Recession, Deep & protracted Recession or DEPRESSION?
October 28, 2008
Seeing the Light –from Financialarmagoden.com
Like Diogenes of Sinope, the Greek philosopher who prowled the streets of Athens, lamp in hand, searching for an honest man, I am constantly on the lookout for savvy individuals who speak the truth about subjects I am interested in.
Among other things, I seek out those who are better trained in and more knowledgeable than I am about disciplines such as economics, for example -- including experts like Nouriel Roubini, Dean Baker, Paul Krugman, Lawrence Summers, and Joseph Stiglitz -- in the hope that I (and, hopefully, others) can learn a fedw things that may prove valuable in future.
Of course, those who know what is going on and who aren't afraid to say it straight may not be well known. Sometimes, they toil away in the shadows, a step or more removed from the public eye.
While I can't say for sure whether Phil Williams, a trained economist and management consultant is a person that is familiar to most people, I knew when I read his latest Financial Sense commentary, "Recession or Depression," that my hunt for a knowledgeable, plainspoken expert had unearthed a valuable find.
I had the great fortune early in my career to work in Shell Oil’s planning department where we worked with scenario planning. Scenario planning is a strategic planning tool that looks at various possible scenarios and allows managers to determine how they might react if one or another scenario eventuates. Given that we can’t accurately foretell the future we need to position our investment portfolio based on our best reading of how things might unwind going forward. It is within this context that I position the following article.
There is much debate at the moment as to whether the current downturn will turn out to be a V or L-shaped recession or whether the economy morphs into something far worse, namely a greater depression. Whilst there doesn’t appear to be a common definition as to what constitutes a depression, it is generally perceived as a period of sustained economic downturn, featuring high unemployment (probably above 10%) and a reduction of 10% or more in GDP.
Base Case – long and protracted recession lasting “another” 12-18 months
The first scenario looks at the argument for a recession. There is little doubt that the US is currently in recession. However I believe that the downturn will turn out to be far more protracted than most people currently think. The key reasons supporting this view are:
* Sustained reduction in consumption – at its peak consumption made up over 70% of US GDP. In fact the mantra of many cheer-leaders for the American dream was “Spend, Spend, Spend”. There are however a large number of factors that will weigh heavily on consumption going forward. These include:
* A large reduction in mortgage equity withdrawals (MEWs), which at their peak totaled over $800 billion, or 6% of GDP. MEWs are declining quickly in line with the sharp drop in house prices and are unlikely to rear their ugly head any time soon;
* Consumers are clearly maxed out with their credit. They used their houses as ATMs, went on a spending spree with no payment down, interest free holidays on a whole range goods including autos, and then used plastic like there was no tomorrow. So not only are banks tightening up on consumer credit but those consumers that can afford it will have to start running down their debt to more reasonable levels;
* Tightening credit - Banks are tightening up on all areas of credit. In some instances this is being imposed on them through their own funding problems. However prudent management would dictate that banks reduce credit in times of a downturn as credit quality deteriorates and customers’ ability to repay comes into question;
* Demographics - As in many other western societies America’s population is ageing quite rapidly. The bursting of the housing and stock market bubbles will have a major impact on many people’s retirement plans. This will force people to stay in the workforce longer (where they can). However instead of using rampant asset price inflation as the key strategy in funding their retirement, people are now going to have to save for retirement the old-fashioned way i.e. through saving out of their income.
In the early 60s and 70s the savings rate moved in a range of between 8 and 12%, reaching a peak of 14% in the 70s. The savings rate dropped steadily from that time and at its low ebb a year or so ago America’s savings rate dropped to negative 2% of GDP. Clearly such a low rate is unsustainable in the long-run and so with asset inflation no longer an option Americans are going to have to substantially increase their savings rate and this will have a major impact on consumption. Even a move towards a low rate of 4% would weigh heavily on consumption. However I believe that people’s retirement plans have been thrown into such disarray that savings could easily move back to the 6-8% range which would have a massive impact on consumption and thus GDP;
* Changing consumption patterns - Over the past 4-5 years Americans have spent up big on houses, furniture and fittings, electronic gadgets and autos. Typically these items have a long shelf life so there will be little need to rush out and buy such items in the near future, particularly when consumers have limited access to credit and they are increasing their savings;
* Increasing unemployment – much of the increase in employment over the past 5 years was related to the housing and financial boom. Large numbers of jobs were created in real estate, construction, retail and finance and these jobs will obviously disappear. However the US is also particularly vulnerable to increasing unemployment due to the changing composition of the US economy. For instance over the past decade US companies have sent many of their manufacturing jobs overseas. It seems reasonable to assume that many of the service jobs created in their place e.g. retail, home services etc relate to discretionary-based expenditure which will be significantly impacted by the downturn;
* Declining returns on investments will significantly impact retirees ability to consume;
* The wealth effect clearly works in reverse as well. With trillions of dollars being wiped off the value of asset prices this is going to have a major reduction in expenditure going forward;
* Changing psychology – US citizens could not possibly go through the fall-out of the housing and stock market declines, as well as the looming increase in unemployment without it having a major impact on their psychology. Just as the Great Depression had a lasting impact on that generation’s psyche, a long drawn out downturn will also severely sap the confidence of consumers for some time to come.
* Asset deflation – it is clear that the US and other world economies are de-leveraging at a rapid rate. It would seem that this de-leveraging will continue for quite some time to come as asset deflation feeds on itself. For example regulators allowed leverage at Freddie and Fannie to reach 50 to 1. De-leveraging back to more normal levels of say 10 to 1 could take $4 trillion out of purchasing power. Now whilst this will impact mainly asset prices it will also have a flow on to consumption as well. De-leveraging of hedge funds (where leverage was typically 30 to 1) and other financial institutions due to asset write-downs will also have a major impact on asset prices and consumption.
