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alstry (35.03)

Why is Alstry So Right So Often???? The crash is just beginning!!!!!!!!!!!!!!

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May 09, 2009 – Comments (7)

Welcome to Reality....from NewsweekKevin KellyNewsweek Web Exclusive

Don't tell me that the economy is getting better, or has even hit rock bottom. My faith in an imminent recovery deserted me on May 5, when one of our customers, Salyer American Foods, based in Monterey, Calif., suddenly fell into receivership. There had been little to no indication that the company was so close to financial ruin. As it turns out, the company's lenders say Salyer owes them over $34 million, a debt equal to almost half its sales. A company attorney told local media that tight credit markets and the economic recession had pushed Salyer over the edge. If the receiver doesn't find some way to revive the company's fortunes, our bag manufacturing company stands to lose nearly $1.5 million in revenue, about 2 percent of our $60 million in sales.

On the same day my customer fell into receivership, Fed chairman Ben Bernanke told a congressional committee that he believed the economy was in the process of bottoming out and "would turn up later this year." He's not alone in his optimism. Over the past two weeks or so, it has become a cottage industry among economists and the media to spot the first "green shoots" of a recovery. Certainly shoots there may be. The stock market has rebounded smartly over the past two months, as has consumer confidence. Pending home sales have ticked up, while unemployment claims are easing. And many economists insist a manufacturing revival is in the wings because inventories have fallen so low that restocking must begin soon.

But I haven't found many small-business owners ready to jump on the recovery bandwagon, and for good reason. We're still experiencing the "bottoming out" phase and worry that another bottom remains below this one. Call us pessimists, but we're not sure the green shoots aren't just weeds.

Who can blame us? Take the experience of a friend of mine, who runs a $6 million company that provides promotional material to businesses. His sales are down 20 percent compared with last year. Over dinner last week, he said he certainly wasn't shedding customers at the same pace he had been in the fall, but customers were still defecting. "I can't see any reason why they'd come back soon," he said. So he's getting ready for a second round of layoffs and plans to end spending on marketing until things look more promising.

He's not alone among my friends and colleagues in his sense that bad times may be here to stay. One friend just decided to abandon her two-year-old Web-based gift boutique thanks to declining sales. She has another friend whose promising e-business startup had its venture funding yanked when it failed to meet sales goals. "Two years ago they'd have been given time to work things out," she says. Instead they recently closed. Another friend of mine works for a commercial real-estate company that's instituting 10 percent wage cuts beginning in mid-May. "It's better than people losing their jobs," he said to me, "but I don't expect to be getting the money back any time soon." Given the growing worries about commercial real estate, he's probably right.

Even some companies that are supposed to be recession-resistant remain worried. I know the general manager of a small candy company, who says his sales haven't stopped sliding despite the belief that people supposedly eat more comfort food during bad economic times. He has cut back a shift and won't be rehiring soon. Representatives for a small local bank have told me that they haven't seen an uptick in business lending, and that they don't have businesses looking for money other than those they wouldn't lend to in the first place. And a long-time machine supplier of mine has had a completed bag-making machine on its floor since late 2008, when the customer decided not to go through with the purchase. Despite a steep discount, the company can't find a buyer.

Based on my company's experience, I don't necessarily see a positive side to low inventories. Over the past several months, we've seen lead times on orders fall at least 30 percent. Where our customers used to give us three to four weeks to fill an order, now they give us as little as two. Shorter lead times have followed the trend toward smaller orders. Where companies would once order 3 million bags and hold them on their floors for several weeks, now they're asking for only 1.5 million and reordering at the last possible moment. In most cases, it's not that their sales are falling, just that they're slashing order sizes and reducing lead times in order to avoid tying up capital in inventory. Since they're entering smaller orders more often, we're less likely to hold inventory as well. In my corner of the manufacturing sector, the revival that economists have been pointing to seems a long way off. 

Now, I know businesspeople can be notoriously wrongheaded when it comes to spotting trends. Aren't the Big Three automakers at least partly responsible for their own demise because of their failure to anticipate the need for more fuel-efficient cars? I know I've almost blown the opportunity to capitalize on growth in the past by being too conservative about buying new equipment. In fact, I've angered customers by stretching out lead times rather than investing, because I've been worried that the sales growth isn't sustainable. Talk about a self-fulfilling prophecy. Even right now, when I can see that a judicious equipment purchase could propel our company forward, I worry about taking on more debt and hold back, even with one supplier offering terms that would give us a machine for a year without any payments.

Then I have a day like May 5. I read the Fed chairman's testimony and feel a bit upbeat, only to get surprised by the collapse of Salyer. Certainly, as my brother points out, it is unlikely we'll lose the entire sales volume even if our troubled customer disappears, because other customers will step in to fill the gap, and they'll buy product from us too. But is it insane to hold off on optimism when you're not sure whether another customer could bite the dust? Perhaps waiting to make any big investments makes sense until we're completely sure recovery is on its way. Of course, if I wait, and lots of other businesspeople like me wait, what will become of those green shoots that may be dotting the landscape?

7 Comments – Post Your Own

#1) On May 09, 2009 at 4:20 PM, alstry (35.03) wrote:

Link to the above article...

http://www.newsweek.com/id/196007/output/print

The contents of the above is consistent with many of the small business owners and CFOs I am consulting with day after day and week after week.

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#2) On May 09, 2009 at 6:44 PM, devoish (99.07) wrote:

This chart did not format correctly. You'll appreciate this website, I think.

