Inflation vs. Deflation - Let the debate begin! Small Businesses and Deflation

Let the debate begin.

I for one, think Deflation and Inflation will be fighting for quite awhile. Deflation is here and it is getting NASTY in a hurry (oil from $140 a barrel to $60 in 4 months?) but the governments of the world have the printing presses going OVERTIME to avert such a situation. So, as the printing presses go wild to prop up the economy (and add inflationary worries) get prepared for WILD, VOLATILE markets. Get your employees and customers prepared for WILD, VOLATILE markets. If you look like you know what is going on you are 20 steps ahead of the next business. Below is a video from yahoo discussing the situation. Below are some helpful tips for businesses to succeed in this environment.

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Six ways for small businesses to prepare for deflation:

1. Scenario Planning: This is what successful, large enterprises do LEAPS and bounds better than smaller enterprises. Typically because they have resources to dedicate SOLELY to this purpose. They develop action plans based on various changes to their industry and look for threats and opportunities based on how they see things playing out in their industry. How will input prices and market forces (like interest rates) impact their company/industry. Which companies have too much debt or are poorly hedged with commodity exposures? Which management teams have depth and can survive an exodus of talent given a volatile market? Deflation may not cut across all sectors equally since commodity prices swing more wildly than semiconductor prices. How will your company adapt?

2. Inventory Reductions: Imagine buying oil as an input for your business at $140 per barrel in July. Today it is $60 per barrel. The business that has to sell its products at $140 is either going to sell at a loss or sell for a MUCH higher price than the business that bought at $60 per barrel. The raw materials cost can destroy a business with such volatility. As such, you need to operate your business on the Just-In-Time (JIT) inventory model or learn to order smaller amounts in shorter cycles to take advantage of dropping prices and optimizing profits.

3. Avoid Commodities: Have you seen oil come down from $140 + in July to the low 60s recently? You can count corn, soybeans, natural gas, etc. in that same bucket/set of issues. Commodity based businesses will have MORE volatility in the next 12-18 months than you can shake a stick at. You need to reposition your business as a niche marketer of high value goods. You need to be selling on VALUE and not on price. How can you add value?

4. Increase Productivity: Not all deflation is negative and wealth destroying. Deflation can benefit small business by making technology affordable. In such an environment you would be well served to buy technology boosts the productivity of your company. This should enhance the bottom line and give you more flexibility with your financials.

5. Cut Costs: Understand which costs are truly adding value in your enterprise. Which costs can be upgraded at the same cost? (ie. better quality) At the same time understand what costs are "nice to have" goods and services. Are you getting maximum productivity in your employees? Is there "dead weight" and which employees truly go "the extra mile" for your customers.

6. Review Contracts: This is a HUGE concern, especially for manufacturing companies. Holding a long-term contract during a period of dropping prices locks you into a high price point. On the contrary, negotiate longer contracts with clients if at all possible to hold your margins and profits.

Dan Ross
http://www.BetterBizIdeas.com/

Stock Market soars 10% but is it for real? Interesting Charts below...

Today the Dow closed up over 900 points or 10% today. Other indexes (S&P and Nasdaq) were up over 10% as well.

GM & Chrysler are asking for $$$. Ford as well.

Consumer confidence hit a new low today. PLUMMETING well below market forecasts, yet the market finished up significantly. This is nothing short of ludicrous to me. The consumer is 70% of the economy and we haven't seen them pull back like this, without a CONSUMER stimulus package, in AGES. Things are going to get worse before they get better.......Just my 2 cents.

The Fed started their meeting today. They'll announce their rate cut tomorrow. If they don't announce a cut to 1% on the Fed Funds Rate the market will sell off. I have posted two graphs of the S&P 500 at the bottom of this email.

While today's move of 90 + (10%+) on the S&P 500 was a HUGE move I haven't seen the market close above, and then stay above, the 20 day moving average in ages. Once a stock or index moves above such a threshhold they typically pop up some more and then re-test going below the average, on the upswing (bullish cycle.) The market still has 32 points to get to the 20 day moving average from the chart below. I'll get more optimistic once the market gets above and then stays above that average for another 30 days. By then the market might have a chance to make a run at a longer-term bearish indicator like the 20 week (100 day) moving average. The 20 week moving average is still NOTABLY higher at 1188 but moving downwards quickly.

The Bottom Line: I think this downtrend is still in full effect for the time being. I will sit on the sidelines with my "powder dry." I don't see a reason to put a bunch of my 401k to work and take it out of money market funds right now....



