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Risks Are Rising Again

Written by Briton Ryle
Posted November 8, 2017

As one of my colleagues pointed out on Monday, a civil war in Saudi Arabia went public over the weekend. News broke that the Saudi crown prince had 33 of his fellow princes, businessmen, and government officials arrested over the weekend.

Officially, it's being called a crackdown on corruption. But the truth is pretty obvious. The arrested men are worth $33 billion. Some of them oppose the crown prince Mohammed bin Salman, affectionately known as MBS. MBS is taking out his opponents, consolidating his power. 

The Saudi Arabian Monetary Authority sent orders to hundreds of lenders to freeze accounts of the detainees. Yesterday, it was 1,200 accounts. Today it's over 1,700. 

I bet that's making some people pretty mad. 

And that's not all that's happening over there. Yemen fired a missile at Saudi Arabia that is rumored to have been enthusiastically supported by Iran. Lebanon's prime minister resigned, reportedly fearing that Iran was about to assassinate him. Israel is on high alert and conducting training missions. 

Our president has said, “I have great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing...”

But should we have confidence in this MBS guy? And what is he actually doing? 

Seems to me he's got a big stick and he's whacking a couple pretty nasty hornet's nests: Iran and his own relatives. 

We know very well that markets and assets like stability. And if you topple one pillar, you just don't know what will happen next. I mean, we took out Saddam Hussein, and the Middle East went to hell in a bucket. Al Qaeda ran wild, and the Islamic State was actually a state for a little while. 480,000 Syrians have been killed and over 10 million displaced. 

MBS is raising the stakes with Iran and his own family. It's a big risk. What if there's a real split in the House of Saud? What do you think: would a weakened Saudi government embolden Iran?

Looking for Trouble

The U.S. stock market has been outright ignoring potential problems. I mean, didn't the S&P 500 rally after the crazy NORK shot a missile over Japan? 

Yeah, for the most part, investors have done the right thing by ignoring North Korea, Trump's tweets, Brexit, Venezuela's descent into chaos, and all the other potentially destabilizing news out there. I mean, we once had a huge sell-off when Cyprus went insolvent. Venezuela seems like a lot bigger fish than Cyprus. And investors didn't blink. 

But here's the thing: strategies work until they don't. 

You buy the dip, buy the dip, buy the dip, and it comes back each time. One of these times it won't come back. People will buy the next one and it won't come back, either. And the next one. Pretty soon the chart will be a series of lower highs, looking an awful lot like a bear market. 

Now, you might think I am trying to find reasons to get bearish on stocks, that I'm out there just looking for trouble. And to you I say: you're damn right I am! I have no intention of being completely blindsided by something like what's going on in the Middle East. Because bull markets don't die of old age or high valuations...

bear markets 118

Since WWII, bear markets have started when P/E ratios were high and when they were low. Bond yields haven't done any better job of forecasting an end to the good times. 

Bull markets end because of a shock to the economic system, some event that drains liquidity and prompts people to stop spending money. Like a spike in the price of oil...

Yeah, Yeah, Oil Again

I know, I just wrote about oil on Monday. But I seriously doubt the rising risks in the Middle East are just going to resolve themselves quietly. Saudi Arabia and Iran have both been trying to establish themselves as the regional power for the last decade. That's not going to just stop. It's probably going to escalate. 

I can easily imagine a scenario where Israel takes some covert action against Iran's nuclear program and oil prices jump $10 overnight. You can bet that when prices at the pump go form $2.30 to $3 overnight, consumers are going to be a little surprised. And the whole dynamic for the stock market will change. 

You've most likely been around for a bear market or two. Do you recall how fast sentiment shifts from "there's plenty of upside" to "why would you ever buy stocks?" 

It's going to happen. It's not a question of "if." I can't tell you for sure that the Middle East will even be the catalyst. But it sure seems like the potential for a misstep there is rising. And investors aren't going to have a tax cut catalyst to fall back on (those tax cuts simply aren't happening anytime soon). 

You should own an oil stock or two. I offered up Permian play Laredo (NYSE: LPI) on Monday. There are others that look good. Solar stocks should do well if oil prices spike, too. And recent earnings from First Solar (NASDAQ: FSLR) were very good.

Be prepared. Fortune favors the bold.

Until next time,

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Briton Ryle

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An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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