"Beep-Beep"

In most episodes of Warner Brothers' popular and long-running Road Runner cartoon series, there is a humorously pivotal moment when Wile E. Coyote suddenly realizes, after chasing the eponymous lead character through many twists and turns, that he has run too far. At that point, the predator nervously looks down and sees that there is nothing but air beneath his feet. Moments later, the clever bird chirps "beep-beep" and the not-so-wily coyote crashes down to earth.

Three recent reports suggest that the time may soon be approaching when the permabulls, Panglossian pundits, and Goldilocks delusionaries will experience a "beep-beep" moment of their own.

"Most Americans Fear Recession in the Next 12 Months, Poll Finds" (via Bloomberg)

Most Americans expect a recession within a year and disapprove of President George W. Bush's handling of the economy even though the unemployment rate is at a five-year low, a new Bloomberg/Los Angeles Times poll found.

Six in 10 who were surveyed predicted a recession, similar to the 64 percent who anticipated the economy would contract in a December 2000 poll by the Los Angeles Times three months before the last decline. In the current survey, 71 percent of those earning less than $40,000 said they expect a recession compared with about half for those making more than $100,000.

"We're living on borrowed time,'' said Andrew Herring, 43, a chemical engineering professor at the Colorado School of Mines in Golden, Colorado, who took part in the survey. "We spend ridiculous amounts of money on the war and now we have issues with the subprime housing market,'' said Herring, a Democrat.

"US Braces for Sharp Profits Slowdown" (via the Financial Times)

US companies are bracing themselves for a sharp fall in profit growth this year, amid rising fears that corporate America’s woes will exacerbate the expected economic slowdown.

Wall Street analysts and economists are warning that the end to a record run of profit increases along with already anaemic business investment by US companies could have serious repercussions on the domestic economy.

Any slackening in the pace of earnings growth could also unsettle equity markets as corporate profits have been one of the key drivers behind the prolonged resilience of US stocks.

“The situation is fairly precarious,” said David Rosenberg, chief North American economist at Merrill Lynch. “The typical chief executive sees a slowing economy and acts accordingly.”

"Private Equity Deals Could Bring Down Banks: IMF" (via The Australian)

The private equity boom could bring down banks if a sharp change in market sentiment occurs while large deals are being completed, according to the International Monetary Fund.

The fund says today's private equity deals are occurring against a benign backdrop of global growth, low interest rates, high corporate profits and low volatility.

"If one of these factors changes, deals that looked promising in a benign environment could suddenly appear much less attractive," the IMF says in its annual review of world financial stability. "It is therefore likely that some private equity deals will fail to live up to expectations."

Last year worldwide mergers and acquisitions surpassed the technology boom peak of 2000, reaching $US3600 billion ($4370 billion). The average size of a deal has risen from $US400 million to $US1.2 billion.

"Few firms are now thought to be too large to be the target of a takeover," the IMF says.

The private equity boom is being driven by leveraged loans, rather than "junk" high-yield bonds.

In principle, that should make it safer, because loans are being syndicated to a highly professional investor base, and have covenants enabling creditors to impose management changes if targets are not met.

However, demand for private equity deals is so hot that loans are being offered with "fewer, weaker or dropped loan covenants".

The IMF says anecdotal evidence suggests due diligence is getting weaker, with investors placing undue reliance upon the due diligence of the deal's sponsors.

"It appears likely that in the future, more funds will be chasing fewer attractive deals. Already, rating agencies have warned that the number of viable targets has diminished."

The IMF says banks take several risks during the syndication process, which can take several months, during which adverse events could render the deal unattractive.

"The bank that has provided bridge finance or has underwritten the provision of the leveraged loans would be at risk during that period, and could suffer large losses as a result of adverse market developments."

The IMF is concerned that world financial stability could be jeopardised by the collapse of several large and high-profile deals during the syndication stage. This could trigger a wider reappraisal across a broader range of products, shutting higher-risk companies out of credit markets.

Meanwhile, the Dow Jones Industrials closed higher today for the eighth session in a row. I guess equity traders know best.

Beep-Beep?

Comments

[Mike M]

Hi Mr. Panzner, you are spot on about the absolutely dreadful underpinnings of our economy. Of course, I have thought this for the last year or two. It is strange how long markets can ignore, what appears to me anyway, to be obvious. Time will tell, I guess.

[Susan N]

Yeah, its been quite obvious for a few years now where we are headed. At this point, really we'd be lucky to have just Great Depression #2. When the Depression hit - Americans were still a lean mean, adaptable and self-reliant group. We now are the most obese, most violent, most heavily medicated, most superstitious/religious, most illiterate people in the industrialized world! I hope for the sake of my children we don't descend into complete barbarism, but we pretty much have dug our own grave!

[Daniel Ebrahimi (Analyst)]

In our current economic environment of low interest rates and rising profit growth all is well. Private
equity deals coupled with hedge fund investments have helped to inflate the over all short term wealth of the U.S. market.
The specter of declining business investment by U.S. companies, decreasing ROE, downturn of the U.S. real estate market,subprime lending, increasing credit default rates, a large trade deficit and declining value of the U.S. dollar should be what keeps us up at night.
Asia is now going through an evolution and the growth prospects are very exciting..We need to avert negative economic events caused by foreign countries that will start investing in their own economies and stop financing U.S. debt. Our market has never been more global. In order to be eschew a significant economic down turn all these issues must be addressed and the U.S. must be seen as an affable and formidable global partner rather than a complacent one.