Wednesday, September 16, 2009

Traffic Signs of Growth Back To RED?

I am generally a positive person and tend to see early stage improvements in the economy because I look for them in every nook and cranny. It is kind of like finding the first flower breaking through the snow after a really tough winter – you have to slow down and look very hard. I have been away from blogging for a while as I founded a new business. Very challenging experience, but more on that in future posts. The good news is that I am seeing a lot of flowers breaking through and other signs of an economic springtime.

What are the flowers (leading indicators) telling us?

  • The stock market is attracting money. Institutional and individual investors are putting money back to work as they are fearful that they might miss the upswing in the stock market. More money over a limited stock supply (very few new issues) leads to higher prices – not necessarily more valuable operational companies. But the stock market is up!

  • Many individual investors are looking for companies to invest in directly. They are tired of the “public” company route where they do not really know the people who are looking out for their investments. Many individual investors are looking at private investments (many shifting from “public” to “private” options) to allow a relationship to be developed with the stewards of their money (the private company’s leadership team). I see quite a bit of interest in putting money back to work via individual investors, but it appears that the greatest activity is coming from angel investors that have teamed up to pool their resources and skills.

  • Companies are emerging from the “let’s slash expenses” stage. I am seeing a trend over the last 3 months that many companies are looking to leverage technology better to get everything done. With reduced staffs and new growth objectives from 2009/2010 planning cycles, just cutting costs won’t get them where they need to go. It is nice to see business customers starting to come back to the marketplace with a clear purpose. Only issue I have seen is the procurement cycle has lengthened, partially due to a greater aversion to risk (all their buddies got laid off) and partially due to the fact they are doing more things (also due to their buddies that got laid off).

  • The available talent pool to drive expansion is likely better than it has ever been. Instead of having to pull great talent out of existing organizations with significant incentives, employers are finding great talent immediately available – at very reasonable prices. This is a residual effect of how employee reductions where conducted in this recession. During this cycle, the primary drivers of employee reductions were company failures, division closures, geographic contraction, and selective reduction of experienced employees. This created a large pool of very talented people on which to select from. Unlike in past cycles, the primary drivers were not low performers (although this also occurred). This is a great time to upgrade talent and to put in place new teams to drive growth for those companies that were positioned to take advantage of marketplace changes.

  • Market dynamics changed in almost every industry. The top 10 players in each industry had their ability to compete change almost overnight as access to capital became issues for those over-leveraged and/or in need of expansion capital. Larger companies fell asleep looking inward for cost reductions and forgot about their most important assets – their customers. Companies that stayed focused on the customer experience, helped customers work through their own challenges, and those that had strong balance sheets are coming out of this recession with aggressive customer expansion programs (either via acquisition of failed competitors’ customers or outright purchase of weakened competitors).

What still concerns me about growth?

  • The commercial real estate market is the next wave of financial crisis. With the failure and downsizing of companies all over the US, the occupancy rates have fallen significantly. The lack of recurring lease streams to support property values and the downward pressure on lease rates due to surplus capacity will prove to be too much for those in commercial real estate to handle. It will be a significant issue for those financial institutions that carry large commercial real estate loans. It is becoming increasingly difficult for real estate firms to service their debt, but the real challenge will come when they need to refinance that debt. With the much lower property values and the significantly reduced lease streams (caused by reduction in occupancy levels and rates) along with tighter lending policies, we should see a new wave of company failures and new pressures on the banking system. It is not a question of “if” this will happen, but “when”. This will again put pressure on the banking system and thus limit capital access to other businesses.

  • The health care debate and taxation climate has so many unanswered questions about additional burdens that our growing businesses must overcome. Resolution of these important issues will have a significant effect on whether the US business focus will be on investing in areas that will drive growth (and create jobs) or to be redirected to pay additional burdens for a “greater good”.

The real question that remains is will Punxsutawney Phil come out and see his shadow and drive us back into a cold business climate for several more quarters or will economic flowers continue to bloom. I am betting that we have turned the corner and now is the time to ask “What's next and how do I take advantage of the marketplace changes?” That is certainly what I am doing with my new venture. So I am putting my energy and my money where my mouth is. Also, some of the greatest businesses of all time were created in challenging times just like we are experiencing now. The factors that made this happen were combinations of great ideas, outstanding talent, drive to excel, and new emerging customer needs. All factors that we are seeing today. This rare concurrence of business drivers rarely happens in good times, but is clear to those visionaries that look beyond the current state of affairs and imagine “what could be”. I am looking forward to seeing what this new wave of business leaders create from this opportunity.


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