Dinner with My Daughter

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

This past weekend, I attended a “Father and Daughter Dance” in support of fundraising for my daughter’s all-girl school. The function was attended by about 600 people, 300 girls from grade nine to grade 12 and their fathers.

Most of the dads in attendance were either owners of small- to medium-sized businesses, executives of large corporations, or professionals. I was surprised by the number of people I recognized from which my past business travels.

Anyhow, I had the opportunity to speak to many businessmen, individuals I consider economic “insiders” for the sole reason they feel the beat of the economy each day in their businesses.

Here is what surprised me:

The majority of businessmen I talked to Saturday night feel that the “second shoe” will soon drop for the economy. The consensus is that small businesses — that’s companies with 50 or fewer employees that in total make up about 70% of all employment in the United States — are operating on a shoestring. Yes, a shoestring.

The current Administration has pulled straws out of a hat to save the economy from going into a depression. They bailed out the big banks. And, let’s face it; they bailed Wall Street out from catastrophe. But I was unable to find one businessperson of the many I talked to that said they benefited from the White House’s economic rescue plans. One of the central ideas behind the government stimulus was that, by helping prop up the big banks, the banks would lend to small businesses. I failed to see the trickle-down to small businesses.

Most businesses are running very tight. They’ve cut staff, so less people are doing more. They are having a hard time collecting their receivables, they can’t get more money from their banks, and they are worried about demand for their products or services from their customers. Over the past 25 years, I have dealt with businesspeople every working day of my life; the business environment has never been so difficult.

The U.S. consumer, which was on a spending spree from 2005 to 2007, has gone into hibernation. Even if they have money, they are scared to spend it; hence the view that the Fed cannot raise interest even one-quarter point unless signs of rapid inflation start to appear.

Our economy is on very thin ice. One more blow to our economic system and many businesses will be throwing in the towel. After talking to so many business people this weekend, my view that the bear market rally that started in March 2009 is doing an excellent job in “tricking” investors into the feeling that the economy is getting better and “it’s okay” to be back into stocks has become even more cemented in my mind.

Where the Market Stands:

The Dow Jones Industrial Average starts this morning down 1.4% for 2010. The bear market rally that started on March 9, 2009, lives on until proven otherwise.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: by late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October 2007.