 SIGNS OF THE TIMES - SEPTEMBER 11,
2007
Porsches and Ferraris next?
Bob Hoye
Institutional Advisors
Sep 12, 2007
Signs Of The Times:
"The banks that underwrote
the $45 billion acquisition of TXU Corp, the world's biggest
buyout, have offered to pay the $1 billion break fee in a desperate
attempt to convince the private equity backers to drop their
bid. It is understood that the banks asked Kohlberg Kravis Roberts
and TPG to consider withdrawing their offer after the turmoil
in the credit markets meant that the banks have little or no
chance of syndicating the record-breaking $37 billion loan to
investors. These banks include Goldman Sachs, Morgan Stanley,
Citigroup, Lehman Brothers, and JP Morgan."
-The Times, September 1
The U.S. Mortgage market is
in 'turmoil' according to H&R Block Inc. Chief Investment
Officer Mark Ernst . . . 'The loan originations market is in
the midst of the most severe dislocation it has seen in years,
maybe the most severe since the 1930s'." -Bloomberg, August 29
This compares with our July
26 observation that this is likely the biggest train wreck in
the history of the credit markets.
That the credit expansion has
corrupted most everything is indicated in the following news
clips, which also include mention of a reversal of opinion:
"The recent tidal wave of money into the art world
has swept away its old ways of establishing an art work's aesthetic
value. Collectors now buy works in public forums such as auctions,
rather than in the privacy of galleries - it's conspicuous consumption."
-Wall Street Journal, January
29
"Art-Backed Loans Get Hung Up by Default Concerns"
The article noted that some
of the art loans were set up like reverse mortgages such that
the owners could receive monthly payments rather than selling
and taking a capital-gains hit. However, recklessness may be
abating as First Republic, one of the major players in the niche
business of art lending, stated that they have "recently
tightened in this area of our business".
Well, all of us may not be
'players' in the art market, but for those who enjoy wine there
may be lower prices ahead.
"Investors Buy Wine to
Drink in Profits"
"Funds Snap Up Cases of
Prime Vintages to Sell at Tidy Prices"
The Wall Street Journal article
of February 24 did not include which bank was aggressive in this
form of niche lending, but it is reasonable to conclude that
conspicuous consumption is often followed by even more conspicuous
liquidation.
Porsches and Ferraris next?
Like civilizations, bull markets
are born stoic and die epicurean.
Stock Market: As the saying goes, the increase in
volatility is enough to gladden the heart of any manic-depressive.
Lowry's "90% days",
both up and down, have been increasing in frequency, and then
there is the growing number of "Hindenburg Omens",
which is a sell signal based upon new highs and new lows. As
Ross notes, there have been more "Hindenburgs" than
stock market tops.
The point is that volatility
arrived suddenly to the street and it is worth adding that it
started with a salient change in the credit markets such that
remarkable dislocation spread through most markets.
The first paragraph listed
a couple of volatility indicators that are definitely saying
that after a long interval the stock market is no longer a one-way
street. The flight to real liquidity drove treasury bills from
4.94% to an extraordinary low of 2.45% in only two weeks. They
haven't been much below 4.90% for over a year and as part of
the rebound in stocks the bill rate has increased to 4.40%.
Dramatically increasing financial
volatility with weaker trading volumes and A/Ds is something
to be wary of.
However, September opened up with a pop and it will be interesting
to see how far it carries. Going along with the move is confidence
that the Fed will lower the Fed funds target. This is more of
the irony we've been looking for. After complaining about rate
hikes the street is celebrating the first rate cut, which seems
imminent.
Early in August the initial
liquidity concern was accomplished by declining treasury bill
rates, which is the way these things work. The street is wrong
in celebrating the Fed's genius to time cuts in administered
rates. We will repeat it yet again. Short-dated market rates
of interest turn down, the Fed follows and rates decline through
most of the bear market.
The next irony could be similar
to the complaints made at the end of 2000 when those who had
celebrated policymaking blamed the last hike for "causing"
the plunge in the stock market.
Until recently there have been
two certainties. If you pitch your voice just right and say "kitty-kitty"
often enough the cat will always come. The other one is
that the Fed can always time interest rate changes to maintain
the "Goldilocks" condition.
Nope - it looks like Lady Bountiful
is joining forces with Mother Nature and we all know that she
invented bear markets to correct the opinion of pundits.
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
SIGNS OF THE TIMES - SEPTEMBER
11, 2007
Hoye Archives
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