Freddie Mac posted a second-quarter loss, and the mortgage financier said it would request another $1.8 billion in government aid.
Tag Archives | recession
Wheat futures surged 6.7% to above $7.25 a bushel, their highest since September 2008, prompting a range of companies to at least consider passing the cost on to consumers.
Nobel Prize-winning economist Paul Krugman’s recent column in The New York Times anticipating an extended economic downturn on par with the “Long Depression” of the 1870s and the “Great Depression” of the 1930s has stimulated a significant amount of discussion online. Are we going to have a third Depression?
Among those weighing in is Professor Michael Brandl of the McCombs School of Business at UT Austin. Professor Brandl is an economist whose work have been cited in numerous media outlets. Some of those outlets include:
- The Associated Press
- Boston Globe
- CBS Evening News
- CBS Early Show
- Fox News
- National Public Radio
- Dallas Morning News
- Fort Worth Star-Telegram
- Houston Chronicle
- USA Today
- The Wall Street Journal
- The Washington Post
He is also a very popular lecturer at the McCombs School of Business.
Professor Brandl’s Thoughts on a Third Depression
So what does Professor Brandl think of Krugman’s analysis?
“Krugman has a point in that we should not think that every thing is peachy simply because the stock market has rebounded, corporate profits are up and our banks are profitable.
Similarly, the critics have a point in that we must build our macroeconomic models from sound microeconomic foundations. We simply can not go back to “story telling” or have models based on ad-hoc assumptions.
But, both arguments are fatally flawed. Krugman’s Keynesian prescription of more spending ignores the reality that not all spending is the same. Keynes and even FDR, did not see spending for the sake of spending as the key to pushing the economy out of a depression…”
The future of real estate over the next thirty-six to forty-eight months in the US will impact the financial markets, as well as the general economy. And, of course, the health of the markets and the economy will impact the real estate market during this time. The ULI and PriceWaterhouseCoopers put out an annual outlook for Real Estate entitled Emerging Trends in Real Estate®, which is available free on the ULI’s website.
When considering an acquisition of, investment in, or employment with a company it is best for your peace of mind, as well as, financially to be aware of indications that the company’s true picture may not be what management would lead you to believe.
Warning Signs of a Company in Trouble
The surest sign that something is amiss is a frustrated stakeholder – be it the owner, investors, or lenders. What are their concerns? Have there been repetitive problems with the company? Does management not seem to have the right skill set to handle the most pressing issues? Does management spend too much time assessing blame and not a lot of time accurately identifying the company’s problems and devising solutions?
Where to Start
It is best to first take a look at the company’s financials. Start with the balance sheet. Are they building inventory and not able to sell it? Do they have a negative cash position? Have they maxed out their borrowing base? Also be sure that the balance sheet reflects the true state of affairs. For example, has the company written a check which it has yet to mail despite debiting its accounts payable account?
Take a look at the income statement, preferably one with monthly performance over the last 12 months. Group the items into three categories: sales, variable costs including direct sales costs, and fixed costs. What trends do you see in those categories? Perform a breakeven analysis. What is their contribution margin? Is it declining? What about EBIT? Is the company able to service its debt?
It can be helpful to simplify a company’s financial statements, combining similar items in order to move out of the detail and focus on the company’s overall performance and financial position.
The greatest mistake is not necessarily investing in a troubled company, but rather misdiagnosing the company’s problem(s).
Here are some items to consider when performing diligence on a company:
Cash shortfall – does the company seem to be constantly in a cash crunch?
Physical deterioration of facilities – signs of inability to maintain facilities due to lack of proper planning and ability to re-invest.
Poor Accounting Systems – accounting records and reporting are delinquent. Often the company does not know if they are making money or losing money.
High concentration of leased assets – inability to secure traditional financing…
Durability bias in business is the tendency of people to project recent trends or occurrences into the future. If it happened in the past then it must happen in the future. The term is often used in behavioral science and forecasting.
Durability Bias in Business
How does durability bias apply to business? Often business professionals project short term trends into the future. They believe that the recent good times will last forever, conversely, they also believe the bad times will go on indefinitely!
The stock market is a good example of durability bias in action. When the market is booming you start seeing books titled, “Dow 20,000”, hitting the bookstores. People started buying stocks and an euphoria took over. Last fall the opposite happened. Stocks started dropping and soon we were in a financial crisis.
For the past six months the stock market has gone from maximum pessimism to the beginnings of optimism. Stocks have risen 21% in the past six months and over 39% since the low on March 9th. Right now the durability bias is on the downside, however, as these gains continue the bias will shift to the upside.
So what is your durability bias telling you? Are you running your business as if the tough times are going on forever or are you investing in your people and infrastructure to take advantage of the recovery?
Most people when faced with treading water realize that at some point to get somewhere they either have to start swimming or drown. You only have so much energy to stay where you are. The same thing holds true for businesses!
A business can maintain the status quo for a period of time. At some point, however, they must start growing or the competition will surpass them. In this recession the goal for most companies has been just to survive. We have seen revenue for most companies settle in at a 30% reduction from a year ago. Cash flow has stabilized at a lower level and companies are not bleeding like they were.
Now is the time for companies to start swimming! You should be improving your sales efforts and products while you have the time to invest. When the economy picks up you won’t have the time to improve your company’s or your own skills. Over the past 2 months we have noticed an uptick in business sentiment. Companies are now starting to realize that the world is not coming to an end.
With that thought in mind they are starting to make inquiries for services to help them through these tough economic times. Are you ready for them? Have you been honing your staff’s skills and increasing the level of training of your staff? Are new skills and products being developed? Finally, are you increasing your marketing efforts before the competition?
By investing your down time into your people and systems you can come out of the recession in a stronger marketing and financial position than the one you went in with. Now is the time to start swimming!