It’s different this time.

No, no, it really is.

Libya isn’t Egypt and the effects on the stock market this time will be different from the effects of the earlier crisis.

Different enough, in my opinion, that you need to factor them into your investment strategy. But not so different that you need to tear up all your investing plans for 2011.

The short-term effects don’t look that all that different, I admit. Especially if you look just a developed economy stock market like that in the United States.

Egypt, as scary and exciting (and important, especially for Egyptians) as it was at the time created, barely a ripple in the U.S. stock markets. On January 25, the “Day of Rage,” the Standard & Poor’s 500 stock index closed at 1291. On January 28, the biggest drop during the crises, the index closed at 1276. By January 31, the day when 250,000 protesters gathered in Tahrir Square, the index was back to 1286. By the day of Hosni Mubarak’s resignation the index had climbed to 1329.

The Libyan crisis is already longer than the Egyptian crisis. Demonstrations began on February 15 in Benghazi and the Libyan crisis was in Day 17 as of March 4.  The Egyptian crisis from January 25 “Day of Rage” to Mubarak’s resignation ran for just 17 days.

At this point U.S. stock market reaction to the Libyan crisis isn’t a whole lot bigger. The U.S. S&P 500 closed at 1328 on the day of the Benghazi protests, fell to 1306 on the February 17 “Day of Rage” demonstrations, rallied, and then fell on March 1 to 1306 again. It rallied to 1331 yesterday as good economic news from the United States overwhelmed reports of continued fighting in Libya. (See my post http://jubakpicks.com/2011/03/03/dont-worry-be-happy/ )

If you want to see “different,” you have to look at oil prices. Read more

China is buying gold at a faster pace than last year.

Gold purchases in China climbed to 200 metric tons in the first two months of the year. Last year gold purchases in China totaled 580 tons. An example of just how hot demand for gold has become in China: The Industrial and Commercial Bank of China, started physical-gold linked savings accounts only last December. Since then the bank has opened 1 million accounts that hold 12 tons of gold.

For gold prices–$1424 an ounce as I write this–the reasons for the buying are as important as the buying itself.

Some of the buying—as is the case around the world—is a reaction to fear produced by the uprisings in the Middle East and the threat to global oil supplies and world economic growth. Demand driven by this fear would, logically, taper off if and when the Middle East retreats to its normal level of instability. Gold buyers should be worried about the price of gold dropping as the fear reading goes down.

But part of the buying is being driven by fears of rising inflation inside China. Read more

Is the violence in Libya the last straw for the world’s emerging economies? Or at least for investors in those markets?

I certainly think that the big drops in emerging market stock markets are leading some investors to abandon markets that they never felt all that comfortable with in the first place.

For those of us—and I do mean us—who do believe in the long-term emerging markets story (and I wouldn’t have started a global mutual fund if I didn’t), it is still important to acknowledge that what we can call the Libya crisis for short has increased the medium term—say the next six to nine months–risk of these markets.

How come? Higher oil prices are a big problem.

Yes, I know that Saudi Arabia has lots of excess oil capacity and has pledged to pump to meet any losses from Libya. I know that it’s likely that once the Libyan crisis is over oil prices will retreat from current levels so that the world is probably not looking at $110 a barrel oil as the new base price. (I argued all this in my post http://jubakpicks.com/2011/02/23/its-still-a-little-early-in-the-libya-crisis-for-bargain-hunting/ )

And I know that the worries of the moment have concentrated on the world’s developed economies, especially Europe, which is very dependent on oil and gas supplies from Libya. The worry here is that higher oil prices—and Brent crude traded at $111 a barrel on February 23—will stall the weakest economies in the European Union. (A rule of thumb among economists is that every $10 increase in the price of a barrel of oil cuts GDP growth by half a percentage point within two years.)

But higher oil prices, even modestly higher oil prices, couldn’t come at a much worse time for emerging economies where governments are waging a tough battle to control inflation without tipping their economies into a big slowdown.

That balancing act, already difficult, got much, much harder with Libya. Read more

Trying to put a price on fear

There’s short-term panic and long-term fear.

Both are at work in the financial markets this morning. The common factor, of course, is Libya, where Muammar Gaddafi seems determined to fight for control to “the last man standing” in the words of his son Seif al-Islam. Libya pumps about 1.6 million barrels of oil a day (making it the eighth largest OPEC producer)—or at least it did before protests calling for an end to Gaddafi’s 40-year dictatorship sent Western oil companies scrambling to evacuate their employees.

Short-term panic has sent prices for West Texas Intermediate crude oil as high as $94.49 a barrel, the highest since October 2008, in New York this morning. Brent, the European oil benchmark, climbed to $108.57 in European trading. (Libya is a major source of Europe’s oil. The United States is not a big importer of Libyan oil.)

Gold advanced another 1.1% as of 9:30 this morning after climbing 1.2% yesterday. Silver was up 3.8% on Monday and has moved up another 3.1% today.

When nobody knows what’s going to happen and when the worst of possible outcomes all seem possible, markets tend to swing to extremes. Read more

And the winners among oil stocks from the Egyptian crisis are…

Interesting pattern in today’s big winners on the New York Stock Exchange: the list is dominated by the names of relatively small, predominantly domestic energy producers.

As of the end of trading in New York today you would have found these stocks among the big percentage winners: Oasis Petroleum (OAS) up 5.9%, Brigham Exploration (BEXP) up 3.4%, Ultra Petroleum (UPL) 4.6%, Swift Energy (SFY) up 3.22%, Chesapeake Energy (CHK) 8.1%, and Berry Petroleum (BRY) up 4.9%.

These energy companies don’t have a whole lot in common—some natural gas producers (Ultra Petroleum and Chesapeake Energy); some produce oil from oil shales (Oasis and Brigham); some work in traditional fields in California (Berry).

But they do have in common a lack of exposure not just to Egypt but also to the Middle East. They’re up as a bet that we’re seeing the beginning of a wave of instability in the region that will make oil from “safe” sources increasingly valuable.

I don’t think I’d chase these here—although I don’t think this trend is over or a flash-in-the-pan, I just don’t want to buy after 10% gains in just two days.

If you like the logic of these stocks, however, I’d suggest that you take a look at oil producers from Canada’s oil sands. Read more