Implications of the Egyptian Upheaval: Buy Oil and Israel

 |  Includes: CEL, PTNR, USO
by: MLP Trader

Disclaimer: I only intend to make an investment case in this article. If you perceive any political or religious viewpoint, it is unintended and accidental.

As a former academic specialist in the Middle East and Islam, I get a lot of questions about the recent Fitna (upheaval) in Egypt. I like to field these questions because I think a few key points have been missed. As you'll see, putting these points together yields a surprising investment thesis.

The Egyptian Army Will Not Assure a Secular State
The Egyptian army is not a great bastion of secularism as the Turkish Army has been. The Ikhwan (Muslim Brotherhood) has a solid foothold in the Army, as do some more extreme Islamist groups. Recall that Sadat's Islamist assassins came from the Army's junior officer ranks. Since that time, Islamists have quietly worked their way up the ranks. They've kept a low profile, because they have been persecuted in the past. But they are now very well represented throughout the chain of command. So there is no guarantee the Army will prevent an Ikhwan-dominated regime; it is more likely to support it.

The Unrest Will Spread to Other Arab Countries
Egypt accounts for the majority of popular media production in the Arab world and contributes vast numbers of guest workers to the oil-producing countries (where more than half the workers are foreigners). In a word, Egypt is a very big domino. And the Arab world is ripe for the domino effect, rather like Europe in 1848 and the Eastern Bloc in 1989. It has had staggering population growth over the last two decades and few jobs to go along with it. With a combined population of 300 million people, the Arab World generates fewer non-oil exports than Finland, a country of only 5 million. Visit just about any Arab country and you'll be struck by the number of unmarried men in their 20s and 30s who are just hanging around, unemployed and disaffected (you normally need to have job, and even a house, to get married in these countries).

Democracy Will Not Mean Stability or Pro-Western Government
We've seen this play out before. Algeria had free democratic elections in 1991. A party of virulently anti-Western Islamists won, and the ensuing bloodbath cost 200,000 lives. Democratically elected governments are unlikely to be friendly toward the U.S. The U.S. does not poll favorably in a single Arab country, including our "allies." Countries that used to moderate oil prices to our benefit may not do so after democratic elections.

This Means You Should Buy Israeli Stocks Now
What? Doesn't this all mean Israel is in mortal peril? That's certainly how the market has reacted, with the TA-25 losing nearly 7%.

But I think the market is mistaken. Investors have concluded too quickly that ascendant Islamists will pre-occupy themselves with Israel. I don't think that will be the case at all. The current Arab governments (including some U.S. allies) have long used Israel as a bogeyman. This gives them credibility with their populations, and keeps them distracted from their own abysmal state of affairs. Islamist movements don't need this credibility; their pious bona fides are already established. Instead, they will focus on other priorities: re-ordering states according to Sharia principles and overthrowing apostates and "hypocrites" in the Arab countries. Ultimately, Islamists care a lot more about Arabia than Israel. Bin Laden and his fellow Salafiya were never motivated to do much about Israel. It was the presence of "infidels" in the Arabian peninsula that got them agitated and motivated their major attacks.

So rather than creating trouble for Israel, Islamists will go after leaders like Bashar al-Assad, who belongs to a sect that most Islamists consider heretical. The Muslim Brotherhood have not forgotten how Assad's father massacred 40,000 of their brethren in Hama. Islamists are also keenly aware how much wealth is concentrated among a handful of princelings from the Arabian peninsula -- many of whom live distinctly un-Islamic lifestyles.

In short, I think several Arab governments are likely to topple. This is a potential threat to oil production. But it is not that much of a threat to Israel. If anything, the Arab world will be too distracted by its own affairs to bother Israel. Longtime nuisances like Syria may actually be nullified by internecine conflict.

The Trade
The Egyptian unrest has battered the stocks of Israel's two biggest mobile phone companies, CellCom Israel (NYSE:CEL) and Partner Communications (NASDAQ:PTNR), which have each lost nearly 10%. Both companies boast whopping double-digit yields and good cash flow.

Although the voice market in Israel is largely saturated, mobile data has huge growth potential. Israelis have a higher propensity than Americans to use mobile, over fixed-line, data. Long-term, Israeli carriers will enjoy higher Average Revenue Per User growth than American carriers.

If you doubt Israel's safety, you can pair this trade with a long position in crude oil. In the very worst case, the Israeli market goes to 0. But oil will go to $200 (or higher) long before that happens.

Disclosure: I am long PTNR, CEL.