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Sure, it was ugly. But it was also a little strange. I mean, how did shares of locally based homebuilder Ryland manage to be up 1.1 percent, while the Dow was down 2.3 percent (or 311 points)? Why was KB Home off a mere 1.8 percent, while Guess was down 4.1 percent? There’s probably some sort of explanation out there (Ryland's second-quarter loss wasn't as bad as analysts had expected, for example), but it's this kind of weirdness that drives market-watchers positively loony. As is typical on these nasty days, the conventional talking head wisdom is that it's no time to panic, the markets are still in good shape, stocks can’t keep going up forever, the selloff was an overreaction, blah, blah, blah. Then, of course, you have the gloom-and-doom types who argue that this could be the start of something bad. Pick your position.
Getting beyond the usual scorecard analysis, however, is this business of credit markets. Merrill Lynch investment strategist Richard Bernstein is calling it the end of the golden era for private equity, and if that's true - even if it's partly true - than the fallout could be considerable. We're talking about a slowdown in mergers and acquisitions, more debt defaults, and maybe even the collapse of numerous deals already in progress. It also could mean a more sluggish stock market. Today may have been the day that equity investors realized that the private equity borrowing machine is not such a sure bet. Actually, those investors realized as much all along - they just pretended to believe that borrowing billions on unrealistic valuations would somehow turn out all right. Hey, when stocks keep going up, what are you going to say?
It's not just the private equity woes that have folks in a dither. A survey by Moody’s Economy.com says that mortgage credit quality will weaken "substantially" through the remainder of 2007 and well into 2008, with delinquencies peaking at 3.6 percent of all mortgage debt outstanding. It's also looking at a 10 percent foreclosure rate in the subprime adjustable-rate mortgage segment, which at some point has to eat into the general economy. If that's not enough to get your heart racing, new-home sales fell in June for fifth time in six months, while the median price fell and inventories rose. And yet, Ford reported its first quarterly profit in two years, and in general earnings have been strong. Also, second-quarter GDP will be out soon and the expectation is an annual growth rate of around 3 percent, which ain't shabby. Bottom line: plenty of reason to worry, plenty of reason to be encouraged. (MarketBeat, NYT)
Mark Lacter created the LA Biz Observed blog in 2006. He posted
until the day before his death on Nov. 13, 2013.