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=56822 

 Please note that the 2004/5/6 period is a function of drastic changes to the bankruptcy code. Basically the bankruptcy contract between the debtor and the creditor changed in 2005 to dramatically benefit the creditor. People filed quickly in 2005 before changes went into effect in 2006.

It is not like bankruptcy laws are all that sacred despite the whining of CNBC.

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#3) On May 09, 2009 at 8:31 PM, alstry (35.03) wrote:

What few realize is the lifeblood of American jobs is small and midsize business.  Most of the mainstream press and media caters to Wall Street.

Right now millions of small and midsize businesses are silently on the verge of filing bankrupctcy and shutting down.  This could impact tens of millions of jobs.

It is why Alstry and the Institute are usually about six to twelve months ahead of the widely reported data and why we have a much clearer picture of the employoment situation.

I don't fault the caps players that can't see, they simply don't have the right prescription to see clearly.

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#4) On May 09, 2009 at 9:26 PM, bostoncelitcs (59.34) wrote:

Salyer needs to get an "exorbitant" no-bid Pentagon contract!! 

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#5) On May 09, 2009 at 10:39 PM, jc09058 (55.51) wrote:

In every recession or depression, the recovery cycle has a lag in it. The length of the lag varies based on how deep the recession is, long the recession last, and the downstream effects of suppliers to those industries that are affected. The key indicator for showing the start of the recovery cycle is the market.

When you see the market starting to improve, you see a change in preception in the people that drive the market(investors) and accompaning change in the flow of businesses. The lag is the time required to reach from the heights of the corporate world to the small Mom&Pop business. This lag runs from 3 to 6 months before all sectors are in or starting recovery.

Generally, most recessions are not cause by financials institutions and if there is one weak point in our economy where you don't want issues, it's there. During the recessions of 1893, 1907 and the Great Depression, Banks were the focal point for the start of these events and they begin long periods of recovery. These periods effectively ran for 5 to 10 years before our economy was in full recovey.

In fact, the period before the recovery of the 1893 and 1907 recessions would have run a lot longer if it weren't for the likes of J.P. Morgan and friends putting personal wealth into the economy and the US Treasury Dept. Both of those events precided the existence of the Fed.

During the Depression, a new institution called the Fed tried to do what it could to keep the Depression from occurring but unfortunately they were new to this and made a critical mistake by reducing the money supply which cause the recession to become a depression and having a protracted period of recovery to occur.

You should note that this time, we have the Treasury Dept. printing cash like there is no tomorrow (simular to what J.P. Morgan did) and this causing the money supply to expand. Then adding in the Fed rate at near zero to stimulate new loans. The effect of both should reduce the amount of time needed to recovery the economy.

 What we should see and I believe that we are is a shorter period of recovery. Instead of years recovering, it looks like months. But we still have that lag to account for before it works its way down to the Mom&Pop businesses and each sector has its own unique rate of recovery that has to be taken into account.

What this means is that the people at the bottom have just got to wait for the lag to play out and nothing is going to hurry it along any faster than it does. Granted this doesn't help those in bankruptcy or looking forward to that event, but to those that survive this, it is a note for their future. Keep more cash in hand and if it looks like the banks are in trouble, start hording cash before things get any worse.

Because, you can bet the banks will be in trouble again some time in the future.

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#6) On May 09, 2009 at 11:56 PM, mliu01 (< 20) wrote:

ico you just don't get it. this is not lag.

We are not really pumping shit into economy. they are pumping money into banks for nothing, just to keep them alive. Yet, the country and taxpayers will have to fork out the interest on that massive amount of money.

 And what is worse, not just banks are highly leverage. Most americans are highly leveraged, Each job cuts have great chance lead to a personal bk if they don't find another job in 8 months. More will simply go into  foreclosures. In those years Americans were not this much in debt. And in those years, standard of living were never this high and  this high burn rate.  For each family who lost job need at least 2.5k to keep everything float. It is just impossible to stop this domino action.

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#7) On May 10, 2009 at 3:42 PM, VintageCat (< 20) wrote:

Recovery certainly looks a good way off for many small businesses right now.  I have recently closed my small retail business seeing in May of last year my costs going up on the bottom side and sales flattening due to the price of fuels and food.  We noticed in our gross/average sales and traffic numbers that consumers had already begun cutting back on discretionary spending months before the press began reporting it.  

In November I decided to not renew my lease even though the shop was still operating in the black (without dipping into our business cash reserves) and it would feasibly continue to be marginally profitable for at least another year given our projections and the data on hand, banking on no recovery or return to spending by consumers.  Given the lack of business lending and confidence in the retail sector I had to change my exit strategy from selling the business to liquidation.  

In the past few months I spent some time liquidating my inventory and fixtures (I'd have liked to have done better) into cash and concentrated just getting out before the rest of the teetering dominoes started flooding the market with goods and retail fixtures.  Since I announced my closing, four more retail businesses in a similar field (one a region-wide retailer) have announced their closings.

I don't see this turning around very quickly. Most independent businesses are dying deaths caused by a thousand cuts.  Higher lease costs, higher utilities, lowered sales both in terms of actual numbers of sales and lower dollar amounts of the sales that get transacted. Many don't have the option of just deciding to close without a bankruptcy or foreclosures looming in their future.  Most struggling small businesses continue to struggle.  I see any recovery or the shaking out of businesses playing out at least over the next two years or more locally.  Interesting conversation.

 

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