Andre J. Peschong

When it comes to deals, I have always wondered when you take a step back and look at the whole picture if things seem more in focus or just more chaotic.  Sometimes you can be so close to a deal or an industry that you lose your macro perspective and cannot always find the answer even when it’s right in front of you.  The great players in history have been extremely focused and are detail oriented but they also had the unique ability to stand back and see the big picture. 

For example, when the first cracks were starting to form in the sub prime market everyone pretty much chalked it up to a short term anomaly.  Professionals looked at the cracks and dismissed them as nothing more than a short term retrenchment so that the real estate market would continue its torrid pace skyward.  As the cracks became larger fissures there was a general sense of disbelief as to how this would affect real estate.  Even the smart ones that recognized the start of the down market had no idea how deep these cracks would go. 

Back to the macro perspective, which looks at how this initial domino effect could affect many other segments of the market. Here are the major causes:

• Cause 1 - Real estate purchased within the last 5 years from exotic subprime instruments were, for the most, part going to start resetting and in many cases the people that bought in were buying at inflated prices.  As loans started to reset buyers were faced with higher payments and in some cases forced to sell.  This caused a flood of real estate supply in the market which, in turn, caused prices to become softer and decline in value. 
• Cause 2 – At the same time, lending institutions were doing a complete 180 in terms of lending standards.  They became so overly cautious and wary of bad paper, that even someone with good credit and an adequate down payment was being turned away from getting a loan. This created a shrinking pool of buyers. 
• Cause 3 - The steep run up in the real estate market generated an unprecedented amount of equity in homes which consumers literally used as a piggy back and tapped into it as a cash resource.  This propelled consumer spending, taking the economy higher.  Now that equity has been severely depleted there is no real driver for consumer spending.

These factors exacerbated the situation and caused a decline in the real estate market which made banks have to re-evaluate their portfolios and start marking them down which again compounds the grief.  The fed was faced with a total melt down and basically had to lower interest rates massively and quickly, which happened.  We are now at risk for inflation which is being helped along nicely by oil’s march to lofty heights and by developing countries competing for natural resources which has caused basic commodity prices to soar. 

So what does this re-hashing of short term history tell us?  If you look at the domino effect in a macro perspective you could have shorted the banking stocks which were still lofty even through the write downs but as a group have declined significantly.  Short the lending institutions Freddie Mac, Sallie Mae as their portfolios were absolutely going to be affected and not in a good way.  Long commodities as the global economy is paying up for these resources.  Let’s also not forget that in troubling times there is one constant and that is a flight to safety and the ultimate safety is GOLD!  That has had a meteoric rise.

Basically, whatever business you are in it always helps to look at things from a macro perspective and if one thing happens what else does it affect and so on.  I am intrigued as to what the new administration will do with the anemic dollar; my belief is that regardless of party that gets elected that there will be a massive support of the dollar.  Look to see a stronger dollar and lower oil prices ($139) over the next 12 months.

Bookmark It

Hide Sites