Geopolitical and other stuff

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


The geopolitical has reared its head again with Hamas and Israel locked in a deadly and ugly struggle. Oil prices reacted predictably as they always do when there is unrest in this section of the world. India and Pakistan are rattling their nuclear sabers in yet another bout of full-throated bellicosity. Somewhat below the radar but troublesome nonetheless is the Russia-Ukraine dispute over alleged past due natural gas bills. Russia is threatening to cut off gas to the Ukraine. Europe uses gas for about half its heat and about 80% of that flows through Ukrainian pipelines. With Russia having used about one-quarter of its currency reserves trying to defend the ruble, it is hard to see how far they might take this, but Europe (and the Ukraine) needs gas more urgently than Russia needs cash. What Europe doesn’t need is additional complexity as they try to figure out the best policy for confronting the economic crisis.

Back on the home front we’ll get the Case Shiller housing report on Tuesday. Prices in the 20 metropolitan areas that are surveyed monthly fell 17.4% in September from a year ago and 1.8% from the month earlier. Expectations are for a steeper decline of -18% and -2.2% for October. A worsening rate of decline is bad news. But if you read the article on Washington Mutual’s lending practices in last Sunday’s New York Times nothing would surprise you. One participant said if you could breathe you qualified and that requirement could be waived. Some guys need to be jailed for what went on!

It looks like this holiday season will be the worst for retailers in 40 years or more. The International Council of Shoppers reported Monday they expect 73,000 retail outlets to close in the first half of 2009. Greg Segall of Versa Capital says 50,000 could close and the average consumer wouldn’t notice. There have already been 148,000 storefronts closed this year and that is the worst since 2001 when 151,000 were shuttered. But since 2001, real consumer incomes haven’t grown and retail square footage has increased a solid single digit percent every year. We got over stored just like we got over mortgaged and pay back is tough.

There is now $8.85 trillion in cash, bank deposits and money market funds and that is equal to 74% of the market capitalization of the stock market. The Leuthold Report says this is the biggest since 1990. As we have been saying for some time, this pool of money will tire of earning close to 0% interest and will start to move out the risk spectrum.

We continue to expect three month Libor to fall from its current 1.46% (and that is down from close to 5% at the worst point of the crisis.) One month Libor (which is the London Interbank Offer Rate), or the rate quoted in Europe that banks loan to one another is currently at .46%. With the rate on U.S.Treasury bills close to 0%, the three month/one month Libor should converge around 1% in the near future. Rates that low should encourage borrowing.


Vincent Farrell
Chief Investment Officer
Soleil Securities Corporation
December 29, 2008

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