I'm on the email distribution list of Ed Yardeni. He's pretty conservative and I disagree with him often. Here's an excerpt from today:
II) CREDIT: Now that we are at mid-year, everyone is reassessing the widely-held view that the worst of the credit crisis would be over by now, and coming to the same conclusion: The worst may not be over and it might last well into 2009. Here are some recent headlines:
(1) ?Credit Storm Back With a Vengeance,? WSJ, 6/27. This story ran the day after Goldman downgraded Citigroup and GM to sells. It was also eight days after Moody?s downgraded the monoline bond insurers. Many securities backed by subprime mortgages hit lows and corporate junk bond yields rose on the deteriorating outlook for Chrysler and GM.
(2) ?Hopes fading that worst of the credit crunch is over,? FT, 6/27. ?The mood in the credit markets had improved considerably in the months after the near-collapse of Bear Stearns in March. Wall Street was able to unload some leveraged buy-out debt left over from the boom and write new business. At the same time, the blockbuster bankruptcy or default that investors had feared failed to materialise. However, poor economic data, concerns of further writedowns at the big banks and problems at US carmakers have rattled investors.?
(3) ?We?ve had only the first act in credit crisis drama,? FT, 6/29. In his column, Michael Mackenzie wrote, ?As the months drag on, there is no escaping the zombie-like nature of the credit crunch; it remains a relentless scourge.?
(4) ?The Credit Crisis Is Going to Get Worse,? WSJ, 7/5. This is an interview with legendary investor Theodore J. Forstmann. He says, ?We are in a credit crisis the likes of which I?ve never seen in my lifetime.? He predicts, ?Things are going to fail. Enterprises are going to fail.?
I must admit that the prolonged credit crunch scenario makes sense. Over the past year, the bad loans were mostly limited to subprime mortgages and the problem was amplified and exaggerated by mark-to-market accounting of asset-backed securities that included these subprime loans. Now the bad loan problem is spreading rapidly to auto loans and to the junk bonds of the auto companies. There has been talk of possible bankruptcies in the industry. The Economist (7/5) observes: ?So just how bad are things for the Big Three? Their survival has been in doubt before. But two things are different this time. The first is that the carmakers? finance arms used to bring in cash even in hard times. That is not happening now. More buyers are defaulting on their car loans, and the resale value of SUVs and pickups has collapsed so catastrophically?that the finance offshoots are losing huge sums on vehicles returned after lease. The second change is that it seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit?s old business model is now obsolete.? Last week, Ford and GM bonds dropped to around 60 cents on the dollar. GMAC, which takes back vehicles it financed at the end of leases, sells them at a discount to dealers. On average, auction rates plunged 20% y/y in May on trucks and SUVs.
