PLANNING FOR 2009

On January 1, 2009, an Associated Press writer informed:  “The number of laid-off workers continuing to draw unemployment benefits bolted to 4.5 million in late December, and even more Americans are expected to join the ranks of the jobless in 2009… Economists predict the jobs situation will get worse before it gets better.”  Near this article was a feature reporting that General Motors had received the initial $4 billion of its bailout money from the federal  government.  If that was not enough reason for pessimism, a nearby news summary was about how Trump Entertainment missed a $53.1 bond interest payment on December 1 and that the grace period was now up and the money was still unpaid.

 

Similarly, the supposedly recession-resistant gambling industry has been badly damaged by the economic downturn.  Casinos are cutting costs and scrambling for customers (see, for instance, “Will Gambling Continue to Grow?  All Bets are Off” in the January 2, 2009, Wall Street Journal).

 

The Wall Street Journal (December 30, 2008) ran a story  titled “Pawnshop Clients Now Drive BMWs.”  Affluent people, or formerly affluent, are visiting pawnshops to offer diamonds, keepsake watches, and the like as collateral for loans to meet expenses.  Another article described how a Beverly Hills general practitioner was stressed because patients were not paying her on time or at all and a woman even solicited a monetary handout from her during an office visit.

 

A personal vignette along the same lines:  When I was in Middleburg, Virginia, in 2008, I visited a bookstore whose owner specializes in rare and out-of-print books, mostly on horses.  He told me that his clientele had cut back on purchasing his books.  If people in the Hunt Country of Middleburg and Loudoun County are experiencing a financial pinch, then things assuredly can’t be good elsewhere.

 

With gloomy statistical reports from government combined with anecdotal evidence, 2009 does not appear promising for doing business.  However, just how bad things will be is problematic because economic forecasting and business forecasting are inexact methodologies, to say the least.  Recall the amusing story about President Harry S. Truman and his frustration with economic advisors who would not give him a straight answer:  “All my economists say, ‘on the one hand and on the other hand.’  Someone give me a one-handed economist.”

 

Nearly 20 years ago, I published a book titled Six Timeless Marketing Blunders; one of the six was explored in a chapter called “Too Much Faith in Forecasting.”  To bolster my assertion I included predictions by renowned experts in their fields, including Nobel prizewinners, which were dead wrong.  My collection has grown as time has gone by.  

   

Last year at this time, one of the leading investment publications forecast a Standard & Poor’s 500 Index level for the end of 2008 that proved to be twice the actual case.  Only a handful of people came remotely close to calling the extent of the economic turmoil in 2008 and the plummet of the major stock indices.

 

The stock market has, on average, peaked at about nine months prior to the beginning of a recession and reached bottom five months before the end of a recession.   These are averages, of course, and calling market bottoms and tops with consistentcy is impossible. 

 

Benjamin Graham, Warren Buffett’s professor at Columbia Business School, said that in the short term, the stock market is a voting machine, but in the long term it is a weighing machine.  In other words, the market correctly values stocks over a protracted period of time, but not necessarily on a day-to-day or a week-to-week basis.

 

A persistent rally in the stock market  is a promising sign, but we have not seen this yet during the recession, so recovery in the first half of 2009 does not look to be likely.

 

A private company I am affiliated with as an advisory board member manufactures a key component for a widely used industrial and consumer product, made primarily in the United States and China.  Revenues for this firm have been reliable in predicting changes in the level of overall economic activity, approximately six months in advance.  Sales were strong until October of 2008 but have gone downhill since.  As of the start of 2009, we see no evidence from incoming orders of a turnaround in the economy in the next half year.  As a result, the company president had to take the painful precaution of furloughing some of his workforce.

 

Whether the recession and subsequent recovery follows a v-shape or a u-shape is pretty well settled.  The recession looks like it will be u-shaped, meaning that there won’t be a quick recovery.  The housing market remains in the doldrums, and is especially bad in locales where a real-estate bubble prevailed, areas like Miami, Las Vegas, and Phoenix.  

 

President-elect Barack Obama and the Democratic Congress plan a huge stimulus package, but when it will promote growth is an open question.  Should the new administration put the bulk of the stimulus package into infrastructure, some reputable economists doubt whether the spending will have the desired effect in 2009.  Moreover, there is the risk of longer term inflation from all of the fiscal and monetary fuel.

 

Horse racing at the racetrack level and the bloodstock level is a quintessential consumer discretionary expenditure, and therefore is highly sensitive to the wealth effect, or how well off we feel.  With all of the bad news, even people who are very well off are affected psychologically and act accordingly.  A news report told of a family with a net worth of in excess of $20 million who curtailed eating out to conserve money.  This kind of negativism is exacerbated by the Bernard Madoff Ponzi Scheme in which so many super-wealthy were bilked.

 

Because economic forecasting is so uncertain, what is a business to do?  Certainly, a firm offering or depending on racehorses, a product that consumers can do without, should plan for a worst-case scenario in 2009.  Better to err on the side of caution.  I would plan for a “most likely” scenario and then reduce the pro forma revenues from that scenario by another 15%-to-20%.  Then operational outlays would be adjusted accordingly.

 

An aphorism advises to hope for the best but plan for the worst.  Hope is not a strategy–the data are telling us to plan for the worst in the first half of 2009 and monitor the leading indicators as we go along.

 

Copyright © 2009, Horse Racing Business

 

Comments

  1. Thanks for the 2009 outook and good luck with your website.

  2. Breeding fees need to get realistic soon, racing has always been known as the sport of kings. Most Kings are loosing their ba-tooties in every other business. This is the time to stay a float with trainers and labours or those kings will soon have to ride and train their own mounts.

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