Into the Wild
The ringside bell at a prizefight must sound like a Bach symphony to a boxer who waits to be saved as he’s pummeled against the ropes. For Wall Street money managers on Sept. 29, though, the opening bell might as well have been an air raid siren, warning those below that something perilous was on its way. Within minutes of the start of the New York Stock Exchange (NYMEX) that Black Monday, traders slipped into a panic as stocks began their rapid plunge.
By the time the business day closed, the U.S. stock market had lost over a trillion dollars. Yes, that’s trillion, with a T — making the crash the hardest fall since 1987 and the third worst since WWII. Not surprisingly, from that epicenter of instability, other globalized markets followed the NYMEX over the cliff. The Toronto Stock Exchange, (TSX) for example, plunged more than 10 percent that same day.
The mass sell-off was in part a reaction to a string of major bank and investment firm collapses or near-failures since the start of the summer and threats that more were coming. Like pylons at this writer’s first Class-1 road test, down they went: Bear Stearns, AIG, Washington Mutual, Lehman Brothers, Wachovia, Merrill Lynch, and dozens of smaller institutions.
The losses instantly dragged the embattled U.S. economy to the brink of the recession threshold, if it wasn’t there already.
That’s not to say that soup kitchen queues are going to triple overnight, but it’s disconcerting that in October, Congress’ $700-billion bailout package for Wall Street was hardly able to file down the bear market’s claws. In fact, days after President Bush signed what some have called the new New Deal, stocks took another major tumble. Analysts at the time suggested the package came too late.
Others speculated that anxious investors had little confidence in the taxpayer curative, which not only signified Washington was all but nationalizing the country’s banking system, but also ballooned from about 1,000 words to 451 pages as partisan politicians earmarked bits of pork for their own pet projects. (A very peculiar trait of American rulemaking, by the way).
The situation is reminiscent of one of the most memorable lines in cinema, where, in the original Superman, our hero scoops Lois Lane in mid air as she falls from a building. “Easy, Miss. I’ve got you,” he assures her. “You’ve got me?” Lois asks incredulously. “Who’s got you?”
Good question. Can anyone in Congress fly?
CUE THE GRINCH
Worsening housing and credit markets, the infectious loss of consumer confidence, and creeping unemployment, therefore, have all but evaporated whatever modest optimism American truckers and cross-border Canadian carriers had for short-term recovery.
It might be too early to say conclusively if the Wall St. collapse in itself put a wet blanket on the previously expected boost for the fall peak shipping season, but anecdotally, more than a few Canadian carriers are reporting a sharp U-turn in pre-Christmas freight volumes.
“Over the course of the summer we saw signs of capacity slowly stabilizing. But now — and this is not a scientific survey —
I have noted that there has been a slowdown,” Canadian Trucking Alliance (CTA) boss David Bradley told us in mid-October. “Whether that’s a blip and things carry on again, who knows? But in the short-term that’s what we’re seeing.”
Still, the Canadian situation needs to be put in context, stresses Bradley. “I don’t want to be seen as spreading panic. Yes, this is a serious situation, and we won’t be immune, but overall, we are in better shape than the U.S.”
No kidding. At the recent American Trucking Associations (ATA) annual convention, ATA chief economist Bob Costello said the economy hasn’t even bottomed out yet.
With fading hope that shoppers will be flooding malls these next two months, expectations for the fall shipping season — a time when carriers can sometimes squeeze out higher rates from shippers — has been revised from “muted” to “negative,” he said.
When we asked what he’s doing to counter more expected weakness to close the year and in ’09, Michael Ludwig, president of the Simcoe, Ont.-based general freight carrier Ludwig Transport, was even more circumspect: “We are at least six months away from even being able to identify a clear trend [in the marketplace].”
What he does know, though, is that he won’t be partying like it’s 2004 for the next half-year at least. “From where I sit right now, right this minute, it is not a pretty picture. Usually one can see some semblance of light at the end of the tunnel. However, this time around it’s still looking pretty dark down there.”
CAPTAIN CREDIT CRUNCH
It’s not just demand-side economics the stock and housing crash is playing havoc with.
So far, there hasn’t been a drastic chilling effect in Canada in response to the credit and lending freeze south of the border. Credit has gradually been getting tighter and borrowing costs more expensive here, sure, but it’s still more available than in the U.S. Will that change, though?
