SURPRISE TRADES

There are very few trades that have a solid trend that we can not trace back to some area of accumulation. The equity or issue is accumulated quietly-stage 1, then it breaks out on solid volume attracting attention and capital inflows-stage 2 mark-up, somewhere in stage 2 the issue is distributed into demand, remember they accumulated a large position, they'll feed t out a little at a time as to not effect the supply/demand equation which allows smart money to distribute into higher prices. Stage 3 is a top, at this point smart money is largely out of the position and even going short, stage 4 is decline and then it starts all over again. This is why I say the market is not random, it's a game-board that has been set. However, once in awhile we get an event that smart money couldn't know about, they couldn't discount and the trade becomes, well-something else.

Oil looks like one of those trades. Take a look at XOIL and 3C

3C is not properly scaled as I had to fit a lot into this, but as you see, during the sideways consolidation through late 2009 until about August 2010, 3C makes higher lows at support near the $67 area, this is accumulation. By October XOIL has broken out and distribution start in November/December. Oil recently starts to round over as the divergence is now quite negative. Oil has a huge up day on Friday due largely to events in Egypt and instability in the Mideast. Now, where does oil go? They can't let it head too far north without establishing a position in it, otherwise it's a wasted move. We'll be keeping a close eye on this trade. I figure either way, they'll have to work quick.

Breaking News in Egypt

January 29th saw a rare and bizarre event across Egypt, the police and internal security forces were absent the streets, only the military had taken up positions and the military has been warmly received by protesters. Apparently Mubarak in a last gasp effort to hold onto power took advantage of the long standing animosity between the police and the military and recalled the police in an effort to show the military what  would happen without the police presence in an effort to try to keep the military from undermining him. Ironically and perhaps showing a poor choice by Mubarak, the lack of police presence seems to have had the opposite effect with protesters calming.

In another perhaps, not so well though out move, Mubarak as of January 20th has recalled the police and internal security back onto the streets. As you may recall, there were widespread reports of police in plain clothes acting as protesters taking part in jail-breaks, arson, robberies of major banks, attacks and break-ins-this at the same time the police were recalled. Apparently Mubarak has negotiated a temporary stay of power, but his plan which is becoming transparent may very well backfire.

Mubarak seems to be counting on an ability to ride out the protests. While he is the main target of protests and a figure head of police brutality, that seems to be the only thing protesters agree on. As far as backing an opposition leader, there are major differences of opinion, from the non-secular Muslim Brotherhood with backing from Hamas to the secular attempt to grab the popular movement by Mohamed ElBaradei. Mubarak is counting on the lack of coalescence behind a central figure that can replace him while playing the police and internal security force against the military and all against the protesters.

Stratfor may have summed the situation up most articulately in calling it an "Iron Fist" tactic. The move is obviously dangerous as the point, removing Mubarak is still very much alive and the protests that have dwindled may very well rise up again once they realize that a shuffling of the cabinet was all that was achieved. Even more dangerously, there remains an elevated risk for conflict between the internal security forces and the military. One stray bullet finding the wrong target could ignite a very serious situation between the two.

I suspect by the time we awake tomorrow morning, the results of Mubarak's gamble will be known. In the meantime, gold and precious metals need to be watched. I see nothing to stand in the way of rising oil prices, except an eventual pullback that should be accumulated if the perception is that this may influence wider spread violence throughout the middle east. There are a lot of players on the sidelines that I'm quite sure will emerge at some point soon to capitalize on the situation.

Perhaps most interestingly will be whether the Fed can remain in control of the markets or at least the averages while Wall Street tries to discount the probabilities. We'll know son enough. As I have said for months know, the market's breadth is so bad, we are one major headline away from a major market correction.

The Worst May Be Falling Into Place

As I mentioned earlier in Egyptian reports (and if you think this doesn't matter look at the market on Friday) the worst scenario is starting to take shape. I mentioned earlier that armed Hamas militants which is an offshoot of the Muslim Brotherhood in Egypt which has been banned from parliamentary elections is now eyeing a coalition government. Obviously factions of Hamas will insert themselves into the process.

The reality of Egyptian politics is there can be no leader without the military's consent and Mubarak's attempts to lay the ground work for his son Gamal to take his place is what had started the friction between Hosni Mubarak and the military. Events transpiring in Tunisia just brought things to a head. The military must work quickly to install their choice for leadership before the people demand popular elections. Everyday Mubarak is in power (which keeps the protests alive), the likelihood of popular elections becomes a bigger thorn in the side of the military.

Now somehow out of left field Mohamed El Baradei is claiming the mantle of popular opposition leader when the truth is that many hold him in low regard for having been absent from Egypt and the popular movement, he has in a way tried to paint himself as the people's choice when there has been no substantial reports of any kind suggesting this.

The one clear danger is that the Muslim Brotherhood who has spent many years feeding, clothing and giving medical aid to Egyptians stands to gain a lot of ground and this is very much at odds with the military. There hasn't been one leader in Egypt that hasn't come from high up in the military ranks since the era of modern Egypt.

