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The Shipping Container Industry Has Gamed Out What the Coronavirus May Do. Take a Seat.

Container Ship/Wiki Media Commons

Wall Street seems to be filled with Nancy Boys, swells, head-cases and drama queens. With every whiff of a problem, they sell off to beat a possible rush – thus creating a rush. There are very few people around like those who tried to blow the whistle in “The Big Short,” for example.

With the Left and their buddies in the media hoping for a crash in the market to douse President Trump’s unrivaled economic prosperity leading up to the election, you can’t really trust the mainstream media to tell you the truth. They almost always over-inflate the importance of everything – especially if it could be twisted to make Trump look bad.

With Jim Acosta telling you the story, could you hope to get a fair treatment of the president and the coronavirus?

Is there a legitimate fear of an existential threat to our country – and others – by it? Could our economy do a full belly flop?

The economy is dynamic. Where a slowdown occurs in one place, the counterweight hurry-up occurs in another. President Trump has talked about executing a plan to get U.S. manufacturers to make face masks to make up for the world shortage, for example.

But there is a lag time.

Assuming the coronavirus is around awhile, one industry, the crucial shipping container industry, gamed out what is likely to happen.

It ain’t pretty.

We get an extraordinary amount of products in shipping containers. You see containers on docks, stretched for miles on trains and hanging from mechanized cranes on tracks as they’re loaded onto huge “container” ships.

In his piece called “Coronavirus container impact to spread far beyond blank sailings,” Lars Jensen, CEO of Sea-Intelligence Consulting, outlines several dominoes that are happening or about to happen in this crucial industry. Though he says the shipping container industry has proven resilient, there’s the potential for much mischief-making:

However, what we are seeing now is the impact of a much larger systemic risk. Blocking a large number of vital nodes in the system for all players at the same time threatens to create a disproportionately large impact, lingering longer than usual. The last time we saw an event with systemic impact was more than a decade ago during the financial crisis. Not even an event such as the sudden bankruptcy of Hanjin Shipping, at the time the seventh-largest carrier worldwide, nor the 2017 cyberattack on Maersk Line, which disrupted operations at the world’s largest carrier for two weeks, had such an impact.

Here are his projected dominoes:

  1. Chinese manufacturing facilities didn’t open after Chinese New Year. A lag followed by a lag which “created massive shortfall in Chinese exports and, therefore, a drop in container demand.”
  2. Sailings were canceled, which caused “staggering” demand shortfall for containers.
  3.  “Blank sailings” lead to more blank sailings back to Asia creating 3 – 10 weeks’ more lag time.
  4. Pre-Chinese New Year peak of delivered cargo results in excess containers building up in places “such as Europe and North America.” Repatriating containers takes time and money.
  5. “Backhauls to Asia will drive up backhaul rates.”
  6. There will be a “surge in demand for containers” but getting containers back takes time. See Domino number 4.
  7. Need to order new containers
  8. Value of all containers will drop as a result of Domino 7.
  9. Headhaul rates will increase. Headhaul is “leg of the route that has the highest volume.” The route back is “back haul.”
  10. Refrigerated containers will continue to stack up in Chinese ports.
  11. That will trigger “congestion surcharges”
  12. Refrigerated containers will be diverted to other Asian ports “creating congestion challenges – and new tranches of dominoes – all their own.
  13. This is will cause temporary equipment shortages.
  14. Refrigerated transport rates will increase.

Now imagine the cost of all that stuff that’s either still stuck inside those containers or will be stuck inside those containers or hasn’t yet received a container in which to be shipped. The cost of whatever those widgets are will go up.

What kind of stuff is transported inside these containers?

  1. Food
  2. Forest Products
  3. Grains
  4. Metal
  5. Construction materials
  6. Iron and steel products
  7. Cars and trucks and parts
  8. Chemicals
  9. Ore
  10. Textiles

Jensen says, “In the best case, the coronavirus outbreak is contained quickly. If so, the dominoes outlined above will continue to fall, but the duration of each one will be relatively short.”

If anything, President Trump has done more to highlight the need for more manufacturing in the United States than offshore. He’s the one who made an issue out of U.S.-made steel, for example, as a national security issue. He’s dismissed as a jingoistic know-nothing for it, but he’s been proven right over and over, as the coronavirus has shown.

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The Black Swan Pushes Events to the Tipping Point-Maximizing Enterprise Value in the upcoming Crisis
This article was orinially published by Steven R. Gerbsman and Robert Tillman in May, 2007 and again in 2016.

With the Coronavirus spreading, this may be the “Black Swan” that pushes the “Tipping Point”.

The more things “change”, the more they remain the “same”.

Please read, enjoy and “be prepared”.