Additionally it does not appear that the decline in housing prices is going to end any time soon. By most measures house prices still appear to have another 10-15% to go. A significant amount of the demand was fuelled by people buying second homes. This will clearly dry up as people struggle to keep their main residence. The return to more stringent loan conditions like a 20% down payment will also impact the housing recovery by suppressing demand.
* Problems in the government sector – the recession will clearly have a major impact on the budget position of State and local governments. This will lead to reductions in expenditure as well as increasing lay-offs as these entities strive to keep their deficits under control. Their budgets will also be impacted through an increasing need to support social programs for the poor.
* Company failures – the turmoil to date seems to have focused primarily on the financial sector. However as the route continues the downturn will have a more significant impact on the real economy, which will in turn be affected by an increasing number of company failures. Factors contributing to these failures will include:
* A reduction in credit as banks tighten up on their lending criteria;
* Junk bond defaults;
* Chronic under-funding in pension schemes. Many companies would have determined their contributions to pension schemes based on returns of 10% per annum. With asset prices collapsing many companies will be forced to make up significant shortfalls in their contributions and in many instances they won’t have the ability to do so;
* The reduction in consumption mentioned above will obviously also impact the viability of many organisations.
* Reduced exports – the stronger dollar and the fact that many of its trading partners are also moving into recession will constrain export growth and could in fact lead to a reduction in exports.
There are of course a number of counter-veiling forces that will work against these contractionary forces. These include the US Federal deficit, which is likely to move from 3% to over 7% of GDP by the time this downturn is finished as well as a decline in commodity prices which restores purchasing power. However these factors will take time to work and I do not believe they will be sufficient to offset the forces highlighted above.
Interestingly some debate has focused on whether the USA government bailouts and the massive expansion in the Fed’s balance sheet will prove inflationary. At this time I am undecided on this matter. However I am inclined to think that deflation is more likely than inflation. In particular the increase in the Fed’s balance sheet will only prove inflationary if this translates into increasing credit growth. In the current circumstances this would seem most unlikely. It seems to me that the Fed’s lending is going into the banks to shore up their liquidity but is not being pushed through to the lending side; akin to pushing on a string. I can see few circumstances where banks are likely to increase their lending any time soon or where consumers will be able to take on additional debt (and be able to pay it back).
Scenario 2 – The recession morphs into a depression
The second scenario occurs when the deep and protracted recession morphs into a depression, either now or in the next couple of years. Interestingly there seem to be a number of factors that could potentially trigger a US depression. Some of the more likely candidates include:
* A catastrophic failure in the financial markets, potentially triggered by say a problem in derivatives. The notional value of credit default swaps for example has grown from next to nothing in 2000 to topping $60 trillion in 2007. Other financial factors could include major defaults in the credit card, auto finance and commercial property sectors which work together to weaken the capital base of US financial institutions.
* The ongoing collapse of the stock market. The recent panic in the stock markets around the world has been a sight to behold. I think that up until recently many on Wall Street had been in denial, using the tried and tested “Buy on the dips” mentality that had worked so well for the past 25 years. However it seems to me that the recent market action is suggesting a change in psychology as people come to grips with the fact that things might be changing. However I believe that we are still a long way off the market capitulation that would warrant a market bottom. Moreover I think as people continue to see their future evaporate before their eyes then real fear could arise, which could lead to an increasing move out of managed funds, thus leading to more forced selling.
It is of course interesting to note that a number of previously cautious investors (e.g. Warren Buffet, John Hussman and Jeremy Grantham) are suggesting that the market might be moving towards providing some reasonable value. Whilst clearly these people have marvelous track records, in my opinion value will only appear if earnings remain at reasonable levels. Interestingly S&P analysts have recently downgraded their earnings forecasts for the S&P 500 to $48.50 for 2009. This is well below the March 28 estimate of $81.50 for the same period. The most recent estimate still puts the S&P 500 P/E ratio at a historically expensive level of 18. A reversion back to recessionary levels of say 8 would suggest that the S&P 500 could drop to as low as 388 or lower. Interestingly the S&P 500 put in a huge double top at the 1500 level over the period 2000 and 2007 with a bottom at the 800 mark in 2003. Based on traditional technical analysis measures this would suggest a possible low-point of 50 for the S&P 500. Impossible you say. Well this is not far off the equivalent 400 level for the Dow that Robert Prechter has been suggesting for some years now.
* US Dollar collapse – the buck seems to be the best of a lousy bunch at the moment. However a rogue event could trigger a run on the dollar that could lead to a collapse in the bond markets and an increase in interest rates.
Ordinarily I would also prepare a scenario based on a speedy or muddle through recovery. However at this time I cannot see any forces that are likely drive a turnaround, particularly with the consumer in retreat.
Accordingly all I can suggest is that one continues to baton down the hatch for the next little while and enjoy the ride. This is a once in a life time experience.
Finally just as an aside I note that European and Asian leaders met over the weekend and called for a radical change in the financial regulatory landscape. By comparison George W called for a continuation of the free market system. Whilst the two positions are not mutually exclusive it seems to me that the US’s reputation has taken a severe battering as a result of this financial crisis and the rest of the world is in no mood to put up with American rhetoric. The US has lost any moral high-ground and the world will impose its wishes on the US. This is supported by several other instances of late including Russia snubbing its nose at Condolezza Rice over the war in Georgia and the increasingly cozy relationship between Venezuela and Russia.
