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Gasket Fabricators Association “Thinking BIG in a Shrinking Economy”
October 2008 Presented By: The Institute for Trend Research Dr. Jeff Dietrich check TEC number, month, name, and slide 1
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This is not an official recession…
US Industrial Production to Gross Domestic Product 3/12 Rates-of-Change (Quarterly year-over-year % change) 2/3rds of Americans believe we are in a recession 60% of US economists surveyed by USA Today say we are too Consumer & Housing Stimulus Packages $464B Fannie Mae & Freddie Mac now in reserveship 9/8 Lehman Bros. largest bankruptcy in US history AND Merrill Lynch bought by BofA AND AIG and others who shall remain nameless - for now… Unemployment is at 6.1% and rising…. S&P 500 officially enters a bear market in July Government bailout $700B and counting… Weak Dec – Sept Retail Sales Global Equity Losses estimated $1.5T to 2T Inflation (5.4%) highest since early 1980s GDP 3.3% 2Q08 This is not an official recession… F:\\Powerpoint Charts\Tec Generic Source.xls FRBGDP3 This is... How much is noise?
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Summary Global view: “North America” is in trouble; Europe’s growth is slowing; Japan is sliding lower; other global economies (BRIC) are showing signs of weakening and expected to follow this downward slope in 2009. Prolonged cyclical event, projected to last into 2010 Caution against linear projections & capital expenditures that do not translate into gains market share. Another picture of Recession…
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US Industrial Production Index Forecast Through December 2011 Annual Average Index
Tipping Points- Hard Landing – Here today Debt (s) Interest Rates Taxes Inflation Liquidity/Credit “Crunch” China Elections Oil Housing & Home Prices Unemployment % Actual % Actual Forecast (Median) 0.6% -2.9% F:\PowerPoint Charts\Tec Generic Source.xls TIPROF2 02/TIPROF2 02 (3) slide 2 Handout remove text numbers off Source: ITR’s EcoTrends® Monthly Economic Report
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Purchasing Managers Index ISM
Leads USIP by 10 mo. F:\PowerPoint Charts\Tec Generic Source.xls PMIROC slide 47 Source: ITR’s EcoTrends® Monthly Economic Report
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U.S. Composite Leading Indicator 1996 = 100
1/12 12/12 Money Supply, Ave. Weekly Hrs (Mfg); Mfg. N.O. (Consumer Goods & Nondefense Capital Goods); Building Permits (New Private Housing units); Stock Prices (500 common stocks); Interest rate spread; Consumer Expectations; Ave. Weekly Unemployment Claims. Actual F:\PowerPoint Charts\Tec Generic Source.xls USLI slide 46 12MMA Source: ITR’s EcoTrends® Monthly Economic Report
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It is not all bad news... Nonresidential Construction
Energy & alternatives (Green) Health Care, Legal, Wealth Management… Used Equipment, Machinery and Equipment Medical Products and Pharmaceuticals Civilian/Commercial Aircraft Consumer Goods – basics (Affluent, Office Supplies, Beer/Wine, Nonprescription meds, games, toys, sports/wellness, tires, car maintenance, basic home supplies...) Food (People & Pets) Exports Defense Capital Goods, Communications Equipment NO Precision Manufacturing
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RATE-OF-CHANGE Percent year-over-year change
ACTUAL MONTHLY DATA AS OF 8/08 ACTUAL MONTHLY DATA AS OF 8/07 (+3.2%) (-3.0%) = 1/12 3-MOS MOVING TOTAL (3MMT) AS OF 8/08 3-MOS MOVING TOTAL (3MMT) AS OF 8/07 = 3/12 Check (current month –1) slide 13 ANNUAL MOVING TOTAL (12MMT) AS OF 8/08 ANNUAL MOVING TOTAL (12MMT) AS OF 8/07 = 12/12
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Company L to US Industrial Production 12/12 Rates-of-Change
F:\PowerPoint Charts\Tec Generic Source.xls CoLFRB slide 19 Co. L
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Four Phases 12/12 Rate of Change (y-o-y)
Nonresidential Construction AircraftX FoodX Retail Sales Expansion Hi-Tech IP Gas/Oil/Coal New Orders Prices Exports Industrial Production Zero Percent Growth Stock Market AutoX PaperX Banks Housing n/a slide 23 remove text from handout (expansion/bankrupt) Bankrupt
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Global Industrial Production Indices 12/12 Rates-of-Change
F:\PowerPoint Charts\ReserveCharts\Misc2\ GlobalIP Slide 20 Source: ITR’s EcoTrends® Monthly Economic Report
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BRIC Industrial Production Indices 12/12 Rates-of-Change
F:\PowerPoint Charts\ReserveCharts\Misc2\ GLOBAL IP (BRIC) Brazil #1 exporter of soy, coffee, sugar, beef, poultry. Second largest iron ore deposits. “New” oil discovery off the coast. Gaining in rice & corn ($58B in farm products).
