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Captain's Blog

Captain's Blog, stardate 7/30/07

Why did smaller stocks have a harder fall last week? Plus: What to read, from Fortune managing editor Andy Serwer.

By Andy Serwer, Fortune managing editor

NEW YORK (Fortune) -- MARKETS: Comes the turn. It appears as if the long-anticipated deflating of the bubble and end of the bull market arrived last week. Only a few are popping champagne corks. ("In the United States today, we have more than our share of the nattering nabobs of negativism." - Spiro T. Agnew) For a quick review, here are the numbers: Last week, the Dow fell 4.23 percent, the S&P 4.66 percent, the NAZ 4.9 percent, and most interesting: The Russell 2000 dropped 7.01 percent and is now down 1.25 percent for the year. (The Russell 2000 includes the smallest 2000 securities in the Russell 3000.)

The point here is that smaller, some would say riskier, stocks took it much more on the chinny, chin, chin, than their bigger brethren. What happened? Well, yes rates went up, but rates have been climbing for months. What happened was FEAR. Credit dried up, particularly for leveraged transactions. And when that happens, watch out. Of course we've seen this before: Back in February, when China hiccupped. Or back in 2005, when it looked like the buyout for SunGard might be tough to digest (it wasn't).

Michael Perelman, who teaches economics at California State University, Chico, points out that SunGard is less risky than deals being done now. "Behavior during bubbles resembles that of young children, testing boundaries of what is permissible. When the parent is too permissive, trouble is fairly certain," he writes. Look at one key measure: total debt to cash flow. Perelman notes that KKR's deal for First Data is expected to be around 10 [times], vs. 7 for SunGard. If fear takes hold this could make for some tough sledding, and if she seizes up real good (as we used to say Downeast), the party is over....

Another interesting one: Met a young guy recently who was doing real estate transactions in emerging markets (BRIC - Brazil, Russia, India, China) for a giant U.S. insurance company. He told me that when he was bidding on buildings in Brazil five years ago, there used to just him and maybe just a couple other parties competing. Today there are a dozen or more, including in at least one case a retirement fund for Canadian teachers that has decided to forgo investing in funds and buy directly into these deals. (You could probably lose either way....)

THE CITI SOMETIMES SLEEPS: Note to Chuck Prince - Your integration of Citi retail and Smith Barney is NOT, in my case, working. Used to be able to sell my SB money market account shares online and move proceeds into my Citi bank account. No more. Now I have to call a broker. Good-byed that account but quick!

MUSIC: Been listening to Ryan Adams a whole lot lately, and there ain't nothing wrong with that! He's a young genius (me and Elton John agree on that) who's been around for a while now. I think his latest, "Easy Tiger" is just fine. "Two" is a wonderful song.... How about someone a bit less known, but also extremely talented: Jonah Smith and his band. . This man has SOUL, a great voice, great songwriter too. We at Fortune were fortunate enough to have him play at our 'strategic off-site' (read summer par-tay) recently, and he was great. Thanks Wendy Martin!

BOOKS: Books? BOOKS, you ask?? Well, I'm only reading the be-all to end-all. CNN's own Jack Cafferty has an opus coming out soon, and someone slipped the ol' Cap'n an advance copy! The title is: "It's Getting Ugly Out There." How do I like it? Tar-NATION! I totally dig it!! Zippin' right thru it... The book is available for pre-order at Amazon, so sign up SCHNELL! (Now of course a disclaimer: Jack and I had a great deal of fun over the past half decade skewering weasels, mutants, cretins, maroons and occasionally having fun with some good folk too (we mean you Kinky Friedman!). And of course more Jack than me.) I get a big kick out of Jack (believe me, in person he is the exact same hombre he is one air, just a little less PG-13, if you follow). Jack's book is terrific. No one has more zingers, but Jack also has a great personal story. Great job Jack. Congratulations! Keep on tellin' like it is!

Loose change

Wouldn't it be cool if someone did a story about the credit rating agencies? (Actually Fortune already has, or at least the interesting parts.) What about a story on Mark Singer, a former Smith Barney investment adviser from the Philadelphia area, who the state of Tennessee has charged with aiding some funeral home owners steal money from pre-paid funerals? (Singer - who is not the writer for the New Yorker - has pleaded not guilty.)... Or how about a story on Cerberus?!?!?...

You know how much I love Ozwald Boateng, right? (Me, Will Smith, Laurence Fishburne, Jamie Foxx, Samuel L. Jackson, etc... tee hee) Hard to buy Boateng in the U.S., though. Well, I just saw this in Wiki: "On June 22, 2006, the Sundance Channel began airing a reality television series called House of Boateng which follows Boateng's efforts to launch his Bespoke Couture line in the United States." Has anyone seen it?!?!?... Was in Maine recently. Rainiest summer in 113 years. So lush up there though. Rosehips are beautiful. For the Rosehips!... Great. Missed the Moxie Festival, (yucko!)... Have you ever visited the store 'Midnight Farm' on Martha's Vineyard, co-owned by Carly Simon? Looks nice! Carly just turned 62 by the way, can you believe it? Well, you might be getting' older yourself!...

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