WSJ Headline Economic Gauge - October leans toward the positive!
For the first time since we started tracking it in March, our WSJ Headline Economic Gauge for the month of October recorded more positive headlines (49%) than negative (42%). Certainly a good sign BUT is it sustainable.
Month-----------Positive-------Neutral--------Negative-----Total Headlines
March-----------18/26% ---------6/9% ---------45/65% -----------69
April------------40/32% --------13/10% --------71/51% ----------124
May ------------50/23% --------37/17% ------131/60% ----------218
June ------------50/40% -------15/12% --------61/48% ----------126
July -------------76/35% -------26/12% -------113/53% ----------215
Aug -------------31/42% --------11/15% -------31/42% ------------73
Sept-------------49/38%----------9/7%---------72/55%------------130
Oct------------94/49%-------16/8%------81/42%---------191
There were reports early last week of unemployment in California increasing to 12.2% and “underemployment” increased to 20+%. There are reports, too, of an increase in mortgage defaults in even the more expensive homes in the SF Bay Area as a result of the un- and underemployment problems. There are still problems ahead with commercial real estate as well as term business and industrial loans made over the past 2-5 years as they come due.
In the last 30 to 45 days, we have been getting an increasing number of calls from business owners about the need to revisit capital structure in light of the continued uncertainty in the market – how to replace debt coming due or lines of credit that are being reduced by the bank and consideration of recapitalizing the business possibly with subordinated debt and/or equity.
While our WSJ Headline Economic Gauge is finally showing some encouraging signs, we believe there are still bumpy times ahead. Middle market business owners have to continue to be cautious as they plan for the next several years. They will not be able to manage their businesses the same way they have in the past and they will not be able to rely solely on their banks for capital. We think this is the time for business owners to consider engaging outside management consultants to help enable them to manage through the more difficult times we believe are still ahead. It is also a time to consider capital outside of your bank to make sure your company is capitalized properly to sustain the business until the economy does improve, which we believe will not be for several more years.
We at Wood Warren would welcome the opportunity to help find the resources right for your company or your clients’ companies.
Comments
I think your blog of November 11 is right
Dear Biff,
I think your blog is right. Now that the positive headlines outnumber the negative, clients need to act. They may be able to get something done now that it is more feasible. Everything takes more time that one thinks. As you suggested, many firms really ought to be engaging advisors to improve their operations and shore up their capital structure. They will need it to survive or seize an opportunity during what looks to be a long road back for a number of years.
There is always refinance risk in the debt markets but I sense a certain underlying nervousness right now for good reason. The maturing debt over 2011, 2012, 2013, 2014 is daunting. Leveraged corporate loans of about $1000 billion and real estate of $600 billion. Good businesses will find a way but others will be disasters. The primary loan markets are just starting to function again and they have a long way to go.
I was meeting with a friend at Blackstone recently. He has worked on 40 corporate leveraged restructurings this year. Many have obtained extensions. But bad businesses are still bad. EBITDA is flat. Firms that are just hanging on will not get the working capital they will need to grow when things turn up. Any firm that can refinance now is being to do it and take the price increase.
On the commercial real estate side, I listened to a panel from Wells, Goldman, Eastdil, JPM all agree that the overwhelming problem everyone was struggling with is unhealthy and deteriorating fundamentals. They see a painful process that will take 3 to 4 years. Capital was formed to invest but no one can put a deal together at 15-20% IRR. Risk is hard to figure out and no one is rushing to out bid or find a way to do the deal. No incentive yet to clean house at banks. Deals can only be done at 40% cash, remainder soft/with shared upside. Models are too easy to manipulate. They are back to cash on cost returns and price/s.f.
I did not intend to get so carried away with this email. Sorry. I was thinking that you would find it consistent with what you are saying in your blog.
Stay in touch.
Bob