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Global Industrial Production Indices 12/12 Rates-of-Change
The challenge: Don’t participate in the projected negative cycle. F:\PowerPoint Charts\ReserveCharts\Misc2\ GlobalIP Slide 20 Source: ITR’s EcoTrends® Monthly Economic Report
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BRIC Industrial Production Indices 12/12 Rates-of-Change
F:\PowerPoint Charts\ReserveCharts\Misc2\ GLOBAL IP (BRIC) Brazil #1 exporter of soy, coffee, sugar, beef, poultry. Second largest iron ore deposits. “New” oil discovery off the coast. Gaining in rice & corn ($58B in farm products).
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Nondefense Capital Goods New Orders w/o Aircraft Billions of $
3/12 12/12 3MMT F:\PowerPoint Charts\Tec Generic Source.xls NDFCGXA slide 37 12MMT Source: ITR’s EcoTrends® Monthly Economic Report
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US Industrial Production to Computers & Electronic Products New Orders 12/12 Rates-of-Change
Forecast 0.8% -8.3% F:\PowerPoint Charts\Reserve Charts\FRB.xls FRBCOMELNO slide59
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Nondefense Capital Goods New Orders w/o Aircraft to Electro medical, Measuring, and Control Instruments New Orders 12/12 Rates-of-Change F:\PowerPoint Charts\Reserve Charts\New Orders.xls NDFCGXA EMCINO slide 23
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US Industrial Production to Industrial Machinery New Orders 12/12 Rates-of-Change
Leads USIP…decline slowing 2008 Mild rise in 2009 (3.7%) Two year cycles – more dynamic than IP F:\PowerPoint Charts\Reserve Charts\FRB2.xls FRBINMACHNO slide 20 Machinery used in the following industries: paper, plastic, rubber, textiles, printing...
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Nondefense Aircraft & Parts New Orders Billions of Dollars
3/12 12/12 12MMT F:\PowerPoint Charts\Reserve Charts\New Orders.xls AIRPNO slide 1 3MMT
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National Defense Expenditures to Defense Capital Goods N. O
National Defense Expenditures to Defense Capital Goods N.O. 12/12 Rates-of Change F:\PowerPoint Charts\Tec Generic Source.xls GDPNCGNO slide 63
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US Industrial Production to Defense Communications Equipment New Orders 12/12 Rates-of-Change
Likely a 5.7% gain this year NDFCOMQ % -19.0% 112.0 F:\PowerPoint Charts\Reserve Charts\FAB2.xls FRBDEFCOMQ slide 10 Opportunities likely into 2008 Peace Dividend
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US Industrial Production to North America Light Vehicle Production 12/12 Rates-of-Change
Forecast -14.6% -10.5% F:\PowerPoint Charts\Reserve Charts\FAB.xls FRBAUTPRNA SLIDE 37
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US Industrial Production to North America Light Truck Production 12/12 Rates-of-Change
F:\PowerPoint Charts\Reserve Charts\FRB3.xls FRBLTTRUCKNA SLIDE 56
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US Industrial Production Index to Foods Production 12/12 Rates-of-Change
Forecast 4.6% 2.3% F:\PowerPoint Charts\Reserve Charts\FRB.xls FRBFOODX slide 20
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US Industrial Production to Civilian Aircraft Equipment Production 12/12 Rates-of-Change
Decelerating growth into 2010 The rest of the world is buying… 24.9% F:\PowerPoint Charts\Reserve Charts\FAB2.xls FRBAIRNECX slide63 Forecast 22.3% 11.3%
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US Industrial Production to Pharmaceutical & Medical Production 12/12 Rates-of-Change
Lags US economy by mo F:\PowerPoint Charts\Reserve Charts\FAB.xls FRBDRMEDX SLIDE 46
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US Industrial Production to Metalworking Machinery Production 12/12 Rates-of-Change
Metalworking Machinery NO projected to see rise (9.8%) into 1Q09. F:\PowerPoint Charts\Reserve Charts\FRB.xls FRBMWMPX slide 16
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US Industrial Production to Fabricated Metal Products Production 12/12 Rates-of-Change
