Why I Think The Worst Is Over

It’s hard to call a bottom to the market and that’s now what I’m doing today. What I am doing is saying that news may not be nearly as bad in the next few months as it has been the past few months. We’re probably somewhere between five and seven on the clock if six is the bottom. Why do I think this?

Information passes much more quickly today and companies are much more able and willing to act adjusting to market news. That’s why the economy fell off a cliff in the October - November time frame. Companies had started laying off workers foreseeing a slowing economy. This led consumers to tighten their belts fearing for their jobs. And even a little tightening, maybe 5-20% of consumer’s discressionary income can cause a small sales contraction instead of a marginal gain for most companies. So if a company is planning on growing sales at 8% and all the sudden falls to losing 2% of sales they’ve got to take action. So they slash costs. And the only real cost they have any control of is headcount. So the slashing begins. And everyone else is doing the same thing so the economy gets worse which leads to more cutting… And the cycle continues.

But there’s an end to this game. See fixed costs have been rising over the past 50 years as a percentage of sales. That’s lead to great productivity improvements but it also removes flexibility for companies. Companies have also gotten much more efficient at running these fixed assets. So for example if Company A owns five molding machines these machines can be run by two operators and a supervisor. Sales fall and management looks to cut costs they can cut one person, probably not two and definitely not three or they’ll have no product to sell. So information flows in quickly, decisions are made quickly and one person is cut. But that’s as low as they’re going to be able to go while staying in business.

That’s why you heard of layoffs by the thousands and tens of thousands in November, December and January but those announcements have come to a screaching halt in the last month and a half. There’s just no one left to cut in a lot of these companies. Someone has to run your huge fixed assets. Accountants need to count the beans. There’s a limit.

So the fact that we went from growth to extremely lean in a matter of six months put a shock in the market but it’s going to limit the time we’ll be in this crap. It’s not going to end tomorrow, but I do believe we’ll start seeing a turnaround sooner than some are expecting. I think before summer is out. And the market will come back fast.<!----><font> qtvr software Buy Microsoft Money 2007 Deluxe
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