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A Slippery Slope

Kevin Raymond February 7, 2011 Freedom by Friday 1 Comment on A Slippery Slope

The news has been dominated by events in Egypt where the populous is trying to oust strongman Hosni Mubarak. This follows the ouster of Tunisian strongman Ben Ali. It’s wonderful to see these regimes topple. But, it’s not so good for the US or Europe. While Cairo burns, oil prices move higher, and security fears become stronger.

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Strongmen have always had their place in history. Love them or hate them, they provided predictability…unlike what we are going to see in the months and years ahead. Democracy or whatever you want to call what is happening in the Middle-East will not happen over night and that is not priced into the US markets yet. In fact what is priced in is a happy ending. But, the markets could be dead wrong if the current crises spread like wildfire, something they are doing as I write this.

The prize in all of this is not freer people but the singular resource that has driven out foreign policy for decades – oil. Oil prices are barely budging based on the current events, up $3 or $4 per barrel since the crises began. Like the stock market, the oil market Volatility Index is acting complacent. In past years the scenes that we are seeing in Egypt would have rocked the oil and stock markets to the tune of double-digit percentage moves. For now, the crisis has not spread to any major oil-producing nation and with good reason. First, the major oil producers like Saudi and Kuwait are running Nanny States, which provide much greater financial support for the populous. Second, the oil producers have an American ace in the hole when it comes to security. We need oil so badly that it would be in our strategic interests to come to the aid of places like Saudi Arabia. This is not to say that it won’t get dicey there…I am sure the House of Saud is experiencing some sleepless nights.

Our dependence on foreign oil, from the Middle East, South America, Mexico and Canada (by the way we get most of our oil from places other than the Middle East, contrary to popular belief) is going to be in the spotlight once more as things tense up. If oil prices do spike to the $100 or $120 level, it will mean an immediate tax on the economy and bring whatever nascent recovery to a screeching halt. That is not good news and news that the markets are ignoring. The play if you think this will happen would be long oil and short the S&P.

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It’s the middle of earnings season and the markets love what they are seeing. The pump priming by the Fed is taking hold and people are once again embarking on the spending track. They’re buying a lot of stuff, but not the stuff that really matters – houses.

Housing starts, permits, foreclosure rates – you name it – are all still at dismal levels. In places like Florida pundits are predicting a further 10% to 15% fall in prices before it’s all over. Much of this depression in prices can be blamed on mass foreclosures, the vast majority of which are still on the books and have yet to hit the market.

The market has broke solidly above levels last seen in 2008. That is great news if you are in the market. Projections from many larger investment banks are for a move of another 10% to 15% higher this year. One may wonder how this is possible considering the economic doldrums that still pervades most of the country?

There is an old saying on Wall Street and one that has been proven correct yet again – “don’t fight the Fed”. It has always been the right move to buy stocks when the Fed is easing and sell when it is tightening. Next clue: when the Fed starts talking tough, it’ll be time to liquidate stocks. But, the way things are going now, it will be at least a year or two before we see that type of backbone from the Federal Reserve.

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