Wednesday, May 5, 2010

Oil Slick or Economic Problem

Recently, one of our clients forwarded us a piece about the Gulf oil spill and its possible economic and financial ramifications. In the piece, written by well known analyst David Kotok of Cumberland Advisors (, Kotok paints a picture that this oil spill will create a financial calamity for many businesses, making a double-dip recession more likely.

Personally, I hate this spill, and am sorry that wildlife and human life has to suffer due to the accident. But I think that turning this unfortunate accident into a higher probability for a double-dip may be a little too drastic at present.

Recent articles about the cumulative economic damage resulting from the spill brings me back to articles that circulated back when Hurricane Katrina rocked the Gulf region back in August of 2005. At the time, there were scary headlines about the ultimate impact of the hurricane on GDP growth and financial markets. Though there was some volatility in the S&P 500 around the time of the storm, patient investors who didn’t panic were well rewarded, as the market rebounded with a gain of about 24% off the October 2005 bottom.

There’s no guarantee that this spill won’t turn into a real problem for growth and financial markets. But for my money, I’d worry more about continued problems in the Euro-zone, falling money supply, depressed wages, and the winding down of the "grand experiment" of massive fiscal and monetary stimulus. In that regard, we’ll continue to diligently monitor macro fundamentals, technical analysis, and valuation, looking for cracks in the bull market.

At present, we still believe that the higher probability is that this is simply a temporary setback. It’s certainly scary, as market corrections always are. But rather than focus on what could go wrong, we are currently focusing on how we can use this bout of volatility to add value to our portfolios.