Fortune Magazine
Captain's Blog

Captain's Blog, stardate 8/31/07

Think this market turbulence has come to an end? Think again. Fortune's Andy Serwer on what Wall Street's big shots are saying.

By Andy Serwer, Fortune managing editor

NEW YORK (Fortune) -- MARKET SHOCK 2007: Wow! Talk about coming home to roost! This is the kind of 'dislocation' (love that euphemism!), um, BLOW UP that Warren Buffett et al have been warning about for years. Here's my question: Was this market implosion brought about by problems in the housing sector - specifically and initially in subprime - or was it brought about by rot in the credit derivatives markets? Of course the answer is yes, and yes! Mortgage market went sour and that hit the credit derivatives business like a ton of breaks which slammed into hedge funds and the like which held the paper, which scared the banks, who shut down the lending spigots, which spooked equity investors who first sold off financial stocks and soon enough sold everything. The big outstanding question - STILL - is how bad will this get? Will the capital markets implosion spill into the overall economy, and even cause a recession? No one knows the answer. The market is volatile, yes, but overall the trend for now, as Rik Kirkland said in Fortune recently, not so hot.*

QUOTES FROM THE STREET: Here are some select e-mails I've received over the past few days: Let's start with this one from a hedgie who's been on the right side of some recent trades: "You were wise not to use the title 'After-Shock' in your last installment. This credit mess is far from over and I couldn't be happier about it. SPS closed only @ +1% on the year today to boot!".......This one is SCARY, from a senior credit derivatives analyst at a bulge bracket firm. His response when asked if things were getting better or worse: "Overall I would say worse, may be bottoming out, layoffs are starting to occur among ABS and CDO professionals (structured credit), some smaller ABS deals are getting done at MUCH wider spreads and only at the top of the capital structure BUT the ABS Commercial Paper market is tanking. The problem is that a lot of inventory and positions have not been properly marked (tens of billions) and is being swept under the rug via accounting and/or modeling sleight of hand, synthetic exposure to subprime is going to magnify the problems..." Feelin' all warm and fuzzy? And finally this from a prominent sell side analyst who covers financials: "As you can imagine the summer has been a b__ch." Kinda says it all, doesn't it?

REAL STUFF: All right forget all that drivel! You know what kind of Jones I have about college football, (go SEC!) and well, been hearing a lot about the BAMA, (enuff already!) Also hearing 'bout the Corn Huskers this year and how their new quarterback Sam Keller is going to take them to the promised land. (Like Moses!) The Nebraska/USC game is going to be a MONSTER (9/15)! Big Red might win this one. So here's the question: What's it like to work for a boss who's a Nebraska fan? (tee hee!) Another question from Duke (Boomer Sooner): Why is it so windy in Oklahoma?

LOOSE CHANGE: Wouldn't it be great to do a magazine story on the 20th anniversary of the Crash of 1987?..... Favorite headline of the day: "ITT (Charts, Fortune 500) Wins Air Traffic Control Contract" Gee lucky you!.........Have you heard Aneela? I kinda dig her! She was born in Denmark to an Indian father and an Iranian/Pakistani mother.........*Okay forget Aneela, there are two songs that come to mind when I think of the market now: "At Home He Feels like a Tourist" by the Gang of Four: (lyrics) "Two steps forward. Six steps back." And "One Step Forward and Two Steps Back" by the Desert Rose Band.......Can't wait to see the new western "3:10 to Yuma" next Tuesday night. My pal Terry McDonnell has kindly invited me to it. Hope to run into Peter Fonda at the screening! ......Finally finished "The Perfect Mile," by Neal Bascomb. It's a little much.....Thanks to the Hofman's for spine tingling' boat ride in beautiful Casco Bay.  Top of page