Political demonstrations are flaring up throughout the Arab world. Anger over rising prices and high unemployment has erupted in Yemen, Morocco, and Algeria. The protests gathered additional momentum after an uprising in Tunisia led to the removal of leader Zine El Abidine Ben Ali on January 14.
The focus is now on Egypt, where anti-government protesters have clashed with police since Tuesday. With help from social media tools like Facebook and Twitter,the tech-savvy youth are organizing protests in Cairo, Suez and Ismailia. Of the country's 80 million citizens, two thirds are under the age of 30. They're angry over a lack of jobs and low wages. The Egyptian government has ordered curfews, the Internet was down throughout parts of the country, and it appeared that text messaging services were being blocked. Nevertheless, the violence continued Friday, leaving one dead and dozens injured.
The political ramifications from the spreading unrest could be far reaching and there could be implications for investors as well. Indeed, some of the developing markets are already being affected. Egypt's equity market suffered a two-day 16 percent decline through Thursday. No shares traded today, as the Egyptian equity market is closed on Fridays. Trading is likely to remain dicey when trading resumes next week. Meanwhile, directly north across the Mediterranean, Turkey's equity market is under pressure. The iShares MSCI Turkey Index Fund ( TUR) is off 4.7 percent to $58.52 Friday.
The iShares Emerging Markets Fund ( EEM), which holds shares of companies from developing economies around the globe, is down $1.36 to $45.45 today and has suffered a two-week 5.7 percent slide. Contagion, a term popularized during the Global Financial Crisis of 1998, refers to the spreading of financial panic from one country to the next. It often begins in the emerging markets. Are we feeling those effects on Wall Street today? The Dow Jones Industrial Average is trading down 150 points at midday.
Fear is back. The CBOE Volatility Index ( VIX) is racing 3.57 points higher to 19.72 and its best levels since early-December. 6.5 million put options have traded across the nine options exchanges, or double the typical volume. Gold (February) hit a low of $1,307 Friday morning, but has caught a flight-to-safety bid and is trading up to $1,345. Crude oil prices are bubbling. After opening at $85.28, crude (March) is now trading up $3.55, to $89.19 a barrel.
Could shares of some of America's companies come under fire as well? Apache ( APA), a Houston, TX natural gas and oil company, has been reeling over the past two days. Shares are off $2.37 to $113.96 Friday and down 6.7% since Wednesday. The company has 11 million acres in Egypt, which accounted for 30% of its revenues in 2009. Like much of the Arab world, Egypt's economy is heavily dependent on energy. However, agriculture, media and tourism are important industries as well. Information technology has been expanding in recent years. Egyptian IT companies now outsource services to the Americas and Europe, operating with larger technology firms like Oracle ( ORCL) and Microsoft ( MSFT).
Yet, the earnings risk to American corporations from political unrest in the Arab world is difficult to quantify. It would be foolhardy to liquidate a stock portfolio simply because there's political unrest. In the long run, the toppling of dictatorships is probably a net positive for the global economy. In addition, compared to the European debt crisis or a possible economic slowdown in China, the macroeconomic impact from the political instability to the US investor might be minimal.
But this story teaches us that in today's intertwined global economy financial troubles in one area of the world can quickly ripple to other parts of the globe. It's often swift and rarely expected. Then, volatility begets more volatility.In this environment, it's never too early to take decisive measures and look for opportunities that generate profits when fear infects the financial markets. Examples include straddles and strangles (buying puts and calls on the same stock), directional put butterfly spreads (advanced strategy discussed Wednesday), or straight bearish bets on sector or market exchange-traded funds. These trades can generate profits in down markets, which can help offset the risks associated with increasing levels of global market volatility.
At the time of publication, Fred Ruffy held no positions in the stocks or issues mentioned.
Frederic Ruffy is an experienced trader and provides daily commentary and analysis of the options market. He is co-founder of the web site, WhatsTrading.com. His work has also appeared in Futures Magazine, Technical Analysis of Stocks & Commodities, Stock Futures and Options, and Sentiment.
In addition to writing market commentary and trading-related books and articles, Fred has also worked as an instructor, educating investors on advanced topics like measuring volatility, the benefits of sector rotation and the risks and potential profits from trading around earnings. An active trader himself, with over 15 years securities industry experience, his market observations and analysis of the options market are featured regularly in the financial press including Barron's, Reuters, The Wall Street Journal, and Bloomberg.
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