Houthi rebels seek targets to strafe
Ships must take longer route
Rising costs will break out
Feel the pinch as your wallet will chafe
Showing posts with label Middle East. Show all posts
Showing posts with label Middle East. Show all posts
Sunday, January 28, 2024
Monday, November 09, 2015
Financial Sarcasm Roundup for 11/09/15
More Americans might be tuned in to my sarcasm if they weren't watching Monday Night Football or some cable TV movie. I might get more traffic if I convert my periodic sarcasm blast into a Netflix series.
One asset management firm thinks Chinese debt benefits from China's recession. The tortured logic right there just baffles me. Devaluing the yuan means a yuan-denominated bond's payment stream to Western investors will be worth less, not more. Buying notes issued by Chinese real estate developers means investors are hurt more by further crashes in a very inflated sector. Some money managers just can't let go of a thesis that no longer matches reality. The next bullish bet could be on wax paper rather than yuan paper, because it easily wraps fish from the live fish market. See, this investment thesis stuff is really easy.
China and the Middle East have an insatiable appetite for natural gas. The West is converting to locally available renewable energy while the developing world becomes even more dependent on hydrocarbons from beyond their borders. Addictions typically end badly. Going cold turkey in a couple of decades won't be an option for developing countries facing bad demographics.
Many European bankers are about to be jobless. Think of the fun they can have becoming tour guides for rich Chinese and Russian expatriates. The fired bankers didn't move fast enough to raise capital cushions. Now they can raise money for the Middle Eastern refugees flooding Europe. Grab those tin cups and hit the street corners in Munich and Prague. Bank CEOs can only fake the ECB's stress tests for so long. The money they save on compensation goes into the rainy day crisis buffer.
My sarcasm is way more entertaining than whatever is on television right now. Tune in again next time for another blast from Alfidi Capital.
One asset management firm thinks Chinese debt benefits from China's recession. The tortured logic right there just baffles me. Devaluing the yuan means a yuan-denominated bond's payment stream to Western investors will be worth less, not more. Buying notes issued by Chinese real estate developers means investors are hurt more by further crashes in a very inflated sector. Some money managers just can't let go of a thesis that no longer matches reality. The next bullish bet could be on wax paper rather than yuan paper, because it easily wraps fish from the live fish market. See, this investment thesis stuff is really easy.
China and the Middle East have an insatiable appetite for natural gas. The West is converting to locally available renewable energy while the developing world becomes even more dependent on hydrocarbons from beyond their borders. Addictions typically end badly. Going cold turkey in a couple of decades won't be an option for developing countries facing bad demographics.
Many European bankers are about to be jobless. Think of the fun they can have becoming tour guides for rich Chinese and Russian expatriates. The fired bankers didn't move fast enough to raise capital cushions. Now they can raise money for the Middle Eastern refugees flooding Europe. Grab those tin cups and hit the street corners in Munich and Prague. Bank CEOs can only fake the ECB's stress tests for so long. The money they save on compensation goes into the rainy day crisis buffer.
My sarcasm is way more entertaining than whatever is on television right now. Tune in again next time for another blast from Alfidi Capital.
Tuesday, October 29, 2013
Dubai Won't Work
Dubai is building an airport that will be as big as a city. The first passengers have started arriving. I hope they take lots of pictures of the endless glass and steel towers in the middle of nowhere. Those things will be derelict hulks and piles of recycling material within one generation. There is no way Dubai's civic boom can be sustained.
Dubai is a city-state built on sand. Anything built with sand or on sand will crumble but the rich Arabs building wild projects in Duabi never figured that out. Developers built island resorts in Dubai that are crumbling into the sea due to natural erosion. There aren't enough clueless rich people in the world to pay for perpetual sand maintenance on artificial islands.
