Coups, Carriers and Tankers

August 20, 2013

  • Washington cuts off the Egyptian junta — sort of. Byron King helps unravel the military and energy state of play
  • Beaten-down bargains? Chris Mayer surveys the damage from a Russian agribusiness bombshell
  • The downside of oil prosperity? Texas takes a step back
  • In which the United States becomes a high-tech Soviet Union: Contest seeks songs and videos praising Obamacare

  So the U.S. government is suspending most military aid to Egypt. Except it’s not saying so publicly. Although it appeared to allow a flack for Sen. Patrick Leahy (D-VT) to spill the news to The Daily Beast.

“The administration won’t publicly acknowledge all aspects of the aid suspension,” the website reports, “and maintains its rhetorical line that no official coup determination has been made, but behind the scenes, extensive measures to treat the military takeover of Egypt last month as a coup are being implemented on a temporary basis.”

Uh-huh. That’s clear as mud.

  Egypt has momentarily retreated from the headlines. Oil is back below $106 this morning. But it’s the calm before the next storm.

We turn to Byron King for perspective this morning, because when the Arab Spring arrived in Egypt in early 2011, he identified a factor behind the turmoil almost no one else did. Months before trouble broke out, Egypt flipped from being a net exporter of oil to a net importer.

For years, the generals bought off the restive masses with food and fuel subsidies made possible by oil income. When that income went away, so did the generals.

100  “U.S. aid to Egypt is in the $1.3 billion a year range,” says Byron, helping us cut through the clutter of the present situation. “Mostly high-end stuff like F-16 jets, Apache helicopters and M-1 tanks. Also, spare parts and repairs.”

Byron has tapped his network of contacts throughout the military-industrial complex. “From what I hear, the ‘big’ stuff is held up, but the spares and repairs are still flowing.

“Right now, Egypt needs crowd control gear like riot gas, gas masks, tasers, rubber bullets, etc. — unless we like the idea of just machine-gunning the Muslim Brotherhood.

“If the U.S. won’t deliver, there are others.”

Cue The New York Times: “As Europeans and the United States considered cutting cash aid to Egypt, Saudi Arabia said Monday that it and its allies would make up any reduction — effectively neutralizing the West’s main leverage over Cairo.”

“Saudi Arabia and the United Arab Emirates,” Byron elaborates, “are already on record for $11 billion of aid in the form of funds, food, fuel. Russia and China are delivering food aid. Doubtless, Russia will be happy to sell jet fighters if the U.S. won’t deliver F-16s — financed by the Saudis, of course.”

  Here’s one reason the administration might be hemming and hawing…

The aircraft carrier USS Harry Truman passed through the Suez Canal two days ago — on its way take the place of the Nimitz in the Arabian Sea, furnishing air support for U.S. operations in Afghanistan.

“About 35-45 U.S. Fifth Fleet naval ships pass through the Suez Canal annually,” says USA Today, “including carrier strike groups.” Over the last year, Egyptian airspace made way for more than 2,000 U.S. warplanes.

“Egypt has been a cornerstone for the U.S. military presence in the Middle East,” says the conservative Heritage Foundation’s James Phillips. “The Egyptian military has always been good to us,” adds the liberal Brookings Institution’s Ken Pollack.

  Suez is also one of the world’s infamous “choke points” for the oil trade.

In 2012, about 7% of all seaborne oil shipments passed through Suez, says the U.S. Energy Information Administration. One shipper is already advising its crew to avoid going ashore in Egypt.

“If I were a tanker owner,” says Byron, “I’d break out the African charts just in case.” Never know when a long trip around the Cape of Good Hope might become necessary to get from Saudi Arabia to Europe.

  “Neither the Brotherhood nor the military made the kind of bargain and compromises necessary for a successful democratic transition,” says the University of Michigan’s Juan Cole.

Once elected president last year, the Muslim Brotherhood’s Mohamed Morsi began lording over everyone who wasn’t Brotherhood. “If Morsi was what democracy looked like, many Egyptians did not want it.”

After he was ousted in the coup the White House won’t call a coup, the country is now run by what Cole calls a “junta, bent on uprooting the Muslim Brotherhood.”

“Egypt,” says Byron, “is a failed state.”

[Ed. Note: The obvious investing takeaway is one Byron has hammered away at for a couple of years now: Steer clear of oil firms with high exposure to the Middle East; stick to the companies best poised to profit from the fracking revolution in the United States.

But beyond that, there’s a host of other investing implications within the flow of armaments through the Suez Canal, around the Middle East and across the globe. Thursday marks the formal rollout of Byron’s third investing advisory with us — Byron King’s Military-Tech Alert. So watch this space.]

  Stocks are trying to arrest a four-day slide this morning. As we write, the Dow is up 52 points and no longer flirting with 15,000. Small caps are looking stronger, with the Russell 2000 up 1%.

Gold is regaining some of the ground it lost yesterday, currently $1,372. But silver is stationary at $23.16.

