Friday 14 September 2007

As Fear Grips the Market, Bargains Appear or Are They Bargains?

This morning, shares of Northern Rock (Ticker LSE: NRK), one of the biggest home mortgage lenders in the UK (18.9% of the market according to the BBC) are down 24%. That's on the day only. The 12 month decline is 41%, all of it since March this year. The company is caught in the crosswinds of the mortgage lending squeeze, though it has itself no direct connection with any of the sub-prime mortgages in the USA. Is this one of those bargains we dream about, a solid company whose shares are dragged down by external events and which will recover when the storm passes? Check out BBC reporter Robert Peston's blog posts on NRK and why central banks are bailing out commercial banks and the comments, many of which suggest NRK has its own UK sub-prime mortgage over-lending.

Is the UK government likely to allow a company with that proportion of the market to fail, especially a company that deals primarily with consumers i.e. voters? (reminds me of the old saying, if you owe the government a million dollars and can't pay, then you're in trouble, but if you owe the government a billion dollars and can't pay, then the government's in trouble). The Aug. 20 post provides a good explanation of how the US sub-prime mess has spilled into Europe.

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