Dubai built its skyscrapers with imported slave labor. The workers live in squalor and make next to nothing. No one told these workers that they would be working for starvation wages under dangerous conditions. When some of them finally got sick of their dire straits, they went on strike and now face mass deportation. Dubai's major construction contractors are eventually going to make the country subject to a host of WTO sanctions that will make the country economically uncompetitive.
Dubai has no real competitive advantage, and its artificial advantages like low labor costs are temporary. Dubai's historical role as a crossroads for Persian trade means little in modern times. Geographically isolated city-states need to be about something to have longevity. Singapore and Hong Kong are about seaborne trade and their natural deep harbors are excellent gateways to mainland Asian markets. Dubai has no such natural advantage. Even comparing it to Las Vegas is meaningless. Las Vegas has an indefinite supply of fresh water and energy thanks to Hoover Dam, assuming the US government can manage demand from the dam's other customers. Dubai has no such resource. Hydrocarbon energy is a small and declining share of Dubai's GDP. The city's physical size, population, and economy will contract to match its energy resources.
Dubai is a physical and financial impossibility. The world's traveling classes will eventually tire of subsiding this high-cost, high-entropy boondoggle with their vacation dollars. The world has plenty of financial hubs and tourist traps that aren't slipping into the sea.
Monday, July 15, 2013
Financial Sarcasm Roundup for 07/15/13
The awesome, mind-blowing action of last week's solar and semiconductor conventions left me with little material for sarcasm. The only comic relief was some inebriated dude in an alien jump suit doing somersaults and almost smashing into a solar panel. This is why I need headline news to deliver sarcasm.
China's GDP growth is toast. Their falsified official statistics have caught up to them and their national leadership can no longer deny that they will have trouble reconciling the accounting for their internal debts. That crashing sound you hear is a giant panda bear tearing through the bamboo shoots that undergird all of the empty real estate built in China's ghost cities.
Global business confidence is down the tubes. Executives who pull the levers that make things are probably better judges of market reality than their lying sales reps or illiterate delivery drivers. The folks at the bottom of the corporate food chain will be the last to know. This is business as usual. Real cuts in advertising budgets and IT spending will confirm this sentiment, so I'll watch for those numbers to appear.
Egypt's oil-rich neighbors gave it an economic lifeline. The Sunni autocracies don't want the Muslim Brotherhood spreading its nonsense in their backyards. The aid is enough to reduce the prices of basic food staples. Exploding food prices caused the Arab Spring in the first place. The major oil producers had enough money to buy off their restive citizens or put them down with force. The minor oil producers - Syria and Egypt - have had more instability. Oil money made the difference for those regimes that survived.
I've got a business meeting down in San Jose tomorrow so I can't afford to overdo it on the sarcasm tonight.
China's GDP growth is toast. Their falsified official statistics have caught up to them and their national leadership can no longer deny that they will have trouble reconciling the accounting for their internal debts. That crashing sound you hear is a giant panda bear tearing through the bamboo shoots that undergird all of the empty real estate built in China's ghost cities.
Global business confidence is down the tubes. Executives who pull the levers that make things are probably better judges of market reality than their lying sales reps or illiterate delivery drivers. The folks at the bottom of the corporate food chain will be the last to know. This is business as usual. Real cuts in advertising budgets and IT spending will confirm this sentiment, so I'll watch for those numbers to appear.
Egypt's oil-rich neighbors gave it an economic lifeline. The Sunni autocracies don't want the Muslim Brotherhood spreading its nonsense in their backyards. The aid is enough to reduce the prices of basic food staples. Exploding food prices caused the Arab Spring in the first place. The major oil producers had enough money to buy off their restive citizens or put them down with force. The minor oil producers - Syria and Egypt - have had more instability. Oil money made the difference for those regimes that survived.
I've got a business meeting down in San Jose tomorrow so I can't afford to overdo it on the sarcasm tonight.
