Monday, February 7, 2011

Investing During Turmoil

Egypt: Mummy’s curse or economic boom?

By John F. Wasik
Author, The Cul-de-Sac Syndrome

Anti-government protesters wave an Egyptian flag during a mass demonstration in Tahrir Square in Cairo February 1, 2011.   REUTERS/Yannis Behrakis Did the Egyptian rebellion open up a gold mine for civil reforms or a mummy’s tomb of economic perils?

I choose to think there are some robust opportunities presenting themselves as Egypt and other countries press their demands for freedom from oppression. On the political side, if you subscribe the “big wave” theory that Egypt’s mass protests will trigger similar revolts in other Arab states, then the resulting reforms — should they happen — may fuel prosperity and greater distribution of wealth.

The markets, of course, have a laser focus on Egypt and its ramifications. There’s a huge commodities rally going on; some of it is guided by fear and speculation but most of it is driven by demand.

I’m rooting for the Egyptians to get a better shake from their thuggish government. For a country of 83 million, most of Egypt’s wealth is concentrated at the top and little of its resource wealth is shared.

Compare the most populous country in Africa to the tiny oil-drenched Gulf State Qatar, which reported about $145,000 in GDP per capita and has one of the highest growth rates in the world at 19 percent. My source, by the way, is the U.S. Central Intelligence Agency, which apparently was behind the curve on unfolding events in the land of the Pharaohs. They weren’t watching Twitter closely enough.

As Jack Ablin, chief investment officer of Harris Private Bank, notes in his current market update, Egypt’s per-capita gross domestic product is $6,200, which even lags Tunisia’s $9,500 and most of the Arab world.

The most immediate reaction of the markets as the revolt unfolded was to sell stocks and buy U.S. Treasury Bonds, gold and energy stocks (and other commodities), which is typical. The widespread fear is that the Arab “street” will emulate Egypt and Tunisia and somehow curtail oil production in other oil-producing states. I don’t buy this idea — yet.

If you believed the panic peddlers and bought into the oil-scarcity scenario, you’d be long natural resources stocks. Just don’t focus on one region, though. Get a piece of energy growth regardless of what happens in the Middle East. Expanding economies from China to Brazil are going to demand more oil to make everything from gasoline to plastics.

Of course, if you were optimistic that Egypt is going to sort out its political crisis in a way that will economically benefit most of its people, you could bet directly on the country through the Market Vectors Egypt Index, a basket of stocks that trade on that country’s exchange. (Normally a reasonable vehicle, the ETF halted trading on Jan. 31.)

Let’s look at some other strategies:

Energy prices continue to rise no matter what happens.
I think this is a safe bet due to rising global demand in emerging economies. In that case, move into the Vanguard Energy ETF or the Rydex S&P Equal Weight Energy ETF.

Petro-energy price increases trigger more clean energy production.
This has always seemed like a reasonably good wager to me, although it’s happened in fits and starts and is a much more powerful trend in China, Japan and Europe. The Powershares Cleantech Portfolio or Van Eck Global Alternative Energy ETF are good places to start. President Obama highlighted a clean energy drive in his State of the Union speech, although he still must get any new legislation through the climate-change hostility of the GOP.

Energy prices will drop in the short term after the panic buying.
This is always a possibility when there’s blood in the streets; energy prices will drop once the protests die down. Want to be adventurous and take much more risk? Short (bet on the price falling) energy through the ProShares Ultrashort Oil & Gas ETF, which moves in the opposite direction of energy prices.

Do you want to think less and invest more? Don’t trouble yourself with which scenario may play out. These things are hard to predict.

Spread your money across all commodities through an ETF like the Powershares DB Commodity Index Tracking Fund, an efficient way to invest in a basket of in-demand goods like crude oil or zinc. Even if there isn’t more unrest and widespread hoarding, there will be growth in this sector.

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