Dec 16, 2008

[Other] The Economy




As we reach mid-December, the next phase of the U.S. economic situation is upon us with 3 distinct new areas:


#1

The retail industry make 60% of their yearly PROFITS through the December holiday sales season. The majority of stores, especially upscale stores, are having their worst holiday season in over 30 years. With the middle of December now upon us, many of these businesses have to decide how (or if) to stay alive. They'll turn to massive sales to clear out their inventory, and come January 2 will begin scaling back sales help and closing stores.

The manufacturers, watching these store trends for tracking next year production planning, will anticipate a drop in orders coming for 2009 leading to cuts in production and staff.

While corporate America has been taking preparatory steps for a major downturn with major layoffs (and of course the financial and real estate sectors have been dealing with the direct impact), the retail side of layoffs begins now and continues through mid-January. (Since initially writing this article in draft, KB Toys - the #2 US toy chain, has entered bankruptcy and declared LIQUIDATION. They join Mervyns, The Sharper Image, Steve & Barry's, Linens 'N Things and Circuit City.)

(Note some retailers are positioned to take advantage of this. Wal-Mart and Target sales are up, as are TJ Maxx and other similar 2nd market, downscale and budget retailers.)


#2

As we come to year end, the investment system begins to adjust market positions - to avoid taxes (capital gains) and to adjust for investment inflows and (most likely in current conditions) outflows. This is a multi-layered process, as savvy investors (is that an oxymoron in the current market) make their adjustments, causing mutual funds to make adjustments in line with their investors besides their own plans, which cause the larger funds, pension systems, and hedge funds to do the same - besides each of them making their own adjustments per their investment strategies.

Over the past 6 months, many funds have basically been finding themselves with a "run on the fund" - with outflows so large they have difficulty redeeming their investments at a sufficient pace or even worse, with their asset sales affecting the price of the base assets, i.e. causing a market drop as the market is flooded with particular financial instruments.

Worse however, as Friday's incredible financial news showed, some funds haven't been totally honest (or honest at all), assets are not readily available (or convertible) or necessary invested where thought (or invested at all!), or worse losses have occurred that the fund hasn't been reporting!!! (For if they did, people wouldn't keep investing.) Friday's $50 billion Madoff Hedge Fund case is still unclear, but the fund lost people's investments, lied in reporting it and used new investments to cover old redemptions. As the end of year pace of redemptions picked up, BOOM, the hollow balloon popped.

Even "good" hedge funds are in trouble, with another similar fund announcing "no withdrawals" until March!

While the focus here is Hedge Funds with investments starting at $1 million - $5 million, many a 401k, mutual fund or pension plan utilizes hedge funds as part of their investment strategy. Even worse, with a history of unusually high returns, many companies and charities have been utilizing hedge funds as well for mid-term cash storage. With a decade of high positive returns, this seemed like a safe strategy (though hedge funds are one of the least regulated and most obscured investment vehicles).

As we come closer to year end, the full scope of this problem will become more apparent. Funds in trouble are going to be forced to come out from under the covers. The Madoff situation may accelerate the problem as nervous investors (private and corporate) rush to withdraw.


#3

The US Auto Industry situation has been apparent for a time, but the potential impact has not been well considered.

US automobile sales are down 30-50% (depending on the brand). Government loans can't help! For, if you don't have a job or you're worried about the future, you're not buying a new car. Loaning the US auto makers may keep them solvent, but it won't increase auto sales and simply result in them continuing the hemmorage money. The resulting impact equation is something like this (which everyone is studiously avoiding discussing):

No Loan = 20-40% layoffs, plant closings, dealership closings.
Loan = 15-30% layoffs, plant closings, dealership closings.

Either way, the short term impact to the U.S. and world economy is similar. Foreign manufacturers with U.S. manufacturing presence (Honda, Toyota, and Hyundai) are already beginning job cuts (though in an interesting swap, Toyota has begun laying off Japanese workforce while maintaining their US one) and production cuts, and their web of parts suppliers will be similarly affected.

The U.S. auto makers have no choice but to react similarly. A government loan will allow the US auto makers run at current workforce levels for a time, but the ONLY way they can operate at current capacity is a FULL ECONOMIC RECOVERY before the loan money runs out. Since that's extremely unlikely in 2009, the U.S. manufacturers have no choice but to slim production and staff down to sales levels.


What's this mean for IT budgets and staffing? Many a U.S. corporate IT organization is headed into "keep the lights on" mode. While improving IT functions such as customer service or easing the sales process may be important, they are not life or death changes and will be suspended.

The only saving grace may be massive increased regulation from the new presidential administration, with associated necessary IT systems changes.

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