Thursday, January 26, 2012
Potential Fed QE3 Informing Anti-Dollar Trades
Let's take note of two seemingly unrelated developments. The Fed is busying itself making noise about another round of quantitative easing. The intended market signal is that even with internal dissent the Fed can still push QE3 liquidity into bank balance sheets and the bond market. I think it's funny that one stated intent is to "keep inflation from slipping" below a target. The Fed's historic mandate has always been to fight inflation. Abetting the devaluation of the dollar is the new Fed mission.
The lesson is not lost on other nations. India will reportedly pay Iran in gold for oil shipments. Take that with a grain of salt. An unconfirmed report from an Israeli intelligence mouthpiece should be considered in the context of Israel's reported security ties to India. Israel has little reason to formally embarrass its security partner but may wish to deter it from working around anti-Iran sanctions. Releasing a hint from a grey source carries little risk. At any rate, the public mention that large oil consumers are considering moving away from settling trades in dollars makes sense in the context of the Fed's willingness to harm the dollar's purchasing power.
I will presume that the Fed has an Observe-Orient-Decide-Act loop even if it doesn't know such a thing exists. Its policies on quantitative easing and zero interest rate targets are oriented upon fostering a gradual inflation that will whittle away the federal government's unfunded liabilities for middle class entitlements. That is an internal orientation, which is the Achilles' heel of an effective grand strategy. The Fed's OODA loop should take into account the gradual abandonment of the dollar that other G-20 nations will eventually pursue apace. That is an external orientation that can keep strategy on target. This OODA loop is thus incomplete and invites a positive feedback cycle that will end the dollar's status as the world's reserve currency.
Longtime readers may note that my tone when discussing the Fed and other major policy actors is now much more sanguine than the periodic vitriol I spewed in the early days of the Alfidi Capital Blog. In 2008 I was angry about incompetence and fraud in the financial markets. Now I am largely resigned to its continued existence. I am not sufficiently pedigreed to gain the ear of policymakers so I cannot dissuade them from any course they choose. I will always fight people who try to rip me off personally. I can offer no such assurance to anyone else.
The lesson is not lost on other nations. India will reportedly pay Iran in gold for oil shipments. Take that with a grain of salt. An unconfirmed report from an Israeli intelligence mouthpiece should be considered in the context of Israel's reported security ties to India. Israel has little reason to formally embarrass its security partner but may wish to deter it from working around anti-Iran sanctions. Releasing a hint from a grey source carries little risk. At any rate, the public mention that large oil consumers are considering moving away from settling trades in dollars makes sense in the context of the Fed's willingness to harm the dollar's purchasing power.
I will presume that the Fed has an Observe-Orient-Decide-Act loop even if it doesn't know such a thing exists. Its policies on quantitative easing and zero interest rate targets are oriented upon fostering a gradual inflation that will whittle away the federal government's unfunded liabilities for middle class entitlements. That is an internal orientation, which is the Achilles' heel of an effective grand strategy. The Fed's OODA loop should take into account the gradual abandonment of the dollar that other G-20 nations will eventually pursue apace. That is an external orientation that can keep strategy on target. This OODA loop is thus incomplete and invites a positive feedback cycle that will end the dollar's status as the world's reserve currency.
Longtime readers may note that my tone when discussing the Fed and other major policy actors is now much more sanguine than the periodic vitriol I spewed in the early days of the Alfidi Capital Blog. In 2008 I was angry about incompetence and fraud in the financial markets. Now I am largely resigned to its continued existence. I am not sufficiently pedigreed to gain the ear of policymakers so I cannot dissuade them from any course they choose. I will always fight people who try to rip me off personally. I can offer no such assurance to anyone else.
Monday, April 18, 2011
Those Wild And Crazy Peak Oil Contingencies and Indicators
Spiking oil prices are a walk in the park compared to what America's Joe Six Packs will be smacked with if Peak Oil turns out to be real. Tune in here for a sneak preview.
Peak Oil may be hard to time precisely but its precursors are numerous. The Saudis say they're cutting back production due to oversupply. It's true that recent surges in the prices of energy and other commodities are primarily due to the Fed's quantitative easing, with all those excess trading dollars from money-center banks needing release somewhere. It still gives us a good image of what will happen when Saudi Arabia finally concedes that it can't increase production even if it wants to once its fields pass their peaks.
China's quest for the emerging world's resources has now prompted countermoves from Uncle Sam. The U.S. wants to subsidize the expansion of a Colombian oil refinery. There should have been a quid pro quo, like a requirement to sell the refinery's products to American distributors. So where's that deal? Did we not think this through? China's going to be the only player left standing if we don't step up our game.
Presidential wanna-be Donald Trump lets it be known that his ego is a suitable substitute for good judgment and international law. He wants to seize oilfields in Iraq and Libya. I hope he's the first one to volunteer for military service if he doesn't get elected. If he thinks it doesn't take hundreds of thousands of troops to guard Iraqi oil infrastructure then he's welcome to go and find out firsthand just what level of security that requires. That kind of ignorant, irresponsible, inflammatory rhetoric will become more common in America once our middle class realizes it has been permanently priced out of motoring at will. It will be an unfortunate day if such rhetoric is taken seriously enough to elect its sponsors.
Peak Oil may be hard to time precisely but its precursors are numerous. The Saudis say they're cutting back production due to oversupply. It's true that recent surges in the prices of energy and other commodities are primarily due to the Fed's quantitative easing, with all those excess trading dollars from money-center banks needing release somewhere. It still gives us a good image of what will happen when Saudi Arabia finally concedes that it can't increase production even if it wants to once its fields pass their peaks.
China's quest for the emerging world's resources has now prompted countermoves from Uncle Sam. The U.S. wants to subsidize the expansion of a Colombian oil refinery. There should have been a quid pro quo, like a requirement to sell the refinery's products to American distributors. So where's that deal? Did we not think this through? China's going to be the only player left standing if we don't step up our game.
Presidential wanna-be Donald Trump lets it be known that his ego is a suitable substitute for good judgment and international law. He wants to seize oilfields in Iraq and Libya. I hope he's the first one to volunteer for military service if he doesn't get elected. If he thinks it doesn't take hundreds of thousands of troops to guard Iraqi oil infrastructure then he's welcome to go and find out firsthand just what level of security that requires. That kind of ignorant, irresponsible, inflammatory rhetoric will become more common in America once our middle class realizes it has been permanently priced out of motoring at will. It will be an unfortunate day if such rhetoric is taken seriously enough to elect its sponsors.
Thursday, March 10, 2011
Monday, March 07, 2011
Greece Credit Lower Than Egypt's
It really says something about your country's credit when you're considered less likely to meet debt payments than a country that just had a coup d'etat:
This goes to show that debt overload can be more painful than a revolution. Egypt recently went through a debt downgrade of its own. The good news for Egypt is that they don't need an IMF bailout just yet. The bad news for Greece is that they can't use regime change as an excuse for inaction.
Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.
This goes to show that debt overload can be more painful than a revolution. Egypt recently went through a debt downgrade of its own. The good news for Egypt is that they don't need an IMF bailout just yet. The bad news for Greece is that they can't use regime change as an excuse for inaction.
Wednesday, March 02, 2011
Energy Diversity In The Works (Hopefully)
U.S. energy policy is overly reliant on hydrocarbons, particularly oil. That's an easy observation to make but changing course is hard. It takes unsettling news of Middle Eastern violence to smack us all out of our collective stupor. Libyan oil disruption is now confirmed and other oil producers are due for their own versions of nasty shakeups. More unrest means more oil price spikes.
The U.S. has plenty of oil in deepwater and unconventional sources but last year's Macondo blowout in the Gulf of Mexico taught us the difficulties of extracting it. Restrictive regulations for offshore drilling can be a cloud with a silver lining. New regulations will increase production costs and discourage new exploration, but they also make renewable alternatives look more attractive.