We do indeed live in very interesting times.
India, China Step Up Protection From Global Crisis (Update1)
http://www.bloomberg.com/apps/news?pid= ... JvZ72Ku8ks
By Michael Dwyer
Enlarge Image/Details
Nov. 3 (Bloomberg) -- India and China are accelerating efforts to prop up growth as a global slump threatens the world's fastest-expanding major economies.
The Reserve Bank of India on Nov. 1 lowered its benchmark interest rate for the second time in two weeks, and for the first time in 11 years reduced the amount of money lenders are required to keep in government bonds. China's central bank removed temporary controls over loans to maintain ``relatively fast'' growth, Xinhua News Agency reported Nov. 1, three days after cutting its key rate for the third time in two months.
China's $3.3 trillion economy grew at the slowest pace in five years in the three months through September as export orders shrank and industrial production waned. The expansion cooled for a fifth straight quarter, to a 9 percent gain from a year earlier.
India's central bank said last month that growth in that $1.2 trillion economy may be as little as 7.5 percent in the year to March 31, compared with 9 percent in the previous 12 months. That would be the weakest pace since 2005.
The People's Bank of China and India's central bank, along with the U.S. Federal Reserve and the Bank of Japan, are already moving to lower borrowing costs and stimulate consumer spending and investment.
Over the weekend, India cut its repurchase rate to 7.5 percent from 8 percent, reduced the amount of deposits that lenders need to set aside as reserves to 5.5 percent from 6.5 percent, and lowered the amount of money lenders are required to keep in government bonds to 24 percent from 25 percent.
* NOVEMBER 3, 2008
October Pain Was 'Black Swan' Gain
By SCOTT PATTERSON
http://online.wsj.com/article/SB122567265138591705.html
For most of October, it seemed nearly everything that could go wrong with the markets did. But the rout turned into a jackpot for author and investor Nassim Nicholas Taleb.
Mr. Taleb last year published "The Black Swan," a best-selling book about the impact of extreme events on the world and the financial markets. He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October's.
[Nassim Nicholas Taleb]
Nassim Nicholas Taleb
Separate funds in Universa's so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. "We're discovering the fragility of the financial system," said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.
A professor of mathematical finance at New York University, Mr. Taleb believes investors often ignore the risk of extreme moves in the market, especially when times are good and volatility is low, as it was for several years leading up to the current turmoil. "Black swan" alludes to the belief, once widespread, that all swans are white -- a notion that was proven false when European explorers discovered black swans in Australia. A black-swan event is something that is highly unexpected.
Assets under management at Universa have neared $2 billion since the fund launched early last year with $300 million under management. While Mr. Taleb frequently consults with Universa's traders, the Santa Monica, Calif., fund is owned and managed by Mark Spitznagel, who worked for several years in the 1990s as a pit trader on the Chicago Board of Trade.
[Mark Spitznagel]
Mark Spitznagel
To execute its strategy, Universa buys far-out-of-the-money "put" options on stocks and stock indexes. These are bets that the market will see a sharp, sudden downturn. They become extremely valuable in a market decline of 20% or more in a one-month period.
When times are good, such options are cheap and Universa gobbles them up, taking small losses along the way. When the market makes a quick, steep turn south, as it has recently, Universa's positions gain value as investors scramble to protect themselves in the downturn by buying puts. The strategy, which keeps more than 90% of assets in cash or cash equivalents such as Treasury bonds, either breaks even or loses small amounts in most months while waiting for periodic, infrequent spikes in volatility.
Here's an example of a trade the fund made recently. In late September, when the Standard & Poor's 500-stock index was trading around 1200, Universa purchased put options that would pay off if the index fell to 850 by late October. Since such a plunge was considered highly unlikely, such options cost only 90 cents. On Oct. 10, those options cost $60 as the S&P 500 tumbled sharply. Universa sold most of its position in the high-$50 range.
Universa also purchased a number of puts on financial stocks, such as Goldman Sachs Group Inc. In late July, it paid $1.29 apiece for options on American International Group Inc., the insurance giant that by September was on the brink of bankruptcy. The puts were priced to pay off if AIG dipped below $25 a share by September. Universa eventually sold them for about $21 apiece.
The fund has "done what it was supposed to do for us," says John Salib, a partner at Landmark Advisors, a New York fund that invests in other hedge funds and that invested in Universa in July. "We wanted to protect our portfolio against this kind of environment."
Mr. Taleb made his first killing on Black Monday, the crash of Oct. 19, 1987, as a trader with the investment bank First Boston (now a part of Credit Suisse), with a large position in out-of-the-money Eurodollar contracts. Investors fled into the highly liquid contracts as the market crashed, causing their value to surge.
While the black-swan strategy has paid off handsomely this year, it hasn't always. Mr. Taleb's previous fund, Empirica Capital, which used similar tactics, shut down in 2004 after several years of lackluster returns amid a period of low volatility. The strategy may face another test after the current bout of market turmoil.
The task for the fund's managers is to persuade clients to stick around after their big gains. Historically, such dramatic downturns have been rare events, occurring only once or twice a decade.
Mr. Spitznagel cautions against optimism. "You could say that so much value has been destroyed that there just isn't much left," he said. That is "a dangerous assumption, since things can always get worse."
Write to Scott Patterson at [email protected]
Where is the link for this article. Without source it will be deleted.Singha wrote:ET
Now, bankers come under fire for high bonuses in UK
3 Nov, 2008, 1942 hrs IST,Sudeshna Sen, ECONOMICTIMES.COM
Reuters.com wrote: Mon Nov 3, 2008 10:08pm EST
By Kevin Krolicki and David Bailey
DETROIT (Reuters) - U.S. auto sales plunged 32 percent in October to lows unseen in a quarter-century led by a 45 percent drop at General Motors Corp in a collapse that hit every major automaker and offered little sign that the industry has hit bottom in its largest market.
