Remind me to take every other Tuesday off. Two weeks after the financial meltdown in Asia triggered a 3.5% drop in the S&P 500, the markets took another 2% hit yesterday. Or, as any dedicated worrywart would proclaim, the S&P 500 is now 28.65 points closer to zero.
I don't mean to belittle the dip. Most of us are a little poorer on paper than we were a day ago. However, let's put this in its proper perspective. Yesterday's decline brought us all the way down to levels last seen ... ummm, well, five trading days ago.
In the subprime of our lives
What was at the root of yesterday's step down? Most of last night's reports were pegging the deflation to the ugly demise of subprime lenders. Even though you probably thought that sector had already become everyone's favorite pinata, there's apparently still a little candy in there waiting to rattle out. Accredited Home Lenders (NASDAQ:LEND) was the market's biggest loser -- it took a 65% freefall -- after warning of a cash crunch that could place it in the same dire straits with many of its risky loan applicants.
NovaStar Financial (NYSE:NFI) was another big loser in the subprime space, off a chunky 19% yesterday. Or, as our resident worrywart would proclaim, the thrill-seeking mortgage REIT is now 81 pennies closer to zero.
So why are you waking up all bruised this morning, even if you never bought into companies providing exotic mortgage products with corporate monikers that sound like 1980s hair-metal bands? Or am I the only one who saw New Century open for NovaStar in my sophomore year of high school?
Well, that bruise is a reminder that we don't live in a vacuum. You may as well have a tattoo artist turn that bruise into permanent artwork. No matter what slick marketing campaign you may have seen, the sexy whisper of "what happens in subprime, stays in subprime" is bunk. Defaults among borrowers and bankruptcies among lenders create a ripple. It's not just a matter of thinking twice before shelling out loan money to a shady credit risk on Prosper.com. If a condo flipper is swamped trying to come up with this month's installment payment on that "zero-down" mortgage that seemed like such a smashing idea two years ago, how much longer can he keep that subscription to Sirius Satellite Radio (NASDAQ:SIRI) going? Maybe he should cancel that trek out to Applebee's (NASDAQ:APPB) for dinner this weekend, too.
See how it works? It also doesn't help that Sirius is already expecting to sign fewer new subscribers than it did last year, or that Applebee's -- like many of its casual-dining peers -- suffered a 4% dip in comps last month.
We're all connected in some sick, twisted game. You've heard of Six Degrees of Kevin Bacon? Welcome to Six Degrees of Subprime Lending.
It's raining Zen
These things work in mysterious ways, though. Payday lenders would appear to live and die by the riskiest lot of paycheck-to-paycheck borrowers, yet some investors see the niche as a recession-resistant haven. You actually had QC Holdings (NASDAQ:QCCO) close out the day in the black yesterday, while leaders such as First Cash (NASDAQ:FCFS) and Advance America (NYSE:AEA) wound up shedding less than the market averages.
This doesn't mean that some eclectic sector rotation is the driest course through the deluge. Your stocks probably aren't broken, just your conviction. Allow me to be your umbrella. Just take a step back and adopt a more panoramic view.
March 13, 2007, was ugly, but let's see where the market was on that date over the past few years.
|
Date |
S&P 500 |
One Year Later |
|---|---|---|
|
3/13/07 |
1,377.95 |
? |
|
3/13/06 |
1,284.13 |
7.3% |
|
3/13/05 |
1,200.08 |
7.0% |
|
3/13/04 |
1,120.57 |
7.1% |
|
3/13/03 |
831.90 |
34.7% |
Now, I'm not predicting another 7% uptick between now and March 13, 2008. I meant what I said about the subprime-ripple sundae. However, as long as companies on the whole keep growing their bottom lines, share prices will eventually follow. That is, of course, if they aren't richly overvalued in the first place. That's just not the case this time, though. The S&P 500 is trading at a reasonable 17 times earnings. The index was fetching 18 times earnings a year ago. Corporate profits grew at a quicker clip than the index advanced. I like that. You should, too.
So are we 28.65 points closer to zero? Sure. But we're also 28.65 points closer to where we were on Monday.
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Longtime Fool contributor Rick Munarriz would like to coin the phrase "what happens in subprime, stays in subprime," but it's a trick coin. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
