Juggling Dynamite

The US Economy:  First quarter growth was the weakest in 4 years at  just .015% for Q1.  Comparing this to 5.6% growth of Q1 2006 even extreme optimists must acknowledge that the economy was slowing significantly heading into the second quarter.

A jump in consumer spending last quarter was one of the few things that kept the expansion alive. The increase in spending, which accounts for about 70 percent of the economy, was revised up to an annual rate of 4.4 percent, the biggest gain in a year, from an initial estimate of 3.8 percent.

Comment:  the sub-prime crunch bubbled to the fore late in Q1 in March 2007.  How long can we expect the consumer to pull the economic cart with tighter lending standards, higher interest rates, falling home prices, and rising gas costs in Q2?

The May 9 FOMC meeting minutes released today confirm that the housing sector is slowing more than the US Federal Reserve had previously anticipated:  See Bloomberg: Fed sees housing dampening growth longer than expected (update 3): “The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year,'' the Fed said in minutes of the May 9 Federal Open Market Committee meeting released in Washington. That assessment was “somewhat longer than previously expected,'' the Fed said.  At the same time they reiterated that persistent inflation remains the biggest risk that must abate meaningfully before any monetary easing can be contemplated.

The Wall Street Journal ran a story May 29 on present sentiment in the private equity space.  Private Equity:  Is deal frenzy nearing end? quotes several principles of large private equity firms sounding caution.  Timothy Collins, CEO of Ripplewood Holdings LLC calls the current conditions a bubble that would end badly.  David Rubenstein of Carlyle Group warned “Greed has taken over.  Nobody fears failure.”

Other mid-market firms are saying its a better time to sell than buy at recent multiples.  The same article quotes Michael Psaros of KPS Capital Partners:  “This economy is not going to get better, especially for manufacturing and industrial companies.  We are selling everything that isn't nailed to the floor at prices that are between stunning and inconceivable.”  Risks have been magnified by sloshing liquidity in recent years that has thrown money on targets in buckets.  Prices paid have been obscenely high.  “Almost everything can go wrong now,” said David Bonderman, co-founder of TPG.