Mortgage meltdown is not root of financial problems

By DAVID MOON, Moon Capital Management
January 13, 2008

Someone once told me he believed there are no coincidences in life. I'm not sure if I believe that or not, but I know what happened this past week was no coincidence.

On the same day that a Knoxville bank was robbed a sixth time by the same baby-faced bandit with black electrical tape on his fingertips, the Dow Jones Industrial Average dipped into what is customarily considered a correction. After dropping more than five percent in the first week of trading this year, the major stock index has now declined more than 10 percent from its high last year.

That move, combined no doubt with some sort of personal subprime tragedy, obviously moved one Knoxville man to make some unauthorized bank withdrawals.

There are plenty of scoundrels on Wall Street, but they usually wear two-thousand-dollar suits to the bank, not sunglasses and hooded sweatshirts on 70-degree days.

The negative investment news this year continues to center on mortgages and residential real estate. Much of the sell-off this week was precipitated by bad news from KB Homes, a homebuilder, and worrisome reports about Countrywide Financial, a lender.

But scores of other companies are using increased default rates on mortgages to explain their own poor performance.

This week, AT&T blamed its poor results on repercussions from the mortgage mess. I understand that people may be less likely to add a bunch of video services to their cable or telephone bills if they're about to lose their houses, but I suspect that Verizon, Comcast and DISH also have a little to do with AT&T's woes.

One of my favorite recent blame-game examples was from Office Depot, the office-supply giant. In early December the company lowered its revenues and earnings projections for the fourth quarter. The stock price declined 9.8 percent in a single day, after falling by 50 percent in six months.

According to the company, what is responsible for these problems?

The real estate market.

That's right. Office Depot wants you to believe that people aren't buying as much copy paper and pencils because the interest rates on their adjustable-rate mortgages are about to increase.

It reminds me of the retail stores that always blame poor results on the weather. The porridge is always either too hot or too cold.

The problems in the real estate market are real. Lenders, borrowers and brokers have all been irresponsible ' and those actions are coming to light.

Downturns in asset classes happen. They happen in stocks, bonds, baseball cards and cattle. Real estate is no different.

But these natural real estate problems are not the root of all financial problems. Subprime mortgages did not cause global warming or send Britney Spears off the deep end. It did not cause a conniving would-be Willie Sutton to dress like the Unabomber and rob a bunch of Knoxville banks.

Some stocks are being punished by investors for mistakenly being identified with the mortgage meltdown. Others are using the mess as a convenient excuse for their own unassociated woes.

Don't confuse the two.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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