’s economic policies. The statistical data on economic performance have indicated good growth in the last year. The UK fiscal deficit has not improved as rapidly as hoped but action is being taken to bear down on expenditure and income, or in other words, receipts from taxation have been slow to recover. Taxation receipts are, however, increasing and should only improve as corporate profits rise and overseas companies are encouraged to set up here to take advantage of the better business environment and competitive UK tax rates. The result of this relative success is that many economic observers have a growing sense that interest rates in the UK will be one of the first of the major economies to rise. Investors, therefore, have the prospect of higher returns from an early rise in interest rates and from an appreciating currency. They appear to have a win-win situation and, in an era of low returns, that is too good to miss so they invest in the UK.

The impact of this strong currency has been for inflation to be lower than it would otherwise have been and, indeed, it is now below the Bank of England’s target of 2%. It also makes it more difficult for UK exporters to compete in overseas markets as a strong currency increases the price of goods created here when sold abroad. If this situation were to be regarded as permanent, the impact is for UK business to cut costs further to bring down the price they have to charge and to improve their competitiveness. This increases capital investment and productivity and is in the long term good of the economy. Countries in this situation are then in a virtuous circle of low costs, high productivity and strong exports. It can, therefore be a difficult thing in the short term but in the country’s long term good. It also impacts on the profits of companies that have operations abroad as profits are translated back into Sterling at a higher rate resulting in lower profits. Companies can mitigate this affect by forward sales and by better buying of raw materials. They can also reduce the impact by generating their borrowings in the foreign currency in order to get the advantage of translating costs at the higher rate. Travellers abroad should get a better rate of exchange so that it becomes cheaper to travel abroad and to spend their holiday overseas.

Events such as the general election next year could reverse this trend as the result could bring changes to policy that may not be regarded as good for the economy in investor’s eyes. The Scottish independence referendum could also affect it as doubts about the impact on the currency arise.

Trading Information

 A volatile market for the trader is like waves for the surfer, without it neither can get a free ride. Facts, rumours and economic data all contribute to volatility in the market; they are the trader’s waves. With that in mind, having your eyes focused and ears tuned to the type of information that’s likely to be market sensitive can be rewarding for the trader. So being able to gain rapid access to this type of information from a reliable and accurate source not only makes a lot of sense, but it could also make you money and enhance your trading performance.

The Regulatory News Service (RNS) provided by the London Stock Exchange is an excellent and reliable source of news information for traders, furthermore, it is free. For the last three hundred years the London Stock Exchange has produced detailed information for companies and investors alike. Moreover, the advent of technological innovation over the past decade has transformed this service from a twice-weekly paper publication for the London business community to a real time news flow of continuous electronic information to the world’s financial markets. In 2008 RNS redeveloped its technology platform which improved data submission and display of announcements to the market in XHTML formatted data output. Today, RNS is the leading specialist provider of regulatory disclosure distribution services to UK listed and Aim companies. For companies, RNS is a one shop stop for them to fulfill their regulatory obligations and communicate with global investors and for the investor RNS is the authority for reliable and accurate corporate news. Approximately, 250,000 announcements are published by RNS per year, according to their website. Additionally, over 70% of all regulatory and potentially price-sensitive UK Company announcements, emanating from leading FTSE companies, originate from RNS. RNS is used by many financial journalists for reliable news providers such as the FT and Reuters. RNS website can be found at; http://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html .

