75%? Make That 25%

by Addison Wiggin

• Libyan oil output crashes 75%, WTI soars above $100

• Saudi promises to "replace any lost Libyan oil"… and why that promise is empty

• What drove down stocks the last two days (and it's not Libya)

• Grains pull back some more… Alan Knuckman on what's next

• How Col. Gaddafi avoided the fate of Steven Spielberg, Sandy Koufax, Larry King

How quickly we're made the fool these days. Yesterday, we speculated Libya’s oil output had fallen to 75% of normal.

This morning, it appears the number has already fallen to 25% of capacity. The output estimate comes from the CEO of the Italian oil giant Eni, the largest foreign operator in Libya.

Down to 25% of capacity… and the "Mad Dog of the Middle East" hasn't even carried out his threat to detonate the nation's pipelines to the Mediterranean yet.

And just like that, West Texas Intermediate crude broke through the $100 barrier. It’s currently $101.41 a barrel. Brent crude is up to $115.28.

Not to worry, says an unnamed “Saudi Arabian oil official” to Bloomberg. “Saudi Arabia and OPEC won’t allow shortages to exist,” reads the story, because they can “replace any lost Libyan oil as soon as companies ask for it.”

Apparently, we’re supposed to forget the WikiLeaks revelation from just two weeks ago that Saudi Arabian reserves may be 40% smaller than advertised. Likewise, we’re supposed to forget that their vaunted “spare capacity” never seemed to come into play as oil ran up from $25 to $147 between 2003-08.

Besides, the 6,000-some Saudi princes have bigger things to worry about right now.

Saudi Arabia’s octogenarian King Abdullah has just returned home from three months of unspecified “medical treatment” overseas in hopes he’ll avoid the fate that’s already befallen Tunisia’s Ben Ali and Egypt’s Mubarak.

He’s unveiled a Saudi-style stimulus program worth $36 billion, including…

• A 15% pay increase for government employees

• Reprieves for imprisoned debtors

• More aid for students and the unemployed — the official unemployment rate is 10%.

Not good enough, say some of the young, hip Saudi Arabians using Facebook to organize a “day of rage” on March 11. "We want rights, not gifts," says a typical message on Twitter.

Into this new and volatile mix we feel compelled to throw a couple of old facts: The House of Saud hews to Sunni Islam. The country’s oil fields are populated mostly by Shiites. Between the two factions lies a rift going back 1,354 years.

That’s what’s at the heart of the “New War” scenario of $220-a-barrel oil from Outstanding Investments editor Byron King. Just yesterday, Japan’s Nomura Securities called for exactly that price if production is shut down in Libya and Algeria. We’re almost there already in Libya.

Review Byron’s scenario now… or wait until it is "old" news. Your choice.

[Ed. Note: “Over the past 10 years,” columnist Peter Brimelow wrote yesterday on MarketWatch.com, “Outstanding Investments was up an absolutely stunning 21.66% annualized by Hulbert Financial Digest's count.” That compares to a mere 2.33% for Hulbert’s benchmark — the dividend-reinvested Wilshire 5000 index.

“That makes OI easily HFD’s top performer over the decade.” It’s one more reason to consider an OI subscription now more than ever.]

Major U.S. stock indexes are stuck in neutral this morning. The Dow appears to be stabilizing after a 300-point loss over the last two days. Ditto for the S&P, which shed some 30 points in as much time.

The volatility index has gone mildly berserk — from 16.5 at the end of last week to 22.25 today.

While we notice that 16 seems like a good level to buy calls in the VIX in the scheme of things; 22 is still pretty mellow – the Flash Crash high of last year was 46 — but it does mark a three-month high.

“Whenever market action has you stressed,” cautions our small-cap sleuth Jonas Elmerraji, “I’d suggest taking a look at the unintentionally humorous stock observations being made by staff writers at CNBC.com:

“This is a perfect example," Jonas points out, "of some ‘journalist’ picking the day’s top news story as the reason for the market’s move… in either direction. Very few stocks have direct exposure to Libya. It’s absurd to think that the situation there is the root cause of Tuesday’s sell-off. Or yesterday’s downward market pressures.

“The correction is the result of the fact that the market has rallied more than 23% in the last six months. There's nothing scary about it. In fact, a correction in prices is often healthy. The relatively normal trading range we saw yesterday is a sign that selling has already stabilized.”

Markets move up. Markets move down. But they rarely do so in a straight line.

Using similar logic for much of last year, Jonas delivered 123 winners out of 127 recommendations. If you're actively trading stocks, we suggest you learn how Jonas' S.T.O.R.M. strategy can help you remain calm in volatile markets… and how it routinely delivers double-digit gains. See Jonas' presentation here.

