The crisis in Egypt has brought to front and center the strategic importance of the Suez Canal, which purportedly carries 8-10% of the world’s wealth as well as anywhere from 5-40% of all oil produced world wide, depending on which jackass on the internet you ask. Needless to say, the prospect for a full blown panic is ripe with these conditions, where no one is bothering to double check how many of which good(s) actually go through this waterway.
I have already stumbled on blogs stating as matter of fact that even temporarily closing the Suez Canal would bring about global pandemonium and the end of civilization.
Very level headed, of course…
Incidentally, I am not interested in what the exact statistics are, as they are not important; the threat of the Suez Canal being shut down is already overblown, even in its infant stages.
As obscure sources begin trumpeting the dangers of global trade being brought to its knees, leaving the entire world decimated in the wake of this one country’s problems, I want you to remember this:
When an event is going to affect the prosperity of entire continents, you can expect someone to do something about it.
So whether 1% or 100% of global oil produced passes through the canal, it doesn’t concern me, as I can pretty well assume the canal wouldn’t be closed for very long.
I’ve been looking through data of the most obvious sector which should be affected by such a panic; the maritime shippers.
Right now, some shippers have experienced mini rallies thanks to speculation of higher tanker rates fueled by a sense of urgency…which is ironically leading to more urgency.
However, most of these names were hit Friday and many of them were already in consolidation before January 25. In my opinion, a shutdown of the canal should trigger losses in shippers with routes that go through it, as they have to take more extended and costly pathways and ultimately change their logistic models. These increased costs and delays would likely have to be absorbed by the shippers themselves, although if manufacturers and suppliers keep sending rates higher this may not be the case.
I am assembling a list of prospective buys, which will be a guideline should fear of a constriction of global trade start tanking shippers. If shippers start rallying hard, then I’m not interested.
As of right now, that list contains CPLP, NMM, DAC, DRYS, TK, and VLCCF. Literally, I just grabbed those names at first sight, off The PPT; some of them I have owned or have wanted to own before. They will make a good starting point and I will begin filtering the list, or adding new names, as/if developments start sinking the companies.
TK and VLCCF probably interest me the most, as I remember looking at them during the financial crisis, thinking I could just bide my time and buy in later. That was, obviously, a mistake. CPLP is also intriguing, with a very young fleet.
Basically, I’m looking for a run down so that I can buy in and then wait for U.S. warships to enter the area and set the record straight. Just picture a U.S. naval carrier cruising in the Mediterranean right off the coast of Egypt, perhaps accompanied by an armada of warships, and you’ll see where my head’s at.
In the second obvious sector to be affected – commodities – I will be taking a pass. The oil trade frightens me, as I will get into later, I have extensive exposure to the best substitute – coal, and I don’t like the metals vis-à-vis Asia/China on crack and maybe overheating.
Besides just the Middle East, the conditions seem right for contraction. People should be starting to ask themselves what might happen if states begin taking their obligations to court for restructuring, or what a Republican Congress demanding spending cuts means for the stock market leaders. And, they should be remembering that there are some things Ben Bernanke cannot ease.
Things like mindless, bloody riots.
I view the market at a crossroads, with a number of high level events looming on the horizon, and will not be surprised if we continue much lower. I will therefore conduct myself with much reservation when it comes to making additional purchases.
I am all long with a negligible cash position, and lots of relatively cheap credit. My positions are MGM, TLP, NRP, VZ, AWK, and physical silver.
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SACRILEGE!
BTW–welcome…
(laughter) thanks, Scott. Good to be onboard.
“the kids” say LOL or RLMFAO or something like that… 🙂
welcome mr.cain. hey, i thought you were done with mgm?
No, but I used to scale in and out of it frequently, as the thing is volatile as all hell.
You probably caught one of my major selling points. I still have a retention position which constitutes about 15-20% of my portfolio (before adding the value of my silver). I made a killing by realizing gains in a portion of my shares, so now what I hold is predominantly paid for.
As a former fellow Michigander (da yoop) congrats on the promotion. I’ve been nibbling on some DRYS myself. Do your vulture like ways extend to the Egypt ETF, EGPT or is that so much wild riverboat gambling for you?
I’ll use ETFs to hedge or when nothing else is available, but for the most part I stick to more specific allocations.