Having rapid access to information relating to directors’ dealings in their company shares is also useful; this is known as “insider trades,” or “insider dealings.” Don’t confuse this with the other illegal activity of insider dealing, which is when the trades are made on information gained prior it being released to the market. The rules on insider trading are complex and do vary from country to country and enforcement varies greatly, depending on the jurisdiction where the white collar crime was committed. Nevertheless, we will concern ourselves with the legal insider dealing. What distinguishes this from the other illegal market activity, in a word, is when the trade was made. If you trade on publicly available information then that is perfectly legitimate trading. There are literally thousands of insiders trades, directors buy or selling their company’s shares on a daily basis. As the saying goes, “the view at the top is always better.” So when a director increases their shareholdings in their own company this is often perceived by the market as a bullish signal and visa versa. However, it is not always a master plan when deciding whether to go long or short on a stock because it may be the director’s strategy to buy stocks with the aim of propping up the company’s share value. So the increase in share price may be tied to no real fundamental reasons, such as the improved competitiveness and profitability of the company. Or a Director may be selling his own shareholdings to buy a holiday home, a luxury yacht etc. Nevertheless, insider dealings could be a useful gauge, particularly when it’s combined with technical analysis. Additionally, this information is publically available for free. The website; http://tiptrades.com/ provides daily updates of insider dealings. “We keep you connected with insider buying and selling alerts directly to your mobile, device,” claims the founder of the website and it prides itself of giving you the data without having to spend hours trying to find it. 

Mergers and acquisitions activity moves the market. The idea is to try and identify target companies, those likely to be taken over, and buy stock in them before they have been acquired, often by a rival company. It’s not uncommon for the share price of target companies to rise by double digits during the course of just one week. So by keeping abreast with mergers and acquisition activity, then acting appropriately on the information might turn out to be a lucrative trading strategy. For mergers and acquisition news relating to US stocks checkout the website http://www.streetinsider.com/Mergers+and+Acquisitions. It has been recommended as the best source for mega merger and acquisitions on Wall Street. The founders claim to have been tracking Mergers and acquisitions of companies on Wall Street since 1999. The premium service provides email alerts with the aim of giving you a trading edge. 

Then there is macroeconomic data that can also be useful. It’s always best to drink at the source, so check out the government websites. For the UK; The Office for National Statistics (ONS) is a reliable source and it can be found at the following address; http://www.ons.gov.uk/ons/index.html. For US; Marco economic data the most reliable source is the Federal Reserve Bank website; http://www.newyorkfed.org/research/calendars/nationalecon_cal.html. This will provide you with the date and time of the key economic events and the available links will direct you directly to the data source.

It might also be prudent to reconcile your trading decisions with some technical analysis. For example, take a hypothetical case where you receive a news alert about insider dealing, a company director buying shares in his company, but the charts are indicating a clear sell signal. The share then falls due to a negative trading statement, later released by the company. Had you not decided to buy you would have avoided a loss. This simple example underscores the importance of combining your trading decisions with analytical software. Typically the best analytical software available is designed by traders http://winwaycharts.com/Tradingexpertpro.html is gaining rapid popularity.

Who Has The Gold and Why It's Important.

There’s about 31,500 tons of gold held in national treasures today. Virtually every sovereign nation holds foreign reserves, of which most of it is held as precious metal, gold. Perusing over a list of countries with the largest gold holdings and it becomes apparent that those at the top of the list tend to be characterized as usually having robust economies; they tend to be technically advanced; usually score good credit rating and are normally dominant players on the world stage.

Predictably, number one on the list, by a considerable amount, is the US with the largest overall gold reserve holding of 8,133.5 tones, according to the World Gold Council, February 2013. Approximately 75.1 percent of the US’s foreign reserves are held in gold. While Fort Knox, situated in Kentucky and home of the US Army Armor Centre, is probably the world’s most famous storage keeper of gold, more of the precious metal is currently being held in the US Federal Reserve Bank of New York's, underground vaults. 

Coming at a distant second is Germany amongst the countries with the largest gold reserve. Duetsche Bundersbank recently reported that it has 3,391.3 tonnes (approx.141 billion USD at today’s quote) of gold. Germany’s gold reserves represent 72.1 percent of the nation’s total foreign reserves, but not all of the gold is held in Germany. Indeed, currently 45 percent is held in the US Federal Reserve Bank vaults in New York; 13 percent in London; 11 percent in Paris and the remain gold is being held in the Bundersbank vaults in Frankfurt.

