The Dow Jones industrial average declined 243 points (1.97%) today - the largest decline since Feb 27th (albeit not the longest span of time ever). In any case, this is one nice peice of bad news since the Chinese stock market rattled global investors last week. A consensus among analysts, and the business press (atleast the Economist anyhow) seems to be that most firms and OECD nations economic outlook is modest for 2007 (compared to 2006's robust growth rates).
Nonetheless, some firms are going to be negatively affected by increasing receivables management problems because of the subprime sector. As the Wall Street Journal noted "tax- preparation giant H&R Block Inc. said it wouldn't be able to file its third-quarter financial statement on time, citing its need to account for "rapidly declining loan values" at its subprime-lending subsidiary." From an accounting perspective, this must be a nightmare indeed. Proper valuation and receivables expectations are difficult for many firms. How risky are risky loans? What percentage of bad debt loss should be calculated in advance? These types of calculations are notoriously vulnerable to accountants inability to find accurate crystal balls, and therefore anticipate future economic events which may drastically affect their expectations.
That said, it may well be that many firms are not following the conservatism accounting principle as much as they should if they are having to vigorously downgrade receivables expectations for a loan sector that is, by definition, at higher risk of default. Some firms though, are bullish on this kind of news. With more risk-averse firms fleeing the market, all the better to seize the opportunity to buy up sub-prime market share at cheap prices and huge upside potential.
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