Tuesday, August 14, 2007

What the Credit Crunch Looks Like On the Inside

Jeff Matthews
Monday, August 13, 2007
What’s Happening at Barclay’s?



It began innocently enough.

A few odd stocks started collapsing—falling really hard for two or three or four days in a row—on no apparent news.

The first such stock I noticed was Teleflex (TFX), a fine, New York Stock Exchange-listed industrial conglomerate whose share price hit a 52-week high of $85 one fine day in July, and then dropped almost 25 points in the next two weeks on absolutely no news.

Now, Teleflex happens to be buying a medical products company called Arrow International, with which I am quite familiar.

And reasonable people might argue that Teleflex is paying an exorbitant price for Arrow, given the fact that Arrow’s core product line (something called central venous catheters—basically fancy straws that allow doctors to inject fluids into the body) are losing share to other types of catheters, thus calling into question Arrow’s ability to grow revenue in line with other medical products companies.

Furthermore, Teleflex plans to sell one of its existing businesses to help fund the Arrow transaction. Given the seize-up in the credit markets and the swift reduction in the number of private equity firms able to buy businesses on margin the way people used to buy houses in Orlando, Vegas and Sacramento, reasonable people might worry that Teleflex will get a less-than-super price for its existing business.

Thus, the market might be spooked into thinking that Teleflex was buying high and selling low, simultaneously.

At least, that was my best guess as to why shares of Teleflex had begun to crater.

But along came more Teleflexes—stocks suddenly dropping as though somebody’s life depended on it.

Ashland, Computer Sciences, Office Depot, CIT and Robert Half, among others, all experienced sudden, sharp drops under relentless selling pressure—most of them on absolutely no new news.

Sure, Office Depot had missed earnings, and yes Computer Sciences had been juiced upwards on private equity takeover speculation. But the decline in these and the others was quite sudden, in tandem and without let-up.

What on earth, then would a chemical company have in common with a high-tech computer services outfit, an office products retailer, a finance company, a headhunter and a diversified conglomerate?

In every case, their single largest publicly disclosed investor is identified as Barclay’s Bank.

Now, Barclay’s is as big as a bank can get—a little volatility in the credit markets is not likely going to cause a problem leading to the wholesale liquidation of assets, and certainly not assets that presumably belong to investors in Barclay’s equity funds, not the bank itself.

Still, Barclay’s is seeking to buy ABN Amro for what is widely considered to be a ridiculous price. And it would appear that Barclay’s has been selling stocks out of its funds in a get-me-out fashion.

Is it all an innocent coincidence, or is it one of the following:

1) Some trader on Barclay’s equities desk hit the wrong button on their computer;
2) The portfolio managers at Barclay’s all decided to sell stocks they had owned in size for a long time into a weak tape.
3) Something else is going on at Barclay’s that hasn’t come to light.

I’m willing to bet the answer is Number 3.

Any informed observations would be most welcome.

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