Coming at a respective third and fourth is Italy and France. The Italian Central Bank, Bank De Italia holds 2,451.8 tons of gold, valued at 90 billion USD at current prices, representing 71.3 per cent of its foreign reserves. However, Italy gold reserves may have actually fallen during the 2008 financial crisis when it needed to sell some of its gold reserves to pay the bills. France holds similarly 2,435.4 tons of gold representing a little less than three quarters of its foreign reserves. 

China, the world’s most populous country, is the fifth largest holder of gold reserves. The People’s Bank of China has reported to hold1054.1 tones, but it only represents 1.6 percent of the country’s total foreign reserves. However, a number of gold analysts believe that China’s gold reserves might actually be higher at around 2,000 tons of gold.

Then there is Switzerland, with the highest nominal wealth of adults in the world, according to a Credit Suisse report. Switzerland came in sixth place on the list with 1041.1 tons of gold reserves, representing approximately a quarter of its overall foreign reserves, in 2012.

Russia holds the seventh position among the countries with the largest gold reserves. The Central Bank of the Russian Federation has 976.9 tons of gold in reserves, which is 9.5 percent of its total foreign reserves, according to The World Gold Council. Russian production of gold has been steadily stepped over the years. In 2009 Russia produced an extra 21 per cent of gold and in 2010 the figure was 24 percent. Russia’s reserve bank has plans to increase its foreign reserves in gold with the aim of bolstering confidence in its currency, the ruble, as a reserve currency for trading its natural resources amongst its Slavic neighboring countries and beyond.

Japan has slid down to eighth position on the list, probably due to the fact that the Bank of Japan sold 20 trillion Yen of its gold reserves during the major 2011 tsunami and nuclear disaster that ensued to calm investor fears. Latest figures now indicate that the Bank of Japan holds about 765.2 tons of gold.

The Netherlands comes in at ninth position on the list with holdings around 612.5 tons of gold. The country’s foreign reserves, of which 58.7 percent are held in gold, were considered a saving grace during the last financial crisis of 2008. 

Making the tenth position on the list is India, which holds around 557.7 tons of gold. Gold only makes up 9.6 percent of India’s overall foreign reserves, according to the World Gold Council report in 2013.

Surprisingly Britain, who once held vast gold reserves, doesn’t even make the top 10 list now, sitting somewhere at the lower end of the top 20 countries holding gold reserves. This slide was partly due to what many commentators believed to be the then Chancellors catastrophic decision to sell off approximately half of the nation’s gold reserves between the years 1999-2002.

As we have noted from recent past financial disruptions and natural disasters, in times of difficulties, nations rely on their foreign reserves to cushion the adverse impact. Whether it’s a sovereign debt crisis or a natural disaster resulting in a huge cleanup cost, such as seen with the 2011 tsunami in Japan or the austerity cuts imposed on Italy in 2008, having some gold reserves to tap into to pay the bills can prevent a bad situation becoming even worse. Moreover, as seen in the Bretton Woods Agreement, the ability to ty a country’s currency exchange value to the value of gold, provided currency stability in times of turmoil. So it’s no coincidence then that since the 2008 financial crisis Germany is eager to implement a plan to repatriate 300 tons held in US Vaults by 2020. But to date just a little more than 10 percent of that figure has been returned to Germany. The progress to repatriate 635 billion USD of gold held in US vaults has been slow, which apparently has never been fully audited by Germany. This has led conspiracy theorists to believe that the gold no longer exists. “Even after one decade of requesting this information from the Fed there is not a least one shred of evidence that German gold is untouched in New York feds vaults we are still missing published gold bar number lists, even though the Federal Reserve does publish this list for their own gold,” said Peter Boehringer, founder of repatriate our gold campaign. But Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank dismisses the rumors, calling them absurd conspiracy theories. 

Nevertheless, the trend for nations to physically hold their gold has been growing steadily over the past few years.

UK Output. What's Going On?

