Signs of contagion in the US housing downturn
By the end of last week, any lingering hope that the housing downturn in the United States would be contained had vanished. As this week begins, signs of contagion seem to be everywhere.
Unnerved by mounting losses in mortgage-related investments, investors have started to shun tens of billions of dollars in corporate debt offers as well - and seem likely to go on doing so for months to come. That would stanch the flow of easy money that has fueled the leveraged buyout boom, which would, in turn, expose the extent to which stocks have also come to depend on cheap credit.
Stocks took a dive last week because debt-driven buyouts had long boosted the share prices of targeted companies. Stocks have also benefited directly from easy money because public companies have borrowed heavily to buy back their own stock, a ploy to drive up earnings per share.
The fallout of housing-related turmoil is also likely to extend beyond financial markets. Among the deals that faltered last week were the $7.4 billion buyout of the Chrysler Group and the $5.6 billion purchase of the Allison Transmission unit of General Motors. Unless investor capital is forthcoming, it could become increasingly difficult for the automakers to avoid bankruptcy. At the same time, the housing slump has also driven down analysts’ monthly forecasts for car and truck sales to levels not seen in nearly a decade.