Baron Nathan Rothschild, the great 19th century financier,
famously remarked, "The time to buy is when blood is flowing in the
street." Rothschild was actually talking about symbolic blood
during the Panic of 1873, the Lehman bankruptcy of its time, which
was brought on by excessive railroad speculation. But investors
have a chance to test the literal truth of his maxim during the
current crisis in Egypt.
This is not an endorsement of the slaughter of hundreds of mostly
unarmed protestors by the Egyptian military. But if the Nobel Peace
Prize winner Barack Obama can act on certain realpolitik
assumptions about Egypt -- for example, that a united army and
police force with considerable popular support will soon rout the
Muslim Brotherhood and restore some semblance of broadly
pro-Western order -- a humble investor can be forgiven for doing
This likely outcome to the bloodletting opens several intriguing
financial possibilities: to go long on Egypt's long-suffering
stock, and especially bond market, and short on oil, which has
spiked based on a fictitious threat from "Egyptian turmoil."
First the stocks. Egyptian equities have lost 37% of their value
since the day Hosni Mubarak left office (February 11, 2011),
according to the one liquid ETF pegged to that market, the
Market Vectors Egypt Index fund
(NYSEARCA:EGPT). That compares to a 15% slump in the
iShares MSCI Emerging Markets ETF
(NYSEARCA:EEM), which tracks the asset class globally.
It is no wonder that Egyptian shares are so badly beaten down. The
core of deposed president Mohamed Morsi's economic policy -- more
like lack of policy -- was to prove that he and his Brotherhood
were no tools of the outside powers that were itching to lavish aid
and investment on him in the name of the Arab Spring. Morsi's
people never seriously engaged the International Monetary Fund,
whose billions in proffered loans would have triggered billions
more from the European Union and other well-wishers. The European
Bank for Reconstruction and Development (EBRD), which was supposed
to spearhead a massive investment drive, could not even wade
through the bureaucracy to open a Cairo office.
Morsi was more alert when it came to score-settling with
undesirable businesspeople, particularly Nassef Sawiris, the head
of Egypt's richest family, who happens to be a Coptic Christian.
Orascom Construction Industries
(OTCMKTS:ORSCY), which happens to be the country's largest publicly
listed company, was besieged by suspicious-looking tax
investigations during Morsi's interval in power.
Egypt's beleaguered business community is clearly cheered by
Morsi's ouster, however. The market has rebounded by 17% since the
military coup that removed him on June 30, and it sold off only
slightly on last week's massacres. If the next government does even
a little better than Morsi -- say, by securing an IMF deal -- the
upside could be considerable.
The case for investing in Egyptian bonds is more clear-cut.
Yields on Egyptian sovereign debt
are the highest in the charted universe, more than 16.5% for
10-year paper. That compares to 12.2% for, say, Kenya, and 9.75%
for Greece. In other words, Egypt is priced for something close to
default. But a military-backed government will not default for one
simple reason. Some of the richest countries in the world, like
Saudi Arabia and the United Arab Emirates, are ardent supporters of
the military coup and cheerleaders for crushing the "terrorist"
Brotherhood, whose spiritual cousins pose a dire threat to their
own traditional autocracies. The Saudis and emirs will not let the
Egyptian generals go broke. Sooner or later, the market should
realize that, and bond spreads will tighten dramatically.
Lastly, we are told that concern over Egypt is pushing up oil
prices. The cost of Brent crude rose by 2% last week amid the
carnage in Cairo, a big jump for this massively traded commodity.
But Egypt driving the oil market is just silly. One explanation is
that disturbances in the Egyptian capital might somehow result in
closing the Suez Canal, more than 100 miles away. But none of the
contenders for power in Egypt is near crazy enough to mess with the
canal, plunging the last stake into the economy's heart for no
Some vague talk has also been heard on the markets about the
contagion effect of the Egyptian chaos on other unstable oil
provinces like Iraq. But the issue in Iraq, and elsewhere across
the Arab world, is sectarian conflict between Sunni and Shiite
Moslems. Egypt is nearly all Sunni, and its divisions are between
secular and theocratic world views.
There is a legitimate reason out there why oil prices have been
tightening: the cutoff of approximately 600,000 barrels per day due
to so-called strikes at ports in Libya. (Actually, they look more
like blackmail on the part of security guards.) The government
managed to get one port
reopened yesterday, showing admirable restraint and patience
compared to its Egyptian neighbors. If Libyan crude starts flowing
freely again, Egypt will revert to being a non-issue in the oil
market and prices will subside to the lower levels dictated by real
supply and demand.