The Office for National Statistics (ONS) raised eyebrows amongst analysts on Monday when it reported a drop in its production index of 0.7 per cent, between the months of April and May. Contributing largely to the fall was a plunge in factory output from April, which represented the largest contraction since January 2013 and the first decline in six months according to a spokesperson from the ONS. The output of 10 manufacturing categories out of a total of 13 declined in May compared to the previous month, informed the statistics office. The biggest contributors to the disappointing output figures were basic metals, which decreased 2.3 percent, and pharmaceuticals, which also slid 3.6 percent during that period. 

The latest ONS production figures took a lot of economists by surprise. Indeed, the median forecast of 25 economists was for a gain of 0.4 per cent, according to a recent Bloomberg news survey. So, May’s slump in UK manufacturing was a bit of a damp squib for the markets. After all, UK domestic consumption remained buoyant during the first quarter of 2014, spurred on by the Bank of England’s expansionary monetary policy, which facilitated cheap and readily available credit. The upshot of a loose monetary policy was a boom for manufacturers, who reported the biggest rise in domestic sales since the survey started in 1989 in the first quarter of 2014. Contributing to this figure were British consumers who splashed out on new cars, at their fastest rate in nine years. A whopping 1.29 million new vehicles were sold in Britain during the first half of the year, which represented a 10.6 per cent increase in sales from the same period last year, according to the Society of Motor Manufacturers and Traders (SMMT). Ford Fiesta, Vauxhall Corsa and Ford Focus were top on the buyers’ list. “Britain's car industry has smashed records going back to 1959 with the longest-ever period of sales growth of new cars,” said Mike Hawes, SMMT chief executive. Car manufacturing in Britain also increased during the first half of the year as foreign owned companies invested in production lines at their UK factory plants. Apparently, this trend is expected to continue with manufacturing output for cars predicted to return to levels not seen since the 1970s where a record 1.92 million vehicles were built in Britain during 1972, according to SMMT. Last year the total was 1.51m cars, which represented a six-year high. 

However, while domestic consumption provided strong tailwind for UK manufacturing, in the first half of 2014, UK exports remain lackluster during the same period. 

The lingering recession in many parts of the Euro zone didn’t help boost UK manufacturing sales. UK exports to the EU fell by £11.5 billion in the month of April 2014, which is a decrease of £2.1 billion (15.8 per cent) compared to last month. It is also a decrease of £0.6 billion (4.9 per cent) compared to April 2013. Certainly, bitter austerity is biting hard in the southern countries of Europe and public health cuts were most probably contributing to falls in UK pharmaceuticals exports to the region. Additionally, Britain’s exports outside the EU declined, the trade deficit rose to £8.92 billion in April, 2014 compared to £8.29 billion in March, representing a decline of 1.5 percent in manufacturing exports, according to a recent Bloomberg article.

Furthermore, the strengthening pound against the euro and dollar could also be a contributing factor providing headwinds for UK manufacturers, which was reflected in May’s dismal manufacturing figures. The appreciating pound is making UK manufacturing exports more expensive and thereby less competitive abroad. Furthermore, the Bank of England’s perceived hasty move to tighten monetary policy could also be strengthening the pound even further, providing more anxiety to UK manufacturing. Underscoring this view Samuel Tombs, an economist at Capital Economics in London said, “The data suggest that the stronger pound might be starting to slow the recovery in the manufacturing sector.” However, on an upbeat note he added that, “Despite today’s disappointing figures, we continue to think that the economic recovery will receive decent support from the industrial sector.”

Michael Saunders, UK economist at Citi also played down May’s disappointing output figures. "We do not regard these data as a sign that the economy's rapid expansion is losing momentum," he said and cited a series of positive industry data to back his support. Manufacturing output has increased 2.3 percent from a year earlier and was up 0.6 percent in the three months through May from the previous quarter. 