All is not lost for the U.S. We can make our existing energy distribution network more flexible with efficiency programs and smart grids. California shows us the way to energy efficiency, as usual. China is looking to the West for help with smart grid projects. American companies should at least try to penetrate the Great Wall of China if they have energy goodies to sell. Emerging economies are hungry for new infrastructure. Let's hope America wakes up - but hope is not a method.
Full disclosure: Long TDW with covered calls.
The U.S. has plenty of oil in deepwater and unconventional sources but last year's Macondo blowout in the Gulf of Mexico taught us the difficulties of extracting it. Restrictive regulations for offshore drilling can be a cloud with a silver lining. New regulations will increase production costs and discourage new exploration, but they also make renewable alternatives look more attractive.
All is not lost for the U.S. We can make our existing energy distribution network more flexible with efficiency programs and smart grids. California shows us the way to energy efficiency, as usual. China is looking to the West for help with smart grid projects. American companies should at least try to penetrate the Great Wall of China if they have energy goodies to sell. Emerging economies are hungry for new infrastructure. Let's hope America wakes up - but hope is not a method.
Full disclosure: Long TDW with covered calls.
Monday, February 28, 2011
Middle Eastern Kleptocrats Demand Gold
Retail investors aren't alone in their flight from unstable currencies to precious metals. Dictators in the notoriously unstable Middle East know the value of gold all too well. They place such esteem in gold as a store of value that they're willing to rely upon it as a ticket out of a crumbling regime.
Zine el-Abidine Ben Ali and his wife Leila Trabelsi looted the Tunisian central bank of one and a half tons of gold bullion. Such an audacious move did not escape the notice of either the international press or European financial regulators. Yet the Ben Alis have not been remanded to the custody of law enforcement. They got away with the heist!
Hosni Mubarak apparently had a similar plan all worked out long ago. He didn't have to wait until the last minute like his Tunisian friends. He spent years sequestering his gold and other investments all around the world, far away from prying Egyptian eyes. How does a President become a billionaire? Inquiring minds at Interpol would like to know. They can start by asking any oil companies or defense contractors who've done business with his regime just how much they had to pay all those years for "access" in Cairo.
Libya's Muammar Gaddafi (just how does that guy spell his name?) has been taking notes. His private jet is rumored to be loaded with gold and other precious goodies, ready to spirit him away to a comfy retirement far from the hassles of cracking down on protesters. A planeload of bullion can buy lots of African savannah.
Perhaps this uncovers a hidden force behind the strong performance of gold in recent years. Dictators in the Middle East and North Africa (that's the MENA neighborhood for you investors looking for a new BRIC bloc) have been quietly taking lots of supply off the market. Sarcasm aside, the World Gold Council will have to update its gold reserve figures with appropriate subtractions for looting by deposed autocrats.
Full disclosure: Long GDX with covered calls.
Zine el-Abidine Ben Ali and his wife Leila Trabelsi looted the Tunisian central bank of one and a half tons of gold bullion. Such an audacious move did not escape the notice of either the international press or European financial regulators. Yet the Ben Alis have not been remanded to the custody of law enforcement. They got away with the heist!
Hosni Mubarak apparently had a similar plan all worked out long ago. He didn't have to wait until the last minute like his Tunisian friends. He spent years sequestering his gold and other investments all around the world, far away from prying Egyptian eyes. How does a President become a billionaire? Inquiring minds at Interpol would like to know. They can start by asking any oil companies or defense contractors who've done business with his regime just how much they had to pay all those years for "access" in Cairo.
Libya's Muammar Gaddafi (just how does that guy spell his name?) has been taking notes. His private jet is rumored to be loaded with gold and other precious goodies, ready to spirit him away to a comfy retirement far from the hassles of cracking down on protesters. A planeload of bullion can buy lots of African savannah.
