Unrest Spreads on Domestic and Foreign Soils

Unrest in Wisconsin escalated late last week as newly elected Republican Governor Walker pushed ahead with his desire to pass his “budget-repair bill.”   The bill is intended to plug a large shortfall in the state’s current budget and asks for increased contributions by certain state employees to their own pensions and health insurance benefits.    The proposed bill also contained revisions to existing collective bargaining agreements which created tension amongst many union workers.    Wisconsin could prove to be a pivotal state with respect to the relationship between state governments and labor unions as other states, such as Indiana and Ohio, facing similar budget issues are considering similar measures in the near future.

Civil unrest was not contained to just the United States and, in fact, was magnitudes of severity higher in certain international markets.  For example, middle-eastern protests have now spread from Tunisia to Egypt to Yemen to Bahrain to Libya.  With respect to the latter, after protestors successfully unseated Hosni Mubarak after nearly 30 years of ruling Egypt, protestors in Libya, where unemployment has been reported as being as high as 30%, took the baton of democracy, if you will, from Egypt and continue to turn up the heat on their own country’s leader; Moammar Gadhafi, who has now been in power himself for 42 years.    However, the outcome is much less certain in Libya and, unfortunately, appears to be heading towards a potentially violent civil war.

As a result of the unrest, all of the oil ports in Libya, including Zawia, Tripoli, Benghazi and Misurata have been temporarily closed.  Despite assurances from Saudi Arabia that they would increase oil production if necessary, the ongoing events in Libya have alarmed many oil traders, causing Crude Oil prices to exceed $100 a barrel, as fears over potential oil supply disruptions have rippled through the international markets.   Libya is a much larger (and growing) oil producer when compared to Egypt.   As of 2009, Libya was reported to be responsible for 1.80 MM barrels a day, which was almost three times as much as Egypt as of that time.

Oil (Light Crude) ($/barrel)

20110224-Blog Chart Oil


Data Source:  CNN Money, Commodities, February 23, 2011

However, it’s not only energy commodity prices that are rising in 2011 as agriculture based commodity prices are also increasing.  In fact, skyrocketing food prices (Ex. Wheat) have been suggested to be one of the primary drivers, in addition to high rates of unemployment, for the unrest in many middle-eastern countries such as Egypt.

Given all of this unrest, we, at Hennion & Walsh, believe that investors would be wise to re-visit their asset allocation strategies to help ensure that they have the diversification in place to withstand potential periods of heightened volatility as well as the breadth of asset classes and sectors, such as the commodities discussed above, to help deliver risk adjusted growth opportunities in a market the continues to grow in complexity and uncertainty.