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Random Thoughts: What Would War Mean for Energy Stocks?

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There's more to the answer than meets the eye.

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Minyan Bryan asks:

Toddo,

Thanks for all you've done with Minyanville, I especially love the real time postings on the Buzz & Banter and how we see differing opinions from the contributors. If a geopolitical event happens in Iran and the price of oil spikes, do you think that will be positive or negative for the corresponding equities? Maybe the answer is obvious to some, but it certainly isn't to me
.

My response?

MBM,

There is no 'easy' answer to your question, and trust me, I've thought about it often. While I don't claim to be an expert on geopolitical affairs, the notion of "economic hardship" preceding global conflict is a central -- and scary -- theme.

The knee-jerk response to your question is obvious: we'll see a serious spike in crude and the corresponding equities. From there, it gets a bit more complicated. The US Dollar will jump as well, which will set into motion a structural unwind of the carry trade, which would be "asset class negative" (including crude).

The net effect will likely be two-fold; first, an immediate gap higher in crude (and the corresponding equities) and second, a relative out-performance of crude (the commodity) as a function of supply-demand constraints (the Strait of Hormuz is HUGE in terms of piping Texas Tea to the world).

With that said and respected, don't underestimate the magnitude of the carry trade unwind; if everyone tries to exit a crowded highway at the same time, the most likely outcome is a bottleneck of supply.

Hope this helps on some level and thanks for the snaps. The 'Ville is truly a community effort and we appreciate your support.

Some Random Thoughts:

  • Ron Coby & Denny Lamson also commented on the above scenario yesterday in their Grail ETF & Equity Investor newsletter here on Minyanville and put on one oil and two gold plays. Take a FREE sneak peek to access.

  • I offered this morning that the risk to regulation is that it takes time to filter through the proper channels while financial markets operate in real-time. Through that lens, the specter of bureaucratic headwinds quelled some "Volcker Rule" fears, which is likely a causal effect of the recent lift.

  • We also touched on the need for solution providers through the lens of a "more austere compensatory curve." Bank America (BAC) (as much as 95% of bonuses will be paid through stock that vests over three years) and Morgan Stanley (MS) (the "pay ratio" would fall this year following a historic high in 2009) are attempting to address this topic.

  • Tranched resistance in the S&P comes into play at 1110 (50-day EMA) through S&P 1120 (50% retracement of the decline from 2007 and the upper band of the 2009 Q4 trading range). This is also an important juncture for tech. Should the four-letter freaks fail, it'll be the third "lower high" for the sector.

  • After covering some exposure on the pop through S&P 1080 earlier this week, I'm again leaning against resistance with an eye towards defined risk, as mapped above. Doesn't make it right, mind you, but at least it's honest.

  • We're seeing some serious N's over S's action emerge, led by the high beta realm (Apple (AAPL), Baidu (BIDU), Research in Motion (RIMM), Google (GOOG)).

  • The most bullish thing on my screen today? Grandma Goldman (GS), which has been giggling green from the word "Go!"

  • The most bearish thing on my screen today? The aforementioned technical inflections and Debbie Downers in the retailing sphere (Lowe's (LOW)) and homebuilding space (Lennar (LEN)).

  • Tree-mendous article this morning by Professor JK on the Greek dilemma. Credit markets continue to feature Greece among the top ten candidates for default, just ahead of California.

  • Speaking of Cali (Cali?), I'm going (going) back (back) to Cali (Cali) for a west coast business swing Monday through Wednesday. As we're a community that prides itself on communication, I wanted to give ye faithful a heads up.

  • A jobless recovery is the silliest thing I've heard since the notion of global decoupling.

  • Minyan Case (not to be confused with Jerry Fletcher) offers, "I'm really not much of a conspiracy theorist but I can't help wonder if the Toyota (TM) bashing by the Transportation Secretary has more to do with boosting the domestic auto makers market share rather than Toyota's vehicles being too unsafe to drive."

  • All I can say is, WOW.

  • Remember when we spoke of government fingers being stuck in the financial dike, only to find new holes springing at a furious pace? That analogy preceded the dam break of Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), Bear Stearns, Lehman, Merrill Lynch (BAC), and so on. I believe that analogy will again prove prescient as it relates to sovereign debt, although that could conceivably be years away.

  • Finally -- and perhaps most importantly -- Happy Birthday Mom! You rock, and I'm blessed to have you in my life.


R.P.

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