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August 10, 2011
Corporate Risk Expert Michael Bechara of Granite Consulting Group Inc. desperately avoids saying “I told you so” as equities crash and reality very impolitely re-manifests itself.
As the Great Recession once again bursts into the quiet room of corporate complacency, a series of calls were hurriedly arranged for Michael Bechara to advise clients on the 5 major risk trends first identified in early 2010.
“The stock market is merely the most visible of risk trends that we have been tracking,” cautioned Bechara. “Companies that do not have a detailed understanding of their risks and a plan to deal with them will be at a severe disadvantage as the other trends begin to take hold.”
In a discussion reminiscent of the biblical stories of great calamities unfolding, Bechara calmly laid out the recurrent trends:
1. Equity Market Pullback – The simplistic theory of “the market will always go up because the Fed will make it go up” has been exposed for what it is. No longer comforted by this false security blanket, investors and companies are reeling from the recent precipitous declines. On the horizon are likely more massive interventions in the markets, the effectiveness of which are questionable to say the least.
2. Energy Price Volatility – Commodities have been on a tear and oil is no exception. Bechara’s earlier prediction of difficulties stemming from rising energy prices has come true, but companies should not assume this will continue. “The real story here is not the high price but rather the volatility,” he commented.
Companies should be wary of over-hedging their risks against high energy prices as the price could drop, leaving them holding the bag. There are a number of geo-political events that could cause a precipitous price swing.
3. Credit Markets – With the S&P downgrade of U.S. sovereign debt, the credit markets have entered an “anything can happen” environment in the credit markets. Questions abound regarding municipal bonds and corporate issues as MBA students wonder what “risk free” rate of return they should plug into their valuation models.
4. Structural Changes – With the credit and equity markets shivering, the proverbial peanut gallery looks to the Fed and Treasury for some semblance of the cavalry arriving. What “game changers” are in store this time around? Stay tuned.
5. Process Degradation – With headcount reduction having been a poor substitute for true process improvement over the last few years, companies are waking up and are reevaluating pricing models, purchasing polices, M&A transactions, etc. ESSA (eliminate, simplify, standardize and automate) is becoming the word of the year and perhaps the decade.