Skip to main content

Econorama continued

I continue to review the mortgage mess with a view of what it might mean to investors. The story gets curiouser and curiouser....we were probably closer to a debt market meltdown than we knew - about three weeks ago $46 billion of short-term paper in Europe need to rollover, and suddenly there were no buyers. On the same day, several billion in the U.S. couldn't find buyers either. Shortly thereafter, Countrywide announced drawing about $11 billion in bank lines because it couldn't sell commercial paper. And, while Countrywide dealt in higher credit risk loans, it also did a large business in strong credit mortgages. So, a key home lender couldn't sell its paper - some, or even most, of which would be very creditworthy.

Here is the part that seems the most curious: wasn't the big problem of S&L's that triggered that series of bankruptcies - and a REAL government bailout (remember Resolution Trust Company?) borrowing short and lending long? Isn't 5, 10, 15, 30 year loans supported by commercial paper an extreme case of borrowing short and lending long?

What remains fuzzy to me is what happens when a very strong credit calls their bank and asks for a mortgage? If weak credits can't find the mortgage they could have, say, a year ago, I don't see that as more than a short term problem. The U.S. savings rate is a long way from where it should be, and if those potential homeowners really want to own a home, they should save until they get a serious down payment. If strong buyers can't get a mortgage, that is a very different problem....

Where is this leading? I've been looking at the homebuilder stocks. They have lost 50% to 75% of their peak value. Calling a bottom is always a difficult task, and generally not worth even trying. On the other hand, one doesn't want to see a further 50% drop after making a purchase, much less a bankruptcy...

If there are any readers out their tracking homebuilders, please post...

Comments

Popular posts from this blog

Book Review: What Matters Now by Gary Hamel

Interview of Eric Schmidt by Gary Hamel at the MLab dinner tonight. Google's Marissa Mayer and Hal Varian also joined the open dialog about Google's culture and management style, from chaos to arrogance. The video just went up on YouTube. It's quite entertaining. (Photo credit: Wikipedia)Cover of The Future of ManagementMy list of must-read business writers continues to expand.Gary Hamel, however, author of What Matters Now, with the very long subtitle of How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation, has been on the list for quite some time.Continuing his thesis on the need for a new approach to management introduced in his prior book The Future of Management, Hamel calls for a complete rethinking of how enterprises are run.

Fundamental to his recommendation is that the practice of management is ossified in a command and control system that is now generations old and needs to be replaced with something that reflects an educat…
Have you ever watched, or been involved in, a business failure, where, despite the best efforts of hardworking people, the business doesn’t survive? Scott Sonenshein lived through it, as he describes in the Introduction to his engrossing book Stretch.  (In some books, the reader can skip the intro- not this one; the introduction is a must-read part of the book.) He was hired by start-up Vividence in Silicon Valley at the very apex of the tech boom.  Despite prestige VC backers, top-tier hires and $50 million, Vividence didn’t make it. As his career continued, that experience led to an interest in why some well-funded operations don’t succeed, while other, more resource constrained, do. Peter Senge wrote about reinforcing cycles as part of his book The Fifth Discipline, which I consider one of the finest business books ever penned. In it, Senge describes the downward cycle that some companies fall into, and why it is so difficult to reverse. Sonenshein explores those cycles from diffe…

The Acceleration of Asset Lite Business Models

The number of asset lite businesses is steadily increasing, as is the breadth of industries effected.  I first noticed them in the 1970’s, when Baron Hilton sold several flagship Hilton hotels while retaining management contracts that entitled Hilton Corporation to a share of revenue and earnings. Over the next two decades, Marriott Corp copied and then perfected the hotel management agreement business approach, coupling a Marriott franchise with a management agreement for any one of a growing stable of brands (Fairfield Inns, Courtyard by Marriott, Residence Inns, J.W. Marriott, etc. etc.), enabling absentee investor/owners.  It turns out, however, that asset lite business structures date back much earlier.
Franchises and Dealers Early versions of asset lite businesses include franchise and dealer organizations. Soft drink and beer distributors, auto dealers and tire and repair franchises date to the early nineteen hundreds, as manufacturers needed mass distribution. The dealers furn…