by Andre J. Peschong

With all the recession talk out there, what will be the bright spot in the financial markets this year?  Will we see a return to defensive stocks, a flight to less volatile stocks or aggressive speculation?  Let’s reflect first on 2007.  As one of the worst years for actual number of IPO’s in recent history, the market was somewhat buoyed by large IPO’s such as Blackstone, but other than some very high profile IPO’s in 2007 it was anemic at best.
 
The one real bright spot I saw that has been on the upswing are SPAC’s (Special Purpose Acquisition Corps.)  SPAC’s, aka blank check companies, are a pool of capital raised behind a qualified management team that basically have 18 months to find a worthy candidate to purchase.  These vehicles are all the rage on Wall Street. Why?  Because they are what bankers will be feeding on in terms of fees in 2008.
  
The management of SPAC’s typically have a very high profile background in the respective industry that the SPAC is trying to purchase an operating company in.  Bankers sell the dream of having a world class management team and a pile of money and hopes that a sufficient arbitrage exists to create value to the shareholders.  The upside for investors? They also have a number of safeguards with respect to the capital being at risk:  Safeguard #1: Capital must be deployed typically within 18 months of the offering. Safeguard #2: Only a small amount of capital can be utilized for operations.  Safeguard #3: The rest of the investor’s capital is put into treasuries or the like until an acceptable acquisition candidate can be found. 
Wall Street’s dream scenario: When the transaction closes the investment banks make their fees, regardless of a deal ever occurring.  I believe that we will see a huge surge of SPAC deals in 2008 because of the fee structure for the investment banks. 
 
Election Year/Sub-prime Blowup Market: This is where the bah humbug enters the picture for ‘08.  Election year! This always makes for nervous and shaky markets. Compounded with the already battered outlook created by the sub prime blowup, this leaves everyone guessing (including yours truly) as to the true costs that will ultimately be borne on the financial institutions holding the paper.
 
The write downs have started to flow and the dollar amounts are staggering, almost akin to the Savings & Loan debacle of the late eighties.  The ultimate question really is how much?  The sub prime blow up is not just a national issue it is an international issue.  Major money center banks worldwide own these mortgages in their own portfolios.  The other real issue with the sub prime meltdown is that it affects all aspects of the economy.  The real estate run up of the last ten years put a lot of people to work; created a ton of opportunity and made a lot of money for those riding the wave.  Now that the music has stopped and there are far fewer musical chairs than most thought, the real estate industry is experiencing a major slow down with prices readjusting across the board.  This meltdown will strain the economy greatly with unemployment rising, real estate equity dwindling (which provided a substantial portion of the capital injected into the economy), an extremely weak dollar and to top it off the uncertainty of an election.