Dan Ross
http://www.BetterBizIdeas.com

Supply / Demand gone upside down in China?

First off, China finds some serious amount of natural resources in their country. It will take time to be mined & shipped (needs infrastructure) but it does have global implications for supply/demand for natural resources over the long-term. They want to import less and use more domestic sources of commodities.

http://english.people.com.cn/90001/90776/90884/6520297.html

Since the beginning of September, major Chinese steel manufacturers have announced to slash production upon falling steel prices on the domestic market.

http://english.people.com.cn/90001/90778/90857/90860/6517391.html

The Aluminum Corporation of China Ltd. (Chalco), the country's largest aluminum producer, said on Wednesday it would cut production in line with falling demand and prices. The total capacity reduction would be 720,000 tons a year or 18 percent of the company's annual production, said a company statement.

http://english.people.com.cn/90001/90776/90884/6520346.html

My take: It should be noted that the Chinese were GOBBLING up every conceivable natural resources before the Olympics to feed their economy. Since then, they have really quieted down and, as supply/demand levels are coming back to true equilibrium, the volatility in the commodity and financial markets has been STAGGERING.

I personally think they got wind of the slowing economy and put the brakes on their purchases of raw materials. After all, they would bring in the raw materials and export products worldwide. Their economy is 50% export right now from what I have read. They are trying to stimulate internal, domestic demand to offset the weakness in their export economy. I expect quite a few more rate cuts in China over the next 1-2 years, which will stimulate their consumer economy at some point.

Dan Ross
http://www.BetterBizIdeas.com

China: Significant Policy Change in Property Market - loosening of credit to increase domestic consumption

So the number of real estate deals is down 72% Y-Y during their holiday period. Some people are now taking a "wait and see" approach and are staying on the sidelines. People say that the remaining potential buyers are "marginal" buyers who have to stretch to afford a home.

http://english.people.com.cn/90001/90776/90884/6510493.html

The government is easing credit requirements to buy property. This should help to sustain real estate prices. Please note, however, that Chinese finance rules say down payments of 30% are being reduced to 20%. I guess they never heard of our 0% down financing here stateside and the wonderful results it has generated :)

http://www3.uobgroup.com/assets/pdfs/Flash_1023A.pdf

Source: http://english.peopledaily.com.cn/200208/09/eng20020809_101182.shtml

Then there is the rumor of U.S. Investment banks selling their chinese owned properties. Chinese politicians/developers are worried that this may cause a drop in commercial real estate values.

http://english.people.com.cn/90001/90776/90884/6511242.html



My take: There are a few investment plays on China real estate.

XIN - XINYUAN Re: Holdings (real estate development) - It focuses on developing residential projects consisting of multiple residential buildings that include multi-layer apartment buildings, and sub-high-rise or high-rise apartment buildings, as well as auxiliary services and amenities comprising retail outlets, leisure and health facilities, and kindergartens and schools. The company also develops small scale residential properties; and leases certain properties, including an elementary school, a clubhouse, a kindergarten, and parking facilities, as well as offers real estate related services, including landscaping and installing intercom systems. As of December 31, 2007, it completed 14 projects with total gross floor area (GFA) of approximately 1,001,199 square meters; 7 projects with a total GFA of 1,069,144 square meters under construction; and 6 projects with a total GFA of 1,452,013 square meters under planning. The company was founded in 1997 and is headquartered in Beijing, the People�s Republic of China.

EJ - E House Holdings - Basically a real estate broker. More volume = more profits (once they cover their costs) This is the safer play on chinese real estate development. It primarily offers real estate agency services to real estate developers of residential properties. The company also provides real property brokerage services, and intends to provide listing and brokerage services, which include sales and rentals. E-House (China) Holdings focuses its secondary real estate brokerage services in three metropolitan areas within China, including Shanghai, Wuhan, and Hangzhou, as well as in Hong Kong and Macau. Its real estate consulting services include land acquisition consulting and real estate development consulting; and other consulting services to investors interested in purchasing businesses with land or other real estate assets, as well as to banks, real estate trade associations, and governmental property and planning agencies. The company�s real estate information services comprise the CRIC system, which supports its primary and secondary real estate services, and consulting and information services. The CRIC system consists of real estate sales data in China covering information on land, residential, office, and commercial spaces, as well as real estate related advertisements. The company was founded in 2000 and is headquartered in Shanghai, the People�s Republic of China.

