MarketWatch Schultz sees high possibility of October mischief Monday October 9, 12:01 am ET By Peter Brimelow Commentary: Newsletter veteran sees high possibility of global mischief NEW YORK (MarketWatch) -- The long-established International Harry Schultz Letter is on a roll right now, ranked third performer over the past 12 months by the Hulbert Financial Digest with a gain of 31.9% vs. 10.4% for the dividend-reinvested Dow Jones Wilshire 5000. See July 31 column But it's all gold and oil, right? Isn't that cycle over? With the Dow Jones Industrial Average finally making new highs, I've been waiting for Shultz's latest issue to snail in. He has adapted to the Internet with distinctly less joy that his friend and fellow-octogenarian, Richard Russell of Dow Theory Letters. It arrived last week. Admittedly, it went to press a few days ago, it's dated Oct. 1, but I am impressed with Schultz's indifference to Wall Street's euphoria. If anything, he's bearish. He writes: "Historically, October has been the month-of-choice for major stock market crashes. I've been moderately bullish on U.S. stocks, but the S&P 500 chart is in a bearish rising wedge. Not much left to go; make or break in October. Nasdaq is stronger, but is possibly in a year 2000-type blow-off stage. History repeats? Dotcoms caused the 2000 NAS blow-off. Will the Aug.-Sept. bursting of the housing bubble cause the Oct 2006 NAS blow-off? ...If US stocks fall, world will follow." This is significant because, despite the general caricature of gold bugs, Schultz is generally very quick to react if the market isn't going his way. In the early 1980s, for example, he did abandon gold and (even more daring) recommend bonds. He was right on both counts. What does preoccupy Schultz right now is the danger of an October surprise. He writes: "October 2006 is potentially the most dangerous, risky month in modern history. That's mostly because U.S. elections come on Nov 7. Geopolitically, the U.S. is bound like Gulliver ... Its military is stretched to a danger point and its mostly bumbling politicians (red & blue) are unable to escape the clutches of two losing and unwinnable wars ... literal tar pits. That makes the following otherwise-illogical moves as logical possibilities in October, when Washington would be acting or failing to act, for election reasons?" Schultz' list of possible October moves naturally leads with an attack on Iran by the U.S. and or Israel. Other possibilities include: Russia invading Abkhazia and South Ossetia; a Chinese invasion of Taiwan or the Spratly Islands; a North Korean "mega missile test" or attack on South Korea; a coup d'ÃÂ©tat in Pakistan. Because of U.S. overstretch and distraction, he writes, "October is a free pass month for wild/risky moves." This may sound wild, but who expected the Iraq War? Unorthodox thinking is what Schultz has specialized in for (anniversary coming up) 42 years of International Harry Shultz Letters. Schultz' investment conclusion: "If any of the above occur, commodity-metal-oil markets will move notably higher. Oil would lead the way. If Iran is bombed (now or later) they'll close the Strait of Hormuz in the Persian Gulf through which most regional oil must pass, increasing oil's price by 50% in one day. Don't be without 1-2 good oil stocks." He means it. Schultz' recommended asset allocation is only 10-15% in non-gold stocks, core positions in one or two oil stocks ... One suggestion: McDermott International Inc. (NYSE:MDR - News) And beyond an October surprise? Schultz says we're "poised between dramatic inflation and shocking deflation (short term?), either of which can come suddenly ... unprecedented debt vs. record-breaking money creation makes the situation explosive, able to go either way almost overnight." Gold may have one more leg down, he says calmly, but "regardless of a bumpy medium term, I see gold at $1,000 within 18 months."