I love this one. On Thursday, the WSJ reported that John Meriwether, the wonderful guy who brought us the Long Term Capital Management fiasco in 1998 that almost brought the international financial system down, is at it again. His current hedge fund (who would give this guy money to manage?) is sinking and, he is "placating investors" by telling them his management team "will use their experience to survive this crisis." And why exactly would that make me feel better?
Consumer spending for February was up only 0.1%, while personal income was up a healthier 0.5%. This is good. We need to have the consumer "deleverage," and curbing spending while incomes grow is a good way to do it. One month does not make a trend, but it was also good to see the savings rate creep back into positive territory with a gain of +.3%. Modest spending eases inflation fears and lets the Fed continue to lower rates if they feel the need.
The Federal Reserve's favorite inflation measure continues to behave. The Personal Consumption Deflator increased a modest .1%, as did the "core" rate. The year-over-year increase in the headline rate is still an uncomfortable (but only uncomfortable) +3.4%, while the year-over-year core rate is +2%, in line with the Fed's goals.
One key metric is showing signs of improvement. The difference between the 10-year Treasury bond and the 30-year fixed mortgage rate is looked upon as a sign of liquidity, or lack thereof, in the system. This spread is usually about 1.5%, or 150 basis points. So, if the 10-year bond was at a 3.5% yield, normally you would expect the 30-year fixed to be 3.5+1.5, or 5%.
Lately, because of the credit crisis, the spread widened to almost 3%. The widest difference I saw reported was actually 292 basis points. That is an indication of an unwillingness to lend. The spread has improved in line with the Fed's recent aggressive actions to stimulate the economy. The spread on Thursday was 222 basis points, or 2.2% vs. the above mentioned norm of 1.5%. Not back to normal, but moving in the right direction.
I have been a long-term bull on the price of oil. At Scotsman, we have been overweight the energy stocks for some time. I still think we are going to see higher prices for years to come. Growing "economic nationalism" argues in favor of that.
Another sign of this nationalistic surge is the recent action of Russia toward BP
(BP)
, the new name for British Petroleum. BP has a 50/50 joint venture with TNK in Russia. TNK is controlled by three Russian oligarchs, and Putin, and it is Putin, is in the process of mugging the joint venture. Visas for key people are impossible to get, a tax inquiry has been launched, an audit of some producing fields is underway, and a couple of employees have been arrested for industrial espionage. BP gets 25% of its production from this venture. We don't own BP, and are not inclined to buy it until this sorts itself out.
Having given one argument for tighter control of oil production to maximize price for one's own country, I do think the price of crude is due for a pullback. Oil was about $60 this time last year, it averaged $72 for all of 2007, and it is now bouncing between $106-$110. I don't accept that a recession is inevitable, but we will have a doozy of a slowdown at the minimum. Except for geopolitical headlines, I think oil will trade down over the next few months.
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.
