Cooling Down
As we enter the homestretch of ‘07, it is clear that we have survived the August and September credit crunch that the subprime mortgage market inflamed. It is also clear that Ben Bernanke and his counterparts in Europe provided the essential market liquidity when it was needed and that the rate cuts were effective in avoiding a very hard landing. As the year comes to an end, though, it is becoming clear that we survived a very rough patch without moving into recession, but growth rates in the 4th quarter of ‘07 and the 1st quarter of ‘08 will most likely be the lowest rates we have seen since emerging from the recession of ‘01. Ironically, the weak U.S. dollar has most likely helped by keeping our exports strong. However, I do not believe that a weak dollar can be a long-term policy as a new administration takes over in ‘09. The jobs report from the Labor Department on Friday was further confirmation that we will be in a cool-down period over the next several quarters.
For those of us that are focused on advertising-driven sectors, all of the major forecasters have revised their forecasts downward to almost flat year-over-year increases for most of the categories. Will Google (GOOG) peak or stall in this environment, or will it continue to take market share and outperform the overall market?
I do not believe that we will see any major LBO’s announced in the near term. The financial institutions that help fuel the past growth are clearly on the sidelines. Most likely, we will continue to see deals canceled because of material adverse effects in the target company’s business. Cerberus appears to be taking the lead in this category. Smaller deals will get done, but they will not have the leverage ratios that they had in the spring. We may also see the phenomenon of each of the groups stepping down the size of their targets because of the greater amount of equity that will have to be employed.
The major financial institutions will remain under pressure and out-of-favor for several more quarters. Even Goldman Sachs was downgraded recently. Only JPMorgan Chase (JPM), with Jamie Dimon at the helm, seems to remain attractive to investors, as a very complimentary article in this week’s Barron’s points out. As I have indicated previously, I am among the group of Dimon’s fans that would love to see him take over Citigroup (C).
And we are finally seeing a cooling down in the New York City condo/coop real estate market, which had defied gravity and moved in the opposite direction of residential real estate around the rest of the country. With projected bonuses for Wall Street being forecast to be substantially below last year, it is clear that 20%+ appreciation for new residential construction projects will not be seen in ‘08.
As I write this, we approach the 15th week of the NFL season with the New England Patriots perfect at 13-0 and the Miami Dolphins perfect, as well, at 0-13. How these teams fare over the next few weeks will be of great interest to all of us who love the NFL season. It has been nice to see the Cleveland Browns resurgence and to finally see the Silver & Black, Oakland Raiders, winning back-to-back division games. It demonstrates, once again, that fortunes can be reversed!