However, while the ONS cautions into reading too much into one set of monthly figures, there are some strong headwinds for UK manufacturing in the months that lie ahead. External factors such as a slowing global economy could put a further dampener on UK manufacturing exports. Moreover, the benign climate of low interest may be coming to an end. BOE Governor Mark Carney has said that the time to normalize rates is now “edging closer.” The market is betting that rates, which have been kept at a historic five year low, will rise 25 basis points by February. But higher interest rates would be a double blow for UK manufactures as it would make financing investments in plant and machinery more costly. It would also cause an appreciation in sterling, making UK manufactured exports less competitive abroad. Moreover, the geopolitical situation in Iraq and the Ukraine is resulting in higher energy costs, which is a huge input cost for manufacturing. So rising energy costs could also be a headwind for UK manufacturers. Furthermore, there is the UK future relationship with the EU to consider. As Europe moves closer towards a federal Europe and the UK continues to isolate itself from it, this may deter future inward investment into UK plants and machinery. Large scale foreign investors may be put off making future investments in their UK production plants due to a fear that the UK could decide to exit from the European Union. So there’s a number of compelling reasons to be bearish about future UK production figures and it could also be factor for investors deciding to take risk off the table.

Fundamental Vs Technical Analysis

Fundamental and technical analysis are two distinct investment methods used by investors to derive investment decisions. Both methods share the same objective, but the data and tools that they use to determine an investment decision are entirely opposed to each other. Technical analysis uses exclusively charts, while fundamental analysis relies on company reports and financial data. Let’s examine the two investment methods in more detail below; 

Fundamental analysis uses real data to derive a stock’s intrinsic value. This type of investment method analyzes financial data, which is “fundamental” to the future performance of the company and its share price. So an investor who relies on fundamental analysis would be largely basing their investment decisions on several factors. For example, any competitive advantage a company might have compared to its rivals, such as patented technology giving its product a unique selling point. Moreover, a company might be able to take advantage of economies of scale, thereby undercutting its rivals, yet still maintaining the highest profit margin in its sector. 

Another factor that fundamental analysts examine when determining a share’s intrinsic value, includes a company’s earnings growth. Is the business expanding in a profitable way by keeping its costs under control? Revenue growth is also an important factor when determining the viability of a business. If the business is under competitive strain it would show up in its revenue figures, since price is a factor of revenue, thus a fall in price due to competitive pressure would result in a fall in revenue, given no change to sales in a certain period. The company’s market share is also a crucial data for the fundamental analysis when determining the intrinsic value of the stock. The more dominant a company is in its market, the more likely it would be to drive rivals out and manipulate prices to maximize its revenue. 

A company’s financial reserve is another factor fundamental analyst like to peruse over when deriving their investment decisions. In a period of economic downturn turn, when credit is tight, the availability of financial reserves could mean the difference between the company’s survival and failure. 

Product pipe line, the likelihood of future products/services being launched on the market, is also considered by the fundamental analyst. For a company to remain a market leader, or aspire to dominate its market, product innovation and development are essential; this is particularly the case in the tech sector, pharmaceutical sector and frankly any business environment that could benefit from research and development. 

Fundamental analysts also like to eye up the company’s management team, bearing in mind that a company is made up of people and guided by its management. Management track record and their experience are often used to gauge the future performance of the company. 

For the fundamental analysts the Holy Grail lies in the company’s annual/interim reports and financial statements with the aim of finding value stock that the market has mispriced. So when the stock is underpriced they buy, alternatively when the stock is overpriced they do the reverse and sell.

