Downturn Confusion
Published May 14, 2008
Economic downturns are notorious for generating mixed messages, so business operators can be forgiven for not knowing what to do, what to expect, or how to plan for the next 18 months or so.
A perfect example would be the two articles that appeared in the Globe and Mail this week. In one article published on May 14 (link: http://www.theglobeandmail.com/servlet/story/
LAC.20080514.RTD14/TPStory/?query=td+bank), the paper quoted TD Bank CEO, Ed Clark warning that commodities are over-inflated.
“Anyone lending money in Western Canada should do so under the assumption that commodity prices are too high, he [Ed Clark] told a financial services conference in New York yesterday, after being asked whether the prices are worrying him.
Mr. Clark, whose bank managed to avoid being whacked by the global liquidity crisis, said TD’s lending standards in the West assume “dramatically lower” prices than now exist.
Banks should keep a close eye on oil service and gas service businesses, he said. And he suggested any downward adjustment in commodity prices could trickle through to individual borrowers in the West.”
In a separate article published on the same day (link: http://www.reportonbusiness.com/servlet/story/
RTGAM.20080514.wyardeni0514/BNStory/SpecialEvents2/home), the paper warned that food prices will drop as agricultural production increases to meet demand. However, oil prices are expected to remain high.
“I do think that food prices will come down, but energy is a whole ‘nother story,” Mr. Yardeni said. “The [oil] price mechanism is distorted by subsidies and national oil companies that have political issues, they are not behaving competitively.”
For that reason, Mr. Yardeni recommended investing in a trinity of sectors: materials, energy and industrials.
“That’s where the growth is,” he said. “These are the growth stocks and they’re still trading like cyclicals.”
Who to believe?
The best thing to do is plan. Give consideration to these:
1. Expect your business costs to rise, especially if you rely on transportation of goods and if you have credit repayements;
2. Expect demand for your products to decline somewhat, so prepare for reduced profits;
3. Seek to expand your market segments – can you get less-ecpensive products to offer as alternatives to your existing lines? – is there scope for marketing your products into different market segments? – have you budgeted for more promotional and/or advertising efforts?
4. If you export your products, consider exploring domestic markets (but be prepared to compete aginst less-expensive imports thanks to an appreciated Loonie).
If you have a plan in place, you will be able to judge how the coming 18 months will likely unravel for you and you will be able to measure your company’s performance against your expectations and objectives. As time passes, you will be able to adjust your plan, keeping you on track and aiming straight at those objectives.
If you need assistance with your planning, please contact us.
— Michael Hogan