Best regards,
Steve Gerbsman

We are currently in one of the best economic times in our country?s history. The stock market is at all time highs, unemployment is at all-time lows, interest rates are low, money is plentiful and deal valuations are high and getting higher. There are, of course, many worrisome trends: terrorism, excessive government spending, trade deficits, high oil prices, immigration and over the longer term, such issues as an aging population and (possibly) global warming. Although problems and worries always exist, in historical terms, times are very good indeed.

The big questions for us as specialists in maximizing enterprise value are:

Will it end?

Yes. Of course. Even fundamentally healthy economies experience frequent and often violent corrections. The current world economy has evolved in many ways over the past decade. All large businesses are international. The primary economies of the world are very tightly linked together. Money is far more liquid and moves around the world with far less “friction” than it did in the past. The pace of technical change continues to increase. Nevertheless, we do not believe that the laws of history, and especially, the laws of human nature, have been repealed.

As always, “The more things change, the more that they remain the same.”

When will it end?

Unfortunately, no one knows the answer to this question. In historical terms, the current economic expansion has continued for a very long time and has survived numerous shocks, including war, a doubling of energy prices, natural disasters and localized economic downturns, such as the bursting of the sub-prime mortgage bubble. It appears to be “ripe” for a downturn. On the other hand, inherently unstable situations often persist for far longer than anyone could believe possible. During the 2000 Internet bubble, it seemed to us for quite some that the old rules of business no longer applied and that 25 year-old CEOs knew something us old guys did not know. When the crash occurred, we were relieved to find out that we were not so obsolete after all.

We did, however, underestimate the staying power of technically insolvent companies with broken or non-existent business models. Many of these companies had significant cash on the balance sheet (offset, of course, by significant liabilities) and investors who continued to infuse more cash far beyond the point of reason. Today, there exist immense pools of uncommitted cash, much of it in the hands of entities, such as private equity funds and hedge funds that are subject to minim al regulatory scrutiny and whose operations are obscured from the public view. In addition, the weakness of the dollar against both the Euro and the Pound Sterling makes U.S. assets a relative bargain. These factors tend to mitigate against an economic downturn. For how much longer they will continue to do so we do not know (and if we did know, we would certainly would not tell).

How will it end?

Fast, hard and unexpectedly. Two recent books shed a great deal of light on the process:

The first book, The Tipping Point by Malcolm Gladwell describes how human behavior causes events to cascade rapidly once a certain critical mass (the “Tipping Point”) has been achieved. Examples in the business world include periodic economic ?panics? and the spread of certain technologies and products, such as personal computers, iPods, cell phones, etc. It is very difficult to predict in advance when the ?tipping point? in any situation will be reached, but history has shown that, once it has been reached, events proceed very quickly.

The second book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb describes how highly improbable, and hence unpredictable, events periodically create massive change. The title of the book derives from the observation that the existence of even a single black swan disproves the assertion that all swans are white. Historical examples include the Fall of France at the beginning of World War II, the rise of the Internet and 9/11.

There are many obvious candidates for a “black swan” event that pushes the world economy over “the tipping point” into a downturn – a war with Iran, a nuclear terrorist attack or a worldwide bird flu or small pox epidemic, but generally, it is what you do not see that gets you. We are fundamentally optimists about the long-term prospects of the world economy. In many highly measurable ways, the wor ld really is improving, driven by technological innovation, a lowering of barriers to trade and increasing economic integration. Nevertheless, we are old enough to have lived through many “bumps” along the road and know that such discontinuities will always occur. We believe that we will see a significant economic event sometime over the next 12-18 months, either localized to a particular sector or geographic region or globally.

Our Advice?

Before such an event occurs:

As a board member, investor or stakeholder:

  1. Implement tight cash flow, receivables and inventory reporting so that you are alerted to problems early.
  2. Focus on the control, preservation and forecasting of CASH on a weekly, monthly and quarterly basis.
  3. Require “bottoms up” forecasting for all aspects of revenue and expense. Have the CEO and CFO defend ALL numbers.
  4. Hold the CEO responsible and accountable for Performance. If you are off the business plan/forecast, re-forecast based on the reality of “what is” today.
  5. Communicate frequently with all parties at interest. Check that the CEO is providing leadership, motivation and morale to the management team and employees.
  6. Review all companies in your portfolio. Identify and define action plans to fix weaknesses now.
  7. Utilize professional resources to assist in maximizing enterprise value, when appropriate.

When such an event occurs:

  1. Face up to reality and act quickly. When things are going bad, waiting seldom improves them. We have never seen a board of directors act too quickly when faced with a crisis. We have all too frequently seen a board act slowly or not at all.
  2. Call for assistance early. The earlier professionals can get involv ed in the process, the better the potential outcome in maximizing enterprise value. Many times boards request assistance only after a company has run out of cash. Many more options exist to maximize enterprise value if a company has some running room.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 108 technology, medical device, life science, digital marketing/social commerce and solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $ 2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, Boston, Orange County, VA/DC, Europe and Israel.

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