Economic Potpourri December 10, 2008

News is flying out of every corner at record speeds. Here are a few headline news reports of interest from the past couple days.

Japan Machine Orders Fall 4.4% as Recession Deepens

Japanese machinery orders fell in October as the deepening global recession choked off demand for the country’s cars and electronics. Orders, an indicator of capital spending in the next three to six months, slid 4.4 percent from September, when they rose 5.5 percent, the Cabinet Office said today in Tokyo. Bookings received from abroad, which are excluded from the headline figures, tumbled 37 percent, the biggest drop in five years.

Falling profit for Japan’s exporters has driven the Topix stock index down 44 percent this year and forced the country’s biggest companies to slash production, fire workers and cut spending. Sony Corp. said yesterday it will eliminate 16,000 jobs and reduce capital investment in its electronics business by 30 percent over the next two years.

“It’s inevitable that business investment will keep falling because the drop in overseas demand is so huge,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. “The reduction in investment and jobs will make Japan’s recession very deep and prolonged.”

China Producer-Price Inflation Is Slowest in 2 Years

China’s producer-price inflation slowed to half the pace estimated by economists as commodity and energy costs fell, raising the possibility that the country will slide into deflation as demand wanes at home and abroad.

“China may face deflation next year, which could be problematic, and the government is trying to avoid it,” said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

Foreign direct investment in China fell 36.5 percent in November from a year earlier, the commerce ministry said today, as economic growth cooled and gains by the yuan stalled against the dollar. Investment was $5.3 billion, the least in 14 months.

There has been recent talk of China devaluing the Renminbi (RMB), which is at odds with all the China bulls believing in decoupling as well as a falling dollar. I doubt a devaluing occurs, however I do expect the RMB to decline vs. the US dollar and other major currencies on into 2009.

China’s Exports Fall for First Time in 7 Years as Demand Slumps

China’s exports fell for the first time in seven years as a world recession slashed demand, adding pressure for more measures to sustain growth in the world’s fourth-biggest economy. Exports declined 2.2 percent in November from a year earlier after gaining 19.2 percent in October, the customs bureau said in a statement on its Web site today. The median forecast of 14 economists in a Bloomberg News survey was for a 14.8 percent gain.

China may keep cutting interest rates, add to a 4 trillion yuan ($581 billion) spending plan and stall gains by the yuan against the dollar to help exporters and stimulate the economy.

Exports are slumping across Asia, with shipments from Taiwan and South Korea declining last month by the most since 2001 because of China’s economic slowdown and recessions in the U.S., Europe and Japan.

About half of China’s toymakers have shut down this year, with 7,000 workers losing their jobs when Smart Union Group (Holdings) Ltd. closed in Guangdong province in October. Sacked workers rioted at another toy factory last month and Zhang Ping, the nation’s top planner, warned of the risk of “massive unemployment” and “social instability.”

This is still more pressure on the RMB. If china floated it freely, it could crash. Expect to see more capital flight over fears of a devaluation.

Big Rate Cut by Canada’s Central Bank

After acknowledging for the first time that Canada is entering a recession, the Bank of Canada cut its key interest rate on Tuesday by three-quarters of a percentage point, to 1.5 percent, a 50-year low.

The move may further inflame an economic debate that has created political turmoil in Canada. The Conservative government of Prime Minister Stephen Harper shut down Parliament last week to avoid a vote of no confidence in an economic program it announced last month.

The opposition parties, which outvote the government in Parliament, condemned the plan’s lack of significant economic stimulus and formed a coalition to defeat it. Had they been allowed to vote, Mr. Harper’s government would have fallen.

With that, Canada joins the race to ZIRP. And speaking of zeros, check this out ....

Nortel explores bankruptcy, government aid scenarios

Nortel Networks Corp has sought legal advice to study a bankruptcy protection scenario in the event that its restructuring plan fails and has also been exploring potential assistance from the Canadian government, the Wall Street Journal reported.

Nortel, North America's biggest maker of telephone equipment has lost billions of dollars and cut tens of thousands of jobs since the technology bubble burst at the beginning of this decade.

Nortel has one amazing chart. Let's take a look.



click on chart for sharper image

Nortel fell from $860 to .37. Wow.

Biotechnology Companies Get Their Turn in Line for Federal Aid

U.S. biotechnology executives are lobbying Congress to change a tax law and provide millions of dollars in government money to small, cash-starved drugmakers that comprise most of the industry.

The industry wants a temporary change in tax laws that would allow companies to receive a rebate upfront in exchange for giving up a portion of net operating losses deductions they are eligible to take once they begin to make a profit, Matt Gardner, president and chief executive of BayBio, an industry group in South San Francisco, California, said yesterday in a telephone interview.

The effort in Congress is being led by the Biotechnology Industry Organization, or BIO, a Washington, D.C.-based trade group. According to the group’s figures, 25 percent of the 370 publicly traded U.S. biotechnology companies have less than six months of cash on hand. The industry also has been hit by hundreds of layoffs and some bankruptcies.

Under the proposal, a company with $100 million in net operating losses would be entitled to $35 million in lower federal taxes when it becomes profitable, Alan Eisenberg, executive vice president of BIO, told the New York Times. Such a company might receive $20 million now under the proposal, he said. Gardner said executives from the lobbying group and biotechnology companies would be talking today with lawmakers on Capitol Hill seeking the change.

Is there any group that does not want a bailout?

Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says

A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.

The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, indicates the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the S&P this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to a trough of 400 by 2014, the strategist said.

Napier, who teaches at Edinburgh Business School, based his S&P 500 forecast on the Q for U.S. equities as well as the 10- year cyclically adjusted price-to-earnings ratio, another measure of long-term value. Before the trough in 2014, investors are likely to see a so-called bear market rally for the next two years as central bank actions delay the onset of deflation, he said.

The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, the author of “Anatomy of the Bear,” a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.

At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat, said Napier.

I see a possible low in the 450-700 range. Earnings are going to continue to plunge in 2009 and what looks cheap now will not look so cheap as earnings continue to plunge. In the meantime, Santa may deliver a year-end rally.

China May Issue 5 Million Ton Corn Export Quota

China, the world’s second-biggest corn producer, may issue as much as 5 million metric tons in corn export quotas to bolster rural incomes, three people familiar with the situation said, adding pressure to falling global prices.

Five million tons of corn exports, or around 6 percent of global corn trade, could pressure prices, which have tumbled 58 percent from a June record as slowing global economic growth damps demand for its use in feed and fuel. China corn exports have plunged after the government stopped issuing export quotas to boost domestic supplies.

Depending on global weather patterns, there may be little to be bullish about corn and grain prices in 2009. And with the recession expect to see declining demand for beef. Declining demand and falling grain prices put downward pressures on cattle futures.

Worst Spending Slump Since 1942 Extends ‘Scary’ U.S. Recession

The biggest slump in U.S. consumer spending since 1942 will extend the recession and push the jobless rate to the highest level in a quarter century, according to economists surveyed by Bloomberg News.

Household spending will drop 1 percent in 2009, the biggest decline since after the attack on Pearl Harbor, according to the median estimate of 51 economists surveyed Dec. 4 through Dec. 9. By the middle of next year, the economy will have shrunk for a record four consecutive quarters, the survey showed.

“It’s a serious recession, and there’s a good chance it will break the 16-month record since the Depression,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “We’re at the stage where the weakness is feeding on itself. The next few months look pretty rough.”

On the jobs front I do not think the November report is an outlier. I expect to see at least 4 months next year where job losses hit 500,000 or more. That's 2 million jobs right there. Obama wants to create 1.5 to 2 million jobs. If he pulls it off, he will still be in the hole. Expect to hear more of the other "D" word, depression.

Rio Tinto to slash 14,000 jobs, pare debt as priorities shift

Mining giant Rio Tinto Wednesday announced a slew of measures reflecting an urgent shift in its priorities toward conserving cash and lowering costs, as a deteriorating economic crisis and falling commodity prices begin to bite.

Citing the "unprecedented rapidity and severity of the global economic downturn," the Anglo-Australian company said it will slash as many as 14,000 job roles globally, including 8,500 contractors and 5,500 employee roles.
The company also said it will pare net debt by US$10 billion by the end of 2009 and lower "controllable operating costs" by at least $2.5 billion a year in 2010.

The disclosure came less than a month after the bigger rival BHP Billiton (BHP) withdrew its $66 billion hostile bid, dashing expectations of investors who bet heavily on the success of a takeover of Rio. At the same time, the pulled bid raised concern that Rio might struggle to meet payments of billions of dollars in debt related to its acquisition of Alcan Inc. last year.

The era of debt financed mega-deals is over.

U.K. May Expand Toolkit to Halt Recession Slide

The Bank of England and the Treasury are looking at a range of options, including pumping money into the economy by bolstering bank reserves, according to a spokesman at the Treasury. The strategy, known as “quantitative easing,” was last used by Japan at the start of the decade.

Prime Minister Gordon Brown’s government is drawing up new plans to revive lending and economic growth after banks refused to pass on the biggest interest rate reductions made by the Bank of England. With the central bank’s key rate at 2 percent, matching the lowest ever, Governor Mervyn King may need to step beyond his traditional policy tools.

Chancellor of the Exchequer Alistair Darling, speaking to lawmakers in Parliament today, suggested such a move is over the horizon for now, noting that the central bank’s interest rate isn’t yet at zero. He left open the door for action if banks keep choking off credit.

“The situation is full of uncertainties,” Darling said in response to a question at the Treasury Committee. “We will always be in a position where we will act as we need to. Interest rates are still 2 percent. We haven’t got to a position where they’re zero yet.”

Darling Said to Consider Credit Guarantees to Spur U.K. Lending

U.K. Chancellor of the Exchequer Alistair Darling is considering credit guarantees for households and companies to spur bank lending, a person familiar with the plan said.

Darling is looking at a range of options to revive credit including whether to expand a 250 billion pound ($370 billion) Treasury program to support bank debt so that it covers mortgages and other loans, according to the person.

The measures would mark an unprecedented step by U.K. authorities to underwrite commercial loans after a rescue that gave the government stakes in HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Plc failed to restart bank lending. The economy is sinking into its first recession since 1991.

“It’s critically important that we get the banks lending again,” Darling told journalists in London yesterday. “Price is important, but so too is the availability of credit.”

Darling is out of his mind as are most of the world's central bankers. The problem is lax lending by banks. The solution cannot possibly be lax lending by banks. But as long as every central banker is doing the same foolish thing to the same foolish degree the U.S. dollar is simply not going to crash. My crash favorites would actually be the British Pound and the Renminbi.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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