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Farr: Two Eco Disasters Undermine Investors

Eco Disaster #1

You know about the Gulf of Mexico BP disaster. The pipe sheared, and they can’t cap it. It’s spilling around 60,000 barrels of oil a day into the Gulf of Mexico. Original estimates were about 5,000 barrels a day, according to the Los Angeles Times. The well is ominously named “Deep Horizon.” Thus far it has released somewhere between 19 million and 39 million gallons of oil, according to the Huffington Post.

Eleven people died at the time of the April 20th accident. BP’s CEO has complained that he “wants his life back.” We haven’t heard from the eleven who died, but we assume they strongly empathize.

Everyone is outraged: Gulf coast residents, politicians, environmentalists, animal rescue workers, everyone. Even The President told NBC’s Matt Lauer that BP’s CEO “wouldn’t be working for me after any of those statements.” The President went on to say that there was a discovery and fact-finding purpose to his Gulf visits to witso I know whose ass to kick.” While the blame-game is robust, oil continues to leak, and the fixes aren’t fixing it.

While we Americans hate oil in the water, let’s not forget that we LOVE oil. Americans consumed 137.8 billion gallons of gasoline in 2008, according to the government. In fact, according to the CIA, Americans consume 19.5 million barrels of oil per day. The point here is that we NEED this stuff.

Eco Disaster #2

It started with rumors of a small Greece leakin the Mediterranean. This Eco disaster has been economic in nature, though the parallels are frightening. The widely dismissed Grecian budgetary problems turned out to be very significant indeed, and Greek bonds dropped as interest rates soared. After years of reckless spending (read drilling), the backing of the European Central Bank (ECB) sheared and said clean up your financial mess or else!

The ECB told the world that they could handle it and were responsibly addressing the leak(s) at the source of the problem. Though they weren’t so base in their word choice, they made it clear that they were prepared to do some European kicking of their own.

But then came Spain and a no confidence vote for Germany’s Angela Merkel. PIIGS crept its way into world idiom as the mnemonic for Portugal, Ireland, Italy, Greece, and Spain. These comprised Europe’s economic axis of evil. Each scary headline has been met with reassuring reassurances from the European Union and ECB that prove less assuring as time shows them to be hollow.

Last week a new European “leak” sprang forth in Hungary. And equity markets around the world moved lower to voice their dismay. You could almost hear a collective gasp incredulously asking, “Hungary! Do we seriously have to worry about Hungary?!”

Consequences

Forgive us for suggesting a word that seems so forgotten and apparently distasteful, but it seems that as long as we are talking about the environment, and aren’t talking about TARP, fiscal policy, record deficits and debt, it might be socially acceptable to think about consequences. East Coast beaches as far north as Long Island are beginning to plan for the eventual oil arrival. Wildlife of all sorts will be threatened and killed. And outrage will justly continue.

Moreover, there will be outrage that the US continues to be so dependent on foreign oil production and that the US remains vulnerable to any decreased supply. In fact, the BP disaster may in fact compound the dependency problem as domestic oil production and new exploration may diminish so as to avoid future “Deep Horizons.”

The Eco (Economic) Crisis in Europe has serious consequences too. A number of our most important customers are in financial trouble and are vowing to spend less. The dollar is getting stronger which makes US goods and service more expensive for those countries who have decided to cut-back.

Our banks, insurance companies, pension funds, and other investors hold securities in European entities (both government and non-government) that may decline in value as risks increase. And there is a risk that the crisis may spread into a contagion that affects the entire world economy.

Outrage is very much in vogue across the pond too. Fiscally responsible countries like Germany and (believe it or not) France are outraged that they must impair their own solid finances to aid the reckless, irresponsible PIIGS + H. Yet for all of the sound and fury, the words are losing effect, and the deepwater leak continues to burp along.

Conclusion

Two global Eco disasters are evolving and being handled similarly: they continue to leak, and repair attempts have been ineffective.

Residents, citizens, markets, and investors are losing confidence in ever seeing the promised rose gardens of repair and resolution. Uncertainty is never welcomed by investors, and they’ve been voting with their wallets as monies are pulled from equity markets.

All of this suggests that the mythological V-shaped recovery is a myth and that the true recovery will be difficult and take time. We apologize to those who’ve been demanding an idyllic whipped cream- and cherry-topped recovery, but we suggest that they not miss the point that the economy is recovering. There are good things happening.

As slow progress progresses, we suggest investors maintain a defensive posture. Large multi-national companies with rock-solid balance sheets, low debt ratios, strong cash-flows, and high returns on equity may not be exciting but should best provide safe passage to sunnier markets and future economic growth. Stay the course.

Hang in there,

Michael

PS Much of the data in this update came from The Daily Green.

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    Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.