As I said in my last analysis, throughout US history our political and economic decisions have had profound and unexpected economic consequences. For instance, the hallmark of Quantitative Easing in Emerging Economies has been rampant inflation followed by worldwide inflation protests and riots as people can not afford to feed themselves. I also made mention that it wouldn't take long for Egyptians to realize that the tear gas being lobbed at them from the police an internal security forces is US made. I posted this today in the morning, now the Jerusalem Post reports that anger against the U.S. And Israel is building. Rallies are now starting to take on an anti-American tone recently. Egyptians are also angry at the lack of response from major world leaders with the U.S. Topping the list. A 20 meter long message was scrolled in Sunday's protest saying, “Go away Mubarak, you are from the Americans and you are working for them”. Another protester summed the feeling up as the following, “The U.S does not support democracy, they support Israel which is like their baby”

Obviously the Americans and other world leaders want to maintain Egypt as the key Arab state ally it has been. To back any leader at this point is impossible and counterproductive. The tentative support for Mubarak is seemingly fading fast as that outcome is no longer a reality.

The analysis I laid out earlier regarding the infighting between Mubarak and the military as to the next leader has taken on a sudden and very dangerous shift. It s no longer clear that the military can establish a new leader of it's own choosing as the message of demonstrators is “Democracy” and as I said in the last report, the 1979 revolution in Iran is a prime example of how the popular protest and what becomes the controlling authority often diverge dramatically. Events are unfolding faster then I thought they would and with militant Islamic factions now coordinating protests, the chances of another long, drawn out ugly fight for power is becoming every more increasing. One of the main reasons for this is the military structure itself. As mentioned before, it's the higher ups that have chosen the leaders and where the leadership has been chosen from, but the middle class military are the ones with boots on the ground and in closer contact with the ordinary citizen. The higher ups may be politically too far removed from the will of the people to get another leader of their choice in power this time.

Ramifications of Egypt falling apart are already being felt from the price of oil and the potential for the Suez to be dominated by hostile forces as well as other key American allies feeling pressure such as King Abdullah of Jordan where protests have taken place, not to mention the shifting political landscape that may leave Israel in a very vulnerable position.

Oil Should Continue Higher For Now as Will Many Commodities.

Commodities are very much about supply and demand as well as perception, it's perception right now that will continue to lift crude. As you know, the market does not like uncertainty and a lot of uncertainty has been introduced into the middle east the last few weeks on an escalating basis.

New reports coming from inside Hamas, which is an outgrowth of the Egyptian Muslim Brotherhood, claim that the Egyptian police are no longer patrolling the Rafah border that crosses into Gaza and armed Hamas militants are entering Egypt to coordinate with the Muslim Brotherhood.

It is claimed that Egyptian Security Forces in plain clothing are among the protesters and destroying property to give the impression that the regime that the Egyptian people have known for 30 years is better then the unknown future -this along with accounts that the police presence on the streets is by and large gone, furthers that perception.

Hamas and the Muslim Brotherhood are said to be organizing citizen patrols to protect property and coordinate demonstrator activities including providing food, water and medical aid.

Further reports have come to light that suggest that this situation has been building since last year as there has been tension among the country's very well respected military and the old guard within it and Mubarak himself who sought to path a way to his son, Gamal's path to succession. Events in Tunisia simply offered an opportunity which has accelerated the dispute.

While Mubarak disposed of his cabinet and gave Suleiman the vice presidency which has been empty for nearly 30 years, Mubarak's plan was to have Suleiman hand over power to his son Gamal after a short period of time. Suleiman is respected among the military, but his advanced age is causing them to disapprove of this appointment as they see the writing on the wall.Instead they are demanding another Air force Branch member, Shafiq be designated successor. He also has the advantage of having been the head of civil aviation since 2002 and would make for a more palatable choice for the public. All in all it seems the end game is mapped out and as Washington feared last week, it is the military who two days ago was reported as clashing with riot police, is really pulling the stings and managing a transition whether Mubarak or the US like it or not. The question is what happens in a slight vacuum of power with the M.B. And Hamas taking an active interest in carving out a political place for themselves? As we learned from the 1979 Iranian Revolution, the ideology and composition of the protesters can have very little to do with the forces that end up in power.

Cities around the Suez Canal are seeing some of the fiercest fighting. Thus there may be elevated fears for sometime about the possibilities of a closure as well as revolutions in other Arab and African states as we have already seen calls for reform in Jordan and the Internet shut down in Syria. Protests have even moved into Eastern Europe through Albania. For now though, the military seems to be shaping the new government and as long as Mubarak remains in power, so do the protests, leading to a dangerous political situation. Even a misfire from the military that ends up killing protesters, who thus far have welcomed the military, could set off a clash of events between protesters and the military, giving the Muslim Brotherhood and Hamas an opening to call for democratically elected leaders, opening the door for their own power ambitions.

As I said late lat year, 2011 promises to be a exciting an unique year. We are barely through the first month and nearly two countries, one with a leader of 30 years have been deposed. The US, as mentioned a few days ago has always had a problem with calculating the unpredictable outcome of it's own economic and foreign policy. Protesters in Egypt can clearly see the tear gas bottles launched at them are American made. Our QE policy is exporting huge amounts of inflation to emerging economies, causing hunger strikes and protests and food rioting around the world. The one thing you can be sure of is the assumptions of Wall Street, the Media and the Government that seem to be so solidified are sometimes the fastest to fall-regardless of intentions.