Stocks Drop Revealed Peak of `LBO Boom,' Faber Says

Stocks Drop Revealed Peak of `LBO Boom,' Faber Says (Update2)
By Eric Martin and Pimm Fox
July 27 (Bloomberg) -- The evaporation of funds for financing takeovers in the past week signals leveraged buyouts have peaked and U.S. stocks were overvalued, Marc Faber said.
``The LBO was a function of loose monetary policies and excessive credit growth, an environment where borrowing was very easy,'' said Faber, managing director of Marc Faber Ltd. and publisher of The Gloom, Boom & Doom Report. ``The LBO bubble has dispersed. The peak of the LBO boom has been reached. It was long overdue that the market would go down.''
The $1.51 trillion of U.S. mergers and acquisitions this year fueled the Standard & Poor's 500 Index's rally. The Dow Jones Industrial Average and S&P 500, which rose to records last week, fell the most since February yesterday on concern higher borrowing costs will slow mergers and spur defaults.
Funds for leveraged buyouts are drying up, Richard Bernstein, Merrill Lynch & Co.'s chief investment strategist, wrote in a report yesterday.
Narrow credit spreads made it too easy to finance takeovers using debt, said Leon Cooperman, Chief Executive Officer of Omega Advisors Inc., a $6 billion hedge fund.
``It wasn't that stocks were overvalued -- it's that bonds were overvalued and credit spreads were too tight, encouraging this enormous substitution of debt for equity,'' he said in a phone interview.
`Wall Street Event'
``From everything we can tell right now, we think it's a Wall Street event,'' Cooperman said. ``We think Wall Street got too greedy, and they're getting themselves adjusted here. That's our expectation. The risk to our view is the problems on Wall Street spread into Main Street.''
LBOs, where buyers typically use debt backed by a target's assets to finance purchases, were the engine behind the S&P 500's largest second-quarter gain since 2003. The index rose 5.8 percent as M&A increased 77 percent from a year earlier to about $782.6 billion, according to data compiled by Bloomberg.
Investors are showing less willingness to finance deals. Two days ago, Daimler Chrysler AG's Chrysler unit and Alliance Boots Plc, the U.K.'s biggest pharmacy chain, failed to find investors for $20 billion of loans.
Faber told investors to bail out of U.S. stocks a week before the 1987 Black Monday crash, according to his Web site. A Zurich native who learned English while picking potatoes in the U.K. countryside at the age of 13, Faber started his own firm in 1990.
He correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent, the smallest annual rise since 1987. He also told investors to buy gold in 2001, before it more than doubled.
On March 29, Faber said the emergence of home loan concerns meant the stock market was unlikely to benefit from the conditions that supported its rally since June 2006. The S&P 500 climbed 10 percent between then and July 19, when it reached a record. The advance from March 29 has since narrowed to 2.6 percent.
To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net ; Pimm Fox in New York at pfox11@bloomberg.net .
Last Updated: July 27, 2007 21:36 EDT

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