Hurt by tighter terms on auto financing by skittish banks and finance companies and the worsening economy, U.S. auto sales fell to their weakest monthly level since February 1983, according to sales data released on Monday.
The decline in U.S. October sales represented the first results since word emerged last month of merger talks between GM and Chrysler LLC and seemed certain to strengthen calls for a new government aid package for the embattled U.S. industry.
Auto sales for four European countries reporting on Monday showed the spreading effect of the slowdown. Sales fell 40 percent in Spain and 19 percent in Italy.
The United States, the world's largest vehicle market, remains at the industry's vortex. October represented the weakest month for U.S. auto sales on a per-capita basis since the end of World War Two, GM said.
Sales for Toyota Motor Co fell 25 percent, Ford Motor Co was off 30 percent, Nissan Motor Co tumbled 33 percent and Chrysler LLC sales fell 35 percent.
"The financial crisis has generated an abrupt constraint on economic activity," said Ford economist Emily Kolinski Morris.
Ford said it could reduce production of passenger cars and crossover vehicles in the coming weeks by cutting overtime and suspending work at some of its plants.
Industry-wide U.S. sales of cars and light trucks dropped to 838,156 in October after falling below the 1 million threshold in September for the first time in 15 years. It marked the twelfth consecutive monthly sales decline.
In the annualized terms tracked by analysts, the auto industry recorded a U.S. sales rate of just under 10.6 million vehicles in October, down from over 16 million a year earlier, according to Autodata Corp.
That raised the stakes for an immediate and more aggressive round of discounting in November and December as automakers prepared to clear remaining 2008 model-year inventory in exchange for cut-rate financing and other incentives.
GM said it would roll out a "Red Tag" sale with lower vehicle prices and cash-back offers starting on Tuesday.
Toyota, which has overtaken GM as the global auto sales leader, extended a zero-percent financing offer it had launched in October and backed by a high-profile ad campaign aimed at capitalizing on the relative strength of its financing arm.
Nissan launched its own zero-percent offer for November and December, saying the financing deal would help its own results move higher from October levels.
Jesse Toprak, an analyst with Edmunds.com, said the U.S. market could steady over the remainder of 2008 but said it would take until 2010 for a real recovery.
"A lot of consumers are now waiting for the dust to settle and instead of making big ticket item purchases like a car, they are waiting for more certainty in the marketplace and some signs of hope for a recovery," he said.
A LOST SALE FOR EVERY PURSE AND PURPOSE
The U.S. sales decline hit everything from budget-minded brands to the most expensive luxury nameplates.
Sales at the mass market Hyundai Motor Co were down 31 percent while its affiliate Kia fell 39 percent. At the high end, sales for Porsche sank 50 percent, while Lamborghini and Bentley posted declines of over 60 percent.
Citing an "unprecedented credit crunch," GM's North American sales chief Mark LaNeve said cutbacks on leasing and consumer financing at GM's affiliated financing company GMAC were responsible for about half of GM's monthly sales drop.
"It was like someone turned off the lights in the month of October," LaNeve said.
GM had sought some $10 billion in government aid to support the merger, a request the U.S. Treasury Department rebuffed last week. That put the focus on whatever support the industry can win from the incoming White House after Tuesday's presidential vote, people familiar with the talks have said.
A trade group representing U.S. auto parts suppliers on Monday urged the Bush administration to create a new loan guarantee program for the industry, adding to the chorus of industry backers calling for urgent government aid.
Chrysler sales chief Jim Press said he expected that it could take another year and a half before automakers started to see substantial sales gains, but held out hope that October would represent the low-point of the downturn.
"At some point you have to sort of hit the bottom of the bathtub and in October we may have got there," he said. "We now think the future won't be any worse, and it may be better."
Sales were expected to fall by at least 10 percent in Germany, Europe's largest economy, when official figures are released.
Sales in Canada bucked the downtrend, edging up by 1.5 percent to 122,711 vehicles, boosted by price reductions.
(Additional reporting by Soyoung Kim and Poornima Gupta in Detroit, Gilles Castonguay in Milan; Editing by Gary Hill and Carol Bishopric)
The New York Times wrote: By BILL VLASIC and NICK BUNKLEY
Published: November 3, 2008
DETROIT — Sales of new cars and trucks in the United States plummeted in October to levels not seen in the auto industry in 25 years.
The stunning fall-off affected all automakers, as shaky consumer confidence and the inability of many eager shoppers to get loans because of tight credit drove sales down 31.9 percent during the month compared with the same period last year.
The grim results — particularly for General Motors, whose sales dropped by 45 percent during the month — raised new concerns about the chances of survival for Detroit’s troubled Big Three.
The auto figures add to the steady march of statistics that suggest the broader economy is grinding to a slower pace. A measure of overall manufacturing activity in the United States fell last month to its lowest level in 26 years, according to data released Monday. The Commerce Department also said that construction spending fell for the eighth time in 10 months in September.
For the auto industry, analysts said the annualized sales rate for the month was the worst recorded since 1983, and few saw any hope for recovery in the industry before 2010.
The sharp decline will only further burden the Detroit companies, and may increase pressure in Washington to provide emergency financial aid to General Motors, the Ford Motor Company and Chrysler.
G.M. has been burning through an estimated $1 billion in cash each month since the middle of the year, although some analysts believe that figure has grown substantially with the drastic drop in demand for new vehicles.
