The Day After

August 24, 2007

The Day After

By Brent Felgner
Bank of America has made an investment in Countrywide Financial, the country’s largest mortgage lender that laid off employees last week and reportedly dipped into its credit facility to buck up liquidity. That’s a big vote of confidence for housing and credit markets, which need all the good news they can find.

It’s also one more in a string of contradictions — much like the see-saw volatility we’ve seen lately in the stock markets. Construction credit has tightened, dealmakers are backing off M&As and IPOs and, surprise, hedge funds and other private equity are taking big hits.

So, what of the soft home business? The industry-centric wisdom used to be that when the economy tanked, curtains and drapes, sheets and towels did just fine, thank you. The equation was something like: If consumers hold off buying a $500,000 home, or making a $50,000 renovation, they are more likely to spend $500 to spruce up their bathroom and bedroom with home textiles.

Maybe. It seems perfectly reasonable.  But it’s difficult to tell if that was ever actually true or simply a self-adjusting sales pitch for the benefit of nervous retail buyers (and a bit of spin for reporters). Sunshine and blue skies—always.

The thing is, this time some ht executives are abandoning that refrain. One confided, “This is the scariest drop in the retail home business I’ve seen in 15 years.” Is it simple hyperbole or is the sky really falling? Others reacted to his statement as a bit over the top, although they acknowledged that this time does seem different and, at a minimum, concerning.

The alternative wisdom suggests that home textiles, along with housing, is six months or so ahead of the rest of the economy — it’s a leading indicator. So, when it tanks, look out. The bright spot: It leads the rest of the economy out of the doldrums on the other side.

Whatever. This downturn is likely to carry implications far beyond mere product marketing. Just consider the number of ht companies quietly on the block right now. It may not be a great time to sell a long-lived asset. Conversely, it may the best time to buy one. The Perfect Zen of it all.

The not-so-perfect side is the number of companies that are heavily into the "shies"—who in a search for operating cash, probably made some regrettable decisions about debt and its terms.

Frankly, it’s difficult not to think about the companies that won’t be sold — that won’t survive to see the other side of this cycle.

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Tough times, conservative designs. A flight to safety. That seemed to be one theme emerging from market: Retailers, more than ever, were looking for old reliables, even more than new fashionable winners. True?

Next: Fallout from the China Syndrome