Wobble or world’s end?
Posted on July 27, 2007 by Richard Beddard
Filed Under Markets |
Judging by the bounce in the ‘footsie’ this morning yesterday’s sell-off was not the beginning of the end, although extrapolating long-term trends from short-time price movements is, frankly, guesswork - at least on my part.
If, as some commentators suggest, we are experience a ‘credit crunch’ sufficient to choke off investment and precipitate the end of the take-over fuelled bull market it will be earlier than I expected. That view was informed, in the main, by Ken Fisher, and he recently confirmed it. Today, he’s still bullish and as Ken is regular columnist on the Interactive mothership, you’ll be able to read his commentary on the ‘credit crunch’ next Thursday.
Meanwhile, the Today Programme did a good job explaining the market jitters at just after 6.00am this morning. If you weren’t up you can listen again (fast forward about seven minutes into this clip), or read these highlights:
Gillian Tett, assistant editor of Financial Times Markets, says:
…There’s been quite a bubble in the credit markets, and that bubble is slowly starting to burst and just like any bubble that bursts… that can cause some bruises for investors.
Eric Weiner, author of ‘What goes up, the uncensored history of Modern Wall Street’, says:
Back in the 1980’s we still didn’t have that huge movement of individuals moving into the stockmarket… Now though, when you are talking about the market flat lining, well that’s everybody’s retirement money… When you are talking about pain, the pain is going to be spread out. And it’s going to be felt in ways that are different than in the past… Everybody was planning on this going on, and on, and on, and that’s just not the way the world works.
Pilar Gomez-Bravo, head of credit markets at Lehman Brothers says prices of…
A lot of derivatives that were structured based on the US sub-prime mortgage market have been falling. As a result of the falling levels… a lot of the investors… have actually borrowed a lot more than they could actually invest based on how much money they had…. When the price goes down when you have borrowed above your means… then you have to unwind those holdings and you are a forced seller.
Steven Bell, chief economist at GLC, a hedge fund, says:
There’s much less deal activity going on… [the share prices of] a lot of… individual companies have been pushed up because people expect these private equity firms to pay a higher price for them, and those deals have just stopped… For the moment that support has gone.
People can’t sell some of this stuff [credit derivatives] we’ve been talking about. They’re trying to find something to offset it. Laying off the risk like a bookmaker is a very good analogy… so they sell the stock market.
In addition, what this has all meant is that the cost to banks of financing their deals has gone up. So the ordinary person listening to this may think what does all this jargon mean to me?
…A lot of property deals involve borrowing money, buying property and using the rent to pay the interest. You cannot do those now because the interest rate is too high relative to the rent.
Mortgage rates… have gone up a lot… but they’ve been slightly cushioned… because competition amongst mortgage lenders has narrowed their margins. Well, they can’t do the securitisation - selling off their loans - quite so easily now. So, we’re probably going to get, even if the Bank doesn’t do anything, an increase in mortgage rates.
The big effect would be if corporate profitability went down and then we had a really serious decline in the ability of banks to lend… but for the moment it’s still just a wobble.
Ultimately, Mr Bell believes, central banks will hold or cut interest rates, and stave off a crisis.
Footnotes:
- For an explanation of how the effects of sub-prime mortgage defaults in the US ripple through to world stockmarkets see: The making of a market crisis.
Comments
15 Responses to “Wobble or world’s end?”
Leave a Reply
As a private investor it seems to me that if people like KKR are finding it diffiult to syndicate debt then that is just bad luck for them.
The fact that there has been a major correction in the markets is just part of life, lots of people have made lots of money. Now that people are running for the exits it seems to me that good buying opportunities are now arising. As I bought all my shares for a reason and not one of those reasons has changed I am now buying. It’s the way that money is made.
Face it, Fortune favours the brave!
Hi stormdog, thanks for the comment. Interesting you mention KKR. Aphaville has a roundup of deals thought to be on the rocks. Time will tell whether that’s temporarily on the rocks!
Bill Gross, chief executive of PIMCO, the world’s biggest bond fund says the private equity buyout boom is frozen (Video: Bloomberg, Tuesday).
Stormdog, all boats float lower in a falling tide…
I am glad you have reported on this situation, Richard. I am concerned about the danger that a financial crisis which appears to be almost wholly American in origin and its real effects, will inevitably cause a worldwide consequence.
My first reaction is that there is no reason why this matter should affect the valuations of most FTSE companies. Certainly, the UK market levelled off today.
