Down went the Dow Jones yesterday, falling to a level which is now 20 per cent below last October’s high. Down went shares in GM, the world’s largest automobile manufacturer yesterday, with the share price falling to its lowest level since 1954. Down went shares in Marks and Spencer yesterday, falling 25 per cent. Down went shares in Taylor Wimpey, Britain’s largest builder, falling 45 per cent.
The falls follow recent sell-offs in Asia, which have seen the Chinese and Indian bubbles, apparently burst.
It was yet another day of carnage.
For Taylor Wimpey, the problem lies in its ability to raise money. It wants £½ billion. Yesterday, its plans were supposed to be announced. But, when it asked its shareholders to look into their piggy banks to dish out more money, the piggy bank was empty.
“However,” went a Taylor Wimpey statement, ”in light of current market conditions we have not been able to conclude a satisfactory transaction.”
So it’s off to the bank to tap them for some more money, while they look around for some more ideas. “We think that we’ve got the time and options to complete the capital raising in the near future,” said Pete Redfern CEO at the company… “We don’t rule out any funding options,” he added.
The problem right now is this. It is still profitable to build; house prices would need to fall an awful lot more before the price of homes is lower than the cost of building them. The snag is the cost of land. The builders have already bought the land, and perhaps paid over the top for it. They could build and sell properties, and boost their cash flow, but that would play havoc with their balance sheets. It would also mean a rise in supply, and that would prompt a full blown property market crash too.
The banks, presumably, are aware of this. So they must, surely, give the likes of Taylor Wimpey all the support they ask for. If they don’t, well, let’s put it this way. If the UK’s builders went bust, some investors, sovereign wealth funds most likely, will buy the land on the cheap, and will start building, prices will fall to a level that makes buying attractive to first time buyers. This will leave many bank’s customers with negative equity, meaning banks will find less of their loans are covered by securities, prompting further big write-downs, making them reluctant to lend. You can see the downward spiral, that will follow. The banks dare not let builders fail.
As for Marks, well, Stuart Rose set the alarms ringing when he talked of “stormy times ahead.” As was told here yesterday, like-for-like sales at the retailer were down 5.3 per cent over the last three months, and analysts didn’t like the sound of that at all. Shares fell 78p to 240p.
Incidentally, the Marks and Spencer share price is now less than a third of the price it hit during the first half of last year.
When Philip Green made his offer for Marks, he was wiling to fork out 400p, and initially he was willing to pay cash. Sir Stuart has done a wonderful job for Marks, and maybe the brand is stronger today than it would have been under Green. Maybe if Green really had forked out all that money, he would now be regretting it. But, to be quite mercenary about it, right now it seems shareholders would have been better off selling.
There are no prizes for guessing the main reason why GM is doing so badly. The high price of oil has hit auto sales in the US hard, and GM was far too slow to read the signs. Far too slow to ditch the pick up trucks and SUVs and go for fuel economy. GM, like the other two big US car makers, Ford and Chrysler, has its fair share of structural problems too of course. There are pension commitments, and massive disagreements with trade unions who want to cling to the agreements made in happier days.
But then yesterday, Merrill Lynch didn’t help much it when it put out a note saying the company may need to raise $15bn to shore up its balance sheet, or bankruptcy was “not impossible”.
Funnily enough, GM did better in June than analysts had expected. Sales fell, but not as much as feared, and for once, Toyota saw even bigger falls. Ford and Chrysler outdid it too.
But then, Toyota’s falling sales were in part due to a shortage of hybrid cars, so that’s fixable. The ‘Detroit’ three, on the other hand, seem to be battling against the tide.
As for the Dow, it fell to 11,215, meaning over the last week it has lost nearly 600 points. It is around 1,800 points down from the start-of-year position, and 2,948 points down from its all-time high set last October. It is also 506 points below the pre-dotcom crash peak.
But frankly, the real puzzle with the Dow is not so much why it has fallen so far, but why did it rise so high in the first place. It was quite early in 2007 that Alan Greenspan warned of a one-in-three chance of a US recession, yet from the time he made that comment, the Dow just soared.
Last October, he said: “The world has gone mad. Everywhere you look you see valuations that suggest insanity has become endemic amongst the world’s traders. Whether it’s oil, property or shares, prices just seem to keep going through the roof. And, as every investor will tell you, what goes up must come down, so presumably it will all go pop.”
“Take the US. Of late,” we said, “the country’s biggest export seems to have become woe, and yet markets continue to flirt with all-time highs.”
Some people blame the media for the current crisis, saying the media has talked up the gloom. That is not true. The problem was lack of realism in the first place.
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