kiplinger connection
Finance • Shipping • Small Business

Finance: Debt-laden buyouts: a new Wild West could go south.
Shipping: Bottlenecks could make materials prices soar again.
Small Business: Assistance in the offing for energy efficiency.

Finance
In today’s financial markets:
There’s a smell of the Wild West...
And leverage is the wagon train.
The liberal use of debt is worrisome, leaving the financial markets and the economy open to unpredictable but inevitable shocks ... a disruption in oil supplies, a sharp hike in interest rates, the failure of a big merger.

Staggering increases tell the story. A third of mergers and acquisitions in 2007 will be financed through leveraged buyouts. In 2000, 4% were. Acquired firms are loaded up with debt: $317 billion in 2006, six times more than in 2002. Hedge funds borrowed eight times more money in 2006 as in 2002: $1.46 trillion. Collateralized debt obligations (CDOs) ... bundled packages of junk bonds, subprime loans and so on ... will be about $475 billion in 2007.

Government regulators can’t keep up. Credit instruments have become so diverse and so complex, it’s impossible to know exactly who owes what to whom.
Overseers fret about excesses but fear doing more harm than good with a crackdown, spooking investors and triggering a rush to the exits. Also, they recognize that the credit changes fueling the debt explosion deliver benefits as well ... more homeownership, greater business efficiency, and increased trade ... by dispersing risk and blunting a default’s impact.
So they’ll continue to simply coax and coach, urging hedge funds and financial firms to have cash cushions large enough to absorb losses and to make sure risks are balanced and positions can withstand stress.

Recently, the heavily leveraged system has begun to be tested with a series of subprime mortgage defaults and associated fund and company failures.
There are early signs of a market adjustment.
Risk spreads are widening as investors demand that iffier credit prospects pay higher yields.
And hedge fund returns are likely to flatten.

Meanwhile, it’s a time to exercise caution, sticking with high-quality bonds and equities.
Consider taking some gains and building cash to take advantage of buying opportunities in the next market correction, whenever it comes.

Shipping
A perfect storm in shipping will make for an ugly 2008.
Expect big bottlenecks and price hikes similar to 2004 and 2005, when a surge in imports overwhelmed truckers and made firms wait weeks.
Worker shortages will affect sea- and airports, trucking firms, and railroads. Federal rules requiring background checks for employees are set to take effect next year, and many applicants won’t pass. Trucking firms, which rely heavily on immigrants, may be hit hardest.
Calif.’s planned clean air regs will also hurt, creating problems at Los Angeles/Long Beach ports, the U.S.’ biggest import-export hub. Harbor firms will have to trade old trucks for new ones, and many can’t.
And a more robust U.S. economy will add to surging demand.

Consider locking in rates through long-term shipping contracts or switching from Calif. ports to those on the Gulf or Atlantic coasts.
One consolation: No problem this year. The late-summer peak time, when shippers get ready for Christmas, will go as smoothly as last year.

Small Business
Small businesses will get some federal help on the energy front. Legislation moving through Congress to promote alternative fuels and spur efficiency includes special incentives for green-minded smalls.
More low-interest loans for energy efficient systems are coming. Utilities will put up the money, with 90% guaranteed by the government. Smalls doing energy research will also be given priority for grants under the government’s Small Business Innovation Research program.
Also look for free energy audits and online energy saving tips.