Hedging Pakistani Unrest Following Bhutto's Assassination

Bhutto was killed in a suicide attack in Pakistan yesterday. Pakistani reaction to this tragic event will be watched carefully by American traders. Oil is immediately higher, but just slightly. As insensitive as we are sorry this sounds, the market will likely be more concerned about Pakistani reaction, and how unrest may escalate, then it is concerned with the event itself. Gold is moving higher and equities have indicated a lower open, but the moves are not exaggerated. We will be closely monitoring protests and government reaction.

In the past, assassinations have occurred just ahead of major al-Qaeda terrorist acts, including 9/11. This should set the markets at quite unease through the New Year as a result. Bhutto would have been a much easier target than Musharraf, and yet holds the potential of inciting similar unrest. We advise resisting the urge to panic now, but including a hedge against market downturn in your portfolio. Tax loss losers could get even cheaper now, so if you have not sold yet, you may consider waiting a day or two longer. I expect market reaction to escalate as unrest unfolds in Pakistan and martial law likely ensues.

President Musharraf is going to look quite ugly as a result of this event, whether he responsible or not. Remember, he removed the top supreme court judge from office just before his reelection review was to be completed. Bhutto has now been killed just ahead of the election that Musharraf was forced to schedule by the international community and Pakistani popular demand. The international community is going to grow more concerned about Pakistan, as Musharraf looks to have an increasingly weaker hold on his country. The UltraShort S&P 500 ProShares (NYSE: SDS) might prove a nice hedging vehicle, and the CBOE Volatility Index (CBOE: VIX-X.W) should move higher in the very near term.