“If they can’t get any help, whether it’s through the government guaranteeing loans or getting a total bailout, we could definitely see one of them going bankrupt,” said Rebecca Lindland, an analyst with IHA Global Insight.
G.M., which is pursuing a merger with Chrysler, was recently turned down by the Treasury Department for $10 billion in federal assistance. All three Detroit automakers are hoping for the release of $25 billion in low-interest loans from the Energy Department for the development of more fuel-efficient vehicles.
Sales of new vehicles have been declining throughout the year because of unstable gas prices, a weak economy and a tightening of credit by banks and other lenders.
Automakers reported total sales of 838,000 vehicles during October, the lowest total since January of 1992. However, the annualized selling rate in that month — a projection of full-year sales at the current rate — was a miserable 10.5 million vehicles, the worst since February of 1983, according to Ward’s Autodata.
Analysts said showroom traffic dried up during the month because of consumer fears about unemployment, continued declines in housing prices, and the aftershocks of the Wall Street financial crisis.
“Consumer confidence is the No. 1 reason we are where we are,” said Jesse Toprak, chief market analyst for the auto-research Web site Edmunds.com.
No automaker was spared from what Mark LaNeve, G.M.’s head of North American sales, called the “carnage” in the market.
Sales at Ford fell 30.2 percent, and at Chrysler by 34.9 percent. G.M.’s 45 percent drop meant the United States market share of the largest American automaker sank to just 20.1 percent.
The Japanese rivals of Detroit’s Big Three hardly fared better, despite having a greater selection of small, fuel-efficient passenger cars in their product lineups.
Toyota’s sales dropped 23 percent in October, while Honda’s sales plunged 25.2 percent, and Nissan’s sales fell by 33 percent.
“One thing that’s clear this month is that absolutely no one is immune,” Ms. Lindland said. “This is a situation that is really dire.”
G.M., which has already lost $18.8 billion in the first six months of this year, took the hardest hit. After pouring on sales incentives in August and September, the company pulled back its cash offers in October — and paid the price.
G.M.’s car sales were down by 34 percent, and its truck sales by 51 percent. Its total sales were just 170,000 vehicles, the first time in recent memory that the automaker had sold less than 200,000 cars and trucks in a month, according to Mr. Toprak.
Mr. LaNeve, G.M.’s sales chief for North America, added, “In my 27 years in the business, I have never seen a month like this.”
G.M.’s chairman, Rick Wagoner, has been leading the efforts by Detroit to get some sort of financial aid package from Washington. So far, he has been unable to persuade the Bush administration to provide direct loans to the companies or inject capital into their auto-finance arms.
There was no immediate comment Monday from Treasury Department officials on whether the dismal October sales might free up aid from the $700 billion rescue fund for financial institutions.
G.M. officials said the October sales rate was, in its estimation, the worst of the post-World War II era, given the nation’s population growth since the 1940s.
The company’s top market analyst, Michael DiGiovanni, said the lack of financing for automotive lenders is driving sales down to a “severe recessionary” level. “At this juncture in U.S. automotive history, it’s highly critical for the government and the banks to help us,” he said.
Officials at other automakers said the downturn will probably continue into next year. “We would not expect that we are at the bottom yet,” said Emily Kolinski Morris, Ford’s senior economist.
Mr. LaNeve and other auto executives said the companies will probably start their traditional year-end sales programs much earlier than usual.
But cash offers to customers will not make up for the lack of available credit. Mr. LaNeve said that about half of G.M.’s 45 percent sales decline in October could be attributed to people simply unable to get a car loan.
Even automakers that have been offering big discounts stumbled badly in October. Toyota, for example, has been providing zero percent financing on the bulk of its lineup for a month, yet still saw its sales tumble 23 percent.
“Buyers are in the driver’s seat in a market that’s awash with good deals, strong values and new products,” said Bob Carter, general manager of the company’s Toyota division.
Another Toyota executive, Irv Miller, said the industry hopes Tuesday’s presidential election might remove some of the uncertainty that consumers are feeling about the economy.
“Anything right now that takes any element of uncertainty out of the marketplace, we think, will be beneficial,” Mr. Miller said.
Besides a new round of incentives for consumers, the October results will probably prompt automakers to make more production cuts and lay off additional factory workers.
Both G.M. and Ford release their third-quarter earnings later this week, and are expected to report huge losses for the quarter. As part of the announcements, both companies will probably reveal plans to further reduce production at their North American plants.
But unlike previous cuts, the reductions might not be limited to gas-guzzling S.U.V.’s or slow-selling pickup trucks. There are no vehicles, according to one Ford executive, that have proven immune from the slumping demand.
“There are no hot segments,” said George Pipas, Ford’s market analyst. “And there really are no hot products.”
This will not happen to any significant degree in USA, since one final guardian of capitalistic control --the hydra headed two party system of Democrats and Republicans-- remains firmly in control of all mainstream sociopolitical thought.Eric Hobsbawm wrote: "We've already got the state as lender of last resort, we might well return to idea of the state as employer of last resort, which is what it was under FDR. It'll be something which orients, and even directs the private economy," he said.
Planemakers May End Up With 200 `Whitetails' Amid Credit Crunch
http://www.bloomberg.com/apps/news?pid= ... refer=home
By Chan Sue Ling
Nov. 6 (Bloomberg) -- Airbus SAS and Boeing Co. may end up with as many as 200 new planes without buyers next year because airlines are unable to obtain funds to pay for them amid a global credit squeeze, a consultant said.
``There's a funding gap and we don't really know where the money is coming from,'' Eddy Pieniazek, a director of aviation adviser Ascend, said at a conference in Hong Kong yesterday. ``If the money doesn't arrive, you can quite easily see 200 new aircraft, or whitetails, parked in a desert.''
