Market Spasms
Research for Online Investors

by John Dalt

3/04/11

This morning’s Non-Farm payroll report beat market expectations, with more people working than expected and unemployment below 9% for the first time in over a year.  So what gives, why is the market off today?  Two distinct problems confront the market today.

One is psychological.  After the ADP employment report on Wednesday showed hiring running ahead of market expectations, the market raised their expectations.  By this morning employment growth of 180 thousand wasn’t enough.  Sure, that is what we expected on Tuesday, but now we wanted more, at least over 200 to satisfy the optimists.

So, we see that all the good news was priced into the market, and in fact more good news was priced into the market than ultimately was available!  The second problem confronting the market is the Middle East.  There are reports of Libyan attacks by rebels, and counter attacks by the government.  This leads us to the widely cited "fear trade."

Libyan President Qadhafi is reportedly hiring mercenaries to help put down the rebellion.  The New York Times reports that the U.N. places the death toll at over 1,000 so far.  Qadhafi is gathering support from some of his friends.  Venezuelan President Hugo Chavez told a television audience that “Qadhafi has been my friend for a long time.”  Fidel Castro condemned the U.S. for orchestrating a NATO invasion of Libya.  Zimbabwean President Robert Mugabe is one of Qadhafi’s allies.  This is in return for the favor of Libya pumping millions of dollars into the Zimbabwe economy.

Early this morning, the Times reports that government forces fired tear gas on protesters that gathered after prayers in Tripoli.  Zawiya, a town 25 miles West of Tripoli, was said to be under attack by government forces this morning.  They were using live ammunition on civilians trying to enter the city.

This violence has put a scare in crude oil markets.  Brent crude is currently trading at a premium to West Texas Intermediate (WTI) because most Libyan crude goes to Italian refiners for resale into Europe.  Libyan crude oil is ‘light’ and ‘sweet.’  According to the Energy Information Agency (EIA), the largest production of Libyan crude is called ‘Es Sider.’ It has a slightly lower gravity than the benchmarks WTI and Brent.  This means it is a little heavier, but it has a lower sulfur content (sweeter).  The next most prominent grade of crude from Libya is ‘Sirtica’, it is lighter than the benchmarks.

Light grades of crude can be refined by any refinery.  Some older refineries cannot process the heavier grade crudes.  When lighter, sweeter crudes are removed from the world’s daily production, refining capacity may artificially decrease as older refineries cannot handle the available feedstock.

This creates higher demand for the lighter crude grades.  Global demand adjusts to the best available grade that is closest to its destination.  If the crude has to be shipped farther to its destination, the additional transport time can add to the shortage in available supply to refineries.

The largest component in crude market pricing for the past few weeks is the ‘domino effect’ across the Middle East.  Will civil unrest from Tunisia spread to Egypt? It did, and then to Libya.  The big danger that has been on everyone’s mind is Saudi Arabia.  How long will it be before the headlines include the UAE, Yemen, Oman and Kuwait?  Bahrain already has protests.  The problem is not just the oil production from these countries; it is the spreading of violence that can change the long term stability of the region.  The EIA has a great article, The ABCs of Crude Supply Disruptions that you may enjoy reading.

One of the troubles today was how to spell Ghaddafi,Khaddafi, Quadafi, Gaddafi, Gaddafi, Qaddafi…you just can’t get in respect when you are a oil rich dictator (that is half nuts).  According to the CIA, his name is “Moammar Abu Minyar al-Qadhafi.

To the mailbag:
Thank you for the unexpected pleasure of Kipling.---subscriber N.T.

The “IF” poem was read at Ayn Rand’s funeral in 1982.  I was there.  Are you aware “Atlas Shrugged Prt. 1” is premiering April 15.  It is uncanny how relevant the film is to what is happening today.---subscriber L.C.

John’s reply: Yes, our oldest daughter sent me the movie trailer clip link from YouTube.  You can see it here.

If you don’t like high gas prices-don’t boycott Exxon, buy it!---subscriber J.D.

John’s reply:  We did in the Long-Term Portfolio; we are up over 32%...that will pay for some gas!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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