Market Morning: Khashoggi Tale Threatens Oil Stability, S&P 500 Weaker Than it Seems

Market Morning

Horrid and Grisly Khashoggi Death Revealed, Could Destabilize Oil Markets

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Word is coming out now via the Middle East Eye that the disappearance and alleged murder of Washington Post columnist and Saudi government critic Jamal Khashoggi was a gruesome, macabre, premeditated affair. According to a Turkish source who has listened to a recording made at the time of the disappearance, Khashoggi was dragged to his study amid horrendous screams. He was then injected with an unknown substance, after which the screaming stopped. Salah Muhammad al-Tubaigy, the head of forensic evidence in the Saudi general security department proceeded to dismember Khashoggi’s body while he was still alive, all while listening to music. It took Khashoggi 7 minutes to die.

SEE: Market Morning: Saudis Boycotted, Sears Circled, Deficit Explodes

Meanwhile, US President Donald Trump has sent his Secretary of State Mike Pompeo to Saudi Arabia for consultations, where he can be seen smiling and thanking Saudi Crown Prince for his hospitality. The Saudi government originally denied all involvement, but then claimed that the recording is of a botched interrogation. Democrats are demanding sanctions on the Saudis, which would undoubtedly result in an OPEC oil embargo similar to the 1970’s. Trump is in a very sticky situation now, since if he stands firm on demanding justice, it will likely put global oil markets into a tailspin.

What to do: Monitor the news cycle on this one. If Khashoggi stays in the news for a prolonged period, the Democrats have a better chance of passing sanctions. Some Republicans are demanding harsh measures as well, including Republican Senators Lindsey Graham and Marco Rubio. A Saudi embargo could push oil to record highs in a very short period of time. (NYSEARCA:USO) (NYSEARCA:XLE)

S&P 500 Not Doing as Well as it Seems

The S&P 500 (NYSEARCA:SPY) continues to trade near all time highs despite last week’s plunge, but the final number may not be what it seems. Half of the stock in the index are down 20% from their highs as of October 15. 162 are down at least 30%. 113% are down at least 40%, and 69, or 14% of the stocks in the index, have been cut in half or worse. That means the strength of the index is relying on only a few winners. Among the worst performers have been apparel stocks and oil and gas companies including L Brands (NYSE:LB), Under Armour (NYSE:UA), and Kinder Morgan (NYSE:KMI)

US Investment Banks In Awkward Position On Saudi Arabia

The Khashoggi episode is key not just for oil markets, but for US financials as well. Saudi Arabia has borrowed billions from Wall Street banks, $52 billion in bond sales and another $11 billion through a consortium of US banks including Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), and JPMorgan (NYSE:JPM), whose CEO Jamie Dimon is now boycotting the upcoming Saudi financial conference taking place in Riyadh. According to Blackstone (NYSE:BX), Saudi Arabia’s public investment fund has also poured about $20 billion in US infrastructure projects.

Fujifilm Wins Appeal Against Xerox After Merger Scrapped

Fujifilm (OTCMKTS:FUJIY) has won an appeal against Xerox (NYSE:XRX) after the latter scrapped a $6.1 billion merger deal under pressure from activist investor Carl Icahn who had opposed the deal.  This was back in May. In a statement from Fujifilm management, the company said, ““(The) Court’s decision will allow us to discuss with Xerox the fulfillment of the original agreement. All Xerox shareholders ought to be able to decide for themselves the operational, financial, and strategic merits of the transaction to combine Fuji Xerox and Xerox,” it said. Fujifilm is also suing Xerox separately for $1 billion for breaking the original deal which it claims was a breach of contract. Both stocks have gone pretty much nowhere for decades, Xerox stuck where it has been since the 1970’s, and Fujifilm since the late 90’s.

 

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