Good morning! Let’s look at Egypt:
______________________________
OVERVIEW
- Oil Prices | Oil gets expensive when there’s trouble in the Middle East, but Egypt is a minor player.
- Global Inflation | Egypt’s uprising provides evidence that the sinking dollar is creating inflation that hurts emerging economies.
- Food Prices | Emerging economies are especially prone to social unrest over rising food costs.
- US Companies | US companies providing foreign capital, food, weapons, and energy to Egypt will probably be fine under the next government because it will need all of those things. For example, Apache (APA) has been fine so far.
______________________________
BRIEFING
Does Egypt Matter to Investors?
The obvious angle is oil prices, with the threat of a Suez Canal closure already pushing the price of Brent crude over $100 per barrel. The FT thinks that’s acceptable, however, because the price is still closer to the stable $70-$90 price range within which it traded virtually all through 2010 than it is to the $148 high of 2008.
Besides, Christopher Helman wrote at Forbes, it would be “no big deal” if the Suez was shut down because “Egypt produces roughly 600,000 bpd of oil, a drop in the globe’s daily demand of 85 million barrels. Each day roughly 1.8 million barrels of crude and refined products transit Suez.”
The real issue is not Egypt itself but what its uprising reveals about global inflation caused by the destruction of the US dollar, says Hedgeye analyst Keith McCullough at Fortune. Don’t let “Ben Bernanke’s conflicted and compromised calculation of CPI” fool you into believing “there’s no real-world inflation out there” when any analyst can show you the “immediate-term inverse correlations between the US Dollar Index and three major global food prices: corn = -0.91, rice = -0.90, wheat = -0.85” which “are extremely high (and alarming) correlations.” He believes inflation “kills emerging markets” as “reflected in last week’s bearish price action” in these six:
Egypt = down 15.7%
Chile = down 4.2%
Turkey = down 4.1%
Brazil = down 3.5%
India = down 3.2%
Thailand = down 2.5%
Larry Kudlow at NRO asks this tough question: “Is Ben Bernanke’s ultra-easy QE2 money pump-priming partially to blame?” It seems to be, since commodities “are priced in dollars, and the Federal Reserve has been overproducing dollars for more than two years. Consequently, emerging markets throughout the world — and the food sector in particular — are suffering from rising inflation. . . . that’s why one can argue that the worldwide revolt against soaring food prices is an unintended consequence of US Fed policy.” He says to “be mindful that if the US fixed its mistaken monetary and energy policies, the forces of freedom and democratization would have an easier time of it in the rest of the world.”
On food price inflation in Egypt, Annie Lowrey agreed at Slate. She thinks the uprising highlights two major problems facing the country: “Most jobs pay too little, and most food costs too much.” The recent run-up in food costs has sent the worldwide food price index to an all-time high “surpassing its 2008 peak, when skyrocketing costs caused global rioting and pushed as many as 64 million people into poverty. The price of oils, sugar, and cereals have all recently hit new peaks — and those latter prices are especially troubling for Egypt, as the world’s biggest importer of wheat.”
She notes that “rising food prices have a long history of causing social unrest” in Egypt, recalling that in 1977 it “cut subsidies of basic staples, leading to deadly riots. In 2008, when food prices hit their first peak, Egyptians again took to the streets.”
She cites a recent study by the University of Adelaide School of Economics which found “that in low-income countries increases in the international food prices lead to a significant deterioration of democratic institutions and a significant increase in the incidence of anti-government demonstrations, riots, and civil conflict.” That’s not the case in high-income countries where raw food material comprises a smaller percentage of overall food cost and because citizens can simply afford better food.
As far as Western interests go, Cyrus Sanati at Fortune suggests that a “possible revolution in the most populous and influential nation in the Arab world shouldn’t be taken lightly given the possibility of an anti-Western government coming to power in Cairo.” Should Islamic fundamentalism take control, “US economic interests in the entire region would be at risk” and it would “probably spell bad news for the western companies operating in the country.”
He thinks the loss of wheat, corn, and soybean export contracts totaling $2B per year “could hurt the sales of companies like ConAgra (CAG), ADM (ADM) and Cargill,” though the ideas in articles above suggest that Egypt’s food supply will be protected by whomever is in charge. He mentions US defense contractors being vulnerable to losing their connection to Egypt’s military.
Then he gets to energy and makes clear that “no company has more exposure to the energy sector in Egypt [than] Apache Corporation (APA). It is by far the largest US investor in Egypt, with a total investment of more than $7B over the past 17 years. Egypt now accounts for a quarter of the company’s earnings. Apache’s large investment in Egypt has not gone unnoticed by the markets. Wall Street has wiped $5B off Apache’s market value since the riots began amid fears that a new government could expropriate their land concessions. That is equivalent to about 50 percent of the estimated value of Apache’s Egyptian assets.”
A glance at Apache’s chart, however, shows little reason for concern. Since the summer Gulf spill sell-off in the oil sector, APA rose from $83 in July to $128 on Jan 18. It closed yesterday at $119 for a loss so far in the Egyptian turmoil of only 7 percent.
Even Sanati acknowledges that US interests are likely to hold up well no matter what government emerges in Egypt: “If the [Muslim Brotherhood] does take power, it is possible that it won’t be as radical as Iran’s hardliners were 32 years ago, therefore allowing US and western companies to remain in the country. After all, Egypt is in dire need of foreign capital, food, weapons, and energy — all the things western companies bring to Egypt. But in a revolution, rational thought usually gives way to irrational actions.”
Rational actions can bring unhappy consequences, too, and one that looks obvious from the recent uprisings is that the world will take action against inflation. If emerging markets and others succeed in stamping out inflation, it will inhibit asset price growth and expose the artificial monetary bubble that’s been buoying the stock market.
Have a great day!
These periodic “Finance at First Light” briefings present a glimpse into my research. If you would like to read actionable investment advice based on this and other information, please consider subscribing to The Kelly Letter.
