Finance Executives See Outlook Brightening in 2002
By ANTHONY PALAZZO
Last week, economists at the National Bureau of Economic Research made it official. The U.S. economy is in a recession, and it has been since March.
So much for that parlor debate, now there's a new one: How long will the pain last?
The Business Journal polled a number of locally based finance executives and asked them what they see as they look ahead. There's no consensus, and the data gives off conflicting signals. "It ought to last through early next year, perhaps the first quarter, and begin to stabilize in the second quarter," said Steven Cochrane, senior economist with Economy.com. Below, the others have their say.
Chairman and chief executive of Cappello Group Inc., a Santa Monica merchant bank specializing in convertible securities
"Since Sept. 11, I've never seen such a lack of confidence among people that invest capital and run companies. I think the depth and breadth of this recession are a little wider and deeper than many have imagined. At the same time, I am confident that the economy will come out of it and business will do well again. Why? Unlike in prior recessions, most companies today have very modest levels of debt on their balance sheets. That's quite different from what you usually see entering a recession. There's a lot of capital still out there on the sidelines.
"Regulators are forcing banks to be more conservative in their lending practices, and banks are forcing borrowers to reduce their loan balances at the worst time possible. This is causing borrowers to do some rather drastic things to come up with the cash: selling equity, selling the company, mergers, joint ventures and the like. Things are going to be pretty tight for the next year."
Managing Director, Ballenger Strike Associates, a West Los Angeles reorganization and turnaround consulting firm
"We have a bunch of pluses for Southern California and some negatives. In terms of manufacturing, the non-defense sector is going to continue to suffer, so much manufacturing is moving to Mexico and Asia. There's been a slowdown in the aircraft industry, but I also think tourism will start to recover by next summer. Companies are trying to cut costs, they are waiting for a sign that things have bottomed out. When that happens people are going to start looking at replacing equipment again.
"The catalyst for the recovery from the early 1990s recession was the technology companies. Today we don't have anything like that. I think the pain's going to be around for a fairly long time. When the stock market starts going up again, people may start feeling better about taking on additional discretionary spending. I expect that to start in the first quarter of next year, but it's not going to be a big upsweep."
Partner, Los Angeles office of Kirkpatrick & Lockhart LLP, specializing in debt offerings, mergers and acquisitions and securitizations
"It's a financial marketplace that is in a huge state of flux, and very difficult to predict. We took Bam Entertainment out (in an IPO) last week, which is a San Jose video game manufacturer. Bam is an anomaly, though. Lots of companies are focusing on alternative financings. Venture capitalists are sort of tending their flocks with their existing portfolios. We've got a couple of small to middle market IPOs that are in registration right now that may come out in the first part of next year. Nevertheless it's still tough. If I had to put a mark around (a recovery), I think the second quarter of next year would be a reasonable expectation.
Investment banker and consultant
"I'm very positive long term, but what's going to happen in the next three to six months is awfully hard to predict. Stock prices have been knocked down, and companies are more cautious in doing mergers and acquisitions. Even the biggest companies have had trouble raising capital. It's not like the good old days when you just call up your banker and say, we need money.
"At the beginning of the recession, a lot of people spent a lot of time cleaning up what was broken, things that weren't going to work. We've started getting into the middle of the downturn, and people are already looking past that to a recovery. I think the stock market's already doing that. People are saying, I'm buying stocks on a multi-year time horizon, what do I care if the company's going to have one or two rough quarters? They've created an expectation that's already starting to bear out."
Principal, Alfred Gobar Associates, a Placentia real estate consultancy
"I argued until a month or two ago that there would be no recession in Southern California. I still don't think that we're going to have a recession in the strict interpretation of two quarters of negative growth. Our expectation is that home prices will continue to rise.
"There is some overbuilding in specific office markets, and I think that's been exacerbated by our energy crisis. High energy bills are making people reluctant to lease new facilities. In the industrial market, there's been a huge reduction in jobs. Trade is a big driver of the industrial market, and trade volume has been off. In L.A., there are areas that still haven't recovered from the prior recession, particularly downtown.
"In retailing you want to buy centers that will be able to come through this restructuring, which means centers with customers like Home Depot, Wal-mart and Costco. I don't think I'd buy a regional center anchored by a Nordstom or a Macy's or a Sears."
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