Market forecasting

Never being one to try to "predict the market" I can't help continuing to ask businesses how the fall is looking. The run up in the market is making folks feel better and as a leading indicator it does seem to be saying the correction overreacted in the winter and that the economy reached bottom in August /September. Thus a spring market recovery indicated not only improvement in the economy but an end to the gloom and doom that the financial/credit meltdown would cause a return to the 30's. So it wasn't as bad as some thought it might get and maybe the worst is behind us. But I am not hearing manufacturers talk about anything other than inventory reductions overshot and rebuilding supply chain. Outside of auto stimulus and government spending economic improvement is very spotty. So how will a market act when it realizes we are not in a "U" or "V" curve and maybe not a "W" even. But what about an "L" what happens in a market. It seems to me after an initial retrenchment it should hesitate to see any signs of sustaining. As a forecaster it seems to indicate stability but from this point earnings wont come from continued cost cutting. Businesses cut fast and hard. Now not much left to cut. Those that cut SG&A the most have outperformed. Now we need revenue growth for any more move. Not seeing it yet in any sustainable form and with consensus saying we are in a recovery the banking system is not going along. When was the last time the economy grew without loan growth or the consumer. Very hesitant right now.

Reasons to Buy?

We have had three down days, for the first time since June. Maybe it's the start of the long-awaited, over-anticipated correction. Or maybe it's not. At any rate, at some point there will be a correction. Given the robust rally we've had, against the backdrop of a halting recovery, we're bound to see a resurrection of D&D (doom and depression) stories in the media if there's a selloff. Just as in March, it will be difficult to pull the trigger and buy stocks at the bottom of the correction. It might be easier to think about the reasons for buying a dip now, before the atmosphere gets poisonous. So we'd like to ask our readers for their thoughts on the reasons to buy the correction. Let us hear your thoughts.

Financial Services Innovation

Talked to a suburban community bank CEO the other day. He's glad his bank is only three years old--very few bad loans. The reluctance of other lenders to commit funds is giving him solid pricing on deals and relationships. He is concerned that a financial products czar will make it difficult/expensive for small financial firms to create new products. This could have the effect of increasing the brand value of big firms by stifling the new product flow necessary for the little guys to compete with the behemoths. But, then, the government owns stakes in the big banks...

Chris Hynes comment on flash trading

Chris's comments on this blog on August 7th appeared in the WSJ today on In Defense of Flash Trading. If you get a chance get onto the comments section of the journal. There is quite a buzz that Chris has created with his comments. Not that they were controversial but it sure is a subject of different opinions.

Private Equity Environment for Middle Market

Talked to some lower middle market private equity guys last week--they said they were having trouble borrowing more than 2 turns on anything--and that is based on recession-reduced EBITDA. They are considering doing deals, taking the 2 turns, praying for a refi opportunity within 12 months so they can keep the excess equity for additional deals. A private wealth sales guy confirms that he's just not seeing new liquidity from business owners--they don't want to sell to private equity firms at the low prices implied by the lack of financing.

In the boom years, the math was interesting. Guy sells a business for $20 million, pays $3 million to the US Treasury, puts $10 million in public equity and $7 million in munis or other bonds. P/E firm put up $7 million in equity, $13 million in debt. Result was more new debt issued than funded. Tody same biz might get $7 million in debt with same EBITDA, or less if cash flows down. Even with 50% equity, P/E firm has a better deal than last year if the growth resumes--same equity, less debt. This only works if current owner takes a haircut,and most of them can wait.

Our Dallas presenter says MI Developments (NYSE:MIM) keeps rolling along. The stock is trading at a large discount to book value and near-term events could unlock significant value.

This fall hostin Xmas shopping previews

we are looking to walk malls in New York, Boston and San Francisco early in the Christmas season. We are hearing very lukewarm back to school is making this an even more important tim ethis year.