MARKET WATCH: Damn! Isn’t There a Bottom Here Somewhere?

Jeff Harbaugh

• October 10 2008
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• 9 comments

Thoughts on the Market and Managing Through This

As I write this on Friday, we may be finding the bottom. We went down big yesterday with big volume. If we can follow through today, plummeting on huge, panic driven volume, we might find a bottom. Maybe even bounce before the close. Complete panic, with everybody giving up in total despair, is the key to a finding a bottom many people seem to think.

Then again, who the hell knows? Nobody reading this (or writing it I hasten to point out) has ever been through anything like this. Check out this chart. http://www.chartoftheday.com/20081010.htm?T

Over the last year, as you can see, we’ve had the biggest correction we’ve ever had. Including during the Great Depression. My mother lived through it and she tells me it wasn’t all that great.

Here’s another one from Investor’s Business Daily that’s interesting.

As I wrote in an earlier posting, the statistical concept of regression to the mean suggests that maybe we’ve got further to go over a period of time to get the price earnings ratios back in line with historical experience. This chart certainly suggests that. But, I’ll say again, who knows.

Meanwhile, what I want to tell you is that the stock market is only a sideshow. It’s what’s going on in the credit markets that is important. The process of deleveraging that we’re going through means that people and businesses can’t get credit that they always got in the normal course of business. General Electric just had to pay Warren Buffet 10% for money in addition to giving him warrants to purchase shares of stock that were already in the money when the deal was done.

Literally as I wrote this, I got a call from my banker in Ireland at Bank of Ireland (I lived there a while and have kept a Euro account). She described lines out the door of people mostly wanting to make deposits of funds they had taken from sources they didn’t consider safe. Like the stock market I’m guessing.

So if GE has to pay 10%, what do you think a surf shop has to pay? Any business in this industry that is competently managed is already doing the following things and hopefully has been doing them for a while. This first one is the most important.

They have crunched, analyzed, and stressed their cash flow numbers until the print has worn off the number keys on their keyboard. With that exercise completed, they have gone to their financing source, whatever it is, shared the information, looked them in the eye and asked, “Are you going to cut me off or reduce my credit lines?”

They are now managing as if these difficult market conditions have the potential to last a while.

They have stopped worrying about inflation. With the plunge in worldwide commodity prices and demand, deflation is what they have to think about.

They are ruthlessly controlling overhead and hiring. Advertising and marketing budgets are taking a hit.

They are aggressively getting rid of excess inventory. I got an email a couple of days ago from a company offering to sell me last year’s product at 71% off suggested retail. I imagine some of you got the same email.

If they’ve got surplus cash, they are being very careful where they invest it.

They’re kind of worried about the credit they’ve extended and are moving aggressively to collect receivables. And shops may find that brands are not so forthcoming with terms this coming season.

Companies whose credit is being squeezed are probably trying to use their suppliers as their bank by delaying payments. Well, that’s hardly new.

There are, of course, those companies with strong balance sheets and good strategic positioning that will do well. That doesn’t mean they won’t take a hit like everybody else but they’ll survive it in a stronger position.

And that’s the thought I’d like to end with. We will get through this, we will survive, the markets will turnaround, and business will improve.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line.

For more information, visit www.jeffharbaugh.com.