The Bubble Is Bursting
We’d joke and say that you’d have to be Osama bin Laden to not know of the housing crisis stemming from a complete meltdown in our credit system, but then again, bin Laden probably knows more about it than we do. Despite the bitch slapping that took place to tech stocks in the past four weeks and the focus on our other article, the real story revolves around money. It’s been a busy news month, and we know you need to focus on the task at hand, so we’ve assembled a timeline of the more notable stories that have taken place thus far in 2008.
Jan 8 – Mediapost leads with "Online Ad Business Recession-Proof, Analyst Say." From the article, "Piper Jaffray remains cautiously optimistic about the performance of Internet companies in the new year. "We believe the secular growth of the Internet will enable Internet fundamentals to outperform," and that "we continue to expect most Internet companies to continue to deliver solid fundamentals and believe that valuations are currently discounting much of the economic concerns." Bet this analyst didn’t see the rest of this month happening. Perhaps he should have said, that valuations are currently in the process of discounting.
Jan 11 – Exiled dot com one analyst but still great thinker Henry Blodget asks, when will the advertising recession hit. His answer, Q1 2008. As he points out, "When companies see revenue weakness, they eventually cut back on ad spending (how else to save the bottom line?) The revenue weakness comes first; the spending cuts usually lag." And, that "Search will likely be the last form of advertising to get cut, because advertisers have direct control over their ROIs, but with less revenue there will be fewer dollars available to spend on advertising. Period." Yahoo might have picked an unlikely time to focus on display…
Jan 11 – Merrill Lynch looks to top all of the banks in the write-down department. A week before the announced earnings news gets out that they might take a $15 billion write-down, well above the predicted $12 billion. In a move similar to Citigroup, they too will seek additional capital to help provide ballast to the teetering ship. Strategists praise the oil rich nations ability to infiltrate our financial engines not just our automotive ones.
Jan 13 – More from Blodget, this time echoing statements heard at NYC’s realestateconnect.com, e.g., "The ‘bad debt’ problem is not just ‘sub-prime’ folks who should never have taken out mortgages in the first place. It includes credit card debt, ‘high quality’ mortgages, car loans, and other leverage that have recently become a consumer way of life." He thinks "all the major Internet and media companies will get hit. We agree that Google will likely do better than display- and US-dependent companies, but ‘doing better than others’ is not the same as ‘doing well’ (at least not as far as stock prices are concerned). We expect the downturn will dampen VC and angel financings, which, in turn, will dampen entrepreneurial activity. So we continue to suggest that digital business executives brace for harder times."
Jan 16 – J.P Morgan Chase & Co.’s fourth-quarter net income fell 34%, as the company recorded $1.3 billion in markdowns on subprime positions. As reported in the Journal, "while earnings fell short of Wall Street’s expectations, investors focused on the bank’s escape thus far from the worst of the credit crisis." They still managed to earn almost $3 billion in profit for quarter, compared to some other banks which barely broke even.
Jan 16 – Speaking of other banks, Citigroup sucked wind then sucked even more in their fourth quarter 2007 results. They didn’t break even or even come close. They didn’t lose a few million or even a few hundred million. No, they managed to set the state for Brewster’s Billions losing 9.8 billion dollars. The umbrella company has needed it’s own golden parachute, first raising $7.5 billion from Abu Dhabi’s investment arm last year and now another $14.5 billion in funds by selling stakes to investors including Singapore’s Government Investment Corp. Wow. What a difference a year makes as they earned more than five billion dollars in profit this time last year.
Jan 16 – Prior to reporting profits, Bank of America lets the world know they will cut another 650 jobs, "retooling the business for what promises to be a ‘simpler world’ in the foreseeable future." I understood the layoff parts at least.
Jan 17 – Federal Reserve Bank of Cleveland President Sandra Pianalto didn’t shed much light on the economic implications of our impending recession when saying, "Directly and indirectly, the negative influence of housing on overall economic performance could affect the outlook for some time," or with fewer hedges, "the economy has shifted to a lower growth track."
Jan 17 – What happens in Vegas stays in Vegas. Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan. Out east, "New York developer Harry Macklowe, who bought a group of Manhattan office buildings last year at the top of the market, is struggling to repay some $7 billion in debt that comes due in February. Mr. Macklowe just put his prized General Motors Building in midtown Manhattan on the block."
Jan 18 – Ben Bernanke, head of the Federal Reserve proves his non-partisan agility and paves the way for approval of his future rate decisions. He must have a successful marriage as he demonstrated "a mastery of the art of commenting on proposals while appearing not to take a position."
Jan 18 – Merill Lynch numbers prove the estimated $15 billion in write-downs almost on spot. More noteworthy, the total economic impact on the balance sheet of US financial institutions with exposure to risky loans tops $100 billion. This comes close to the $170 billion in losses from the 80’s savings and loans scandal. The bursting of the tech bubble exceeded both with a wealth loss near two trillion dollars, but using home prices as the measuring stick, the total loss for the credit crunch could easily exceed $4 trillion if homes fall another 20% in value on average.
Jan 18 – No especially decent housing information came out either as home construction collapsed; new housing starts hit their lowest levels in 16 years.
Jan 21 – Asian stock markets tank on a weakening dollar and spreading credit crunch concerns. After a bad Monday, Hong Kong posts a one-day loss of 8.7% and China 7.2%. It was the former’s biggest point decline ever and biggest percentage drop since September 11, 2001. The Japanese stock market lost 5% and 18% for the year. As reported in the Wall Street Journal, The last significant credit crunch, which ran from about 1989 to 1992, began with a pullback on lending for commercial real estate that then spread to business lending. This time, the problems spread from residential real estate and are being felt by everyone from commercial orchid growers in Florida to makers of heavy machinery.
Jan 22 – Fed cuts the rate banks lend money overnight to others by 3/4 of a point, the largest single cut in recorded history, putting the federal fund rate at 3.5%, a rate not seen since August 2005.
Source: HSH.com
Jan 22 – Bank of America and Wachovia report hammered profits; as reported in Bloomberg.com, "the second- and fourth-largest U.S. banks, said earnings plummeted after more than $6 billion of combined mortgage- related writedowns." The banks recovered after the unexpected fed rate cut, gaining back 10% in the past two days for Wachovia and 14% in Bank of America’s case; unfortunately, since August when some of the first major indicators of the housing crisis, even with the recent gains, Wachovia is down 32% and BOA down just under twenty percent.
Jan 22 – Expect a leaner, hopefully meaner, US economy…and Yahoo? Despite the challenges, they insist that they remain a powerful force on the Internet, with about 500 million people visiting its sites around the world each month. But, do expect several hundred to lose their jobs, as they "phase out or consolidate services like photos, premium music, auctions and Yahoo 360, a largely unsuccessful social network."
Jan 24 – After the late in the trading day US stock market rally which saw the Dow Jones Industrial Average soar to an almost 300 point gain after starting the day almost 600 total points lower, the Asian markets surged recapturing much of what they gave up earlier this week. The US sneezed, and the rest of the world, especially Asia, decided to catch a sympathy cold but has since healed…for now. A ray of hope? We’ll see.