With all the screaming headlines and hurly-burly of this week’s events in the Middle East and Midwest, it’s easy to lose sight of other key market indicators. So here’s a quick update…

• Gold is up again today, however modestly. Last we checked, the spot price was $1,413. Silver is giving up some ground, though — it’s down to $33.07.

• Treasuries are benefiting from the safety trade. Yields on the 10-year note, which peaked above 3.7% earlier this month, have climbed down to 3.43% as of this morning.

• The dollar index is definitely not benefiting from the safety trade. From a high of 78.6 just over a week ago, it hangs by a thread to 77.

• Copper prices are stabilizing after several days of losses. From a peak of $4.62 a pound on Valentine’s Day, it’s now at $4.29 — still well above its 2008 high.

Durable goods orders registered their first monthly increase since September, according to the Commerce Department this morning. The general definition of durable goods are “expensive items expected to least three years or longer,” and orders for those items grew 2.7% in January.

Unfortunately, most of the increase is confined to the aircraft sector. Take out "transportation" and the number fell 3.6%, the weakest number since those cold, dark days of January 2009.

Another down day in the grain markets, although it’s not shaping up to the “lock limit down” day that Tuesday was… when several commodities fell the maximum allowed by the exchange.

“One day does not change a trend,” cautions our commodities watcher Alan Knuckman. “The limit down moves in soybeans, corn and wheat show downward moves are often fast and more violent. The grains are all 10% off the recent highs that looked on the march to 2008 record prices.“Though these 2011 prices peaked at 30-month highs, more upside exists. A decline from lofty levels doesn't just reverse straight down with fundamental food forces at work.

“I'll be watching this increased volatility (see: opportunity) closely to find buying support levels as the unpredictable spring planting season adds another whole layer of uncertainty and uncontrollable variable to production.”

Right now, you have a unique opportunity to take advantage of Alan’s profitable trade recommendations in Resource Trader Alert… plus the explosive small-cap resource recommendations from Byron King’s Energy & Scarcity Investor… not to mention Outstanding Investments, top ranked over the last 10 years by Hulbert Financial Digest.

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More than 10% of the nation’s banks now sit on the FDIC’s “troubled bank” list — the highest level since the hangover from the S&L crisis and subsequent recession in 1991.

Out of 7,657 banks, the FDIC reckons 884 have too little capital to cover the risks they’ve taken. Considering how loose the FDIC’s standards are, the real number is surely much higher.

The FDIC’s deposit insurance fund — the fund that allegedly backs your account up to $250,000 — is now $7.4 billion in the red.

Courtesy of WikiLeaks, we’ve just learned Libya’s sovereign wealth fund had placed $32 billion in cash with U.S. banks ever since the Bush administration let Col. Gaddafi in from the diplomatic cold in 2003.

More interesting, we think, is who Libya did not place its funds with — Bernie Madoff.

The relevant State Department cable, dated Jan. 28, 2010, reveals Madoff approached the Libyan Investment Authority, but LIA chief Mohamed Layas turned him down.

Further, Layas wrote a letter to the Financial Times denying that LIA had placed $100 million with Madoff’s small-time rival Allen Stanford.

On the other hand, the cable says Layas was quite proud of his September 2009 purchase of the Canadian oil operator Verenex. As well he should be… he bought near the bottom, and shares had doubled just six months later.

We haven’t heard whether Mr. Layas is among the many Libyans who’ve defected to the opposition… or whether Col. Gaddafi has made him an offer he can’t refuse. Stay tuned.

“Can you make available a print copy of the Resource Reserve offer?” a reader inquires? “I don't feel like taking the time to watch a video, but am very interested in subscribing. Thanks.”

“Greatly interested,” adds another, “but I do not have the time to listen to lengthy presentation: Any shortcuts to know more about the service?”

The 5: Sure, right here. Or you can call John Wilkinson at (866) 361-7662 and he can answer any questions you might have. Thanks for your interest. If you're interested in investing in or trading resources, the Resource Reserve is the best deal you can get in the industry. Hands down.

“I never quite understood the passionate devotion of libertarians to Ayn Rand, and especially her tome Atlas Shrugged,” writes a reader. “So about a year ago, I bought a copy of the book and started working my way through almost a thousand pages of what I can only describe as turgid prose.

“Her characters are two-dimensional at best, and comparable to Workers of the World depictions of robber barons and greedy capitalist caricatures from the 1930s, albeit from a diametrically opposite point of view.

“About three-quarters of the way through the novel, after countless straw man setups glorifying the clever, somewhat saintly, hard-working, industrious capitalist heroes of production pitted against a dull, lifeless, faceless, whining and totalitarian bureaucracy, I finally arrived in Rand's private picture of heaven… Galt's Gulch.

“Frankly, I am no more thrilled by that concept than the leaden images of workers' paradises envisioned by leftists of the last century. Did I miss anything by not disciplining myself to read to the last page?

