September 5, 2013 Update

DJIA:14,931 S&P 500:1,653 NASDAQ:3,649 Gold:$1,395 Oil:$107.74 EURO:$1.32 YEN:99.87

On The Syrian Oil Scare

Since the second World War, US markets have soldiered through a diverse collection of unexpected tragedies; including natural disasters, terrorist attacks, wars, assassinations, extreme political and social conflict, and financial crisis. And of the various catalysts that trigged market sell-offs, it only took the S&P 500 an average of six days for the market to reach a new low and fourteen days for the market to recover (S&P CapIQ). Markets are sensitive to its’ investors’ emotions, since it falls with fear and rallies with confidence. The conflict in Syria has placed upward pressures on commodities, oil in particular. This week alone, oil became the most expensive it has been in over two years as investors worry about how the geopolitical scene will distort production in the region. It seems to me that this concern may have become over dramatized. As a region, the Middle East accounted for 35% of oil production in 1Q13. Syria, however, was not a generous contributor to this statistic. The country is not a major exporter of oil. Every year 20% of the total global oil supply flows through the Strait of Hormuz, which the US has spent $8T since 1976 protecting despite the fact that only half of the oil that passes through the strait belongs to the US. Iran is a huge importer of oil, and uses the Strait of Hormuz for trade. Even if the US decides to bring down the Syrian regime, it is extremely unlikely that Iran would bomb or block the Strait as it hurt the Iranian economy just as much as it would hurt the US. Think about it, no one intentionally stabs themselves in the front while seeking revenge. Ten years ago when the US invaded Iraq, oil futures fell 15%. About two years ago in May 2011, oil prices retreated about 10% when NATO sought action against Gaddafi. Oil prices rose in tandem with fear, but then corrected shortly after the conflict commenced; when the reality became real. As it is, the US only imports about 20% of it’s energy needs. The International Energy Agency has estimated that by 2017 the US will become the world’s largest energy producer (passing both Russia and Saudi Arabia) and will be completely energy independent by 2035. I don’t believe the conflict in Syria will be as toxic to US oil markets as it is in its own country. In fact I think oil will correct to $100 per barrel relatively soon. Like most emotions, fear is irrational. And people act irrationally when they’re scared. Because of this, I would sell the fear, sell the Syrian shivers, and buy after the US has acted upon the decision they’ve made for retaliation. I would buy once the reality of war becomes real. 

Domestic News

• Market Update Futures are up ahead of the release of heavy economic data that could directly correlate to the strength of the Fed’s monthly asset purchasing.
• The ADP Employment Report will be released at 8:15, and is expected to show a rise of 177,000 in private sector jobs in August, down from July’s 200,000 surge. 
• Weekly jobless claims will be released at 8:30, and is expected to have fallen 330,000 from 331,000 the week before, proving that layoffs are hovering around the post-recession low. 
• Data on factory orders will be released at 10:00, and are expected to have declined 3.4% for July compared to June’s 1.5% increase. 

International Updates

Asia

• Market Update Markets are mostly higher, expect equities in Australia which fell ahead of this week’s federal election. 
• The Bank of Japan has declared that it is back on the recovery track, and has voted to keep the monetary policy that boosts the monetary base by ¥60-70T annually.

Europe

• Market Update Markets reacted positively to the ECB and BOE rate decision.