Perhaps this uncovers a hidden force behind the strong performance of gold in recent years. Dictators in the Middle East and North Africa (that's the MENA neighborhood for you investors looking for a new BRIC bloc) have been quietly taking lots of supply off the market. Sarcasm aside, the World Gold Council will have to update its gold reserve figures with appropriate subtractions for looting by deposed autocrats.
Full disclosure: Long GDX with covered calls.
Thursday, February 24, 2011
Italy Depends On Libyan Oil
This one's fast and easy to digest. Libya's turmoil has cut its oil production. Italy gets 22% of its crude from Libya. Direct substitutes for light sweet crude are not easy to obtain on a moment's notice.
Short ideas involve obvious candidates like ENI SpA (E) and the iShares MSCI Italy Index Fund (EWI). Similar short ideas are probably available for Spain, Ireland, Austria, and any other country drinking from Libya's tap.
Full disclosure: No positions in E, EWI, or anything else mentioned above.
Short ideas involve obvious candidates like ENI SpA (E) and the iShares MSCI Italy Index Fund (EWI). Similar short ideas are probably available for Spain, Ireland, Austria, and any other country drinking from Libya's tap.
Full disclosure: No positions in E, EWI, or anything else mentioned above.
Monday, February 21, 2011
Monday Newsreel for 02/21/11
The U.S. stock market is closed, so I need something to do. Reading headlines is just the thing.
The IMF (i.e., the U.S.) is unable to help the EU solve its debt crisis. The Fed is too preoccupied with buying U.S. sovereign debt to make any QE available for Europe.
Speaking of U.S. debt, there's more of it now than there has ever been since World War II. Remember what FDR's Treasury Secretary said prior to WWII about how the New Deal did nothing but put the U.S. deeper in debt? That was when the U.S. was still the world's largest creditor nation. Now that we are the world's largest debtor, we have no spare room to launch any great projects. Growth won't save us this time. Inflation is not a substitute for real growth.
Speaking of inflation, China continues to fight it by raising fuel prices. The rising price of oil due to Middle East turmoil will magnify the impact of this policy. China's economy will hit the brakes faster than its Mandarins expect.
Egypt wants the bond market to buy almost a billion dollars worth of debt. They should send the bill to former President Mubarak. He can easily cover it. The new government is taking its first steps to locate the assets he grabbed. Recovering all of the national wealth he stole will take some time, and of course even a corrupt former head of state is innocent until proven guilty.
Finally, U.S. investor behavior continues to defy common sense. The stock market's dizzying rise does not deter new investors despite indications it is overvalued. The U.S. economy's fundamentals have not improved at all since 2008. The Fed's QE provides liquidity to the i-bank dealers of U.S. debt, who are emboldened in turn to extend credit to hedge funds that churn and pump the stock market to no end. This cannot end well for investors when QE ends.
The IMF (i.e., the U.S.) is unable to help the EU solve its debt crisis. The Fed is too preoccupied with buying U.S. sovereign debt to make any QE available for Europe.
Speaking of U.S. debt, there's more of it now than there has ever been since World War II. Remember what FDR's Treasury Secretary said prior to WWII about how the New Deal did nothing but put the U.S. deeper in debt? That was when the U.S. was still the world's largest creditor nation. Now that we are the world's largest debtor, we have no spare room to launch any great projects. Growth won't save us this time. Inflation is not a substitute for real growth.
Speaking of inflation, China continues to fight it by raising fuel prices. The rising price of oil due to Middle East turmoil will magnify the impact of this policy. China's economy will hit the brakes faster than its Mandarins expect.
Egypt wants the bond market to buy almost a billion dollars worth of debt. They should send the bill to former President Mubarak. He can easily cover it. The new government is taking its first steps to locate the assets he grabbed. Recovering all of the national wealth he stole will take some time, and of course even a corrupt former head of state is innocent until proven guilty.