“I suspect that people who really become enamored of this book do so because it meshes so nicely with their own libertarian point of view, which is not frequently extolled in mainstream literature. But then all bibles and holy texts I've ever encountered make pretty boring reading except to the anointed believers and a few anthropologists.”

The 5: Amen.

“If anyone cares to," a reader responds to our candid query yesterday, "they can 'flee' and keep their entrepreneurial spirit. Moreover, that spirit will only grow after flight.

“I've lived continuously in Chile and Argentina for more than two years, and every day I see opportunity absolutely everywhere. Yet the locals don't see it without my pointing it out to them and explaining what I mean.

“For example, only today I found that I can't get trifocal glasses in Argentina. Surely, out of 41 million people in the country, there must be a local market…either present or created. Even if only one person in a thousand buys trifocals, that's a huge market.

“Pick your country, pick your opportunity — it is there, just waiting. The hardest part will be choosing the one you most want to do.”

The 5: Are you sure that someone who wants to start a trifocal business doesn’t have to fill out multiple forms and file them with disparate government agencies… and perhaps that’s the reason no one has moved into the trifocal niche? Just asking.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: “I sent your account of the Granada, Nicaragua, poetry festival to my daughter,” writes a reader. “She’s been in that area for the last two months learning Spanish at a local school in exchange for teaching art and English at the same school. Her take on the festival and Nicaragua in general is a little different than yours:

“I wonder about the use of the word 'untainted' being used to describe Nicaragua's people. The description of Nica's internal economy glosses over any mention of globalization… it fails to mention the coffee industry's effect on Nicaraguan land ownership and the reality for farmers who are struggling to battle international companies.

“While jobs are supplied, the idea that these jobs wouldn't exist without us is absurd. If we had truly left Nicaragua untainted, we wouldn't be there at all. There would still be jobs for Nicaraguans in Nicaragua, and they wouldn't be immigrating in hordes to Texas and New York.

“Yes, there are still local fisherman and big hotels purchasing the fish, but the fisherman certainly aren't benefiting much from it. The fish is purchased for nearly the same cost as a Nicaraguan might buy it, but is sold to tourists who come for cheaper eats, but not the street food, thereby still spending over the local limit. It uses economic, rather than ideological, terminology, to justify an imperialist mind-set.

“But the ideology is still threaded into the baseness of the interpretation of the Nicaraguan people as untainted. There is a definite dual economy in Granada — the tourist and the Nica.

“The notion of an untainted economy really refers to a dichotomy of rich and poor. The poor folks are untainted from our view as we sit in this Western-inspired cafe, companions either travelers or…well, usually travelers, and occasionally well-off locals… We're trying to stay in the world we're used to — untainted by our world of bottled water, better hygiene, better food that doesn't make us sick… whatever else we've made up to be able to sell more stuff to more people.

“I'm glad these people there are aware of perhaps not being exactly 'god's work,' but I still get a feeling that they might not really understand their own effect on the people here. Comments about people not wanting to gather in 91 degree weather or how they see the untainted economy from where they stay, but offer no anecdotes for participation, except their business-creating jobs — seems to me they don't want to think seriously about the other standards that are realities for many in Granada.

“Just because we are aware in general that we change countries we visit doesn't mean we have fully grasped that every individual action we take affects the place and people we are nearest to. Just because we are 'from somewhere' doesn't mean we are exempt from how we act in other countries.

“I really am starting to believe that as much as possible, contributing to the local economy is the far most responsible decision we can make as travelers.”

The 5: Ah, yes… to be young and perfect again.

We were marveling at the civility of the poetry festival. Admiring it. Not complaining about the weather. Oy. The description of the Nicaraguan people as 'untainted' we found interesting because it came from a gentleman who hails from a Oaxaca, a town he described as similar that is not too far north in Mexico. His description. And, for the record, something he also admired.

Bottled water? We prefer the local beer.

Food that doesn't make us sick? Have you seen the obesity rate in the U.S.? The food in Nicaragua is much better. Simple. Fresh. Local. What's not to like?

Western-inspired cafe? Nicaragua is the West. The dichotomy of rich and poor exists just as much in Baltimore as it does in Granada. It's worse in many ways. The folks at the festival in Granada just seemed a little more civilized about it… on that day.

We apologize for not self-aggrandizing to the point where we feel comfortable pontificating on things we don't know anything about: fair trade in coffee production or the battle of farmers against international corporations. Enlighten us.

We do write about the perils of empire, ad nauseum.

Come to think of it… that was our point. We don't fully understand our impact on the people in Nicaragua. Nor do most 'travelers' pay any attention. Maybe it would have been better if the U.S. never meddled in Nicaraguan affairs. Amen. That's not really for us to decide now, though is it? The history is long and sordid.

If we failed at anything, we failed to tinge our comments with enough guilt and self-loathing to reach your high level of sanctimony. Thanks for setting us straight.