An Economic Winter

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When an economic winter starts in springtime, it is impossible to determine when it will end. What one must remember is all winters end, but I expect the current one to be different. I expect many of the juniors that held through the last down trough with grit and drive to crumble. I also expect many banking teams will break up and regroup. Law firms will have to rethink how they bill clients, and do clients really want to pay for coffee? My bet is they would be happy to bring their own from Starbucks.

The fact is the 2008-2009 economic dip was horrible, but people had savings, lack of shock, and drive to survive it. The 2012-2013 recession is going to kill lots of companies because it will involve China ending the first round of its super cycle with a break and a consolidation. Plus we will see the end of the Euro as we know it.

 

China will continue to use vast amounts of minerals, but double-digit increases in demand for commodities such as steel will end. Eventually Europe will get its act together but not before it goes through a real return to religion and achieves a basic understanding of demographics and pension reform. Let’s not even talk about America and its two parties that cannot agree on anything except their hatred for each other.

Companies with good projects should exercise patience, go on vacation, and not turn drills or spend money. Companies with bad projects should understand that they will not live forever, and need to decide if they want to go gracefully or do that last-ditch $1-2 million financing at five cents per share. Majors should sharpen their steak knives and set the table because they can choose when juniors are taken out. Valuations are down and shopping is cheap. Even if they do not have cash, shareholders are willing to do paper deals right now.

Spring will come, but it is going to be a harsh winter and not everyone is going to make it. Companies need to control their burn rates; sublet office space, fly economy, and stay at the Days Inn. If you get a hostile bid, address it with style and grace and find a second bidder. If you shut your company down, do it cleanly. No Hail Mary passes with vendor financing, please.

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