United Bank & Trust Blog

David Blough

Since late April, stock markets around the world have declined by 10-15% from their 2010 highs. The Dow Jones Industrial Average reached 11,200 just four weeks ago and today is back to 10,000. European and even Asia stock markets have seen even larger percentage declines. What’s it about and what does it mean?

The catalyst for this significant correction in stock prices after a nearly 14 month recovery from the 2008 bear market is Europe. Just six months ago the Euro was riding high, costing $1.50 to purchase, today it has depreciated to the $1.20 -$1.25 range. Greece and its bloated national debt and ongoing high government deficits compared to the size of it GDP has been the focal point. While Greece is a small player in the European Economic Union (ECU), the markets are worried that other larger European countries (Spain in particular) have large deficits as well. Since European banks hold significant amounts of the government bonds of Greece, Spain, Portugal and Ireland, the fear is that a default by one or more would seriously weaken banks in Europe and could lead to another credit freeze.

Europe has responded, putting together with the IMF a war-chest of 650 billion Euros (over $900 billion) to provide loans as needed to the Greek government and other European countries, should they need financing. Greece and the other weak sisters of Southern Europe have made pledges to quickly address the unsustainable spending gaps between tax revenues and spending levels. As governments move toward austerity, it will likely reduce the levels of economic growth across Europe. While the U.S. economy is expected to grow by 3% or more in 2010 and 2011 according to consensus forecasts, Europe may only be able to grow by 1 – 2% over the next couple of years. Meanwhile Asian economies are growing by 6% or more led by China and India.

We believe the European financial turmoil can be contained in Europe and that eventually fears should begin to dissipate. The U.S stock market has corrected by more than 10% and looks somewhat undervalued at 10,000. We think high quality U.S. stocks are attractive at this time. Asian and emerging country stocks likewise look attractive after a more than 15% pullback and strong underlying economies. We continue to under-weight Europe and over-weight Asia and emerging countries like Brazil, in our international investing strategy.

If you are concerned about how this recent volatility is affectiving your portfolio, please give us a call.

Kathy McCrate

The Internet is changing the way we save, borrow and invest. The vast amount of financial information on the Internet can be troublesome. Finding the right information, making sure it is accurate and from a trustworthy source are critical.

Reliability of Financial “Advice”
The “open” nature of the Internet makes it easy for con artists to promote their “get rich quick” ideas. Be especially wary of investment chat rooms and bulletin boards. A tip might be a promoter’s attempt to push up a stock price, just to unload their shares.

Rules to remember:

• When something sounds too good to be true, it may not be true.
• Be wary of unfamiliar companies offering investments.
• Be wary of hype. You may not know who is saying what and why.
• Check out sources of information that seem suspicious.

The Privacy of Personal Information
The technology used throughout the “Internet process” also gives rise to concerns over the privacy and use of personal information you may disclose when visiting different web sites.

Many web sites ask for personal information, such as age, name, e-mail address and more. In some cases, that information is sold to others so they can direct promotional efforts toward you over the Internet or through the mail. In some cases, those additional promotions may be of use. You may get special offers for products and services you are interested in. But in some cases, it may just result in further junk e-mail.

One way to understand how different web sites treat this type of information is to look for a posted privacy policy. Most companies with major a Internet presence have policies that describe how they may or may not use any personal information they may obtain.

The issue of personal privacy on the Internet will probably become more visible as more people use this communication tool. Congress is considering legislation that would regulate financial sites. Probably, the most important thing you can do is to be aware of the policies of the sites you visit most often.

The Security of Internet Transactions
Most of the publicized Internet hacking has caused problems for the web site companies. The hackers have tried to overload the system, not perform illegal transactions. Most sites that offer purchasing capabilities with a credit card use a password protected system with encryption and high-level security. Since Congress enacted a maximum loss of $50 in the event of unauthorized credit card use, using a credit card has become safer than writing a check.

Conclusion
The Internet is a new communication device that can present some additional risks. But, as with most things, common sense will provide a relatively high level of safety. Here are a few pointers:

• Don’t believe everything you see on the Internet, especially if it is coming from unknown sources.
• Never give out your passwords or any PIN numbers.
• Beware of things that sound too good.
• Most importantly, do business with those individuals and companies you can trust.