Airbus and Boeing, the world's two-biggest airplane makers, will probably deliver about $65 billion of large commercial aircraft next year, according to a report by JPMorgan Securities Inc. Leasing companies and banks, which will account for about 60 percent of the aircraft financing market in 2008, are likely to ``pull back substantially,'' creating a funding gap as wide as $20 billion, the report said.
``Nobody is getting out of this alive,'' said Bill Cumberlidge, director of aviation asset finance at Allco Finance Group, which on Nov. 4 handed over operations to outside managers after warning it may default on its debt. ``The debt market is dead.''
``Zero Liquidity''
Damage from the credit crunch has accelerated after Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.
``There's almost zero liquidity at the moment,'' said Vicente Alava-Pons, regional head of aviation at DVB Group Merchant Bank (Asia) Ltd. ``It will take longer for the banks to come back because there will be more writedowns.''
Borrowing costs have tripled compared with six months ago, according to Alava-Pons, declining to be more specific. DVB may extend $1 billion in loans to finance aircraft in 2009, less than half of the more than $2 billion it provided this year, he said.
``The market has dried up,'' Eddy Porwanto, executive vice president for finance at PT Garuda Indonesia, said on Oct. 31. ``Some of the potential lessors that we were talking to have pulled out.''
Garuda, the Indonesia's biggest airline, is seeking financing for the remaining 14 of 25 Boeing 737 planes it has on order, said Porwanto. The carrier already secured funding for the 11 aircraft through so-called sale and leaseback agreements.
Boeing, Airbus
Difficulties in obtaining financing is adding to the problems at airlines worldwide, which are already struggling to cope with higher fuel costs and slowing demand for air travel.
Cathay Pacific Airways Ltd., Hong Kong's largest carrier, yesterday said that financial results this year will be ``disappointing.'' Air France-KLM Group, Europe's biggest airline, said it will be ``very difficult'' to meet full-year earnings targets as the global credit crisis and slowing economic growth undermine demand for travel.
Even so, none of Boeing's customers have indicated they need help to pay for aircraft, according to the company's financing arm. Boeing Capital Corp. said liquidity is starting to return after central banks worldwide cut interest rates. The unit expects funding needs to be lower than in the aftermath of the Sept. 11 terrorist attacks, when it financed as much as $3 billion of aircraft annually for three years.
China, Japan
``People have greatly underestimated what export credit agencies are going to fund,'' Boeing Capital's Managing Director Kostya Zolotusky said yesterday. ``No one has accounted for regional banks.''
Airbus Chief Operating Officer John Leahy has said the planemaker would be willing to increase direct financing of purchases.
China's banks are financing all of the deliveries by its carriers, while the majority of planes for the Japanese market are being funded by the country's lenders, according to Zolotusky.
Even if manufacturers boost financing and export credit agencies increase their contribution from the $11 billion to $12 billion level in 2008 by 50 percent, ``they may not be able to make up the difference, which could result in production cuts or ``whitetails,'' Joseph Nadol, a New York-based analyst at JPMorgan, wrote in an Oct. 20 report.
Whitetails are brand new planes, straight off the assembly line, but with tails that lack the logos of airlines because carriers aren't able to accept them.
Some airlines have asked DVB to provide ``bridging'' solutions, or short-term loans, to make payments for planes, a sign that new aircraft may be put in storage, Alava-Pons said.
The lack of funding is also pushing the value of second- hand aircraft lower, said Mike Skinner, chief executive officer at aviation consultant AMS Aircraft Ltd.
Airlines including Cathay, which on Nov. 1 said it plans to sell five aircraft to slow fleet expansion, may not be able to find a buyer.
``The problem is, people may want the aircraft but can't finance them,'' Skinner said.
To contact the reporter on this story: Chan Sue Ling in Singapore [email protected]
Reuters.com wrote: Fri Nov 7, 2008 2:54pm EST
By Kevin Krolicki and David Bailey
DETROIT (Reuters) - General Motors Corp and Ford Motor Co reported far deeper-than-expected quarterly losses on Friday and said their rate of cash burn had accelerated, as an extended slump in car sales raised questions about the future of the U.S. auto industry.
Both companies said they would take aggressive steps to cut their costs even further. The two largest U.S. automakers reported third-quarter results after the world's No. 1 automaker, Toyota Motor Corp of Japan, slashed its profit forecast for the year.
GM's shares tumbled 13 percent and Ford's 2.5 percent. The two collectively burned through $14.6 billion in cash in the quarter as they ran up bills related to restructuring actions and as they face a deepening global financial crisis. Chrysler LLC is also burning through cash quickly, sources said.
GM also indicated it had set aside consideration of an acquisition of smaller rival Chrysler -- without mentioning the company's name -- saying it was focused on cost-cutting and other steps to free up $20 billion in liquidity through 2009.
"It offered significant synergies we felt, but the fact is those synergies tended to come in the medium and long term," GM Chief Executive Rick Wagoner said in an interview with CNBC business television. "The issue in short-term liquidity is the state of the auto industry and so we said we're going to put all our efforts on focusing on that issue for now."
Chrysler declined to confirm having talked with GM.
The news came the day after the heads of Ford, Chrysler and GM -- once called the Big Three, due to their dominance of the industry -- as well as the head of the United Auto Workers union went to the U.S. Congress seeking $50 billion in federal aid to help them ride out the crisis.
"Today's deeper-than-expected quarterly loss at GM accelerates the need for government help for the sector," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, of Greenwich, Connecticut.