  “There are better ways to make money in agriculture,” says Chris Mayer as he inspects the smoldering wreckage of the potash miners.

Let’s back up a bit. Potash is one of the major ingredients in fertilizer. Two-thirds of the world’s potash trade rested comfortably in the hands of two cartels — one North American, one Russian — until one day last month.

“Uralkali, based in Russia and the world’s largest producer, ran a shocking gambit,” says Chris. “It said it would break away from Belarusian Potash Company (BPC) cartel. (One analyst likened it to Saudi Arabia leaving OPEC.) BPC spoke for 43% of the world’s market. Uralkali said it would run at 100% capacity, instead of 70%, and chop pricing by 25%.

“The reaction was swift. The big fertilizer stocks such as PotashCorp and Mosaic fell by 20% in two trading days. Billions of dollars in value just evaporated.”

Chris was tempted to buy in. In years past, his readers had the chance to double their money on PotashCorp and bag 63% gains on Mosaic. But he’s taking a pass.

There’s a potash glut: “CIBC forecasts that annual potash capacity will hit almost 71 million metric tons by 2015. This is up from just 62 million tons in 2012. Meanwhile, demand runs at about 54 million metric tons. So some combination of two things has to happen. Either the price falls a lot and forces some of this production off the market or demand has to grow — a lot.”

Chris says a much better agriculture opportunity lies in a firm we described last month when it went public — Toronto Venture-traded Input Capital, with its one-of-a-kind streaming model for canola production.

  Call it the downside of prosperity… or, if you prefer, a lack of foresight.

“I just can’t believe the Department of Transportation is going back to the dark ages,” Darlene Meyer, a 77-year-old rancher told The Texas Tribune.

Here’s a side effect of the oil and gas boom: Because of all those oversized vehicles and heavyweight traffic, farm-to-market roads in Texas are falling to pieces.

The Texas Department of Transportation (TxDOT) said it needs $400 million to repair the current damage caused by the energy-sector traffic across the state. Money they apparently lack, which is why they’ve hastily decided to convert more than 80 miles of paved road to gravel.

“Since paving roads is too expensive and there is not enough funding to repave them all,” says TxDOT spokesman David Glessner, “our only other option to make them safer is to turn them into gravel roads.”

After an effort to increase taxes on the companies profiting from the energy boom went bust, Texas lawmakers turned to the state’s rainy day fund. They also approved a ballot measure that would devote $1.2 billion a year for roads beginning in 2014, provided the voters approve.

  “Help get the word out, be a part of the solution and win some cash!” says the Young Invincibles website, underneath their ill-defined slogan, “together, invincible.”

“Call us generation vibrant,” their latest blog post reads. “We party (too) hard sometimes, play intense games of kickball and yes, we get injured or sick — more often than we’d like to admit. So most young people generally agree — we need health coverage and we worry about paying for needed care.”

See where this is going yet?

“So with open enrollment for Obamacare starting Oct. 1,” the blog post goes on, “Young Invincibles teamed up with the U.S. Department of Health and Human Services to host the Healthy Young America online video contest.”

And they’re willing to shell out a total of $30,000 to the best videos.

Contestants have three themes to choose from:

1. You Are Not Invincible: Contestants can create a short skit where performers show a time when a young person would need health ins… [cough]… Obamacare.

2. Perform a Song: Contestants are to write a song of praise about health insurance.

3. Animation: And lastly, they can “create an engaging, informative video about critical facts of Obamacare.”

Hmm… some of our younger colleagues at Laissez Faire Books might be eligible and equipped for No. 3. Unfortunately, the critical facts in their survival guide probably aren’t aligned with the modus operandi.

  “Your forecast had some interesting ideas, especially regarding gold,” a reader writes after yesterday’s episode, “but are we going to forever be faced with a series of what are essentially advertisements for your different services?

“I thought the whole idea behind 5 Min. Forecast and 5 Min. PRO was to get away from all that guff and get to the nitty-gritty. I must admit I’m disappointed to have had to crawl through all that mire… and I’ve only just joined and upgraded to PRO! I hope I don’t have to go through that every day.. I’d much rather be singing your praises as, with your help, I grow my wealth.”

The 5: First off, welcome. Second, from the outset — and The 5’s been kicking for more than six years — our policy has been that our analysis comes free, but the recommendations remain the province of paying readers — whether it’s our 5 PRO or any other service. Thank you for your understanding.


Dave Gonigam
The 5 Min. Forecast

P.S. “The Federal Reserve’s holdings of publicly traded U.S. Treasury securities — federal government debt — pushed above $2 trillion for the first time last week,” according to CNS News. That compares with $476 billion at year-end 2008.

The Fed is the largest holder of U.S. Treasuries. After that come China and Japan… and they both have pared back their positions, according to the latest figures.

What happens when the Fed is the only buyer left standing? The mother of all financial bubbles pops, that’s what.


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