The credit crunch is clearly worst for financial companies. Banks are already having trouble selling the bonds to finance a spate of planned leveraged buyouts. In the UK, it’s the Alliance Boots deal that can’t find any takers. Last week we mentioned the takeover of Chrysler by Cerberus, which couldn’t find any takers for Chrysler bonds.
Suddenly, investors want no part of the bonds and collateralised debt obligations that have backed the private equity boom of the last two years. Deal volume is slowing. And the US$300 billion in high-yield bonds that Wall Street banks hope to unload during the rest of this year may not find any takers.
Yep. The unintended consequences of the credit crunch are starting to appear. As the subprime flu spreads, it reduces investor appetite for risky loans packaged up as securities. Banks can’t easily sell-off risky loans anymore, so the banks themselves, unable to free up the balance sheet for yet another loan, sit tight. The credit noose tightens on the stock market.
In this situation, you’d think companies with cash on the balance sheet would be strong. Which brings us to the subject of M&A activity in the resource sector. Will it too dry up as the market re-prices risk and credit tightens? Remember, Rio’s offer for Alcan was all cash. It didn’t require schlepping any high-yield bonds on to gullible lenders.
So where does that leave us? Well, we wouldn’t be at all surprised if the credit crunch that’s causing financial stocks so much pain will be the cause of more Aussie resource gain. For one, it’s a question of asset quality. It’s better to own metals than mortgages these days. Metals you can touch, twist, and bend. Mortgages, not so much.
Second, investors are wising up to the fact that the engine of global growth is in the Rim of Fire now, not in America. And if it’s not wholly there yet, that’s where the future is. Stocks look forward.
American analysts are starting to size up Aussie stocks. Mining stock analyst Jim Mustard told the Uranium Conference in Perth last week that Aussie uranium shares traded at a discount to their North American peers because of the uncertainty over the new mines policy of state Labor governments. Despite the mixed prospects for that policy, the discount may evaporate as North American investors look to get outside the US dollar and into a more direct China/resource market.
And then again, what do we know? We left Vancouver on Friday at 9am, spent six hours in transit in San Francisco, and three more in Auckland before arriving back in Melbourne just in time for a beef bento box for Sunday lunch. Our brain and our body are still on North American time. But in the world of globalisation, we are glad to call Melbourne home, and glad to be back.
The markets are going to be volatile for awhile. This great transition of global growth won’t be smooth and orderly. It will be punctuated with massive losses, failure, and huge opportunity. But we reminded listeners in Vancouver that upwards of 80% of your total return in any investment comes from simply being in the right asset class. You still have to do some security analysis, of course. But being in the right market at the right time sure does help. And though the numbers this week could be big and red, there are positive black swans all over the place. Now if we could just find one for lunch…
The Daily Reckoning Australia