Contagion Spreads To… Gulf States

Contagion Spreads To Hallowed Halls Of Oil Rich Gulf States

By Dr Joe Duarte | 27 October 2008

Nowhere To Hide As Petrodollar Insurance Fades

The regions of the world thought to be immune to the subprime crisis are finding that in a global economy, there is no where to hide when the brown stuff hits the fan. The folks, who via their sovereign funds, were supposed to save us all from the nasty subprime meltdown are having one of their own. According to The Wall Street Journal:

"The global financial storm rolled across the Persian Gulf on Sunday, as Kuwait's central bank guaranteed bank deposits and cobbled together a hasty bailout for one of the country's largest banks."

No kidding? Imagine that, economies financed by the price of crude oil, which have recycled their petrodollars into so called "diversified" global investments, such as stocks, bonds, and real estate, are now in the same boat as the rest of the paper dependent world. According to the Journal, even the most immune of places, Saudi Arabia and Dubai, is having trouble. The Journal reported:

"Saudi Arabia, in an apparent bid to ease the fallout of the global credit crisis on its citizens, said it would funnel some $2.3 billion in loans to low-income borrowers. And in Dubai, real-estate brokers in the Mideast boomtown said they are seeing signs of price weakness for the first time in years, as financing dries up and speculators bow out of the once red-hot market."

There are now signs that the real estate bubble in Dubai is starting to show cracks, as Property investors "are not finding buyers,"' leading to a scenario in which "government finances" could get into trouble and basically stop the whole "debt-fueled expansion" of the world's most Go-Go property market and playground for the rich and the merely 'hoping to some day be rich'. And as usual, the problems began with excessive speculation. According to the Journal, most of Kuwait's problems began when petrodollar laden investors began to speculate in real estate and the currency markets. The local rally, also brought international money into the Gulf.

Yet, when the international money pulled out, earlier this year, Kuwait's banks were left in a bad position. Still, the Journal reports it was the currency trades that caused Kuwait the most trouble as "defaults by counterparties on bad euro-dollar derivatives contracts" took their toll.

Wall Streeters Head To Greener Pastures

Some of Wall Street's best talent is going elsewhere, with the beneficiaries being smaller firms and even those in other countries.

According to AP:

"Bankers and brokers looking to escape the financial meltdown are scrambling to relocate their families, possessions and rarified talent far from Wall Street to places such as Florida, Chicago, Milwaukee, Virginia and Asia."

The wire service added:

"Corporate headhunters say Wall Street's malaise will lead to a permanent talent loss for New York. It could help small boutique firms become bigger players with employees they would never have been able to lure from the city long-regarded as the world's financial capital."

So how dramatic is the situation? Some smaller boutique firms around the country are now seeing 20% of their resume's come from big investment bank talent looking for a new home. This is up from 1% of their potential workers in past years.

More important, for the firms, and for the communities where top talent relocates, are the repercussions of the new employees. According to AP:

"Former Wall Streeters also tend to bring clients with larger net worth— another potential long-term blow to firms trying to recover from the meltdown— so boutiques and middle market firms stand to reap the profits. In turn they deliver something that's currently elusive on Wall Street: stability. Jobs in the financial sector can pay anywhere from $100,000 to well into the seven-figure range depending on location, experience and the size of a firm, said Kimberly Bishop, vice chairman of Slayton Search partners, a Chicago-based headhunting firm."

Talk about "spreading the wealth" around.

Conclusion

The stock market continues to fall because the dominoes keep falling. The fact that petrodollars are no longer the insurance policy of all insurance policies, and that Wall Street talent is moving to areas of the country and the world that it wouldn't have given the time of day to in the past are signs of this crisis being a life changer for people. The question for investors, though, is whether this is that "blood in the streets" moment, or just another episode in a movie that seems to get new sequels on a daily basis. If you'd have asked us two weeks ago, we'd have gone for the latter as the answer. Today, though, we're just not sure.

That means that our current posture of being mostly in cash, while making a shopping list remains a good way to have it both ways but avoid pain and suffering. The next thing to watch for is what happens in Venezuela and Iran. If Kuwait and Dubai are having trouble, it seems likely that the left wing, 20th Century neanderthal, no real economy players in OPEC are in even worse trouble.

Oh yeah. Maybe they can do like Argentina wants to do and take over their population's life savings in order to preserve their hold on power. What the mainstream media is failing to address is that the current global economic crisis is now starting to center around the currency markets. That, in our opinion is a very bad sign.

Valero Energy (NYSE: VLO) Points To Even Lower Oil Prices

The refinery stocks, such as Valero Energy (NYSE: VLO) are weakening on a daily basis, suggesting that even lower crude oil prices lie ahead.

Chart Courtesy of StockCharts.com

If petrodollar countries are starting to feel the economic pinch, it stands to reason that U.S. refiners are likely to have a difficult time as the global economy slows. To be sure, slowing demand for gasoline was not too evident this weekend, as regular unleaded in the Dallas metroplex was selling below 2.40 per gallon in many places. But the facts are fairly straight, with regard to refiners. At these prices, profits will only come if they start to decrease the amount of product on the market, which is why they're likely to buy less crude.

Refiners make money when they can pass on large amounts of their costs to consumers. But, they can't gouge consumers, either, so they walk a tightrope, looking for the "just right" set of pricing circumstances, which at this point are elusive. Yet, as a value play, Valero is hard to resist, with a P/E ratio below 4 and a 3.76% dividend yield.

The company, though, had 1.6 billion dollars in cash and 7 billion of accounts receivables at the end of the last quarter, with 12 billion of debt. This means that if it collected every penny that it is owed, which is hard to fathom in this credit cycle, it would still need to sell assets if there was a run on its interests. In other words, Valero may be vulnerable in a worsening scenario, which is why despite a low P/E, there are very few takers on the shares right now.