Why Egypt is so dangerous
After a quick market rebound, a possible coup sends crude oil soaring out of a multi-year consolidation and sucks the wind out of stocks.
Well, that didn't last long. Stocks have recovered over the past week as the Federal Reserve, after watching liquidity-addicted markets freak out, walked back its hawkish "taper" commentary on reducing its $85 billion-a-month bond purchase program. Economic data has also stabilized somewhat, but remains weak enough for the Fed to justify a continuation -- if not an expansion, based on some comments today by New York Fed president William Dudley -- of its cheap money stimulus.
Why not? Inflation remains low. But maybe not for much longer.
About two hours ago, Egypt's military issued an ultimatum to the ruling Muslim Brotherhood that sets the stage for a violent coup attempt tomorrow as supporters and opponents of Egyptian President Mohammed Morsi rally in the streets. That's renewing concerns about the stability of the region and the flow of crude oil through the Suez Canal, sending oil surging out of a multi-year consolidation pattern. And that threatens to boost gas prices (pressuring consumers) and lift inflation (limiting the Fed's flexibility).
The Dow Jones Industrial Average is reacting by falling away from resistance at 15,000, as well as its 50-day moving average. But the bigger story is what's happening in crude oil, which is rising alongside the U.S. dollar (which is rare) and has moved up and out of the downtrend pattern that's contained it since the mid-2011 inflation scare driven by the Arab Spring turmoil.
The CBOE Volatility Index (VIX) or fear gauge also on the move as a continued rise in energy prices provides a new threat to the cheap money liquidity that has kept this market aloft amid deteriorating economic fundamentals and slowing corporate earnings growth.
I'm still seeing some long side action in smaller stocks like Lifevantage (LFVN). But the situation in Egypt is a serious threat to the market because it risks boosting the one variable that represents the Achilles's heel for global central bankers: Higher commodity prices feeding inflationary pressure.
That'll force them to taper, even if the economy isn't as strong as they'd like.
The situation is fluid and fast moving, but the moves in the ProShares Ultra Crude Oil (UCO) and the VelocityShares 2x VIX (TVIX) are strong enough that I'm adding them to my Edge Letter Sample Portfolio. Less aggressive options include the U.S. Oil Fund (USO) and the iPath S&P 500 VIX (VXX).
The rise in crude oil could continue as the Egyptian military sends assets to the Sinai Peninsula ostensibly to prevent the flow of Islamists from flowing across the border to support Morsi. And if so, the country could be looking at $4 a gallon gasoline by the end of summer.
Disclosure: Anthony has recommended UCO and TVIX to his clients.
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oh, so there are still some of those "geo-political concerns" thingies that could derail the rally?
We will be in a much worse position 4 years from now than we were 4 years ago. This administration has become a laughingstock around the world. When Obama speaks, the world puts their heads in their hands in quiet amusement, the same way they might react if a Kardashian gave a speech on climate change. 10 years ago, we'd have Snowden back in custody in a matter of hours. Today, we couldn't convince the Russians to give us a bottle of vodka if our very lives depended on it. And if we could, Obama would have to promise his first-born grandchild to secure the deal. Obama has probably never even haggled on a price at a flea market. And yet half the voters elected him to a position to negotiate on our behalf on the world stage. The results of his incompetent foreign policy directives will be felt for decades.
You mean just printing more money can't fix every problem?
Who'd of thunk it!
Maybe a renewed focus on global warming will!
Sameo-sameo...Can't cry about this, moving along...
Lose here win at another local..
Guess where I'm going?
Karma says it will pay me back, because I'm a good person..
get the feeling this mursi dude is blind and will soon meet a fate similar to bani sadr and goatsbade.
::Insert racist remark here::
::Insert condemning liberal democratic remark here::
::Insert snide conservative right wing remark here::
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The US isn't strong enough not to care about them now. But one day it will be.
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