Keep Watching Libor

Of all the economic news posted lately the most encouraging was that the three-month U.S. Dollar Libor, seen as a key gauge of the effectiveness of the Federal Reserve's monetary policy, fell to 0.63688% yesterday, the lowest rate since the British Bankers Association began publishing Libor data in 1986. Click this link for the Wall Street Journal Article http://online.wsj.com/article/BT-CO-20090603-704345.html?mod=dist_smartbrief . Very early in the financial crisis the three month Dollar Libor rate peaked at 4.81875% on Oct. 10, 2008, indicating a near shutdown of interbank lending. LIBOR is important for a host of reasons. The most important is that it is the rate that banks around the world charge each other to borrow U.S. Dollars. It is generally regarded as a measure of the level of confidence that bankers have in each other’s institutions. It is also vital to the health of the balance sheets of individual families as it is a key standard for setting interest rates on all kinds of variable rate loans such as floating rate mortgages and home equity loans. Many commercial and municipal loans with variable rates are also based on Libor. Obviously lower rates on these loans help individuals and businesses meet their debt obligations and are a key piece of working our way out of a very nasty economic situation. We said very early on that Libor was going to be a key indicator of our progress. Myriad problems remain in the global economy, but real progress is very visible. We are encouraged, and so are the financial markets.

On the downside, we are concerned that the recent rise in oil prices could nip our nascent recovery in the bud. Keep in mind that the drop in gasoline prices from over $4 a gallon to less that $2 was a de facto tax cut for the U.S. consumer. The recent rise to $2.50 is not a killer but bears watching. In general, gasoline in the U.S. over $3 a gallon is a problem for consumers. This is a two edged sword for Pilot Capital though, as our managed portfolios at PCM tend to have an overweight to energy. We continue to like the sector. Our long term secular outlook for a great many people looking to use fewer resources remains intact.

Note that this post was prepared from material believed to be accurate at the time of posting. Pilot Capital Management, Inc. does not warrant or guarantee that said information was accurate. This blog represents opinion only and should not be construed as investment advice. Investor’s should always consult their own investment and tax advisors regarding the suitability of any investment for their particular needs.