That’s where the purchase can be best tailored to the situation. And that’s, thereby, where the money is to be made.
http://www.thestreet.com/_yahoo/story/10990239/1/suez-canal-closure-seen-as-unlikely.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
While closure of the Suez makes for a great headline – the canal is the least of our concerns at this point.
There are some “canal” issues beyond simple closure (which has happened in the past).
Our Navy is currently granted special expedited use of the canal (with nuclear warships escpecially). Expect a review of that policy under a less favorable government. Our projection of power in that theater will be weakened.
Ships pay heavy fees (fees include things like night transit inspection lighting). $250,000 for an average ship last I looked with over $25,000+ in insurance just to transit. Expect fees to be “reviewed” perhaps even based on origin & destination for the cargo. Expect insurance to increase at a minimum.
When you lok past the canal, there are so many other concerns that are raised. Are we allowing another Iran? Will Jordan & Yemen other follow? Does the US lose almost every Western-friendly government in the region? Does this boost US hatred in the region? Does the new ruler (ElBaradei possibly) favor a nuclear Iran as he has stated in the past? Does Israel go ape-shit over this incident?
We have a president who has shown that he is ill-prepared to handle these issues. It appears we are going to just stand by and let it all look like our fault. As soon as the food runs out and the real violence starts, images of sick, wounded, & hungry people at the hands of a “paid US butcher” will have “Made in USA” written on them like the tear gas cans and tanks. We do not need that on Al Jazeera.
Can our economy afford to have $20++ tacked on to oil for this bullshit? We already got $8. Can Europe afford the same?
Beyond that, I do believe that the shippers & their insurers have something of the upper hand with this. They will at least try to spin it into higher profits via “you don’t expect us to add dangerous 6,000 miles for free do you?” That said, I am not and would not be a buyer of said shippers beyond a day trade maybe – extortion is not really a long-term profit model.
This is an oil trade – pure and simple. As an oil futures trader, I can say I’ve never just sat long with so much conviction as I have for the past couple of days. Beyond that, Canadian producers will benefit, PBR may benefit, and there are a lot of other names that could do well regardless of how this ends but will fly if it shows an uptick in trouble.
I agree with your shippers assessment; it was pretty much my own. This whole affair is bad for global networks. I’m more interested after a correction.
And the thing with oil is I don’t think we can afford oil to gain 20%. There’s a breaking point somewhere up there when higher oil pushes people too far and demand falls out. It was about $150 back at the height of the housing bubble when everyone had money.
Who wants to bet it’s lower now?
Tough to say lower now but I cut my exposure by 80% – into the 2:30 pit close. I’m a big fan of cutting the trade before it gets tired. I do say I’d rather own oil over gold any day.
http://pragcap.com/the-risk-of-egypt-oil-prices
To that end, this article suggests $120 is the breaking point.
“According to Merrill Lynch’s Sabine Schels, a commodity analyst, the breaking point for the global economy is when the size of the energy sector hits 9%. With the sector currently at 7.8% Schels says the breaking point is $120 oil:”
(laughter) unrelated to your post’s point, but here this guy is saying that roughly 2% of global oil pass through the Suez Canal.
Fucking ridiculous, how no one seems to be even within the same ballpark.
Oh, but to your “Al Jazeera will hate us” line of reasoning.
They already do that, so who cares. No shock value there; just steady as she goes.
Al Jazeera has been neutral to downright friendly to the US in their reporting of this incident. One might argue that they are more neutral toward Obama than Fox news!
No joke, check it out: http://english.aljazeera.net/
Mr. Thaler,
Nice to see you with your own blog now. May I be so bold as to ask you for your opinion on silver – I am looking for a pullback to the 24-25.20 area with some consolidation there before it continues its march upwards.
Of course that is paper silver, not the real silver, where the market – according to some crazies – manipulated (as if that could EVER happen in this day and age haha)
Thanks and regards
P
Much appreciation but if you’re talking commodity technicals, Jake is the one to ask. He studies them.
As a general question, I now hold only a base position after selling out in December. I think silver will likely trend higher, but the monster gain of 2010 has past and I just don’t anticipate another year like it.
Despite not liking the dollar, I refuse to oppose it, at this late hour, if that makes sense.
I’m looking forward to making money off your hard work!!
But seriously.. Looking forward to reading more of your posts!