The technical analyst, on the other hand, is a different type of animal. Indeed, a technical analyst doesn’t look at the financial statements of the companies they may wish to invest in, let alone know who runs them. The technical analyst bases their investment decisions on a distinct investigation method by studying historic charts, patterns and trends of publicly quoted companies. This type of analysis employs the use of charts, bar charts, candle stick charts, and trading volume to determine the future trajectory of share prices. Such things as a company’s revenue, market share, product pipeline and financial statements are literally of no concern to the technical analyst. It’s almost as if the technical analyst is entirely oblivious and unconcerned about the entity’s activities. The technical analysis is completely focused on the historic and potential future price movements of the instrument they wish to invest in. They believe that future price movement of a particular financial instrument can be determined by analyzing its price charts. Trend lines can be plotted to determine their trajectory and entry (buy) and exit (sell) points. Technical analysis, as a method of investigation assumes that we are creatures of habit that we behave in a certain predictable way when the price of an instrument breaks through a predetermined threshold point. So the technical analyst type of investor buys when an instrument’s price falls to its price support level, conversely they sell when the price breaches its price resistance level. 

They say if you want to master a game you need to watch meticulously the top players in action. So what do the gods of the investment world do? Apparently, there is no ambiguity when you ask Warren Buffett, Peter Lynch and Benjamin Graham, whether they base their investment decisions on fundamental or technical analysis. "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer," famously replied Buffett when asked what he thought of technical analysis as an investment method. 

Meanwhile, Peter Lynch, another billionaire investor who was involved in Fidelity Investments, returning an average of 29 percent between the years 1977-1990, said "Charts are great for predicting the past." Benjamin Graham, famously said, "In the short term the market is a voting machine, but in the long run it is a weighing machine."

So those in the top league share a few things in common, they didn’t rely on trend lines, charts and candlestick charts to amass their fortunes; they relied on fundamental analysis and focused on finding long term value in their investment decisions.

Well and good, but over the past decade the scandals of Enron and more recently the Bank of America, Citi Group, GM and the list goes on of companies cooking the books calls into question the auditor’s report, “that the financial statement gives a true and fair view of the state of affairs of the company.” In a globally connected, highly competitive world, where success is handsomely rewarded and failure punished, the pressure for companies to perform is greater than ever, sometimes, not always, financial statements and reports may be economical with the truth. For this reason, an investor who ignores or dismisses technical analysis as tea leaf reading would do so at their own peril. The fundamental analyst may interpret value in a stock after interpreting its accounts, but they may also be oblivious to high volume trades in the stock due to say, insiders selling. Such a move would blip on the technical analyst’s radar and they would be able to take measures to preserve wealth.

You may not drive your car looking only in the rear mirror, but it certainly helps you avoid an accident by checking regularly what is going on behind you. Perhaps it is for this reason that all large broking houses now employ technical analyst.

What You Need to Know About Super ISAs

It has been dubbed Britain’s biggest saving plan and it has undergone some major changes recently. Approximately 24 million Britons, half the adult population, hold an Individual Saving Account (ISA), which is a class of retail investments arrangements available to those residents of the United Kingdom. The principal advantage of an ISA is that savers are exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either. Cash and a broad range of investments can be held within the plan. Moreover, there is no restriction on when or how much money can be withdrawn. Payments into the account are made from net income earned.

Chancellor George Osborne’s sweeping changes to ISA, which came into effect on July 1, now means that ISA savers can invest more, pay less tax and decide where they invest. So under the new ISA scheme, known as super ISAs, the annual amount savers can now invest within an Isa per year rises to £15,000 from July 1, which is nearly treble the cash ISA limit of £5,940. Perhaps another and more significant change to ISAs from the beginning of this month is that the previous restrictions that could be saved in cash ISA accounts as opposed to stock market investments has been abolished, thereby giving savers freedom to exit out of equities should they wish to do so.

Indeed, the new rule now implies that a saver can sell all their existing shares held in their ISA account and transfer part, or all of the proceeds into an ISA cash accounts with different providers. This means that nervous investors who require access to the funds in the immediate or short term future, for say a deposit on a property or retirement could then move all or part of their ISA savings out of shares into cash.

Assuming the saver has started a new cash ISA this tax year with a building society, then decides to invest some of the extra allowance into a stock market fund. Under the new rules they would be entitled to open one cash and one stock market ISA per year. Moreover, the saver would be free to choose any provider of stock market ISAs and could invest up to £15,000 within the two ISAs.