There’s little doubt that Canada’s banks are more robust — in fact, a recent survey by the World Economic Forum found our system to be the soundest in the world. But some northern blowback from the crisis is expected.
For one thing, Canadians are no longer the net savers we used to be. Households first moved into deficit in 2002 and by the start of this year deficit rose to 6.4 percent. Not too unlike the U.S. a few years ago, we’re seeing property values start to fall while mortgage debt grows disproportionately.
Canadian banks have held up pretty well so far. But there are some cracks starting to appear on the surface. Just as we went to press, Ottawa moved to shore up national banks by picking up $25 billion in mortgages to help ease lending, suggesting there’s some real anxiety over an impending credit crunch of our own.
“Bankers are like sheep,” said Bob Tebbutt, vice-president of Peregrine Financial of Mississauga Ont. “If you’re down the street and you’re not lending money, I’m going to see that and think I better not lend money either because you might know something I don’t know.”
In a market downturn, the possibility of tighter credit and creeping cost of capital could be detrimental to truckers, most notably for small and medium fleets and owner-operators who rely on short-term lines of credit or small loans to do things like meet payroll or make payments on equipment during periods when profitable loads are hard to come by. And if you’ve already ordered equipment for next year, there may be some new concerns of what it’ll cost you in terms of requiring cash.
Jim Mickey of Coastal Pacific Xpress in Cloverdale, B.C., says the vise grips are out now. He says one fairly large financial house in the province has already shut the tap on most new equipment advances — even on previously-approved lines — and a big-name fuel supplier has reportedly been cutting upper credit limits (and days outstanding) in half. “It comes at the worst possible time when fuel prices are high and bank overdrafts are most needed,” he says.
Alternatively, if carriers’ cash is flowing at the speed of a solar-powered car on a cloudy day, chances are so is their customers’ –especially if they’re dependant on U.S. trade.
Cash is king in trucking and to survive, long-term receivables should routinely come in within 30 days. If they don’t — and credit isn’t readily available as a stopgap solution — then what?
“What we’re seeing is [receivables] creep up into 45 days and beyond,” says David Bradley. “That is going to have a real impact on truckers who have fuel bills to pay within seven days and payroll to meet. If customers aren’t paying their bills in a timely fashion, that’s going to create some real problems.”
Adds RBC Capital Markets analyst Walter Spracklin: “In times like these, we see that there’s a polarization between well-capitalized, cash flow-positive operations and those that are highly leveraged with thin operating margins.
“The weak players will be in a squeeze play, whereas the healthy players will develop somewhat of a competitive advantage through better access to capital — an advantage that wasn’t there before when capital was easy to come by for everyone.”
Fact is, debt doesn’t discriminate between large and small carriers. Bigger fleets, typically, get the benefit of the doubt from banks trying to insulate themselves from risk, says Scott Taylor, president of Waterloo, Ont.-based TFS Group, a tax and financial planning firm for truckers.
“Bigger boys may or may not be wealthier, but what they can do is generate more fees,” he says. “A bank looks at a small guy or owner-operator and must determine whether to take a risk for a proverbial $100-worth of service charges, whereas with the big guy they might be more willing to take a risk if instead he’s providing $15,000 worth of service charges. They play that game.”
We used to say not too long ago that the insurance industry had become the de-facto trucking regulator in that it has total discretion over what types of fleets get to hit the road. Similarly, it seems banks are now the true gatekeepers by deciding more often which truckers get a lifeline and which have to fend for themselves.
“This is the death knoll to all but the strongest of businesses,” says Mickey, “and will exaggerate the plight of the already weak players.”
If there’s a shiny chrome lining in all of this, it’s that when the industry does emerge from recession — and it’s anyone’s guess when that will be exactly — capacity should tighten once again, principally because driver demographics are still sliding one way. Those truckers who hang on by shedding debt, mitigating fuel costs, and have some role in more robust sectors like tank and reefer (plus whose own customers can stay afloat) should do well when things recover.
In the meantime, survival tactics are being put to the test every day on the highways, says Michael Ludwig.
“I was offered a load out of Denver the other day for $1.00 a mile—all inclusive,” he recounts. “I told the guy I would have my driver take his truck to the Freightliner dealership, hand in the keys, and fly him home before I took a load like that. And that’s commonplace.
“The sad part is that guy moved that load, for that price.”
Alas, probably not for long. That guy is on a standing eight-count and the final bell’s about to ring.
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