When retreating can take courage

CURRENT economic conditions call for bold decisions, especially when stock markets seem to be defying gravity.

Economic indicators in recent days have been pretty awful everywhere in the Western world. Britain has not been too badly hit but in the US personal spending fell at its fastest rate for 14 years, imports fell at their fastest for two decades, exports slumped, payrolls showed the fastest drop for 21 years and factory orders plunged. In the EU, the purchasing managers index fell sharply and like other indicators, came out even worse than analysts had feared.

Yet US, British and Continental markets are close to or above their pre-11 September levels, which is a dangerous temptation to optimism in the boardroom about an early economic recovery.

Fortunately, many are disinclined to believe what the markets imply - investors please note. Decisions like those of 3i to close seven offices in Britain and on the Continent and pay off nearly 20% of its staff are painful but wise.

Directors thinking of a slogan for the boardroom wall should consider the Duke of Wellington's observation that it is the mark of a good general that he knows when to retreat - and has the courage to do it.

This is a good motto in any case, whatever the economic conditions. There is a popular belief that succesful businesses only make successful decisions. On the contrary, every business makes wrong decisions from time to time. The important thing is to make the good ones outnumber the bad - and when the wrong one becomes apparent, to apply the Iron Duke's advice.

Pride may be hurt, the short-term share price may suffer, commentators may scoff. But companies willing to bite the bullet when things go wrong are the ones to trust.

Booking a loss
AMAZON is a wonderful company - in the sense that it keeps some of us constantly wondering.

The online bookseller has survived on a steady diet of heavy losses and boasts about rising turnover ever since coming to market in 1997. It now says it expects to make an operating profit this quarter (for the first time), and maybe for 2002 as a whole.

One should beware of firms that boast about turnover or operating profits. The latter means earnings before interest charges (considerable in Amazon's case), tax, depreciation and amortisation. But a loss is a loss is a loss. And it is hard to see how the company can survive, short of an unexpected takeover.

The business's obvious faults include building enormous warehouses for stock - instead of letting publishers bear the burden - and helter-skelter expansion not just globally for books but also into other consumer durables.

When I urged the demerits of the company a year ago, the shares were $37. Anyone tempted to say that a company whose stock stood once at $100 and now stands at $7 must represent a buying opportunity should lie down until the thought passes - or think of Marconi.

Clueless banker
WHEN it comes to central bankers' language , the managing director of the International Monetary Fund has much to offer.

In a survey of the economic outlook, Horst Koehler includes the comments: 'There are good reasons to expect the current deterioration may be short-lived with an upturn commencing in the first half of 2002...But there is also the non-negligible probability of a worse outcome involving lower growth and increasing financial difficulties for many countries...Finally the impact on oil prices could be substantial in either direction.'

It is a remarkably roundabout way of saying he hasn't a clue what will happen next.