Economy may trail markets in recovery

While some believe that the financial markets may have seen the worst of the subprime credit meltdown, the worst may be yet to come in the 'real' economy. There's an article worth reading in today's WSJ that touches on this. Basically, the impact of the loss of household wealth in the form of rapidly declining home values coupled with the impact of banks tightening their lending and new construction all but dead will continue to limit economic growth.

Regional Turnaround Management Conference

Last week I attended the Turnaround Management Associations' regional conference in San Antonio. Several interesting trends and comments were made. The most enlightening were from an economist, Don Reynolds, out of Fort Worth. If you ever get a chance to hear him, do so! He is very entertaining and filled with common sense. Some of his predictions were as follows:

- The recession (yes, we are in a recession) will last longer than people think. Most probably 12 - 15 months vs the 6 months that is being tossed around.

- Housing has yet to see the 2nd shoe fall

- same for the credit card markets. Their next!

- There is a major de-leveraging of risk going on in the global markets which will take 5 years to work out of the systems. Presently, we are 2 1/2 years into the cycle.

-Underwriting standards at banks are going up. (Even in Houston, Texas!)

- Finally, there is a commodity bubble that will have to be dealt with.


You would think that in the middle of oil country everyone would be optimistic. However, the mood would best be described as nervous. We all know that the world is a global market. If everyone has a cold chances are you will too.

Libor vs Prime Rate

Interesting article in the April 23rd Wall Street Journal on page C1 highlighting the divergence of Libor from U.S. Prime Rate. Libor has been increasing while the Prime Rate has been dropping.

You need to check your loan agreement to see what is the index for setting your loan rate. Now is also a good time to see if there is a floor on your interest rate. I have had clients in the past who woke up to find that the prime rate had fallen significantly but their interest rate had a floor on it. You can often negotiate that floor away.

Pricing Strategies & Tactics Day 4

Day 4 (Last Day) at Northwestern University Pricing Strategies & Tactics course. Learn about recommended book: Value Merchants by James Anderson.

Pricing Strategies & Tactics Day 3

Day 3 at Northwestern University's Pricing Stratetgies & Tactics course. Learn how activity based costing combined with segment sales analysis can drive profitability.

Pricing Strategies & Tactics Day 2

On Day 2 at Northwestern University's Pricing Strategies & Tactics course we discuss segmenting your customers and applying Activity Based Costing to those segments to drive profitability.

Pricing Strategies & Tactics Day 1

View the highlights from day 1 at a course I am taking at Northwestern University on Pricing Strategies and Tactics. I will try to highlight the key "take aways" and how to apply them to drive profits.

Bernanke: "Recession"

So Bernanke tells us what we knew about 4 months ago. Recession. I'm not sure we needed him to tell us this given the activities of the Fed over the last couple of quarters.

Naturally, the Fed can always attempt to inflate the dollar in order to avoid or shorten an economic downturn. In DC today there doesn't seem to be an economic problem that cannot be cured by the printing press.

Sooner or later a good chunk of this new money is going to come home to roost.

Is the Mailman Dead?

Not Yet! But he doesn't look good.

A few weeks ago I took off for three days during Spring Break. When I came back to work I had eighty-two emails, six voice mails and two magazines. No letters, no direct mail pieces, no junk mail!

Recently, there were several newspaper articles highlighting the fact that the U.S. Postal Office has joined forces with the Direct Mail association to fight steps to create a "Do Not Mail List". Talk about strange bedfellows! The U.S. Post Office was worried that the drop in volume would hurt their revenue.

We are advertising more and more via email versus direct mail at The Strategic CFO. In addition, we are looking into invoicing our customers via email. Furthermore, I am paying all of my personal bills using online banking and I just cancelled car insurance on a car I sold versus the insurance agent mailing me a consent form.

All of these trends seem to be pointing to a decline in volume for the U.S. Post Office. I believe that some day in the not too distant future we will hit the tipping point where this decline accelerates. (If it hasn't already and we just don't know it!)

Dollar Posts Biggest Weekly Decline Against Euro Since 2006

"The dollar posted the biggest weekly drop against the euro in more than two years as traders increased bets the Federal Reserve will cut borrowing costs further while the European Central Bank holds rates steady." (Bloomberg)

Now might be the time to finance or refinance, if you can find someone to lend to you.

Midday Update

US GDP grew at 0.6% annualized rate in Q4 of 2007. (WSJ)

30 year mortgage rates fall. (Reuters)

Tech stocks slide on Oracle earnings, Google outlook. (WSJ)

Midday Update

US new home sales hit a 13 year low in February, though that was better than expected. (FT)

Crude Oil rises; Gasoline hits record after refineries cut back production. (Bloomberg)

Dollar drops. (Forbes)

Mortgage volume spikes on refis. (BusinessWeek)

Capital Spending Indicator Down

Orders for durable goods fell for the second straight month in February according to the Commerce Department, as did orders for non-defense capital goods. (Bloomberg)

Orders for machinery fell by the largest amount since the Commerce Dept began tracking them in 1992.

