BP Oil Disaster
Let’s address the question if BP plc (NYSE: BP) will be around next week, much less next year. The exposures of the Gulf Oil Spill are hard to quantify, but it is estimated at $37 billion. BP alone has lost nearly $57 billion in market capitalization—at one point loosing nearly 15% in one day. If the company is going to survive, our prediction is the company will be bought out. Let’s face it; this could be an entire coastline. Arthur Anderson was put out of business for their mistakes on Enron and that was just one company. If the spill is not contained, the ocean’s currents are expected to take the oil spill around the tip of Florida and up the East Coast to Maine. Can a company like BP recover from the poor public relations they have created through this 40+ day and counting disaster? Possibly, if they change their name. After all, Allied Bank was once GMAC.
For the economy of the affected areas, again, it is hard to quantify, as we do not know how long it will take to clean up; how long the fishing and tourism industries will be affected, and when damages will be paid out. It was approximately two years ago when the final settlements were paid from the Exxon Valdez tanker running aground in 1989 spilling 257,000 barrels of oil into Alaska’s Prince William Sound. And those settlements were much less than anyone thought they would be.
There will be damage to the economy in Louisiana, which is driven primarily by the seafood and tourism industries. Florida may not have as much economic damage, as they have substantial in-state tourism in Orlando and an entire other coastline away from the Gulf. However, the short-term impact is huge. Even if there is not any oil on the beaches, some resorts are asking their guests not to cancel their reservations by offering to cut the cost of their stays by 50%. In addition, they are offering to refund costs if the beaches are dirty by the time tourists visit. Short-term it is a very large and hard impact, but long-term it may not be so bad. A lot of the oil may end up settling to the bottom, and while that still has a huge environmental impact, the tourism may not suffer like we thought.
From an investment point of view, we still buy energy stocks. Many of them have been pulled down by this disaster by mere sector association. Regulations will become stiffer. It will be the deep-water drilling companies that will be hurt most. They will have to contend with potentially higher insurance and permit costs. We just don’t know how much yet.
Outlook on Rating Agencies
We do not feel that rating agencies like Moody’s and Standard & Poor’s will be forced out of business; however, they will be regulated differently, and will not be able to make as much of a profit as they once did. We also do not feel that regulating the ratings the agencies will make the ratings any more meaningful. What investors need to recognize is that when you’re considering ratings, it is more an art form than a science. What may come could be tiered ratings. We’ll see a more conservative approach with less happy ratings and more bad ones. We also think we will see a system put in place where the companies issuing the bonds that are being rated are not the ones who are paying for the ratings.
From an investment standpoint, we would absolutely not buy Moody’s Corporation (NYSE: MCO) or McGraw-Hill Companies (NYSE: MHP). We had McGraw-Hill, and we sold it. We feel it will be a long time before they are able to generate the money they once did. Bottom line is their profitability will be a lot less.
European Economic Crisis
In our opinion, Europe’s situation is their own fault. The European Central Bank was late to the game in cutting interest rates. The ECB was hiking interest rates well into July 2008, and that had an effect on Greece and some of the other poorer nations in the European Union. Eventually the ECB did lower their rates, and we feel they are about to lower them again. The ECB might consider a quantitative easing campaign, similar to what the Fed did for the United States.
However, areas like Germany are looking to start their own austerity measures to cut their budgets and slow things down. Yes, this is a contraction. We will see growth decrease across Europe throughout the next year or two, as many of the nations get their house in order.
This will affect the United States because Europe will purchase less U.S. goods, but keep in mind they were never a big importer of U.S. goods. We will be at a disadvantage because with the dollar increasing in value, our goods become more expensive. Imports for us will be cheaper, and we probably will end up buying more German goods.
Contraction rumors feed on each other. Europe makes up around 22% of China’s exports, so with the Chinese yuan up against the euro, naturally there is speculation that China will also be forced to contract.
Europe’s situation should not direct your portfolio. We have always suggested to look for companies with operations diversified around the world and not central to one location. We look for companies that have operations in multiple countries and are sourced in those countries because they know how to hedge and control their currencies. We do not ignore the global economic crisis. However, we certainly do not seek out companies with operations solely in Greece. You want multi-national businesses with operations in Europe, Asia, Africa and the United States.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
