McCall’s Call: Taking Measure Of The Chaos

March 23, 2011

The ‘wall of worry’ has rarely been more worrisome, but climbing it investors are.

 

The one situation bulls fear could put a stop to the current bull market isn’t negative news, but rather, uncertainty, and there’s plenty of it to go around at the moment.

Matthew D. McCallWhether the news is good or bad, investors are able to adjust their portfolios accordingly. Unfortunately, because the future is unknown, it tends to form a cloud over any bull market rally.

Between the trace amounts of radioactive isotopes from damaged nuclear power plants in Japan that have made their way across the Pacific Ocean to the U.S. West Coast, to what lurks beyond the U.S.-led effort to rid the Middle East of another tyrant, to Europe’s ongoing sovereign debt crisis, the future looks quite murky.

So, what’s an investor to do now that oil is over $100 a barrel and so much is up in the air as far as Europe’s and Japan’s health? Moreover, some are beginning to fret the Federal Reserve may print yet more money to stave off a deflationary spiral, which, in the worst case, would feed into fears of inflation down the road.

MENA

The Middle East and Northern Africa—MENA in investor-speak—has been the site of political unrest, and now a full-out war for the last two months. It began with a little-publicized uprising in Algeria that has spread to the toppling of a regime in Egypt and now a war in oil-rich Libya.

It took a millisecond for investors to realize what’s at stake with the turmoil in MENA: worldwide oil supply.

As of now, the serious fighting is limited to Libya, home to between 2 and 3 percent of the world’s oil output and whose oil reserves rank as the ninth-biggest in the world. But even the limited theater of warfare has kept oil above $95 per barrel and it settled today on the NYMEX at $105.36.

The two unknowns are the length and severity of the Libyan war and the extent to which the violence spread to other countries such as Yemen, and especially the biggest oil-producing countries in the Middle East—Saudi Arabia, or even Iran.

Because the possibility of a prolonged war or the shutdown of the Strait of Hormuz, through which so much of the world’s oil passes, crude should remain above $90 a barrel for the foreseeable future. My guess is that $125 oil is not out of the question in coming months.

The question then becomes whether crude at $125 a barrel will be a culprit in slowing down the current economic recovery? It could, but at $125 it won’t have the effect that many think and won’t put an end to the current growth in the U.S. That said, anything higher would start to ruffle some feathers.

 

 

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