In 2007, we had a lousy year. The transition period we’ve been discussing for two years is lasting longer than we expected, and having greater negative effect on some of our companies than we expected.
Nevertheless, the general pattern is familiar. After a period of economic and market expansion, the Fed raised interest rates to contain inflation and slow the economy. Subsequently, it has lowered rates to start a new cycle. We covered this pattern in some detail in Muhlenkamp Memorandum #84,
three months ago.
As often happens in boon times, some consumers and some companies lost sight of reality in pricing their products and have since suffered severely. In 1999-2000, it occurred among technology companies; in 2006-2007, it occurred in the credit markets. The credit markets include loans of all kinds. Much has
been written about the problems in subprime residential mortgages, but similar problems exist in commercial mortgages and some corporate loans, particularly for mergers and acquisitions. In the aggregate, these problem loans affect the balance sheets of financial companies, including banks and brokers. The problem to date is that no one knows how bad the problems will prove to be, or to what degree each company is affected. So the markets assume the worst.
In one respect, it’s good to be at year’s end. In preparation for year-end reports, company management and their auditors are required to do a thorough assessment of the value of their assets and liabilities. So, some of these questions should soon be cleared up. (In the current instance, the risk might be that they over compensate and go too far.)
Read the complete commentary
Nevertheless, the general pattern is familiar. After a period of economic and market expansion, the Fed raised interest rates to contain inflation and slow the economy. Subsequently, it has lowered rates to start a new cycle. We covered this pattern in some detail in Muhlenkamp Memorandum #84,
three months ago.
As often happens in boon times, some consumers and some companies lost sight of reality in pricing their products and have since suffered severely. In 1999-2000, it occurred among technology companies; in 2006-2007, it occurred in the credit markets. The credit markets include loans of all kinds. Much has
been written about the problems in subprime residential mortgages, but similar problems exist in commercial mortgages and some corporate loans, particularly for mergers and acquisitions. In the aggregate, these problem loans affect the balance sheets of financial companies, including banks and brokers. The problem to date is that no one knows how bad the problems will prove to be, or to what degree each company is affected. So the markets assume the worst.
In one respect, it’s good to be at year’s end. In preparation for year-end reports, company management and their auditors are required to do a thorough assessment of the value of their assets and liabilities. So, some of these questions should soon be cleared up. (In the current instance, the risk might be that they over compensate and go too far.)
Read the complete commentary