Forecast 2.7% -0.8% F:\PowerPoint Charts\Tec Generic Source.xls FRBFABX slide 30 Depends on Markets…
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US Industrial Production to Non-Residential Construction Data Trends
Growth slowing through 2009 Office Building Construction Commercial Building Construction Industrial Building Construction Hospitals – Medical Facilities College and Universities, Tech Schools Casinos – Resorts Sr. Adult Housing Public Projects (Schools) +12.3% +13.6% +34.2% +50.4% +10.8% F:\PowerPoint Charts\Tech Generic Source.xls FRBCONNRESDT slide 15
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Housing Starts Millions of Units
Forecast % % 3/12 12/12 Inventory of existing homes 11.0 mo Inventory of new homes 11.5 mo 3MMT 12MMT F:\PowerPoint Charts\Tec Generic Source.xls HS slide 58 Source: ITR’s EcoTrends® Monthly Economic Report
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US Industrial Production to Appliance Market Production 12/12 Rates-of-Change
Forecast -7.9% -5.7% Gradual recovery F:\PowerPoint Charts\Reserve Charts\FRB.xls FRBAPLACX SLIDE 51
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Hand Tools Expenditures to Retail Sales Excluding Autos 12/12 Rates-of-Change
F:\PowerPoint Charts\Reserve Charts\PCE Expenditure.xls PCE Handtools RSALES.D slide 2
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Retail Sales Excluding Automobiles Adjusted for Inflation Trillions of 82-84$
Weak consumer trends into 2010 12/12 3/12 Forecast Actual % to 1.2% Negative 3MMT 12MMT F:\PowerPoint Charts\Tec Generic Source.xls RSALES.D slide 54 Across the board…. Source: ITR’s EcoTrends® Monthly Economic Report
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Consumer Sentiment/Expectations and Retail Sales
F:\PowerPoint Charts\Tec Generic Source.xls CONXRSD slide 55
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Fed. Government Cash Account to US Industrial Production Index Data Trends
F:\PowerPoint Charts\Tec Generic Source.xls FRBCASH3 slide 62
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US Industrial Production to Oil & Gas Extraction Production Annual Data Trends
Price of oil per barrel: 1998 2003 2004 $14 $31 $42 % Oil Imports 1973 - 2005 - 28% 63% F:\PowerPoint Charts\Tec Generic Source.xls FRBOILGASDT slide 69
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Preparing for & Profiting through 2009
Sell – top of the business cycle Acquisitions… Avoid Linear Thinking in Late Phase B to Early C (Stockdale Principle) Trim inventories… Capital Expenditures –to gain market share, improve efficiencies (return) Liquidity – Cash is King Phase C: Conserve Cash, Consolidate Expenses Focus on key revenue stream (products/services) Delineate Competitive Advantages – Value Proposition Cross-train (reduce employee costs) Reduce fixed costs & Renegotiate lease and/or refinance debt Cut high maintenance low value customers (products/services) Market share/organic growth – “get smarter, think bigger, move faster” Retention – customer relationships Diversify – Entrepreneurial Spirit – What Next? Else? We can do this… Energy Efficiency – Productivity Improvements – Cost Savings
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Six Ways to Compete/Grow
Price – Cost: Everyday low pricing Wal-Mart is legendary for squeezing pennies “Anyone” can beat price for a day, month, 6 mo Service – Hassle Free: Responsive to Client/Customer No mistakes, no delays, no inconvenience (Fed-Ex) Confusion sometimes between Sales & Delivery Quality - Uniquely Better – “quality is a given” Platform/Product is superior, innovation superior (Apple) Provide others can’t or won’t or aren’t PORTFOLIO - getting better each year…3-5 revenue streams Results Expertise – Solution Selling Asking the right questions (GE – radiology) Insights that save time, money, personnel… Internal Efficiencies – cost savings Leadership Team - Beyond Strategies/Plans Passionate, Principled & Partnering Translating Plans into Action Relentless improvement – more “new tries” “Get Smarter. Think Differently. Move Faster”
