Kiplinger Connection
Wall Street Mess • The Economy • Energy

Wall Street Mess: Cash is king (invest if you’ve got it), credit tight.
The Economy: Retail and auto sales both face travails.
Energy: While Southeast gas shortages continue, E85 is available.

Wall Street Mess
In a few months, when the smoke clears on the current financial and legislative turmoil ...
What will be different from a few months ago?

First, a much less leveraged economy.
Cash will be king. There’ll be little financing of speculative building and higher preleasing hurdles. More money up front on merger and acquisition deals. Bigger mortgage down payments. Lower limits on credit cards. Plus higher capital reserves for banks.
And less risk in other ways as well. Borrowers will need squeaky-clean track records. Financial deals at publicly traded firms will be more transparent.

So ... more-modest rewards. Fewer stocks racking up double-digit gains. Slower appreciation of property values. Smaller returns on endowments for universities and nonprofits. Fewer second homes, boats, etc ... more households living within their means.

A feast for bottom-fishers. Investors with cash and the patience for a slow recovery are positioned to make a bundle, snapping up undervalued assets ... businesses, real estate, securities, etc. Even out-of-work talent may be gotten cheap.
Fewer financial firms, as big universal banks swallow up midsize regionals.

More government oversight of financial markets. Better communication and coordination among regulatory agencies. Increased disclosure requirements. A tighter rein on short-selling. Closer supervision of credit rating agencies. And more.
But a revival of private financial firms ... investment banking partnerships and boutique M&A houses, for example. The allure: Minimizing regulatory burdens and filling a need for investors willing and able to take larger risks for larger returns.
Simpler forms of securitizing debt ... plain vanilla ways to spread risk. Secondary markets for mortgages and other assets won’t vanish but will be less exotic.
Greater scrutiny of executive compensation, whether mandated by Congress or not. Shareholders are sure to take on the issue more aggressively in the near term.

Higher taxes and/or a bigger federal deficit as Uncle Sam shoulders the load of Wall Street’s toxic debt. Although eventually the government may make money on the deal, in the short term, the Treasury ... and taxpayers ... will pony up billions.
Higher long-term interest rates. Treasury yields must rise to lure capital, driving up mortgage and corporate bond rates. Short-term rates will slide, though, as the Federal Reserve tries to put banks on solid ground and keep the economy afloat.

It’s a return to past norms, before cheap money inflated asset values, debased lending standards, and encouraged excess risk. Bitter, but needed, medicine.

The Economy
Tightening credit on top of a lousy holiday season will hit retailers hard. Some are likely to default on loans come January. Others will be forced to scrap expansion plans. Three-fourths of credit rating changes so far this year were downgrades. More will follow, despite somewhat stronger balance sheets ... in part due to lower inventories being carried ... heading into the fourth quarter.

More doom and gloom ahead for U.S. automakers, too. Auto sales this year will likely wind up at only around 13.5 million vehicles, down 2.6 million from 2007 and the worst since 1990. They won’t pick up next year, either, given the economy.
Detroit-brand dealers are in for an especially tough slog. They depend on credit extended by the automakers, and makers aren’t in any shape to be lenient. That’s one of the reasons the country’s largest Chevy dealer is calling it quits.
The auto industry’s woes are contagious, infecting advertising and media. Total ad spending by automakers dropped 11.2% in the first half of this year, adding to the steepest decline in ad spending since 2001. Worse, the downward spiral will continue through 2009. Car ads typically account for 12% of total ad spending.

The bloom’s definitely off the self-storage business ... just a 3%-5% increase in square footage both this year and next. That’s half the gain racked up in 2007 ... and much less than 2000-2006 annual gains, a six-year span when space doubled. Part of the decline reflects the maturing industry. But a moribund housing market is taking a toll as well ... housing turnover is the single largest driver of demand.
Rental rates will be mostly flat, maybe dropping a bit in some areas.

Energy
Spot gasoline shortages in the southeastern U.S. are likely to linger ... even after offshore oil production and refineries knocked out of service by Hurricanes Gustav and Ike crank back up in coming weeks. Why? Terminals and gas stations will scramble to refuel, quickly swallowing up available supplies. Around 60% of oil production in the Gulf of Mexico remains shut down.
Doing brisk business: Stations pumping E85 ...15% gasoline, 85% ethanol ... which is readily available. The problem is, few vehicles are equipped to run on it.