advertising section TURNAROUND
It has been encouraging to watch the
recent run up in the markets as they
have rebounded from their March lows.
Second quarter earnings came in much
stronger than expected with more
than two thirds of companies beating
analysts’ estimates by an average of
15 percent. In response, the S&P has
jumped a healthy 12 percent since June.
All good indicators the U.S. economy is
on the road to recovery. Sort of.
Keep in mind, most of the second
quarter earnings improvement was
driven by cost cutting and not revenue
growth. Furthermore, Government-led initiatives, such as the “Cash for
Clunkers” program, continue to buoy
our economic health in the short term.
However, for a self-sustaining expansion to take hold, we must see top-line
growth across the broad spectrum of
For the remainder of this year and
into next, the financial sector will
face a new set of challenges, from
consumer loans and commercial real
estate. Thus far, tier one banks are
weathering the storm. However, many
regional banks are still at risk. In fact,
the number of banks being added
to the Feds watch list suggests that
we will see further consolidation as
those smaller banks fail. This has the
potential to create a financial burden
on the system as we head into the
fall season. September is historically
the worst month for markets and any
weakness could stall the economic
recovery for several quarters to come.
Few would argue that Government intervention was necessary.
However, there will be longer term
ramifications as the Federal Government wrestles with a growing deficit.
Just look at how the activities of the
Federal Reserve Board enter into the
larger federal budget. Over the past
year, the Federal Government has
engaged in a variety of new lending activities, most notably, the $1.4
trillion in credit support to purchase
various “toxic assets” from banks.
This, coupled with the initiation of
the payment of interest on reserves,
will have a significant impact on the
Feds earnings and hence contribute
directly to the federal budget deficit
in future years.
So what does all this mean? Anyone
in the “C Suite” should be attuned to the
impact these outcomes could have on
a fragile recovery and the financial implications for their company in the near
term. Liquidity should remain a primary
focus throughout 2010.
Gary Prager is a Managing Director
at GB Merchant Partners, the investment management affiliate of Gordon
Brothers Group. He can be reached
at (404) 307-0165 or firstname.lastname@example.org