the visible hand

it is the theory which decides what can be observed – einstein

Stocks Drop Revealed Peak of ‘LBO Boom’

Posted by ecoshift on July 27, 2007

The Dow is down over 700 points this week to 13,265 from the 14k peak last week. It looks like tightening credit spreading from subprime to alt A and now to corporate debt has well and truly spooked investors.

Today Treasury Secretary Paulson assured us all that the economy is “moving toward sustained growth” while the market continued to drop over 200 points directly on the heels of yesterday’s 300 point fall — despite this week’s upbeat of 2nd quarter growth report showing GDP up to 3.4% from the previous quarter’s 0.7%.

Charles Biderman insists that this is merely “a complete panic by individual investors, they just don’t know what’s going on”.

(I can see Dustin Hoffman saying: “You think that’s something, that’s nothin'”.)

Others are more sanguine about the current correction. While Faber (below) may regret his attempt to call the top, Monday should be interesting. Worldwide
Stocks Drop Revealed Peak of `LBO Boom,’ Faber Says

By Eric Martin and Pimm Fox

July 27 (Bloomberg) — The evaporation of funds for financing takeovers in the past week signals leveraged buyouts have peaked and U.S. stocks were overvalued, Marc Faber said.

“The LBO was a function of loose monetary policies and excessive credit growth, an environment where borrowing was very easy,” said Faber, managing director of Marc Faber Ltd. and publisher of The Gloom, Boom & Doom Report. “The LBO bubble has dispersed. The peak of the LBO boom has been reached. It was long overdue that the market would go down.”

The $1.51 trillion of U.S. mergers and acquisitions this year fueled the Standard & Poor’s 500 Index’s rally. The Dow Jones Industrial Average and S&P 500, which rose to records last week, fell the most since February yesterday on concern higher borrowing costs will slow mergers and spur defaults.

Funds for leveraged buyouts are drying up, Richard Bernstein, Merrill Lynch & Co.’s chief investment strategist, wrote in a report yesterday.


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