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.

By Anthony Mirhaydari Jul 2, 2013 3:03PM

Kevin Phillips, Digital Vision, age fotostockWell, 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.


Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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Jul 2, 2013 5:39PM
The US needs to get out of all Muslim countries including Afghan, Egypt, Iraq, Israel, Pakistan and Syria.  We need to tell the world we are no longer going to arbitrate or intervene on anybody's behalf but our own. We really shouldn't care if 1/2 of Muslims kill the other 1/2 of Muslims in the name of their god.
Jul 2, 2013 3:29PM
It would have been just as accurate to have written "because they are muslim".  Can't be trusted.
Jul 2, 2013 4:48PM
The wisest path for the US is to drill and build. The XL pipeline would be a good start. Next open up federal lands both on shore and off shore to the new drilling methods. Then expand the refineries and build new ones. This would put Americans back to work and the multiplier effect would kick in and create more jobs . The price of gas would go lower and be more stable. The middle East will be a dangerous place for far into the future.
Jul 2, 2013 5:07PM
Egypt is just another example of the complete and utter incompetence consistently demonstrated in foreign affairs by this administration.  Many thought our standing in the world had fallen by 2008.  It's plummeted since then. We are now weaker than we've been in decades.   We are substantially less safe and less respected.  We have significantly less sway.   And just about all of our foreign policies have made our enemies a lot stronger and our allies a lot weaker and questioning their commitment to us, and ours to them. 

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.

Jul 2, 2013 3:39PM

You mean just printing more money can't fix every problem?

Who'd of thunk it!


Maybe a renewed focus on global warming will!



Jul 2, 2013 4:41PM
It`s time to send Dennis Rodman over there to straighten everybody out.
Jul 2, 2013 3:39PM
Too early for this article, Tony. It will read in the weeks to come: Nations Pulverizing New World Order Troops And Regaining Freedom. Central Bankers Gathered And Roasted... Taste Like Chicken.
Jul 2, 2013 4:11PM
 thought hillary had everybody there singing kumbaya earlier in her carreer at state. oh well, time to send in  that other empty shirt, what's his name? you know, that karry dude.
Jul 2, 2013 3:52PM
Not to worry.  The military will keep the Suez open and the "spice" flowing.  I've observed that nonsectarian heads are always cooler that sectarian heads.  To keep the money coming into ones country one must concentrate on life here and now on earth and not on the afterlife.
Jul 2, 2013 5:17PM
Anthony, Egypt is nothing. That's not to say the people there don't have meaning and don't count, they just aren't that big of a concern for Crude Prices to soar or for Stock Markets to rise or fall. They are however an excuse for crude prices to soar. There is No Shortage of Crude Oil. In fact, Big Oil is planning to Export Crude that we produce HERE in America. For all the Yap about needing Middle East Crude, that is hardly the case anymore. In fact, we get more Crude from Canada than the Middle East. All this fear mongering over Egypt is misplaced as is most fear mongering about the Middle East. We have FAR bigger fish to FRY than Egypt.
Jul 2, 2013 3:57PM
Capitalism is doomed (at least this new capitalism based on money printing)
Jul 2, 2013 4:15PM
somehow i don't even think any of this mid east crap would be going on if someone like reagan were in charge.
Jul 2, 2013 5:39PM
To beat the snake you must cut off its head!
Jul 2, 2013 5:41PM
Whoopsie the price of gas in my town just went up and not even 24 hours. Wonder why , just another case of greed. This **** been happening for decades. And will take months for it to come back down. As Gomer Pyle use to say GReed, Greed Greed.
Jul 2, 2013 5:41PM
I don't pretend to believe that the Global FEDS unlimited printing is a Good thing. However I also refuse to be blind to the huge recovery of sales and profits for American Auto Companies. I refuse to be blind to the Record Profits and Cash Hoards of American Corporations. I refuse to be blind to the fact that typically, a huge rebound in truck sales usually mean a stronger economy then what some are saying. I also refuse to be blind that it can all come crashing down if and when the Global Feds unlimited money printing blows up in Our faces and not theirs.
Jul 2, 2013 5:10PM

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..

Jul 2, 2013 6:09PM
In a lickety split liquidity split like liquid he spit in a sea in Egypt where he lipped a cheeky shiek greedy as guts can get.  
Jul 2, 2013 10:44PM

get the feeling this mursi dude is blind and will soon meet a fate similar to bani sadr and goatsbade.

Jul 2, 2013 5:36PM

::Insert racist remark here::


::Insert condemning liberal democratic remark here::


::Insert snide conservative right wing remark here::


Jul 2, 2013 6:26PM
How about we settle it once and for all,lets turn the Middle East into a much needed bombing practice range. We could start with the Neutron Bomb and work our way up!!!! The Serferdude
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