Market Brief

There is little doubt that we are in unprecedented times.  The complicated web of mortgage backed securities and collateralized debt obligations has weaved its way throughout the global financial markets and the underlying economy.  As a result, we have seen equities markets continue to slide.  With all major indices down almost 20% this year, investors are looking anywhere short of their mattress to stash their money.

Economic fundamentals are cracking under the weight of the financial crisis, showing how pervasive the issues truly are.  However, it helps to look at the underlying data to see a silver lining.  Headline unemployment has jumped to 6.1%, which is the highest is has been since August of 2003, which was the tempering of a run on post-September 11^th unemployment that had risen to 6.3% in June of 2003.  While this is significantly higher than 5.0% median unemployment rate since 2000, it helps to look at the perspective that unemployment has seen a median of 5.5% since WWII.  Further, exports are supporting real GDP, which rose at an annual rate of 2.1% on the second quarter, as opposed to the negligible 0.9% rise in the previous quarter and a shrinking economy in the last quarter of 2007.  Finally, corporate profits have dipped by 4% in the second quarter, though they are still slightly up 1% when looking at a longer term three-year compound annual growth rate. 

Digging deeper into the corporate profit data, there is significant growth in certain segments of the economy.  Four segments have posted significant gains in profits in the last quarter: chemical products, utilities, wholesale trade and food and beverage and tobacco products.  These segments grew at a rate of 30%, 23%, 21%, and 18% respectively.

The Federal Reserve previously left the benchmark rate unchanged, though it has clearly been moving to increase liquidity in the market through the “bailout” bill and other actions.  It has more than doubled its currency swaps with foreign central banks from $290 billion to $620 billion.  Further, the Federal Reserve’s emergency lending program, the Term Auction Facility, has tripled from $150 billion to $450 billion.  These unprecedented moves to flood the markets with liquidity will hopefully assist in restoring confidence in the credit markets and get the flow of money going once again.

Deal Overview

The healthcare sector has seen ongoing transactional activity even in the face of the tough financial markets.  However, some target companies and their shareholders have been unreceptive to bids, perhaps pointing to a valuation gap as buyers look to take advantage of depressed valuations. The ongoing saga between Carl Icahn’s ImClone and Bristol-Myers Squibb continues to play itself out, with the most recent development an increase in Bristol-Myers’ bid for ImClone to $62 per share, valuing the company at $4.7 billion.  In response, Icahn called the offer “absurd” and claimed the phantom $70 per share bidder would be revealed on Wednesday with or without an offer from said bidder.