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GOODS & SERVICES AS A PERCENT OF GDP (real) w/o structures
F:\PowerPoint Charts\Tec Generic Source.xls G&S slide 10
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GDP, Bils of US $, Current Prices Percent of World GDP
Korea Mexico India Australia Russia Brazil Canada United States Spain Italy France United Kingdom Japan Tec\World GDP\2005 slide 70 Yellow #’s not on handouts Source: IMF Year: 2006 Preliminary Data China Germany
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“It is always the adventurers who do great things, not the sovereigns of great empires” - Charles De Montesquieu
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Phase Management ObjectivesTM :
Phase Late B Early C - Prosperity: 1. Stay in stock on A items, be careful with C items 2. Consider selling the business in a climate of maximum “goodwill” 3. Penetrate new selected accounts 4. Develop plan for lower activity in traditional, mature markets 5. Freeze expansion plans (unless related to “what is next”) 6. Spin off undesirable operations 7. Consider taking on subcontract work if the backside of the cycle looks recessionary 8. Stay realistic – beware of linear budgets 9. Begin missionary efforts into new markets 10.Communicate competitive advantages to maintain margins n/a slide 27
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Phase Management ObjectivesTM :
Phase Late C - Warning: 1. Begin work force reductions 2. Set budget reduction goals by department 3. Avoid long-term purchase commitments late in the price cycle 4. Concentrate on cash and balance sheet Reduce advertising 6. Reduce inventories 7. De-emphasize commodity/services in anticipation of diminishing margins 8. Weed out inferior products (lose the losers) 9. Encourage distributors to decrease inventory n/a slide 28
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Phase Management ObjectivesTM :
Phase Late C - Warning: 10. Identify and overcome any competitive disadvantages 11. Make sure you and the management team are not in denial 12. Cross train key people 13. Watch Accounts Receivable aging 14. Increase the requirements for justification of capital expenditures 15. Evaluate vendors for strength (don’t get caught honoring their warranties with no one to accept returned goods) 16. Manage the backlog through pricing and delivery, try to fill the funnel n/a slide 28
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Phase Management ObjectivesTM :
Phase Early D - Recession: Continue force reduction Reduce advertising – be very selective 3. Continue to avoid long-term purchase commitments 4. Review all lease agreements 5. Increase the requirements for justification of capital equipment 6. Eliminate all overtime 7. Reduce overhead labor 8. Combine departments with like capabilities and reduce management 9. Select targets of opportunity where price will get the business 10. Tighten credit policies – increase scrutiny 11. Look for opportunistic purchases 12. Grab market share as your competitor dies n/a slide 29
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Crude Oil Futures Prices Light & Sweet $ per Barrel
1/12 12/12 F:\PowerPoint Charts\Reserve Charts\SOC A-O.xls OILCLS slide 80 Actual 12MMA
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Natural Gas Future Prices Dollars per MMBTU
3/12 12/12 12MMA F:\PowerPoint Charts\Reserve Charts\SOC A-O.xls NGAS slide 79 3MMA
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State & Local Government Expenditures Trillions of Chained 2000$
12/12 3/12 3MMA F:\PowerPoint Charts\Reserve Charts\SOC A-O.xls GVPSL slide 54 12MMA
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US Industrial Production to Corporate Bond Prices 12/12 Rates-of-Change
F:\PowerPoint Charts\Tec Generic Source.xls FRBCBAA7.I slide 43 Source: ITR’s EcoTrends® Monthly Economic Report
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