This is not a good sign moving forward.

Afternoon Roundup

Home prices take a dive in January. By 11% if you believe the Case-Shiller Index and 3% if you believe the government. (WSJ)

US consumer confidence at 5 year low. (FT)

Small firms find credit is tightening. (NYT)

Exports are cushioning America's downturn. But for how long? (The Economist)

What Happens if the Lenders of Last Resort are Gone?

On Friday of last week the Wall Street Journal had two articles, one on the front page and the other in the Money section, that taken together paint a chilling picture for the small and mid market companies. The front page article highlights the peril that local banks are in because of home builder loans. The jest of the article is that banks are going to have to cut back on their loans because of losses sustained by lending to home builders.

The other article highlights the plight of CIT. CIT is often a lender to companies whose bank has asked them to move their loan or are having financial difficulties. (By the way, I have had clients do business with CIT and have had excellent results. I can't say enough good things about the company.) There are numerous small companies like CIT in the market place who perform a vital function in providing liquidity to financially stressed companies.

The question is where do the asset based lenders get their money from? The answer is: banks! Often an asset based company or a factorer will leverage investors' money with a bank line of credit. In times of easy liquidity in the market place this business model works fine. But what is going to happen if banks won't lend as much? Liquidity dries up!

Today's WSJ article describes how this business model may not work in today's banking environment (page C1, "CIT Scrambles for Cash"). So what about the other smaller asset based lenders? They too should start having difficulties raising money. This could pose a problem if your bank asks you to move your loan and no one will take you!

JPMorgan Chase ups bid for Bear Stearns to $10

JPMorgan reached an agreement with Bear's board to acquire Bear for $2.65 billion, or $10 a share, over the weekend.

Not sure how much comfort that brings to shareholders who two Mondays ago had shares worth $70 a share.

Now might be the time to review the prospects of the financial services equities in your portfolio.

What's up, g?

You may recall from school (at least when you weren't down at the bar nearest campus) that when valuing a company using a discounted cash flow technique, the value for g (earnings growth, that is) was quite significant in the company's valuation. What creates the g at your company? Does that product, unit, or person have what it needs? If they are being held back, why?

Know your business.

Next up: cash.

The Subprime Mess Claims Its First Blue Chip Victim

JPMorgan Chase announced today that it will acquire Bear Stearns for $2 a share today. On Friday, Bear Stearns' stock price closed at $30.00 on Friday, already down close to half over its Thursday close and 81% down from its high for the last year of $159.36.

Bear Stearns, a major investment banking, securities trading, and asset management company and a Wall Street institution was forced on Friday to accept a loan package from JPMorgan Chase and the US Federal Reserve System on Friday. This loan from the Fed represents the first time the Fed had bailed out a non-bank financial institution since the Great Depression.

The plot thickens.

Do You Know Who Your A-List Customers Are?

I was in a board meeting last week when I heard an interesting story from one of the other board members. Mike recalled when he was a young man and developed an interest in electrical work. While continuing to work at his day job Mike developed a skill for doing light (pardon the pun!) electrical work.

As time passed the demand for Mike's work increased. He would do odd jobs for people on the weekend and at night. He would install flood lights, ceiling fans and fixtures. In addition, friends and family would request favors which he was happy to do! As the request started pouring in Mike started keeping two lists; one for paying customers; the other for favors.

One day his brother-in-law asked if Mike would do a favor by installing a flood light for his father-in-law. Mike agreed and put the name on the list. Several months went by and the brother-in-law had not heard from Mike. When he asked Mike why he had not installed the light Mike explained his two lists.

The first list was the A list. This list consisted of paying customers. The B list was for favors. Mike was happy to start working on the B list as soon as he had completed the A list. The brother-in-law thought for a moment then said that he would like to be moved to the A list.

Often we lump our own customers together. We treat the loyal customer who pays promptly the same as the demanding customer who is never happy and pays slow! In fact, it is often the demanding customer who gets more of our attention.

The lesson of this story is that we should have an A list and a B list for our customers. The A list should consist of those customers that pay on time, value our services and refer our name. The B list is for customers that don't value our services, dispute our fees and are late or slow paying our bills. We should constantly be increasing the length of the A list and shortening the B list.

Mushroom Cloud Spreads to Small Banks

The New York Times has an interesting story in today's business section on the credit crisis spreading to small and midsize banks. The article highlights that the banks were unprepared for the residential downturn and are highly exposed to a commercial real estate downturn.

