If all you have is a hammer, everything looks like a nail. To those who keep thinking that the events of the past 18 months are merely an interruption in a long-running bull market, every tunnel has a light at the end of it. Unfortunately, what they see seems to be little more than a mirage. As Naked Capitalism notes in "Companies Paring Exposures to Risky Counterparts," there's little evidence that the worst is past.
As much as some optimists would like to find evidence of recovery, it is far more likely that the US will see a further deterioration in economic activity. We have not yet seen much in the way of bankrupticies and debt restructuring. Until this sort of thing becomes sadly routine, the bottom is not yet nigh.
One sign that conditions are worsening is that major companies are cutting their exposures to business partners they deem to be in peril. This is a corporate version of the paradox of thrift. While this activity may seem laudable as far as each actor is concerned, it will have the effect of pushing some enterprises over the edge. And those failures feed the downspiral of activity and psychology.
From the Financial Times:The world’s biggest companies are terminating contracts with customers they fear will collapse, a report will show on Monday in a sign of the turmoil spreading through global supply chains.
Of the 337 international corporates surveyed by accountancy firm Ernst & Young, most of which turn over more than $10bn a year, the majority said important customers were in financial distress and were taking longer to pay than usual.
A quarter said one or more key customers had gone into bankruptcy while almost on in ten said suppliers had gone out of business. As a result, a third of the companies surveyed have stopped trading with customers they perceived as high risk.
John Murphy, global managing partner of markets at Ernst & Young, said managers would have to scrutinise the health of even ultra-safe trading partners very carefully. “A company’s risk profile can change almost overnight,” he said.
I've read several recent articles on how the indicators are showing that the worst may be getting over. Light at the end of the tunnel? It is probably the headlamp of an on-rushing train!
Posted by: Subhankar | February 20, 2009 at 12:56 PM