HEFTY LOSSES, BURNING CASH
GM, the largest U.S. automaker, reported a $4.2 billion quarterly loss and said it would cut white-collar jobs and slash next year's capital spending budget by $2.5 billion to try to cope with a sharp sales slowdown.
Ford posted a $2.98 billion quarterly operating loss on Friday and told investors that it would look to cut salary expenses by 10 percent, a move that follows a 15 percent cut earlier this year.
Demand for cars is collapsing around the world, as fears of possibly deep recessions in the United States and Europe prompt consumers to put off big-ticket purchases and a worldwide credit crunch makes it harder for those who are interested in buying cars to get loans.
Ford said it depleted its cash by $7.7 billion -- almost 30 percent -- as it had to pay costs related to production cuts and make payments to Ford Credit in an effort to spur consumers to buy automobiles. GM said it went through $6.9 billion in cash.
"That cash burn was quite a bit higher than what would be a normal cash burn," said Ford CEO Alan Mulally in an interview on CNBC, explaining that Ford ratcheted down production of its best-selling F150 pickup in the quarter to prepare for the launch of a new 2009 model.
"We're managing our cash very carefully," Mulally said, adding that he expects the rate of cash use to decline in the fourth quarter.
GM's Wagoner also said his company's cash burn would slow.
Privately owned Chrysler, which does not report financial information, is also rapidly spending its cash, according to people with knowledge of the situation.
Chrysler and its controlling shareholder, Cerberus Capital Management LP, declined comment.
"As an independent company, we will continue to explore multiple strategic alliances or partnerships ... that would aid in our return to profitability," said Chrysler Chairman and CEO Bob Nardelli, in a statement.
Ford shares fell 5 cents, or 2.5 percent, to $1.93. They had been up prior to GM's news. GM shares fell 64 cents to $4.16. Both trade on the New York Stock Exchange.
Both companies' shares have tumbled dramatically this year, with Ford down 71 percent and GM down 83 percent, far deeper slides than the 43 percent fall of the global Dow Jones Automobiles & Parts Titans 30 index.
SALES STALL WORLDWIDE
In Germany both Bayerische Motoren Werke AG or BMW, the world's largest premium carmaker, and its rival Daimler AG, maker of Mercedes, posted sharp sales declines in October, citing weakness in the United States and western Europe.
Both BMW and Daimler have reduced profit forecasts for their automobile businesses in two consecutive quarters following a sharp drop in demand.
Porsche SE posted a 46 percent rise in pretax profit for the 12 months ended in July that easily topped analysts' forecasts. The growth was largely the result of better-than-expected returns from hedging strategies on shares of Volkswagen AG.
Analysts said Toyota's policy of breakneck expansion has left it especially exposed to an industry crunch brought on by the global financial crisis.
(Additional reporting by Poornima Gupta and Soyoung Kim in Detroit, Doris Frankel in Chicago, Chang-Ran Kim and Taiga Uranaka in Tokyo, Christiaan Hetzner in Frankfurt and Walden Siew in New York; Writing by Scott Malone and Victoria Bryan; Editing by Gerald E. McCormick, Dave Zimmerman)
Reuters.com wrote: Fri Nov 7, 2008 3:34pm EST
By Glenn Somerville
WASHINGTON (Reuters) - The unemployment rate shot to a 14-1/2 year high last month as employers slashed jobs by an unexpectedly steep 240,000, suggesting President-elect Barack Obama will face a deep recession when he takes office.
The Labor Department said on Friday the jobless rate rose a steep four-tenths of a percent to 6.5 percent in October, the highest since March 1994, and that job losses in September and August were deeper than previously thought.
So far this year 1.2 million U.S. jobs have been lost, with 651,000 in the past three months alone as the slide in the national labor market picked up in intensity.
"We have entered the phase of serious recession conditions. Unfortunately we will encounter more of this," said Richard DeKaser, chief economist for National City Corp in Cleveland.
Goldman Sachs economist Jan Hatzius said the data implied the U.S. economy was sinking into a deep recession in which the jobless rate could climb to 8.5 percent by the end of 2009.
While the data was bleak, it was not as grim as some had feared. While the dollar fell, U.S. stocks rose after two days of sharp losses and prices of U.S. Treasuries turned lower.
KICKING THE ECONOMY
About 284,000 jobs were shed in September, the most since November 2001, shortly after the September 11 attacks on the United States, and 127,000 were lost in August. In all, 179,000 more jobs were cut in August and September than previously thought.
Michael Feroli, an economist with JPMorgan Chase, said the surprising weakness in August and September suggests the economy headed into recession even before the worst of the credit crisis hit.
"Whereas it had been thought the financial crisis pushed a teetering economy over the edge, it now looks like that crisis kicked an economy that was already down," Feroli said.
Fear about job security has led U.S. consumers to cut spending, and that has reverberated around the globe, with China and other low-cost goods producers feeling the impact of slacker American demand.
On Capitol Hill, Democratic Sen. Charles Schumer of New York described the job numbers as "shocking" and said they call for "a strong, deep and effective stimulus package."
General Motors Corp, which along with other domestic carmakers is pleading for government help, said it had a $4.2 billion operating loss in the third quarter.
In a telephone interview, Commerce Secretary Carlos Gutierrez said the economy "will go through several difficult months," but by the time Obama takes office in January a Treasury plan to buy bad assets from banks should be working. He predicted that will ease some economic pressures.
The Bush administration is "willing to listen to ideas (on stimulus) but most of what we've heard called stimulus doesn't meet our definition of stimulus," Gutierrez said.
Stimulus measures should be targeted to have immediate effect rather than designed for long-term impact like road building and other infrastructure projects, he added.
