Bankruptcies are heightened stock market threats during a recession. The US Fed has attracted widespread criticism for saving Bear Stearns from bankruptcy. India and China are the only major economies where regulators protect investors. Margaret Thatcher started a powerful tradition of abandon in the UK. Even her labor opponents have not dared to openly save Northern Rock from financial disaster. Washington may also follow its close ally in being cagey about helping floundering stock.
A free market democracy comes at a price. You must watch your stocks. Small capital stocks make you especially vulnerable. They may have no lobbies in Washington. Bankruptcy rather than a fire sale to a crony is a more likely outcome of bad business management. Either way, you get to pay the check. The only axis of freedom is to spot bankruptcies before they are official.
1. Analyze cash flow of stock. Retained earnings and tax credits are the best. Private Equity and Sovereign Wealth Funds are worst. They can pull plugs on stocks at whim. Cheap credit going in to assets with fluctuating values is another danger signal.
2. Keep one eye on marketing metrics at all times. Has customer satisfaction begun to decline? Are new launches behind schedule or gone sour? Is a competitor waiting to strike after a promotion runs out of inventory?
3. Weigh every cent of fixed costs. Unions and head count increases are top threats to your stocks. Executive pay rises may get your goat, but they are small change for any corporation of decent size.
4. Watch advertising dollars as well, but the other way around. Executives tend to window-dress recession affected business results. A quarter with profits from lesser branding is no good for stock. Support stocks that keep investing in customers during lean times.
5. Stay wary of capital spending on new manufacturing capacity. IRR (Internal Rate of Return) can drift way off-target during a recession. Liquidity may no longer fit operations after a new plant goes on stream. Worse is in store if commissioning is delayed.
The next 12 months could see more bankruptcies than usual. Hopefully, your portfolio will remain unscathed. There is no harm in setting up new posts to safeguard your stocks from threats.