Kenny Leonard

We are currently in one of the most protracted business cycles in modern history.  If you recall your macroeconomics class from college, a business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time.

Economists note, however, that complete business cycles vary in length.  Historically, they have ranged anywhere from about two to twelve years with most cycles averaging about six years.  But, of these four stages, we seem terminally stuck in the 1st phase of this particular business cycle, namely the Recession.

RECESSION, you will recall from your ‘macro’ class, is that period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish.  This is the most unwelcome stage of the business cycle for business owners and consumers alike – and particularly this one.  Now if we believe the economists, this recession had technically been going on since September 2007, and it ended sometime in October 2009.  Now, we are supposed to be in the 2nd stage, Recovery.

RECOVERY, also known as an upturn, is supposed to be the point at which the economy “troughs” out on a graph and starts working its way up to better financial footing, i.e. things are getting noticeably better and we are moving on to the 3rd stage, Growth.

Recovery may be the stage we are ‘in’, but don’t tell that to the average entrepreneur.  Even though many of the factors which indicate recovery are beginning to emerge, it certainly doesn’t seem like much of a recovery quite yet – at least to many of the small business people we speak with every week.  To them, ‘things are just starting to happen’.  Increased consumer confidence and investment of capital are among them, but as we are on the mend, many businesses are still struggling, working capital is being drawn down to dire levels, and many are struggling to maintain their business loans at current levels.

So before the Growth stage comes at us again, and everyone can breathe a sigh of relief, businesses need to reevaluate what they are doing now and what they plan to do in the future to ensure that they can continue to survive the remainder of the current business cycle as well as the next!

Small business owners can take several steps to help ensure that their establishments weather business cycles with a minimum of uncertainty and economic damage.  They need to develop strategies that work now at the bottom of the business cycle as well as developing those that work when we are well into the Growth phase of the cycle — which we all hope is sooner than later.

Specific tips for managing businesses during this business cycle downturn include the following:

• Long-Term Planning — Business consultants encourage small businesses to adopt a moderate stance in their long-range forecasting.  We often see pro-formas that are too far reaching, even for a Growth stage economy.  So, it is wise for businesses to temper their forecasts to this particular reality, and many have difficulty doing that.

• Flexibility — Developing a business plan that allows for appropriate development times in each of the four stages of a business cycle is critical. This includes structuring alternative recession-resistant funding structures and putting away retained earnings during the strong Growth stage to help weather the next Recessionary stage, which always follows.

• Attention to Customers — Staying close to your customers is a tough discipline to maintain in good times, but it is especially crucial coming out of bad times, like we are currently experiencing.  Having your clients asking their best customers what their future orders will look like in 2, 4, and 6 months can be a specific indicator of when their company can expect an up-turn in business. But during bad times, like these, those questions often go unasked.

• Objectivity — Small business owners need to maintain a high level of objectivity when riding business cycles.  Making operational decisions based on hopes, desires and emotion rather than a sober examination of the facts can devastate a business, especially in economic down periods like we are experiencing right now.  Asking your clients to ‘get real’ is extremely important but difficult for many bankers to articulate.

Timing – Timing any decision within a company during a stage like this is difficult, and often we see businesses looking to the economists, politicians, media and even the stock market for their indication as to when to ‘pull the trigger’ on large expense items, like ordering additional manufacturing equipment or increasing the sales force or support personnel.  However, expanding too quickly when the markets are not there places huge demands on working capital.  But, in contrast, waiting to make these decisions till the Growth part of the business cycle is in a full upswing may result in decreased market share or an eroding customer base.  Again, the best route may very well be to listen to your customers, learn what they plan to do and when they plan to do it and then time your response to spending on capital items and personnel around their decisions.  For small businesses, customers are ultimately their ‘business destiny’ and who they rely on regardless of what ‘others in the industry may be doing’.  So, to the extent that small businesses utilize their current (and new/future) customers as a resource rather than an excuse for their current failings is paramount to their continued success.

We at United Bank & Trust and United Structured Finance Company are here for you. Luckily the SBA programs provide a great opportunity for customers to extend their amortizations, reduce monthly debt obligations, and add new working capital when other banks turned off their willingness to lend. As a resource to our clients as well as your banker we are here to help you manage these phases.

Don’t hesitate to call on us.

Source: Jim Fliss, Zions National Real Estate weekly rate update