Obama was to huddle with his top economic advisers in the afternoon before holding his first news conference since being elected, and the data underscored the challenge he will face.
PAIN WIDESPREAD
The U.S. Federal Reserve has cut benchmark interest rates to a low 1 percent over the last 13 months in an effort to buffer the economy from the widening credit crisis, and financial markets expect rates to go lower still.
In a separate report, the Commerce Department said wholesale inventories dipped in September, but sales were off for a third straight month and a stocks-to-sales gauge suggested businesses were holding more inventory than desired.
The National Association of Realtors said pending sales of existing U.S. homes dropped 4.6 percent in September because of tighter credit and worsening economic conditions.
The jobs report showed the construction industry shed 49,000 jobs last month, the 16th straight monthly loss.
It also showed a whopping 90,000 manufacturing jobs were cut in October -- reflecting in part 27,000 striking workers at Boeing Co and marking the 28th consecutive month in which factory employment has fallen.
Earlier this year, job losses had been concentrated on the goods-producing side of the economy. But the latest data showed the pain spreading further into the vast services sector.
Service industries cut 108,000 jobs last month, on top of 201,000 lost in September.
(Additional reporting by Doug Palmer, Ros Krasny in Chicago and Burton Frierson in New York; Editing by Dan Grebler)
The Associated Press wrote:
not sure if I'd call them bijnes-klas, they sure are as pimply as their occupants (regardless of their ivy-ee-ness).Singha wrote:with 'corporate style'
dorms that would rival residence inn or mariott in std of living - for pimply college
freshmen.
errr.. google or DOJ?pandyan wrote:so, google managed to royally screw yahoo....
Guess you gotta decide first whether it was that "even msft-yahoo combined cannot challenge googs position" or that Google was concerned that "yahoo might have landed into msft pocket". Whatever your conclusions, I do not wish to continue this discussiom any further since I expect little to come out of it. However, I do leave the following opinion for your serious considerations:pandyan wrote:errr.....every merger takes doj factor into account. if google did not play its part, yahoo might have landed into msft pocket. google is the monopoly in the ad business...even msft-yahoo combined cannot challenge googs position. google has pre-empted a potential challenge to its status-quo using chanakyan strategy
Now this is how you treat brokers!Lisa wrote:Do note that share price has continued to rise and now has market cap approaching 140 Bn euros
Surge pushes VW past Toyota in market cap
By Richard Milne and Daniel Schäfer in London
Published: October 8 2008 03:00 | Last updated: October 8 2008 03:00
Volkswagen has overtaken Toyota as the world's largest carmaker by market capitalisation after an extraordinary scramble by hedge funds to cover positions betting on a share price fall in the German company.
Volkswagen's shares surged as much as 55 per cent yesterday, extending recent strong gains. But the shares then fell in late trading to close 2 per cent down.
In spite of the late fall, VW is now worth more than Daimler, BMW, General Motors, Ford, Fiat, PSA Peugeot Citroën, Renault, Mitsubishi and Hyundai combined. VW has a market capitalisation of €94.5bn ($129bn) compared with Toyota's Y12,792bn ($126bn).
Traders and investors said the rise in VW - as well as a 27 per cent leap on September 18 and other increases in the recent falling markets - was due to a squeeze when hedge funds were forced to cover short positions.
These trades seek to make money by selling borrowed shares and then buying the equivalent position back at a lower price before returning the stock to the lender. When VW's stock started rising, traders and hedge funds had to scramble to buy stock to minimise losses as the price rose above the level at which they had sold.
Hedge funds have been forced to sell as they seek to conserve cash and see redemptions by their investors soar. "It is clearly the brutal unwinding of a hedge fund position. Somebody has got burnt in a big way," said a trader at a large US bank.
Hedge funds had bet VW's preference shares - shares that pay a fixed rate of interest but usually do not have voting rights - would rise more than the common shares. This was based on the view that Porsche's dominance made the voting rights of the ordinary shares worthless. But in recent weeks, the preference shares have dropped in value and the common shares have soared.
The rise comes amid difficult times for carmakers, faced with the twin threat of weakening demand and an increased need to invest to produce environmentally friendly products.
Porsche, the German sports carmaker, owns 35 per cent of VW and intends to raise that to more than 50 per cent by the end of next month
i was reminded of this (a little dated) economist article offering a more subaltern view of the han juggernaut. maybe one gives more credit to their NX than due - and if the true NX is what it seems to be, then it is primarily their I and G that accounted for 27 percent of global economic growth last year. in which event the 4 Trillion Yuan economic stimulus does not seem that far off.vina wrote:I dont think that G can exactly substitute for I and C exactly. Govt spending will have it's own priorities ..(remember socialist India.. babu monkeys wanted to make steel, while people wanted milk and soap?) . Yes, by increasing G, you can still do the math and GDP can reach desired levels even when I and NX and C fall. But is that GDP the same as the GDP with "normal" levels of I, NX and C ?. Is that GDP real or unreal ?
So, if 7% investment goes to exports, and domestic consumption being what it is in China, it is safe to assume that mostof the investment is going to build modern white elephants.China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production.
That number is in PPP.ramana wrote:Vina, how real is the PRC economy? They said $586B is 15% of their GDP. The spending is more than US bailouts so whats happening? Is PRC hollow?
Also is PRC pulling a Germany by spending domestically so that they wont be forced to revalue their currency?
IMF numbers for 2008 (deflator for 2008 = 267.503)Acharya wrote:That number is in PPP.
The real number must be lower.
Marc Faber in CNBC says that China GDP will not be higher than 5% max
