Risky Business

Gazprom is a Russian natural gas company. It is the biggest natural gas company in the world, and supplies much of Europe's gas needs. Its current chairman, Dmitry Medvedev, was just elected president of Russia. He appointed Vladimir Putin, who could not succeed himself as president, as prime minister, and the former prime minister, Viktor Zubkov, is becoming chairman of Gazprom. Putin, Medvedev, Zubkov. Should be spelled "K-G-B" for short. None of this sounds good on several levels.

AIG (AIG - commentary - Cramer's Take) doesn't sound too good either. Hank Greenberg, deposed chairman of AIG, is scheduled to be on Larry Kudlow tonight. Greenberg is a tough guy with strong opinions. Many of the issues facing AIG were started on his watch, and it will be interesting to hear what he has to say. He's calling for Martin Sullivan to step down and for a new board to be installed. There will likely be fireworks.

And what should be done? Barron's over the weekend had an article that said AIG's earnings power is at least $5 a share in 2009. That's a skinny 8 times with the stock at about $40. The problem is guessing when the write-offs stop and they can get back to the insurance business. AIG is in the business of underwriting risk. They have a reputation as one of the best at assessing risk, but there is a real divide as to how bad things are. Of the "$19.3 billion of market-value losses AIG already has taken on the derivatives ... AIG is predicting actual losses will be $1.2 billion to $2.4 billion" (The Wall Street Journal, Saturday, May 10). A third-party (unidentified) analysis provided to the company estimates losses of "$9 billion to $11 billion" (same WSJ article.) There is no reason to trust AIG's judgment, which might mark the extreme of pessimism and the bottom of the stock. Or it may not. I'm looking forward to seeing Greenberg tonight.

More lousy news on the oil front. The Nigerian rebel group, Movement for the Emancipation of the Niger Delta, or MEND, is threatening to step up its campaign against oil facilities. Nigeria produces 3% of the world's oil, but 15% of medium and sweet crude so highly prized by refineries since it's less costly to process. We are not likely to get geopolitical relief from this section of the world.

The U.S. Agriculture Department estimates that corn production in the U.S will be down 7% from last year as farmers switch to more profitable wheat and soybeans. The additional problem is that one-third of the corn crop is used to produce ethanol. Spurred by efforts to create ethanol as an alternative fuel, that industry's consumption of corn has doubled since 2005, and food prices have skyrocketed. Beware the law of unintended consequences.

---

Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.