However - America sneezes and we all catch a cold. Its a small world these days. I also suspect that few of us understand exactly what the hedge funds have actually been doing, and if it starts to unravel, what the consequences might be.
Not just yet, you think, and I agree. However the professional commentators quoted are dealing with very large portfolios that are not especially easy to liquidate, and they do not want to encourage panic and bearish thoughts.
I think that it may soon be time for the private investor to think seriously about moving a proportion of his or her investments into cash. Illogical it may be, but losses are more painful than missed gains. (as Ken Fisher points out, and I agree wholeheartedly)
Markets are pushed up by demand. Market makers make money by trading. If the money supply dries up ( because its diverted )then the push stops. If there is less activity then market makers will drop prices to encourage trade.
This correction will not rebound until new money re-enters the market. Where will it come from if people are being cautious? The best news will be that the problem is contained and then we the investors can look for value in the market. However a correction of 10% may look like a bargain but it isn’t if we fear 20%
We need an interest rate drop or property values to stabilise.
Why don’t we just have one giant stock market and call it the Sp or Dow, might as well be because all the ftse and the European bourses do is follow the US.
It shows that the whole world is now linked to the US financially.
For what it’s worth i don’t think this is the big crash, just another blip, interest rates are not that high, unemployment is low (US and UK), China and India are booming, even Germany is picking up.
Commodities will be the driver for many years to come, be it metals or grains.
By the way why is the bank of England so hawkish, no need for it. Mervyn king certainly must have paid off his mortgage and now have a rather large savings account, nice if you can push interest rates up.
The ftse is now back at late 06 levels with a very undemanding pe.
“When the tide goes out you get to see who’s been swimming naked”, that’s not my quote but some rich guy, now what was his name? I think what he was implying is that financial institutions and private individuals can have one hell of party on borrowed money. But when interest rates go up, the sh** hits the proverbial fan.
Hi everyone. Thanks for your comments. It’s looking a little more cheery this morning. Angela - I take your point about being sceptical about fund manager commentary. I guess my personal (not-expert) view is it comes down to valuations, while the market is cheap relative to earnings I don’t see a sustained crash regardless of worries about debt - which is why Steven Bell’s focus on corporate profitability rings true (i.e. if the global economy goes into recession, or if the market is priced like it will, we’re in trouble). Anatole Kaletsky says something similar in the Times today.. Otherwise the sh** Mr Reynard refers to, will be contained
I think that instead of saying that all markets are connected to America, you should simply say that all markets are connected. A few months ago people were saying the same things about China.
I am sure that something will arise stronger out of this current collapse in the credit market and I will be looking around for it carefully. It will probably be the thing that has attracted the least leveraged investment globally, whatever that may be.
Richard:
I am in the main session of the AlwaysOn Stanford conference — you can watch it in streamed video at alwayson.goingon.com — they have a fireside chat with US presidential candidate John McCain at 1615 PST — and we just finished a panel session on why VCs aren’t happy in which all agreed that the structure of US capital is “out of whack” and that “a lot of public market capital and private equity capital is going to have to be vaporised before the current situation gets fixed”.
That’s right: the man said *vaporised. ‘The Man’ was Roger McNamee of Elevation Partners. He did say that we are now in cyclical correction — so that’s fine then
Just don’t get in the way.
-T
Hi Tomas, thanks for sharing that cheery observation! For anyone still following the story, here’s a list compiled by the WSJ of hedge funds, bond issues, private equity fundings and so on threatened by the ‘credit crunch’ - it includes our own Cadbury and Alliance Boots deals. Also here’s Ken Fisher on why the scare isn’t a crisis.
Richard:
I should have added that McNamee did say that — once the correction had been completed — we would have laid the groundwork for an amazing bull run, and we should all get ready for that.
His point is therefore that our task as private investors is to make sure that it isn’t our capital that gets “vaporised” in the meantime (because somebody’s capital will be. Goldman Sachs (GS) is down 15% in the last few days. Goldman Sachs? Aren’t they supposed to know what they are doing?)
-T
Hi Tomas, I’ve got some thoughts on that (preserving your capital) which I’m going to put up in another blog post (easier said than done I think). On the subject of vaporisation Marc Andreessen’s annotations on the transcript of a recent Bear Stern conference call are quite funny/painful depending on how well you are riding out the market gyrations.
Also The Economist: “a healthy repricing of risk“: Banks have “cash to spare”.
[…] Wobble or World’s end? Falling house prices wouldn’t trouble markets, The Great Crash of 2009, The boom must go […]