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Paging Chicken Little

June 6, 2012

Last night I talked to my neighbor, the currency trader, who is more convinced than ever that we're about to see a global repeat of 2008. I won't repeat the explanation because you'll either think I'm nutty or I'll just scare the heck out of you. But, bottom line, he's leveraging everything and going all cash until the bottom - 40% loss in global equities. I'm neither that clever nor apocalyptic so I'll probably just stay in my mutual funds and hope for the best.

At any rate, it brought up a question for me: Are any of my clients capable of surviving another 2008? Answer: No. And I know a long list of former great, now treading water companies that probably aren't ready for that sort of stress test either. Think about it, credit freezes up and businesses liquefy their balance sheets to stay alive. Same as in '08-'09, but that's when we had fat to keep us warm. Since then we've reigned in receivables, leveraged our assets, thinned our inventories and shortened our cash cycle. This would be a leaner winter.

I say it's a low odds event but just in case take a look at your balance sheet and think about a 30% drop in sales (remember that tail spin in early 2009?). If you're ready for that kind of jolt, wow, damn nice job being an amazing CEO. I'd sure like to call you for advice some day. If you're not ready for that kind of shock, no worries; my neighbor says it won't really crash until mid-late 2013.

Jeff Sands is a managing director with Dorset Partners LLC . A summary of their work in 2011 can be found at http://www.dorsetpartners.com/2011casestudies.pdf