It seems every year there are those who get in front of the press and claim that there is a looming recession that is about to envelop the country and if there is no action, the depths of it will surpass our worst fears.
This year is no exception. December retail sales were down 4%, unemployment is up to 5%, and, of course,
RV sales are plummeting. Yes, according to several articles, the reduction of RV sales is an accurate forecaster of recession. I am sure
Federal Reserver Chairman Ben Bernanke is keeping close tabs on this key indicator.
Larry Bodine doesn't just think we are headed for economic recession - he claims that
we are already there. His reasons do not include RV sales:
- Housing starts are down 24% from a year ago. The median sales price of existing single-family homes has been falling all year, according to the National Association of Realtors. A person's home is the largest single asset and the source of a sense of prosperity for most Americans.
- The value of the dollar is near an all-time low [ ]. The dollar is worth the same as the Canadian Loonie currency.
- The price of oil spiked at $100 per barrel on January 2 and has settled at an exorbitant $92 per barrel.
- The US trade deficit widened sharply by 9.3% in November to a larger-than-expected $63.1 billion. The trade deficit has widened to its highest level in more than a year.
- The "credit crunch" means that investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, thereby driving up the price of debt products for borrowers. Citigroup, the nation's biggest bank, announced a stunning $10 billion fourth-quarter loss. The Kuwait Investment Authority -- a foreign country -- is expected to bail out Merrill Lynch with a $4 billion investment.
- The cost of the war in Iraq over the past five years is now approaching a cumulative $500 billion, or about $100 billion per year on average.
Bodine isn't the only one (not by a long shot) ringing in the new recession. Bruce MacEwen has two posts in a row (
The Upcoming Banana? and
A Contrarian Bounce?) dedicated to the apparently imminent recession.
In The Upcoming Banana?, MacEwen has his own figures to back up the sure "banana" that is happening:
Morgan Stanley, Goldman Sachs and Merrill Lynch have issued "recession warnings."
The Economist's somewhat impish "R-word index," which counts how many times in a quarter the word appears in The New York Times and The Washington Post, and which accurately forecast the 1980, 1991, and 2001 recessions, is nearing a new peak.
Sullivan & Cromwell Chairman H. Rodgin Cohen said "It is hard to be an optimist," [of the outlook for M&A activity in 2008]. "With the markets where they are, it is going to be a tough year. The markets hate uncertainty, and we are in an uncertain time."
Gold and oil are both at or near all-time (inflation-adjusted) highs.
The front page of just one day's Wall Street Journal lists the following facts:
American Express drops 10% in one day after announcing increased write offs and delinquencies; Capital One, Master Card, and Discover also drop;
Retailers ranging from McDonald's to Tiffany report disappointing same-store sales;
The stock market has started 2008 with its worst year-opening slide in over 30 years; and
A Barron's roundtable questions whether the 25-year bull market is running out of gas.
The American Lawyer's most recent survey of law firm leaders (last month) was appropriately headined "Fog Advisory"—the outlook is unclear.
And, of course, Cadwalader laid off 35 finance attorneys.
With the 300 points the Dow Jones Industrial Average lost Thursday, we may be doing more than just talking ourselves into a recession. Tensions are certainly high. Jim Blasingame from the Memphis Commercial Appeal, however, has a remedy: Don't participate in the recession. Some of his ideas include eliminating operational inefficiencies, cutting costs, converting non-performing assets to cash, and pay more attention to receivables.
MacEwen, in A Contrarian Bounce? has one idea contrary to the above: Don't cut costs - invest:
Rather than tightening their belts, the aggressive firms apparently sensed opportunity and chose to invest in [SG&A, R&D and advertising] in hopes of a longer-run payoff, whereas during flush times they focused on operational efficiencies. In other words—although they always invested more than their peers in R&D—their strategy was to sacrifice short-term profits in bad times for the sake of longer-term advantage: And to more than make up the sacrifice when good times returned.
Investing rather than cutting costs is consistent with what the
LexisNexis Economic Survey shows. For firms who retain earnings, recessions become opportunities to exploit the weak economy to its own advantage. The market starves for investors during economic troughs and those who can afford to invest will find great opportunities to expand. Those who choose to devour all profits in good times will be the ones struggling to keep the doors open in bad times.
It is like the politically corrected story of a brother and sister who decided to open different restaurants on the same city block. Both sold roughly the same type of food and catered to the lunch crowd. The brother was very outgoing. He always remembered his customers, greeted them happily when they entered the restaurant, came to their table to mingle with his customers, and was so liked that the place was packed all the time. The sister, on the other hand, was a quiet woman who merely went about running the restaurant and most customers never saw her. The restaurant often was practically empty and you sometimes wondered how the place was still open.
The brother's business soon failed. Though great at bringing in customers, he was a poor manager. His employees stole from him, he gave away food, and he rarely ever looked at the books. On the other hand, the sister's business grew because she kept a ledger, measured what items sold and which didn't, changed the menu to highlight items that sold better, guarded her margins and saved her money.
There is a lesson in this for law firms. I have seen many firms who have neglected their finances because the volume of business kept constant cash flow and hid structural deficiencies in their model. Does your firm give away food? Do you have attorneys well liked by their clients but under producing from a financial standpoint? Do you want to be the brother or the sister?
Firms that plan and measure performance are in a much better position to aggressively attack recessions and benefit from them. Investing in the expansion of your business is a sign of a strong company. Cutting costs is a sign of a failing one.
Don't misunderstand: you don't want to spend away your margins. Make sure there is a link between your spending and increased revenue. But don't necessarily look to cost cutting when the economy is on the downturn. As MacEwen notes, "[i]s it "risky" to increase operating expenses during a downturn? So it would seem. But the real risk may be in following the herd."
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Posted
Fri, Jan 18 2008 3:00 AM
by
Admin