Sense on Cents

The lessons of history are so great. Regrettably, all too often those lessons are not fully learned and are thus repeated. My days at Boston Latin School in the early ’70s introduced me to the great ancient civilizations of Greece and Rome. The stories of the battles, the empires, the pride, and the downfalls held many lessons which stay with me to this day. These memories came back to me this morning as I reviewed a recent poll of our nation’s CFOs. Let’s look both forward and backward as we review CFO Magazine’s That Sinking Feeling, Again:

Optimism about the U.S. economy has fallen back to recession levels among U.S. chief financial officers, despite the fact that they expect earnings to grow by 12% in the next 12 months and capital spending to increase by 7%.

According to the latest quarterly Duke University/CFO Magazine Global Business Outlook Survey, which polled 937 CFOs in early September, only 14% of U.S. CFOs are more optimistic about the economy than they were last quarter, while 57% are less optimistic. This puts the optimism level at 49 (on a scale of 0 to 100), a result not seen since the first quarter of 2009, when CFOs rated the economy at 40.

Seven quarters of ‘rolling that economic rock’ and our CFOs are hardly more optimistic than the first quarter of 2009? Let’s continue:

Furthermore,  half of CFOs say there is only a 6-month window — and a quarter believe it’s a 12-month window — during which they can maintain current levels of business activity without improvement in the overall economy.

Blame the twin demons of unemployment and (lack of) credit. Thirty percent of CFOs say borrowing has become more difficult than it was a year ago, compared with 25% who say borrowing is easier. “There has been no progress in fixing the credit problem over the last year,” says Campbell R. Harvey, a professor of finance at Duke’s Fuqua School of Business and founding director of the survey. “Indeed, half of the small businesses say credit conditions are worse than in 2009.”

He continues, “The math is simple. A, banks are sitting on cash because of their poor health and general uncertainty. B, small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C, in usual circumstances, small and medium-sized businesses account for the majority of employment growth. A plus B plus C implies we are stuck at 9% or 10% unemployment.”

Despite the relatively strong earnings and capital-spending expectations, CFOs expect employment to increase by only 0.7%, not enough to reduce unemployment.  Moreover, nearly one-fourth of recent hiring has been targeted at contract and part-time employees, up from 17% prior to the recession. Such numbers translate into reduced consumer demand, which finance executives once again cited as their top external concern.

Will our CFOs, like the ancient Greek mythological character Sisyphus, ever get that rock to the top of the hill? Let us not forget that Sisyphus was doomed to that fate because of bad behaviors. In much the same way, we are now paying for the financial excesses and wasteful spending over a protracted period.

Will we ever learn these lessons, or are we forever doomed to pushing that rock?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

This entry was posted on Thursday, September 23rd, 2010 at 12:47 PM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.