Mideast/Africa in Turmoil!

 
 
March 3, 2011

BOY! What a February!

 
Over the last several weeks, we have seen revolutions and protests in many Mideast and African countries. Let’s take a quick look at what has happened:

  • EGYPT: President Mubarak has been forced into exile as the army has taken over effective control of the government until elections can be held in the third quarter.
  • TUNISIA: President Zine El Abidine Ben Ali fled on January 14th. Then the interim president Ghannouchi resigned and chose a former government minister to be prime minister. It doesn’t seem like anyone wants to be head of government in that country?
  • BAHRAIN:   Protesters in the capital of Manama rejected the king’s appeals for talks.
  • OMAN: Security forces are trying to control the protesters.
  • YEMEN: Protesters are trying to oust President Saleh, a U.S. ally.
  • SAUDI ARABIA: There is much unrest in this oil rich state.   With the leaders in their 80s and more than 7,000 princes, this country’s leadership will change dramatically in the next few years.
  • IRAQ: Demonstrations are widespread in this new “democracy.”
  • LIBYA: Colonel Gadhafi refuses to step down as forces loyal to his are waging battles against the rebels.
 
So why did the stock market become more volatile as the Libyan uprising gained strength?

THE SHORT ANSWER: OIL !!!!!!!!!!!!!!!!!

Libya possesses the world’s 9thlargest oil reserves.   Even though the Libyans have very little oil trade with the U.S., Libya supplies a lot of the oil and gas to Europe – especially Italy. ; However, the markets are much more concerned about Saudi Arabia, which produces about 20% or more of the world’s oil, and has the world’s largest oil reserves.

 

Will the political revolutions spread to other oil producing nations, causing a prolonged rise in the price of oil? This would significantly disrupt the U.S. economic recovery. Oil is very close to $100 per barrel and a spike in oil hurts corporate profits and consumer spending. It is effectively a tax on businesses and consumers and will reduce GDP. In fact, according to Nariman Behravesh, a senior economist at IHS Global Insight, every $10 increase in the price of a barrel of oil reduces economic growth (GDP) by 0.2% after one year and a full 1% after 2 years.

 

The government would like us to believe that inflation is very low and under control.   But core inflation, as measured by the Bureau of Labor Statistics (BLS), does not include food or energy prices.   Food in the last month alone has risen by 5 to 8%, and gas prices are up significantly in the last month.  And according to my last observation, we all eat food and use energy.

 

BOTTOM LINE: The question on everyone’s mind is “how does all of this geopolitical strife affect me and my portfolio”? We are likely to see the following:

  • Increased inflation as indicated previously in food, energy and commodity prices
  • Greater short-term volatility in the stock market
  • Higher energy prices and gas prices at the pump. Gas could easily be at $ 4.00 per gallon by the end of the summer……….I hope not!
  • Greater perceived risk in the stock market
  • Belief by the Fed that they will need to keep interest rates lower for a longer period of time


So far the stock market has digested the Mideast/Africa turmoil reasonably well. However, the market has risen for about 6 months in a row without a 10% correction. It would not be unusual if these events triggered a correction. And, if more dominoes fall, a more dramatic decline could occur.

Please be aware that we are NOT predicting a market decline, but just alerting you to the fact that these events call for more caution in our market outlook.

 

As always, please call us if you have any questions.   We do not believe that any corrections are needed in your portfolios at this time.   We believe your portfolio is already appropriately positioned for this type of environment. When we meet with you we will review any specific issues or concerns you may have.

 

As the nicer weather approaches and flowers start to bloom, we look forward to a happy and healthy Spring season.


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Best Regards,
Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Edward J. Kohlhepp, Jr., CFP®, MBA



"If we could learn how to balance rest against effort, calmness against strain, quiet against turmoil, we would assure ourselves of joy in living and psychological health for life."
-Josephine Rathbone



 

Sources: USA Today, Wall Street Journal, NY Times

This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
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