Dan Ross
http://www.BetterBizIdeas.com/

Will lower oil prices cause social unrest and terrorism to rise? What about the impact to global capital markets?

Countries have a tendency to increase their government spending when times are good.

Governments would be best served by undertaking projects that have a short or defined time span / implementation. These would be capital spend projects like roads, bridges, power plants, water treatment centers and other "infrastructure projects." This way, when revenue sources fall they can cut their spending to get their budgets balanced and not run protracted deficits. Where governments get into trouble is when they increase spending notably by increasing social security benefits or other "welfare" type of projects that generate year-after-year (continual spending). When the revenue source declines the governments either have to run a deficit, cut the spending to the chagrin of those who become dependent on the services (who vote as well) or increase taxes. At some point the American taxpayer/consumer/economy is in for a BIG awakening due to continually rising national deficits and a RIDICULOUS national debt.

Argentina's economy is in trouble right now for this very reason. They spend too much each year on continual spending and can't pay back their loans.

In the gulf region (Saudi Arabia, UAE, Qatar, Kuwait, Bahrain and Oman) many governments are at risk of running deficits in 2009 due to a falling price of oil. Oil was $140 + a barrel in July 2008 and has fallen as low as the high 60s in recent days.

The rgemonitor ( http://www.rgemonitor.com ) ie estimating that the lowest breakeven oil price that would bring 2008-2009 budgets into balance "is in Saudi Arabia ($30/bbl), followed by UAE ($40/bbl) and Qatar ($55/bbl). Therefore, that means that Saudi Arabia can maintain the current level of budget spending even if the oil price were to fall to $30/bbl." However, this year Saudi Arabia is undertaking many capital projects and, as a result, they need oil to stay above $49/barrel in 2009 to avoid running a deficit. Apparently Merrill Lynch is estimating the average breakeven for GCC is $50/bbl. Bahrain and Oman are at risk of running 2009 deficit if the oil price remains around $70/barrel (IMF).

Another thought: If Saudi Arabia runs a deficit what will the impact be to the global capital markets? The Far East and Gulf Regions have been the biggest investors in the last few years, running large surpluses each year. Who will then have $$$ to invest in re-capitalizing banks or buying U.S. government paper? The demand for U.S. paper would decline in such an event and who would finance our deficits? This would lead to excess paper supply and the U.S. dollar falling in value. This, in turn, could cause inflationary pressures to come back.

Another thought (v2): Venezuelan President Hugo Chavez said Wednesday that his nation could withstand the global financial crisis even if the oil price falls to 55 U.S. dollars a barrel, Venezuela's national TV channel reported. On Tuesday, Economy and Finance Minister Ali Rodriguez Araque presented to lawmakers the Venezuelan budget for 2009, which was formulated based on an average oil price of 60 dollars per barrel. U.S. policymakers have to love this as falling oil will cause more social unrest in Venenzuala and Chavez has less free $$$ to hand out to other Latin American countries to support his rhetoric against the U.S.

Dan Ross
http://www.BetterBizIdeas.com

Great Observation by Cramer - Which companies saw this coming?

Dan Ross
http://www.BetterBizIdeas.com

Updated Las Vegas info.

Not sure if everyone is aware of this:

Boyd Gaming Corp. recently postponed work on its $4.8 billion Echelon resort in Las Vegas. The Las Vegas-based company, whose ratings were lowered by Moody's last week, also suspended its annual cash common dividend. They have a steel framed building up and that is all that will be completed for the next 6 to 12 months. Bet Vegas gov’t officials were happy to see that! NOT!

MGM Mirage announced wednesday they weren’t going to give out bonuses & their ratings were cut. Meantime, Kirk Kerkorian sold his Ford stake to protect his majority stake in MGM. Rumor has it that he needs to raise more $$$ to finish the CityCenter project so he’ll put $$$ to work with foreign investors.

Then, wednesday as well, LVS sands says that they need to raise a BOATLOAD of $$$$ ($2 billion) to finish their Macau (Cotai strip) property. Adelson, the CEO, thinks banks over there will be more receptive than U.S. banks. The Cotai Strip project in Macau, due to be completed in 2011, is to include retail malls plus hotels that will be operated by some of the biggest names in hospitality, such as Sheraton, St. Regis, Hilton, Conrad, Shangri-La and Traders.

http://biz.yahoo.com/ap/081022/las_vegas_sands_adelson.html?.v=1

Dan