Libya and Your Stocks: The Real Risk and Opportunity

What the unrest in Libya, a major oil-producing country, could mean for the U.S. and your own investments.Today marks the ninth consecutive day of protests in Libya. It’s big news for American companies, because the rebellion in Libya is the first civil unrest in a major oil-producing country.

I’ve been following Libyan leader Muammar al-Qaddafi for years. If you thought Saddam Hussein was a piece of work, you need to do a Google on Qaddafi. He’s been milking Libya’s coffers for years. And now he’s telling us that, after 42 years of ruling the country, he will fight with every “last drop of blood.”

Back on February 4, 2011, my lead story for PROFIT CONFIDENTIAL had the headline, “Oil Stocks: Why $100.00-a-Barrel Oil Is a Reality.” Back then, crude was selling for about $90.00 a barrel. This morning, crude is trading at a 28-month high. No, I didn’t predict the civil unrest in Libya. My analysis of the price charts of crude oil and the stocks of major U.S. oil companies simply told me that the price for oil was headed higher, which I attributed to continuing demand in China (that opinion has not changed).

According to the International Energy Agency, Libya is the world’s 12th largest oil exporter, producing about 1.6 million barrels of crude a day, which is equal to two percent of global oil demand. So, the short answer is that there is little risk to your stocks if the oil taps are turned off in Libya. In fact, getting people like Qaddafi out of power is a long-term positive for American companies and your stocks.

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But here is the real risk: If civil unrests in the Middle East spread to Saudi Arabia, it’s a different ball game altogether. Saudi Arabia is the world’s largest net oil exporter. It has one-fifth of the world’s proven oil reserves. While the government in Saudi Arabia has been less harsh and more generous to its citizens than Egypt and Libya, any civil unrest in Saudi Arabia will send oil prices skyrocketing and stock prices sharply lower in North America, as the oil crisis of the 1970s is played out again.

Rising oil prices lead to rising precious metal prices. I’ve been begging my PROFIT CONFIDENTIAL family of readers to own the precious metals, especially gold, since 2002. And it’s still not too late today! We are only in phase two of the bull markets in resource and precious metal prices. Phase three could make the NASDAQ run-up to 5,000 in 1999 look amateurish!

Michael’s Personal Notes:

Sure, all eyes are on Libya this morning. But we should look at what’s happening in our own backyard.

Mexico’s GDP was just reported as growing 5.5% in 2010—its fastest growth rate in a decade. Mexico is Latin America’s second biggest economy after Brazil. And Mexico’s economy is expected to grow between 4.5% and 5.5% in 2011.

Our neighbor economy is growing at a rate that is equal to 50% the growth of China’s economy; truly remarkable. Unfortunately, with that type of growth, inflationary pressures will increase substantially this year in Mexico, pushing the country’s interest rates higher.

To the north, Canada has been raising interest rates. To the south, Mexico’s interest rates are about to rise. And, in the middle, we have the mammoth U.S., where short-term interest rates remain near zero. Interest rates throughout the world are rising, but not in the U.S., as the American game of keeping interest rates low so the greenback continues its “quiet devaluation” among other world currencies continues.

The worst-kept secret in the financial world is the quiet devaluation of the greenback. How long will the game continue? Not long, my dear reader, not long at all. Paying back an ever-increasing national debt with cheaper U.S. dollars is starting to run thin with the foreigners who finance us.

Where the Market Stands; Where it’s Headed:

Yesterday, the stock market took it on the chin, with the S&P 500 having its single biggest daily drop since August of 2010. So, the question is: can one day of trading establish a new trend? Of course not! It will take much more than one down day to break the back of the strongest bear market rally I’ve ever seen.

Tuesday’s stock market action can almost entirely be related to the jump in oil prices. The higher oil prices go, the less money the big American industrial companies make, as their delivery and energy costs rise sharply. But, in this case, the unrest in Libya is placing pressure on the stock prices of the actual companies that produce oil, as their supply risk increases. The Dow Jones U.S Oil and Gas Index was the biggest loser yesterday, down 5.3% for the day, and that’s what brought stock prices lower

The Dow Jones Industrial Average opens this morning up 5.5% for 2011. The bear market rally in stocks that started in March of 2009 is alive and well.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s” rally developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.