Finally, U.S. investor behavior continues to defy common sense. The stock market's dizzying rise does not deter new investors despite indications it is overvalued. The U.S. economy's fundamentals have not improved at all since 2008. The Fed's QE provides liquidity to the i-bank dealers of U.S. debt, who are emboldened in turn to extend credit to hedge funds that churn and pump the stock market to no end. This cannot end well for investors when QE ends.
Friday, February 18, 2011
Sunday, February 06, 2011
Walk Like An Egyptian ETF - With Caution
The world's eyes were until recently glued to Greece, the cradle of civilization. Now they're mesmerized by that other font of ancient mystery, Egypt. U.S. retail investors have little access to the Egyptian stock market except through thinly traded instruments like the Market Vectors Egypt Index ETF (EGPT). This ETF isn't as liquid as others because many of its underlying equities are illiquid, requiring new shares to be handled via in-kind creations. Van Eck has suspended those creations now that Egypt's turmoil has closed its equity market. Investor cash intended for EGPT can't be put to work in the fund, so the Egyptian market remains largely inaccessible to new investors despite increased investor attention. Even ETF experts are unable to estimate a fair value for EGPT thanks to the implied tracking error of all that sidelined cash.
Daily trading volume in EGPT has exploded in the past two weeks. Long investors might be betting that the crisis will soon be resolved and stability will return. Short investors can bet on further chaos. Value investors need to consider the long-run implications of Egypt's problems. Credit default swaps on its debt are extremely high, with yields rising due to uncertain bond market interest in new issues. There is some risk that Egypt's logistics infrastructure can be compromised by political violence. The Suez Canal seems safe for now but an explosion has taken a very important natural gas pipeline offline. It is too early to tell whether that explosion was due to sabotage, but any any infrastructure vulnerability puts additional pressure on the military to implement backup measures.
The risks of investing in emerging markets are obvious. Egypt is a boiling cauldron right now, and investors can easily get burned.
Full disclosure: No position in EGPT.
Daily trading volume in EGPT has exploded in the past two weeks. Long investors might be betting that the crisis will soon be resolved and stability will return. Short investors can bet on further chaos. Value investors need to consider the long-run implications of Egypt's problems. Credit default swaps on its debt are extremely high, with yields rising due to uncertain bond market interest in new issues. There is some risk that Egypt's logistics infrastructure can be compromised by political violence. The Suez Canal seems safe for now but an explosion has taken a very important natural gas pipeline offline. It is too early to tell whether that explosion was due to sabotage, but any any infrastructure vulnerability puts additional pressure on the military to implement backup measures.
The risks of investing in emerging markets are obvious. Egypt is a boiling cauldron right now, and investors can easily get burned.
Full disclosure: No position in EGPT.
Thursday, February 03, 2011
Whither The Suez Canal In Early 2011
Unrest in Egypt makes Suez-bound shippers nervous. Is there really cause for concern?
The Suez Canal itself remains open to throughput traffic, but some Egyptian ports remain inaccessible due to unrest. This could pose a short-term problem for Egyptians if any overland routes into the country are disrupted. Transnational firms exporting from Egypt think their supply chains are secure. They are probably very fortunate that Internet access was restored so soon. In-transit visibility can be lost very quickly when all of your query systems are Web-based.
Oil prices continue to rise purely on fear of the unknown. We know now that the Egyptian military has a big stake in maintaining that nation's stability, is moving to secure ports, and is probably the most powerful institution in the country (and thus most able to broker a way out of the political crisis). Shippers are balking at changing crews in the canal but the Egyptian army's history of securing it during crises should put them more at ease.
Concerns about disruptions of Suez Canal traffic are probably overblown.
The Suez Canal itself remains open to throughput traffic, but some Egyptian ports remain inaccessible due to unrest. This could pose a short-term problem for Egyptians if any overland routes into the country are disrupted. Transnational firms exporting from Egypt think their supply chains are secure. They are probably very fortunate that Internet access was restored so soon. In-transit visibility can be lost very quickly when all of your query systems are Web-based.
