Financial Freefall: What Lies Ahead?
August 11, 2011

By Sahely Mukerji

Glass companies have a mixed reaction to the stock market turmoil this week. Officials at the industry's largest suppliers express concern over the roller coaster, while contractors and retailers down the chain remain unperturbed.

After the Standard and Poor's downgraded the U.S. rating from AAA to AA+ last week, August 8 was the worst day for stocks since the credit crisis, reflecting the lowest close in over 10 months. The Dow ended with a 635-point decline, down 5.6 percent; NASDAQ was down 175 points, a 6.9-percent decline; and S&P was down 80 points, a 6.7-percent decline. Dow's decline on Monday reflects a $2 trillion dollar loss in equities, says Jeff Dietrich, senior analyst, Institute for Trend Research, Concord, N.H.

The Volatility Index was up 50 percent, and economists on CNBC's Kudlow Report, on Monday night, predicted a 50-percent chance of a double-dip recession in the next 2 years.

Glass and glazing company stocks also took a hit on Monday. For example, according to the Kudlow Report website, Pittsburgh-based Alcoa Inc. was down 11. 52 percent; Minneapolis-based Apogee Enterprises Inc. was down 9.51 percent; Houston-based Quanex Building Products Corp. was down 11.73 percent; and St. Louis-based Solutia Inc. was down 15.96 percent.

Some of the industry's smaller companies remain unmoved about the markets' performance.

"I am not too concerned with the recent Dow correction," says Bill Evans, president of Evans Glass Co. in Nashville. "Observing the Dow's history tells us that we are due for a correction. We will see continued growth in the near future. From January 1, 2010, through September 21, 2010, the Dow had a 0 return YTD. Yet, by December 31, 2010, the Dow had a 15-percent YTD return. Our recent correction is early enough in the calendar year to allow for some growth by year end. Patience is a virtue. Exercise it."

Dietrich agrees: Going forward "the residential market will remain in the doldrums this year and begin to recover as we move through 2012," he says. "We are less optimistic than some of the large financial institutions that foresee a robust turn around in 2012, with growth of 15 percent to 20 percent or more. The housing market will be gaining momentum. Nonresidential construction is in a normal rising trend, but still below year ago levels. The strongest recoveries have been health care, education, power, office and industrial and public construction. Remodels and retrofit have kept many fairly busy. We are more confident of the soundness of corporate balance sheets than that of consumers."

Newton Little, executive vice president of ACE Glass in Little Rock, Ark., is in agreement with Evans: "I don't follow the stock market much unless it's a barometer of attitudes prevailing for the day. My dad was a stockbroker and he used to say the stock market was a forecast of six months forward-I hope not. As Sam Walton said after the huge Black Day of Dive, our glass shop is still open for business and we still have our backlog to perform. We're still quoting and chasing opportunities, so not much changed except the conversations' topics."

Geoffrey G. Galow, vice president of investor relations and corporate communications for Quanex Building Products, however, has another story to tell: "Watching the performance of the stock market over the last week or two has been nothing short of terrifying. Wall Street abhors uncertainty, and when it finds itself suddenly trapped in that environment, fear kicks in, and investors typically know only one way to respond to that fear - they leap off the cliff by the droves.

"Unfortunately, quality companies like Quanex Building Products, with its solid financial footing and outlook, gets swept right over the edge with them," Galow says. "There are certainly reasons for investors to be concerned: very weak housing activity, tepid GDP growth and troubling unemployment. Add to that more talk of a double dip in the economy in 2012, and you've set a fine table for investor unrest. However, I don't believe it pays to bet against the U.S. economy in the long term, nor against companies with solid track records that produce products that others are willing to pay a fair price to buy. But for now, you should be prepared for a stock market that swings wildly between fear and greed, and for now, fear is holding a much better set of cards."

Dietrich agrees: "Erroneous assumptions about future economic growth rates (federal revenues) and achieving only a nominal 18 percent dent in the surge of red ink heading our way over the next 10 years will not derail the U.S. economy in the short term, but will likely play a role in the projected recession of 2013-2014, and even more likely the next recession after that. The next round of drama is likely in to appear in 2013; our forecast says that there won't be a soft landing resulting from the next round of relative inaction in Washington."

Credit market poses another concern for business owners. Says Eric Nichols, president and general manager of Solutia's Advanced Interlayers division: "Solutia has weathered several market induced storms since emerging from bankruptcy in 2008. Our ongoing concern is how the current dynamics will affect credit markets in the short term. The ability to finance new projects is critical to fuel the already slow to recover U.S. construction industry. We were pleased to hear on [August 9] that the Federal Reserve will hold interest rates near zero until mid-2013, but more will be needed for the economy to fully recover."

As far as the dollar is concerned, it remains "the world's safe haven" even at a rating cut to AA+, Dietrich says. "There is as yet no reasonable alternative to the U.S. as the world's reserve currency. This will change in time, but not over the next one to two years (or more). Many folks comment on what a financial mess the U.S. government has created and how it is untenable. As yet, the world seemingly does not agree."

Despite the recent events in the media and markets, this is not the end, Dietrich emphasizes. "The rise and decline of economic cycles [are] times of opportunity," he says. "Those who have survived the 'Great Recession' have emerged more stable, with less overhead and more cash on hand. The lessons learned can be turned into even greater profitability in the years to come. How good the next two years will be for your company is clearly up to you. The macroeconomic trend is tilted toward the positive. Your aggressive actions will make the difference between an okay year and a solid, profitable year. Avoid heading for the bunker of fear and inaction; instead go hunting for more sales opportunities."

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