Davemuti’s Weblog

The perfect Storm for Downward Pressure

October is always a scary month because of Halloween but this year has brought about an entire new meaning to scary.  Today’s blog is long and it is a reprint of my October 14^th Take Control^SM newsletter.  It is direct and to the point of my thoughts on the markets and what you can do to take control of your financial future.
 
Please remember that I am neither an economist nor an analyst.  I draw my opinions from working with and speaking to my clients, colleagues and other professionals that are on the front lines every day.  As you can guess my outlook is not good.  If you go back a year or so and review my newsletters, you will see that I have been warning about the recession we are in and steps to take to try and position yourself to weather the storm.  Below I outline the downside as well as what to do to stay afloat.
 
Summer brought us the “eye” of the storm as I have been saying but September brought with it the second half of the storm and I see it persisting through much of 2009 before things start to steady.  Often the second half of any storm is more destructive than the first half as the first half weakens structures and the second half blows them over.  Hopefully I am dead wrong but it is better to prepare for the worst than hope and pray for the best. 
 
As I see it, things that will contribute to harm the markets are:

• Unemployment will continue to rise.
• Retail sales this holiday season will not be good causing more bad news for corporate earnings and job security.
• Those in finance and real estate can expect another tough year draining what savings are left.
• Foreclosures will continue to increase which of course place downward pressure on the value of neighboring homes.
• Personal credit card debt continues to increase
• Many are finding that their credit card limits have been reduced and capped which in turn shuts off the last avenue for cash to pay bills.
• Many small businesses are finding that their credit limits (both bank lines of credits and credit cards) have been reduced and capped at a level that prohibits many owners from being able to order inventory which stymies growth.  Some are even finding it difficult to make payroll.
• Bankruptcies are on the rise.
• Retirement accounts are decreasing.  
• Tax revenues will be down due to the above which will increase deficits and possibly taxes.

All of these factors create a self feeding cycle for the perfect storm as each has a correlated affect on the other contributing to downward pressure of home sales and further evaporation of home equity.  These factors are also why many would be buyers are sitting on the sidelines causing a greater supply than demand.
 
While the government bailout package (still being defined) should help the economy it will take several months or longer to work its way through the system.  Furthermore, during this time I believe that several more large firms will fail requiring a bailout, file for bankruptcy or be acquired by a stronger suitor.  One of the overlooked factors that will increase the severity of the storm is the defaults that are starting to occur on unsecured credit card debt.  There are dozens of banks that have billions in exposure which will increase the downward pressure of their stock and of course further depress the markets.  So what does all this mean to you?  Keep reading for my 5 step plan to help you navigate the storm.
 
First, you should know that despite what you read and hear in the media there is still plenty of mortgage money to lend to homeowners.  It is just a bit tougher to get and you need to know where to look.  This is why it is imperative that you work with a local mortgage planner to guide you through the maze of regulatory changes and guidelines to get you the money you need.  Conduct an annual mortgage and credit review today to see if you can improve your cash flow by consolidating debt and/or get a better mortgage program?
 
Second, don’t panic but don’t ignore the situation either.  Sit with your financial advisor to review your goals, where you are, and develop a plan how to navigate out of this mess to preserve your assets and ensure you will still achieve your long term goals.  Third, control your spending.  During the boom years we all seemed to forget something called a budget.  Now that money is tight across all economic levels people are again beginning to curb their expenses.  Start with the simple things such as making your own morning coffee, bringing lunch to work, set the thermostat lower in the winter, review your cell phone plan and rent a movie rather than going to the theater.  We just scratched the surface but by Implementing these simple steps you can save you hundreds of dollars each month if you stay focused.  One simple step to help you really gain control of your spending is to convert to cash and stop using your credit cards.  This move alone will help you realize just how much you are spending and it will also stop the increase to your credit card balances. 
 
Once you have begun to control your spending, the next step involves building up your cash reserves.  In my book I detail that you should strive to have a minimum of 3 months of all your monthly expenses in a liquid account to draw from if emergencies pop up.  But in tough economic times it is more important than ever to build this account to six or even twelve months of reserves just in case. 
 
The fifth step is to get a second job or see if you can work overtime?  We are all working harder than ever but if you can fit a part time job into your life (or a stay at home spouse gets a part time job) and then you place these earnings in your reserve account, you will start to see progress.  If a traditional part time job is not something you can do, then consider implementing what I call Plan B.  Start a home based business so you can work during the evenings while the kids are sleeping.  This can provide the extra income you need and if the unforeseen happens and you find yourself out of a job you will have something to fall back on?  There are countless things you can do and if you are not sure where to look just ask your friends or drop me an email for some ideas.  You may be surprised to learn just how many are actually doing this to create an extra couple of hundred and even thousands of dollars a month. 
 
I know that it sounds like I am painting a dismal picture but better safe than sorry.  By taking the necessary steps to cut your expenses and shore up your savings you will get back on the path to a more prosperous future.  Be proactive and Make Life Happen, you’ll be happy you did.