Oil prices continue to rise purely on fear of the unknown. We know now that the Egyptian military has a big stake in maintaining that nation's stability, is moving to secure ports, and is probably the most powerful institution in the country (and thus most able to broker a way out of the political crisis). Shippers are balking at changing crews in the canal but the Egyptian army's history of securing it during crises should put them more at ease.
Concerns about disruptions of Suez Canal traffic are probably overblown.
Tuesday, February 01, 2011
Sunday, January 30, 2011
Thumbnail Sketch Of The Egyptian Crisis
Several things are worth noting about the unfolding Egyptian political crisis.
The possibility that political instability will force closure of the Suez Canal is real but remote at present. Whatever successor regime may follow the current one has little incentive to turn off Suez transit unless it wishes to invite international intervention. Read history for details on the last Suez crisis.
Certain classes of supertankers are too large to fit through the Suez Canal anyway, so shippers owning VLCC ships and larger will be largely unaffected by a potential closure. Suezmax and smaller ships will face rerouting from Asia to Europe. Look for smaller carriers to start scrambling to line up hedges against higher rates from suddenly longer routes.
The Egyptian business elite has probably already moved significant capital out of the country. Remaining direct investment of note is thus probably held by foreign investors. Egypt's own fiscal situation will grow progressively more perilous the longer this crisis lasts. The Egyptian stock market is down and credit default swaps on its sovereign debt are up. That is a recipe for capital flight. A successor regime may impose capital controls to prevent such flight if the country's foreign reserves are depleted. Companies with significant Egyptian exposure (like Apache Corp., with 30% of its production from Egypt) should probably start hedging against the potential for nationalization of their assets.
Full disclosure: No positions in Egyptian equities, bonds, or other instruments at this time. No position in APA.
The possibility that political instability will force closure of the Suez Canal is real but remote at present. Whatever successor regime may follow the current one has little incentive to turn off Suez transit unless it wishes to invite international intervention. Read history for details on the last Suez crisis.
Certain classes of supertankers are too large to fit through the Suez Canal anyway, so shippers owning VLCC ships and larger will be largely unaffected by a potential closure. Suezmax and smaller ships will face rerouting from Asia to Europe. Look for smaller carriers to start scrambling to line up hedges against higher rates from suddenly longer routes.
The Egyptian business elite has probably already moved significant capital out of the country. Remaining direct investment of note is thus probably held by foreign investors. Egypt's own fiscal situation will grow progressively more perilous the longer this crisis lasts. The Egyptian stock market is down and credit default swaps on its sovereign debt are up. That is a recipe for capital flight. A successor regime may impose capital controls to prevent such flight if the country's foreign reserves are depleted. Companies with significant Egyptian exposure (like Apache Corp., with 30% of its production from Egypt) should probably start hedging against the potential for nationalization of their assets.
Full disclosure: No positions in Egyptian equities, bonds, or other instruments at this time. No position in APA.
The Limerick of Finance for 01/30/11
Egypt gives the markets a scare
More chaos will spread over there
If ship lanes are gone
Here comes a black swan
A sign for investors: beware
More chaos will spread over there
If ship lanes are gone
Here comes a black swan
A sign for investors: beware
Thursday, December 23, 2010
Saudia Arabia's Fiscal Reality
The Saudi government is basing its fiscal budget for 2011 on a world oil price of about US$50/bbl, which is more than a third lower than the current market price of US$90/bbl. It is now drawing on reserve funds and deficit spending to keep its multi-year US$400 billion infrastructure improvement program on track.
Saudi Arabia is very concerned about its ability to sustain its infrastructure projects in the face of both slackening oil demand (from a possible global recession) and constrained supply (from reservoir depletion). Despite Saudi Aramco spending $100 billion on improvements in production capacity to 12 million bbls/day, average daily output in 2009 fell by 11%. This inability to raise production may be more a function of dwindling reserves than insufficient infrastructure. They may be throwing good money after bad in the face of Peak Oil, much as Dubai did.
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