It's still a little early in the Libya crisis for bargain hunting

02/23/2011 1:29 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com



Just a wild guess but the world’s financial markets were a bit rattled yesterday when Libya’s leader Muammar Gaddafi, "Guide of the First of September Great Revolution of the Socialist People's Libyan Arab Jamahiriya,” vowed to fight to his “last drop of blood.” Warning of civil war, Gaddafi did his bit to plunge Libya into civil war by pledging that he will use the army and police to restore order, and calling upon his supporters to reclaim the streets.

Gaddafi has called the opposition “rats” and “microbes” and has said that they will face the death penalty after order is restored. On his record, I’d assume that the opposition would take Gaddafi’s threat seriously. Which, of course, gives them no incentive to stop trying to bring him down.

Gaddafi’s Libya is very different from Mubarak's Egypt in one important way: The army in Libya is not a powerful, unified institution that could easily act to depose the country’s leader. Gaddafi has been very careful to keep the army divided along regional and tribal lines and there really doesn’t seem to be a unified command that could force him out and then form a transitional government. Any move by the army would itself likely come only after much  fighting in order to work out those tribal divisions.

There’s a good chance that coming days will be even more violent—which will, of course, continue the flight to safety in the financial markets. In the short-run that means investors and traders are fleeing emerging markets and taking profits from recent market favorites—which explains the big sell offs yesterday in stocks such as engine-maker Cummins (CMI) or Potash of Saskatchewan (POT) down 6.3% and 5.5%, respectively. IShares MSCI Brazil (EWZ) was down 3.1% yesterday, for example. Asian markets were down big yesterday, with Hong Kong’s Hang Seng index down 2.1% and the Shanghai Composite down 2.6%, but showed a much more muted response today with Tokyo's Nikkei 25 down 0.8%, the Hang Seng down 0.4%, and the Shanghai Composite actually up 0.3%

Should you be bargain hunting? Given the likelihood of even more violence in Libya in the next few days—and greater circulation of stories saying that Gaddafi has ordered the sabotage of Libya’s oil fields—I say you’re early but yes, bargain hunting will be in order not too far down the road. The big worry is that the violence in Libya will produce a permanent rise in oil prices above $100 to $110 a barrel. That would be enough to slow global economic growth. I think the Saudis have enough excess capacity to make up the difference—this time—so I think oil prices won’t stay at current levels once there’s some resolution in Libya. That isn’t to say that oil is headed back to where it was before Tunisia—just that I don’t think we’re going to see $110 as barrel oil as the new default price in the weeks ahead.

Related Articles on STOCKS