Egypt Unrest: Four Factors Investors Must Consider

Source: Jeb Handwerger, Gold Stock Trades (2/1/11)

"Fasten your seat belts for the volatile rides ahead. . ."

Last week, I warned of a flare-up in Egypt and a reversal in oil and gold. The media are transmitting pictures of street scenes in Egypt that for the most part appear benign. However, riptides of anti-Americanism are squirreling ominously beneath the surface. There are reports that El Baredei is to form a unity government with the Muslim Brotherhood. Business leaders, Westerners and major shipping companies have rerouted their ships away from Egypt. Egypt has been an ally of the United States for more than 30 years but the new leadership may move the country more extreme. President Hosni Mubarek has been "America's Man" at the cost of over a billion dollars a year. During Mubarek's rule Egypt has been at peace with Israel and the U.S., yet there is now growing anti-Western sentiment. It is a complex situation loaded with large black swans.

The main point for investors is this change is causing a major flow out of Middle Eastern equities and paper—such as Egypt Index ETF (EGPT), Market Vectors Gulf States Index ETF (MES), WisdomTree Middle East Dividend Fund (GULF), Israeli Stock ETF (EIS) and SPDR S&P Emerging Middle East & Africa (GAF)—into gold (CEF), oil (OIL) and commodities (DBC). I expect this trend to continue and for investors to hedge for an eventual changing of the guards. As evidenced in Lebanon and Gaza, the anti-Western sentiment is gaining popularity and we may see several years of geopolitical tensions throughout the Middle East. It doesn't appear that investors like this change of the guard and we may see a more militant Middle East. Investors are fleeing Middle Eastern paper for hard assets as major geopolitical concerns increase.

Consider the following factors in play:

"The Domino Scenario" Initially, Lebanon and Tunisia succumbed, now Egypt is in crisis, and Yemen, Algeria and Libya are on the brink; eyes are now on Jordan, one of our major allies in the Middle East, where unemployment and hunger are rife within a hostile Palestinian population. They still mourn the night of September 16, 1970, known as "Black September," when 25,000 Palestinians were massacred by the troops of King Hussein. This was in retaliation for the Palestinians' assassination of Hussein's grandfather while he was in prayer at the Dome of the Rock.

Can the Egyptian Crisis Be Contained? Or are we witnessing a pivotal turning point in history? The answer remains to be seen. Thus far the United States has been able to control such emergencies. However, America doesn't have a healthy financial structure at home. Our states and municipalities are failing. Unemployment is still high. In addition, the U.S. is involved in two foreign wars. How much more spending both domestic and foreign can the U.S. take with record deficits? The U.S. has plenty of global enemies who are fully aware of our weakened condition.

Only One Nation—Iran—Comes Out of This with a Win/Win. Mysteriously, the country has been silent in the present crisis. One wonders if it stealthily continues to build its nuclear program. Iran is an old hand at using diversionary geopolitical tactics to mask their true intentions. With all these revolutions taking place who cares about Iran?

Could the Suez Canal Be Shut Down? If the Suez Canal closes, expect oil to gap higher. Remember 8% of all sea traffic goes through this intersection. Shipping costs could significantly increase along with Brent crude oil hitting above $100 a barrel. Shipping stocks' volume has increased as analysts monitor this sector. Before the 30-year peace agreement with Israel the Suez Canal was shut down for several years causing major increases. The speculation of this strategic location to shut down or the lack of safety may be signaling companies are already rerouting carriers. Some of the key shipping stocks to watch are Overseas Shipholding (OSG) and Frontline (FRO). These stocks could see major gains if violence in the area increases.

Egyptian forces have cut off the use of cell phones and Internet from this region. Israel remains very tightlipped about Sinai operations. The Israeli Stock ETF has gapped lower on this potential loss of an ally and trading partner. They are concerned about new enemy fronts being opened to the north in Lebanon, now controlled by Hezbollah and Syria, to the east by Jordan, which is dangerously close to becoming politically unstable, and now the potential of the Muslim Brotherhood in Egypt to the south.

Important decisions over the next few weeks should move the Middle Eastern markets and could have a significant effect on precious metals, oil and stock markets.

Fasten your seat belts for the volatile rides ahead.

Jeb Handwerger
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