The take away I get from this story is that the Fed's are going to be tightening credit underwriting on all the banks, not just the ones in trouble. This credit squeeze will affect everyone!

Subprime Mess: Is that a Mushroom Cloud in the Distance?

If you are like me you are having a difficult time getting your arms around the subprime crisis. I am not sure how bad it is; what it is going to do to me; and what action I should take, if any? I hear all of the problems in the news, but, as of yet, it hasn't affected me. Finally, I after much agnst I came up with an anology that helps me visualize the situation and how I should react.

Picture yourself standing outside your home. Fifty miles away, in the distance, you see a mushroom cloud from a nuclear blast rising into the atmosphere. Once you get over the initial shock you realize that it is far away from you. In fact, the sun is shining and everyone is going about their business.

The second thought that comes to your mind is: "I wonder which way the wind is blowing?" Is the nuclear fallout coming towards me or away? How bad is it going to be? For those individuals at ground zero it is pretty bad!

I visualize the subprime mess as a nuclear bomb that has exploded in our financal system. Personally, I don't have any direct contact with industries affected by the crisis. The sun is still shining on my business and we are making money. But I am keeping an eye on that mushroom cloud in the distance! I know that as it spreads through the economy some fallout will affect me. In the meantime, we are spending causiously, hiring selectively and marketing aggressively.

Banks Tighten Credit Standards

An article in todays' Wall Street Journal highlights the tightening of credit across the countries banking community. The author cites interviews with bankers indicating a change in the amount of risk that lenders are willing to take. Later in the article the author cites sources that say they haven't seen a credit crunch. So which is it?

The short answer is that it depends on your local market. How is the local economy performing and how competitive is your banking community? Regardless of the current lending environment you can count on banks' underwriting to become more conservative. Why? Because the federal banking regulators will begin to tighten the rules for the entire banking community not just local markets.

As a CFO or controller how can you prepare for this changing environment? The best way is to get your financial house in order. Imprvove your cash management reporting. Prepare a cash flow projection to give to your banker. Prepare a strategic plan to manage and predict your capital needs months in advance. Finally, take your banker to lunch. Let him know what is happening in your business so there will be no surprises.

By improving your cash management tools, forecasting your needs and communicating with your banker you can actually weather the coming credit crunch.

Fed cuts rates again

The Fed follows up its 0.75% cut in the fed funds rate last week with another 0.50% cut, announced this afternoon. That's a 1.25% rate cut in little over a week. Is the Fed racing to close the barn door after the recession got out? Sure feels like it. Oh, by the way it's a presidential election year and the Fed is printing money. Go figure.

Now for some initial reactions from around the web:

WSJ: Economists react - Fed Racing to Tie
FT: Bernanke's reflation gamble may work too well

Risk Management

By now you may have heard of the 31 year old, lower level trader at Société Générale, one of the largest banks in France, who apparently made some unauthorized bad bets on European equity indexes using futures contracts, resulting in a €4.9 billion ($7.2 billion) loss for the company. The trader had managed to fraudulently bet some €50 billion ($72 billion) that those indexes would rise. Why'd he do it? As of now it appears that he did not profit from these trades. Maybe his boss ticked him off. Maybe it was the thrill.

While you may not have a trading operation and your firm may not be able to place such outsized bets, perhaps you should consider if your internal controls are strong enough to prevent an employee from pulling off a fraud with disastrous consequences. For many firms, this usually centers around cash management. But it encompasses more, such as who exactly is able to enter the firm into agreements. You want to think the best of your employees, but prudence requires sound policies and procedures.

Interest and Inflation

Per the Bureau of Labor Statistics, the rate of inflation in the prices of consumer goods and services was roughly 4.5% from December of 1996 to December of 1997. Yet the Federal Reserve, which up until a few months ago was mightily concerned about such inflation, has now set its federal funds rate target at 3.5%.

The Fed publicly stated last week that it expected "inflation to moderate in coming quarters". Given the extent to which the dollar has sunk in value relative to most major, if not all, global currencies so far this century, in no small part thanks to the Fed itself, one must contemplate just how much this newfound indifference to inflation will continue.

In the near term, the Fed may be able to keep short rates low, with another rate cut expected this week to be announced after the FOMC meeting. But eventually those rates should start to creep up.

So what does this mean for you? If perhaps you are considering seeking debt financing, between now and June may be the time to lock in a decent rate before the Fed is forced to do the obvious and begin to raise the fed funds target rate to deal with inflation and the continuing weakness in the dollar. But be mindful that we might be headed into an economic slowdown in which emergency Fed actions and dead cat bounces in the equity markets can mask no longer.