Khamsin

Khamsin
February, 17, 2011
David R. Kotok

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“This is not just a warm wind, but a dust-laden, suffocating hot wind! It blows in the desert regions of certain Arab-populated countries. Khamsin is the Arabic word for “fifty” and it is quite appropriate since this far from friendly wind blows for fifty days and during its “occupation” of the area all activity ceases and there is no outward sign of life. The natives merely remain inside their dwellings and resign themselves to waiting for Khamsin to use up the allotted time. It should be evident that the denizens of such a region have all learned how to count up to half a hundred…The music itself has a sort of lonely quality which is intended to portray the hopelessness of a situation that can only be met by perseverance and a determination to outlast the ever present Khamsin.”

Source: liner notes: third movement of “Warm Winds” by Lyle Murphy, recorded by the Hollywood Saxophone Quartet in the 1950s. Wikipedia.

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Khamsin is the hot wind of North Africa and the Middle East. Wikipedia will give you the details. Google will take you there. I’ve personally felt its parching bite on trips to the Middle East. But I was just a visitor. Today, country-by-country, residents plan their ways to deal with this period. They are trying to survive multiple tornadoes.

Khamsin arrived two months early this year. It blew in on the back of food riots. It mixed with ethanol thanks to the madness of US policy of spending many billions of taxpayer subsidy to grow food in order to distill it and put it in fuel tanks. Iowa Senator Grassley (R) and Iowa Senator Harkin (D): how much global blood is on your hands? Yours is a true bi-partisan effort when it comes to hunger and strife.

Now we have a firestorm raging in a dozen countries. And now we see know about the true colors of murder and mayhem revealed in Iran, Syria, Libya, Lebanon (Hezbollah) and others. When you do not see TV the images, when a young person uses a social network at personal peril, you can assume the very worst.

We set out to write more and then saw Ed Yardeni and his pen do the job for us this morning. So we credit him with the following four paragraphs. Thank you Ed for summarizing what I am now calling true contagion and not just young people demonstrating peacefully for some human rights. We fear this gets worse before it stabilizes.

Ed Yardeni, www.yardeni.com, wrote:

“Iran’s Mad Mullahs need a diversion. The pro-democracy Green Revolution remains a big threat to their regime, especially after the Egyptians deposed their autocrat. So their game plan may be to stir up a conflict with Israel and to drag Egypt into the mess. Why not send a couple of Iranian gunboats through the Suez Canal and at the same time escalate tension between Israel and Lebanon? Yesterday, Israeli Foreign Minister Avigdor Lieberman claimed that two Iranian gunboats were planning to sail to Syria through Egypt’s Suez Canal in what he called a “provocation.” Israeli Prime Minister Benjamin Netanyahu said Iran is trying to push Egypt into breaking its 32-year-old peace treaty with Israel. On Tuesday, Israeli Defense Minister Ehud Barak toured his military’s northern command and told soldiers there that the quiet along the frontier might not last. In Lebanon, Hezbollah’s leader, Sheik Hassan Nasrallah, told his Shiite guerrilla group Wednesday to be prepared to invade northern Israel “if war is imposed on us.” This morning’s Washington Post reports that the Iran warships cancelled their request to transit the Suez Canal.

“There is a serious potential for continuing and widespread civil disorder in the Middle East. Now that Mubarak has been deposed, the Egyptian economy faces a new challenge of widespread labor strikes. Yesterday’s WSJ reported: “Egypt’s unofficial labor unions have a record of using walkouts to wring concessions from government-owned companies. The labor movement first joined political protesters on February 10 to demand increased wages, improved benefits and the sacking of corporate bosses who many workers believe enjoyed corrupt relationships with the former ruling regime.” Even some Iraqis seem to want a revolution, even though George W. Bush deposed Saddam Hussein and brought the semblance of democracy to Iraq. Iraqi groups on Facebook are calling for a coordinated protest on February 25.

“Rapidly rising food prices triggered the latest round of civil disorder around the world, as they did the first round during 2008. Today’s WSJ observes that American farmers are preparing to plant their next crop and that “[o]nly a limited amount of idle land can be brought into production, further capping supply.” The US provides more than half of global corn exports and over 40% of soybean exports.

Globally, current corn stocks amount to about 5% of annual use, far below the average of 13.6% over the past 15 years, according to the USDA. Last year, 5 billion bushels of corn produced in the US went for livestock feed; ethanol production approached 5 billion bushels; exports, 2 billion; sweeteners and corn starch, 1.2 to 1.3 billion. That added up to about 13.5 billion bushels of demand for corn, while American farmers produced about 12.4 billion bushels last year, a shortfall of about 1 billion. Ethanol is eating up 40% of America’s corn crop to meet no more than 10% of America’s gasoline demand! So our ethanol policy is exacerbating the global food fight, destabilizing the Middle East, and pushing up oil prices. Is that insane, or what?”

At Cumberland, we believe regional firestorm is now becoming large enough to impact world growth. And it will certainly cause higher prices for oil. Brent is telling the oil price story of over $100. WTI is distorted by Cushing, Oklahoma inventory problems. We expect higher gasoline prices will accompany the Khamsin. Markets seem too sanguine for us.

We are maintain a cash reserves in US ETF accounts. We continue to be overweight the energy sector.

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David R. Kotok, Chairman and Chief Investment Officer