TechWeek: Pop Goes the Equity Bubble
The mortgage bubble is bad enough. The specter of thousands of homeowners and their lenders going belly-up after an orgy of subprime lending has Wall Streeters reaching for the Xanax.
Even worse, though, could be a private-equity bubble, warns Eric Gebaide, managing director of Innovation Advisers, a technology-oriented investment bank.
Mortgage brokering and investment banking are very different businesses, of course, but there is a scary parallel. The downfall of many homeowners has been the ability to borrow large amounts of money for very little cash down, with the expectation that rising equity will make the transaction work. But when interest rates rise and selling prices fall, the math gets ugly.
Similarly, some private-equity firms have engaged in their own version of that high-wire act, says Gebaide. Leverage by the purchaser of four or five times EBITA is reasonable. But when that ratio climbs as high or seven or eight times, it gets risky, because the debt has to be serviced while the owners are trying to increase the value of the company.That may work in good times, but a string of bad quarters, whether caused by an economic hiccup or a company-specific issue, can erase the equity the firm has built up.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV