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Investor Relations in the Worst Market Conditions Ever
Be Positioned For a Recovery
October 13, 2008

Barron's called the performance of the market last week, "the worst week ever" for stocks. Investors are in a state of shock. The market is experiencing everything from panic dumping, to forced redemptions and sales, to total investor paralysis with investors so unsure of the situation that like deer caught in the headlights they are afraid to do anything and therefore do nothing as they watch their portfolios wither away. The media is filled with politicians making promises and pundits offering conflicting advice. The situation is totally chaotic. We've never seen anything like it.

For CEOs of publicly-traded small companies, the obvious questions are, What should we expect going forward?
What does this mean for the price of our stock and our IR program?
A major part of last week's story was the dramatic deleveraging of the financial markets. We saw massive selling by investment banks, commercial banks, hedge funds and pension funds, which unloaded assets to lever down.

Investors' Business Daily points out that although there are restrictions on how much leverage individual investors can take on, there have been no limits on hedge funds or the investment banks, which have been able to leverage at debt-to-equity ratios of 30-to-1. In good times, using 30-to-1 leverage, a 10% gain on $1 million in capital takes the bet from $100,000 to $3 million. But in a sliding market, the institutions have to sell off assets to meet capital or margin calls. This means selling off even good holdings, putting even more pressure on asset prices, triggering even more margin calls. One banker was quoted as saying, "These institutions are not failing because 95% of their assets are bad, they're failing because 5% of the assets have gone bad and they overetched their capital." This has resulted in conditions that few if any could have foreseen including the sudden emergence of amazing values. Stocks are selling at fire sale prices. The Wall Street Journal reports there are 876 stocks now trading BELOW the value of their per share holdings of cash. Charles Schwab, for instance, holds $27.8 billion in cash and has a market cap of $21 billion. That means you can buy the business for free and get a little extra cash to go with it.

Even so, the major question now for both investors and the companies themselves is, "where's the bottom?" Barron's suggested this weekend that we are getting close, but was understandably unwilling to make a definitive call. In the meantime, there is strong evidence that cash pools are growing. The WSJ reports that money manager Waddell & Reed currently has 22% of its assets in cash, one of the highest levels ever. This is just the tip of the iceberg.

The Asian and European markets did well overnight and the futures suggest the market this morning will open strong. But only hindsight will permit us to understand whether this means anything or not. So as we wait for this to play out, you need to consider what this means for your investor relations program.

Here is our guidance:
Focus your primary efforts on making your business successful. Don't over worry about the stock price. There is little anyone can do about it right now. But continue to be active in telling your story and getting your message out as you make the case for your company and the stock. Make it a priority to reassure your current shareholders. Be as visible as possible. Maintain a strong, positive outreach with an ongoing active IR effort. Keep the press releases coming. When the turn finally comes, it will be essential to have a major presence in the minds of your targeted investors. Protect your credibility. This means communicate as openly and as often with your shareholders and the market as possible. If there is bad news, don't try and sweep it under the rug. History shows that the market has always staged large bounce backs after hitting bottom. A rising tide will lift all boats, but it won't do any good if you are hiding in the boatyard. That applies to both investors and companies seeking investor attention and support.

Barron's pointed out this weekend that "$1 invested in stocks from February 1966 through May of 2007 would have grown $16.58. That's a 7% annual return. But investors who were out of the market in the five best days during that period were left with only $0.11." Keep your boat in the water. Have faith in yourself and your business. Continue to tell the story. When the turn upwards comes, you want to be in the strongest possible position to earn the valuation that your company deserves.

Frank Hawkins
CEO of Hawk Associates Inc.

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