Greenspan blames fear for today’s market, SEC launches sub-prime investigation and China sets another record

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2007 mirrors worst recessions, fear driving today’s markets: Alan Greenspan

Eli Hoffman, writing for the Seeking Alpha Market Overview Blog, posted a series of comments made Thursday night by former Federal Reserve Chairman Alan Greenspan. Speaking to a group of economists in Washington D.C, Greenspan compared current market behavior to conditions that preceded several of the biggest stock market crashes of the past century. Greenspan stated “the behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907.

Hoffman explained Greenspan’s theory that market expansion is driven by euphoria while “contraction is driven by fear.” According to the post, Greenspan told the economists that “the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria.”

In his speech, Greenspan stated “euphoria-lead economic bubbles can not be remedied by Fed interest rate hikes,” while noting that this is nothing new, “The human race has never found a way to confront bubbles.”

Regulators approve largest stock sale in Chinese history

It was reported, earlier this week, that the massive glut of IPO activity in China was outpacing demand. Today, the Chinese government effectively decided not to step in with regulatory action as Chinese securities regulators approved the initial public offering of China Construction Bank. A post from the New York Times Dealbook blog, edited by Andrew Russ Sorkin, provided some additional details about the approval.



The post revealed that the IPO could “raise up to $7.4 billion, in what will be the mainland’s largest stock sale.” According to the post, China Construction Bank (or C.C.B. as it is known) is known as “the country’s second-largest lender by assets, will list 9 billion local-currency A shares in Shanghai in late September, regulators said.”



Within the next several weeks, numerous high profile state-owned assets will be floating additional shares on the mainland stock exchange. The companies include PetroChina Company, China Shenhua Energy, China Mobile and the Bank of Beijing.

SEC investigating rating agencies over lax sub-prime standards

The Securities and Exchange Commission have begun investigating the activities of three ratings agencies involved in the approval of sub-prime loans. According to a post in 24/7 Wall Street, a widely read business blog, Moody's, Standard & Poor's and Fitch are all targets of the investigation. Douglas A McIntyre, the author of the post, was adamant that this type of investigation has destroyed established companies in the past and could definitely do so again. He declared, “It was not that many years ago that a slew of investigations almost ruined the big players in the accounting industry. Arthur Andersen disappeared under the weight of a Justice Department investigation.”

The basic assertion is that as more sub-prime loans were approved, the stock prices and profit margins of these companies rose dramatically. The SEC is interested in finding out whether the companies relaxed approval standards in order to keep their stock price surging. McIntyre declares “the smoking gun is that.... from 2003 to 2006, the growth in the mortgage market helped Moody's stock price triple, while its profit climbed 27% a year on average"

McIntyre's post was positive that many investors are still wondering where to affix blame for the sub-prime debacle. “The sub-prime debacle needs a scapegoat or two. Billions of dollars are likely to be lost, Investors want to know why there were no storm flags up until it was too late.” McIntyre also wondered “how could Moody's and its competitors have gotten it so wrong?” At the end of the day, it seemed as though things will get worse for these companies before they get better. “The problem is potentially a very big one, and it has no ready solution.”

Dramatic increase in Cleantech Investing

A recent post in the SmartCool Blog, an expert blog written by Dave Klecha devoted to green building news and cleantech investing, reported a dramatic increase in venture financing for Cleantech companies. “The Cleantech Network report indicates that cleantech investment rose 70% to US$ 3.9 billion in 2006, putting an exclamation point on a long streak of consecutive quarters of increased investment.”

The post quotes Vinod Khosla, a high profile venture capitalist, saying that he believes solar power to be a big investment opportunity, “solar thermal is poised right now to make a significant difference in the balance of power generation throughout North America.” Additionally, Klecha points to the emergence of nanotech as a leading cause for excitement within the Cleantech investment circle. Klecha also quoted noted venture capitalist Ira Ehrenpreis stating that “many of the factors driving interest in cleantech today are unprecedented, and could lead to a dramatic explosion in financial interest in the sector.” Ehrenpreis was adamant that Cleantech should not be considered an investment bubble and Klecha concurred by stating that “the sector is far-ranging and growing by the day, with more and more people waking up the realties of needing to live in a greener world.”

This latest trend of Cleantech as hot investment commodity comes as no surprise to Klecha, he said that “there is quite a healthy outlook, and it could grow into an economic driver in much the same way as information technology has over the past thirty years.”

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