Home Depot is getting squeezed at both ends. The fortunes of the giant retail chain have always been tightly coupled to the health of the housing sector, so the bust has been an ongoing adverse headwind for the company. One strategy cooked up by CEO Frank Blake for escaping the quagmire was supposed to be unloading Home Depot's building supply subsidiary aimed at professionals, HD Supply. Cash from the proceeds of that sale would be used to partially fund a share buyback, or "recapitalization" plan, ultimately aimed at boosting Home Depot's sagging share price.
On Tuesday, Home Depot announced that its second quarter net income dropped another 15 percent and that the sale of HD Supply was in some doubt. It seems the three private-equity firms negotiating the purchase are balking at the original asking price, given how hard it is under current market conditions to raise money for buyout purposes.
Track the chain of events. The housing boom runs out of steam, depressing demand for Home Depot's products and spawning a wave of subprime mortgage loan defaults. The subsequent financial losses incurred by hedge funds and other owners of derivative securities whose value was tied to those mortgages sets off a market panic in which everyone simultaneously decides that maybe they haven't properly been accounting for how much risk really was implicit in their opaque and illiquid high-yielding holdings. That "repricing of risk" hikes the cost of assuming any kind of debt, which then ends up making life more difficult for companies like Home Depot as they strive to cope with the problems caused by the events at the beginning of the chain.
It's a vicious cycle, and it exposes why the right-wing economic pundits who are pooh-poohing the current crisis by pointing out that the total number of subprime mortgage loans outstanding only make up a tiny fraction of the overall U.S. economy are missing (or purposefully ignoring) what is really going on. The cascading effects of the housing bust have taken on a life of their own -- the subprime crisis is just the catalyst exposing much larger cracks in the economic foundation.
And for those wondering when the nadir will finally be reached, the Wall Street Journal coverage of Home Depot's announcement included a line that should send a chill through anyone still waiting for more shoes to drop: "Home Depot sells products like flooring and faucets, and its business is closely tied to the U.S. housing market, which is in a downturn and showing no signs of a recovery."
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