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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerThe 3 groups in trouble are home builders, banks and mortgage brokers, and brokerage firm stocks. Here are the 'worst case scenarios' out there:
Home builders are a total mess, and the only one he thinks isn't a disaster is MDC Holdings (NYSE: MDC). He even thinks some home builders could go under. South Florida, Phoenix, California are all in trouble and way overbuilt.
Countrywide Financial Corp. (NYSE: CFC) is the only good lender out there and is at least honest about exposure and how bad some of it is. The worst case is that 50% of home buyers could walk away. Cramer reminds us that he doesn't really think that will happen, but that is the worst case scenario.
The brokers could lose all the private equity business and lose all the mortgage and derivative lending. They could even see estimates fall 50% and they could see numerous headcount reductions. Bear Stearns (NYSE: BSC) is in these the deepest, but all the brokers are in the same boat.
Later on, Cramer did note that if the FED does end up cutting rates, then you could actually see many of these sector stocks soar. He even noted that emergency rate cuts could add 50% to some of these names.
Now before you go panic and want to cry about the gloom and doom, keep in mind that this isn't what was being predicted. But this is what the absolute worst case scenario believers are thinking. Cramer doesn't think this is going to happen. I don't believe this will happen either, for whatever that is worth. I recall seeing these debt implosions left and right affecting private and public pension funds, and it blew up many firms and many jobs were lost as a result. These "toxic waste" products cause a lot of pain, but if they crater the economy and implode many of the large diversified brokers and investment houses then the world has changed. In fact, that means the tail will have wagged the dog.
Jon Ogg is a partner at 24/7 Wall St.; he does not own securities in the companies he covers.
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Reader Comments (Page 1 of 1)
7-30-2007 @ 9:56PM
BizIntel said...
I agree - there are plenty of reasons out there for the doomsday guys to worry - weakness in housing, the subprime fiasco, a lack of funding for LBOs, and even a slowdown in personal consumption.
However, with the S&P reasonably priced (not necessarily undervalued), real GDP growing, and inflation in check, I think the market will still end the year on a positive note. I also like MDC (I own some shares) due to the strong balance sheet. However, they have exposure to some of the hardest hit markets such as California & Nevada.
8-20-2007 @ 11:52AM
Jerry Bluhm said...
I think some sectors of the market are over-sold and offer great opportunities for those investors who can hold for two to five years. Opportunities come and they go to buy. Home improvement stores selling to customers will recover by the second half of 2008. The stocks are over-sold.