So what if savers have locked in fixed-rate cash ISAs with their banks, say early in the year, would they then still be able to top up the same account to the full £15,000 from July? Apparently, this may be possible bearing in mind that fixed rate accounts, guarantee a set rate of interest over the agreed period and that interest rates have not varied much throughout the year, so many providers are allowing top ups at the agreed same rate.

But how will funds be transferred from a share ISA, which is managed by an investment house, to a cash ISA run by a different institution, such as a bank or building society. It’s very likely that the two separate institutions don’t share the same computer systems, have different rules and different administrative systems. This would mean that any transfer of funds from share ISAs to cash ISAs would probably have to be done manually. Currently savers can transfer cash ISAs from one building society or bank to another electronically, without much complications. Indeed, a transfer from one cash ISA to another takes on average eight days, which incidentally also happens to be the same time period required to transfer cash to shares.

However, the electronic transfer of funds from share ISAs to cash ISAs will not be possible in most cases and it doesn’t take much imagination to see that this could result in an administrative headache and delay for the saver. According to industry guidelines published just last week savers would have to wait up to a maximum of 26 working days (36 days in total) for their money to be moved from an investment ISA to a cash ISA. Additionally, during this delay in the transfer of funds the saver will not be entitled to any interest payments. Some industry experts believe that this week’s Super ISA launch is really a complete unknown, which could cause problems. If the volume of shares to cash switches is low then the system should be able to cope. Where the problem could arise is when savers are switching from shares to cash in masses, then things could get really clogged up, claimed an industry expert. Transfer requests sitting in mail bags for days on end and savers losing interest while their cheques are in the post and paperwork gone astray typifies the kind of problems that could arise. Nevertheless, transferring one cash ISA to another should still remain relatively straightforward.

ISA holders are advised to select the cash ISA that suites them best and to shop around for the highest interest rates. Should you decide to sell your investment ISAs, don’t leave the funds too long in your ISA investment account, as it will earn you little or no interest. The best payer of fixed rates at the moment is Virgin Money, which accepts transfers and new money. Savers also need to bear in mind that while cash ISAs don’t charge you penalties for transfers, investment ISAs do. In some case you might be charged up to £175 to leave and move to a rival firm.

However, despite some potential hiccups arising from the super ISA the saving plan is still being heralded by many as a major boost for savers, giving them more freedom to decide for themselves how and where to invest. Admittedly, the bank rates are so low that the cash brakes on deposits in ISA maybe worth next to nothing, thereby cancelling out the benefit of the higher allowance. So Super ISA may be just another super political sound bite. But what remains to be seen is whether savers will stampede out of equities into cash or vice versa. What happen here could then determine the future direction of equity markets.

Iraq and The Price of Oil

Regretfully, the situation in Iraq has deteriorated for Iraq Prime Minister Nouri Maliki and his western allies. The Islamic State of Iraq and al-Sham (ISIS) is continuing to take territory in Iraq, Fallujah and parts of Ramadi have fallen. On the door step of the Iraqi capital, Bagdad, ISIS is marching towards the Euphrates River damn, about 120 miles northwest of Bagdad. Islamic fighters have reached Burwana, the eastern side of Haditha, according to recent reports in the New York Times. ISIS continues to outthink, outmaneuver and take territory, despite the Iraqi army being greater in number and better equipped.

The battlefield in Iraq is evolving in two ways, according to Michael Knights who specializes in Middle

Eastern military and security affairs for the Washington Institute. “Firstly, Jihadist fighters (ISIS) have obtained greater strategic depth in terms of distance than Iraqi government soldiers would need to travel to retake key areas,” said Mr. Knight. This implies that ISIS already has a logistical and strategic advantage due to the recent territory taken. Secondly, making reference to approximately 60 of the 243 Iraqi army combatants being unaccounted for and their equipment lost, he added that ISIS offenses have resulted in a serious moral issue that should not be brushed under the carpet.

A compelling question that might be perplexing western analysts now arises; why is a better equipped, greater in number Iraqi army conceding to a Jihadist force amounting to only 6,000 or so Islamic fighters? It does seem rather strange that ISIS is achieving successive military victories in Iraq against the odds.

Maybe there are several reasons for ISIS military success. For example, ISIS has gained additional manpower from jailbreaks. Approximately 500 prisoners have escaped from Abu Ghraib last July. Most of these prisoners are surge/sahwa war veterans, so with these war veterans now aligned to the Jihadist force they have raised ISIS fighting competence level.

Moreover, ISIS recent military victory in Iraq is raising its prestige and luring foreign fighters to join the Jihadist force. In the last few weeks ISIS has been recruiting heavily from fighters based in Syria who have also crossed the border to aid with the overthrow of the Iraqi Maliki government.

But a militant/revolutionary force, such as ISIS would not be able to make such strides against Iraqi government force, a more numerous and better armed opponent, without the support of the populace. Additionally, the Iraqi army may feel dispirited and frankly unwilling to fight for their leader, Maliki, a polarizing figure who has been criticized for stirring up religious friction between the Shia and the Sunni Muslims and excluding the latter. The Iraqi army in some regions is dominated by Sunnis, while their political masters are mainly Shia. Some Iraqi soldiers may not feel like fighting their Sunni brothers for a political master that opposes them. With this in mind the Iraqi leader and commander and chief, Maliki, may have lost legitimacy.

The situation in Iraq has a wider implication for the US and its allies since it also affects the price of oil. Indeed, oil prices have spiked up to a nine month high at 106 USD (July 1). Oil markets continue to remain on edge as escalating concerns over the prospects of oil supplies to OPECs second largest oil producer, Iraq, could be jeopardized. Furthermore, oil consumers are now more dependent on Iraqi’s increasing oil production over the last few years, this being particularly the case as Libya continues to struggle to come back online amid the continuing violence and persistent political turmoil. In February 2014 Iraqi oil production reached 3.6 million barrels a day, which represented its highest output in more than 30 years. However, oil production has slipped back to 3.3 million barrels a day last month, according to oil analysts. The Iraqi government’s intention was to raise production to 4 million barrels a day by the end of 2014 with further planned increases to oil production reaching 7 million barrels a day by 2016, according to economists at Capital Economics.

Therefore, given Iraq’s significant contribution to OPEC’s output, a major disruption to its oil production could also result in a major spike in oil prices, according to analysts. The worse fears in the oil markets are now a reality. Fighting has spread to Iraq’s main oil production areas in the south and Iraq’s largest oil refinery in Baiji now remains under ISIS control.

But a stable Iraq is desirable for western interests, although knowing what effective foreign policy to adopt is complex for the government. Re-equipping the embattled Iraqi army with more modern weaponry may not be the solution. If fractions of the Iraqi army are unwilling to engage ISIS due to common beliefs, then the fear is that any weaponry supplied to Iraqi forces could also be transferred to ISIS. Sending in US allied ground troops would also not be the solution. “If the Iraqis will not fight for their own country, America should not get involved,” said US diplomat James F. Jeffrey. Indeed, massive US troop involvement would reek of US western imperialism and the last thing US would want to do is stir up more anti US western sentiment in the region. Perhaps then the solution lies with assisting the Iraqi’s to elect a more cohesive and inclusive government through the democratic process in Iraq. Maybe a new Iraqi leader who would not ignite friction between the Shia and Sunni Muslims could be part of the solution to win the Iraqi army and its people back on side. Moreover, US military support, through the use of armed drones, maybe desirable if it is perceived as supporting the Iraqi army in its offensive against ISIS. Indeed, armed US predator drones fitted with Hellfire missiles have begun their flying missions in Bagdad and elsewhere in Iraq with the aim of protecting US troops and diplomats on the ground and attacking ISIS positions. The situation remains fluid.