Economic Potpourri December 18, 2008

The barrage of noteworthy economic news continues unabated. Here are a few headline news reports of interest from the past couple days.

FedEx to cut wages in face of downturn

FedEx on Thursday moved to slash employees’ salaries and other benefits in the face of what Fred Smith, chief executive, called “the worst economic conditions in the company’s 35-year operating history”.

Betting the downturn will steepen in the next six months, FedEx plans to add an additional $200m to its cost-cutting programme in the fiscal year to the end of May and will trim expenses by $600m in 2010.

The pay cuts affect 36,000 of FedEx’s 290,000 employees and range from 5 per cent for mid-level salaried workers up to 20 per cent for Mr Smith. The reductions do not apply to hourly workers or contractors.

FedEx will also eliminate merit-based increases for US salaried employees in 2009 and suspend matching contributions to 401(k) retirement accounts for a year.

Wage cuts are a critical issue. And Federal Express is still making a profit. Perhaps this is a sign they do not expect to make a profit in 2009. Companies cutting wages is a massive sign of deflation in light of other confirming indicators.

GM May Shrink Pontiac Lineup to One Model From Six

General Motors Corp. peddled Pontiacs for years with the slogan “We Build Excitement.” To stay afloat, it’s producing fewer thrills -- and models.

The company may shrink the Pontiac division to a single model from six following a drop in sales every year since 1999. “It might be just one model,” Mark LaNeve, GM’s North American sales chief, said in an interview.

Paring Pontiac to a lone model would deprive GM of its third highest-selling brand after Chevrolet and GMC, and almost 2.2 points of U.S. market share accounted for by Pontiac’s sales of 358,022 vehicles in 2007. GM’s market share has dwindled to 22.1 percent from a peak of 51.1 percent in 1962.

Sales of GM vehicles are down 22 percent through November of this year from the year-earlier period, including a 23 percent plunge for Pontiac to 250,902 units. Only Pontiac’s redesigned Vibe small car has increased sales this year.

GM could have and should have slashed the number of models ity was building years ago. It should also get rid of the entire Saturn lineup that has never had a profitable year in history.

GM, Chrysler May Get U.S. Loans to Survive to March

General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said.

“I’m worried about a disorderly bankruptcy and what it would do to the psychology of the markets,” President George W. Bush said yesterday during a forum at the American Enterprise Institute in Washington. Bush said he doesn’t want to “dump a major catastrophe” on his successor, Barack Obama. Still, he added, he is “worried about putting good money after bad.”

The Treasury Department may lend to the automakers through their credit arms, GMAC LLC and Chrysler Financial, to avoid having other industrial companies line up for access to the $700 billion Troubled Asset Relief Program, the people said.

“The idea of TARP is to help with troubled assets, so Treasury can do it this way, and it already has permission to do it,” said Ed Fredericks, a professor at Pepperdine University’s Graziadio School of Business in Malibu, California.

The idea of making GMAC a bank or even lending to GMAC just so it can funnel money to GM is ludicrous. Every day I get more disgusted with the actions of our government.

GM, Chrysler close in on deal for US loans

Emergency federal loans for the two companies could be announced by the government as early as Friday, according to the sources who were not authorized to discuss the negotiations.

The aid package being spearheaded by the White House would demand that both automakers restructure by seeking new concessions from organized labor and creditors, two people briefed on the talks said.

The real question here is exactly what does "restructure mean". This article seems to imply something other than bankruptcy. But the ping pong ball keeps bouncing even at this late hour. Following is another version that came after the above.

Bush considering 'orderly' auto bankruptcy

The Bush administration is looking at "orderly" bankruptcy as a possible way to deal with the desperately ailing U.S. auto industry, Treasury Secretary Henry Paulson said Thursday as carmakers readied more plant closings and a half million new jobless claims underscored the deteriorating national economy.

With General Motors, Chrysler and the rest of Detroit anxiously awaiting a White House decision on billions of dollars in emergency federal loans, Paulson said bankruptcy for Detroit automakers should be avoided if possible but that an orderly reorganization may be the best option to keep them from collapsing.

"If the right outcome is reorganization or bankruptcy, then isn't it better to get there through an orderly process?" Paulson said in a speech to a business forum Thursday night in New York.

Well one of these stories is bound to be correct. Most likely we find out on Friday.

Bank of Canada has prepared range of options

Bank of Canada governor Mark Carney says the central bank has prepared a range of options, beyond interest rate cuts, to stimulate the Canadian economy, but says it's "premature" to put any such plans into action right now.

Since Canada is in a recession, and interest rates are heading toward historical lows, the central bank should be ready to move beyond its lending programs to buy securities outright, especially securities with longer terms, says Mark Chandler, head of North American fixed income strategy at RBC Dominion Securities Inc.

While the Bank of Canada's key interest rate is not nearly as low as the near-zero rate set in the United States, it's low enough that the central bank should be ready with non-conventional measures, and prepare to buy Government of Canada securities of various expiries.

And the central bank should hold public consultations about what options would work best in the Canadian system, Chandler added, so that the financial system can be sure the Bank of Canada is well prepared.

"It's useful to have a public discussion."

The central bank's current measures to keep money markets moving have helped somewhat, he said, but the commercial banks are still shouldering all the risk, and that makes them reluctant to lend. The Bank of Canada could alleviate the risk by becoming "a pawnbroker of last resort" and accepting high-risk loans as collateral.

"I think they could be a lot more aggressive .... Let's go crazy and go into markets and buy the index of stocks."

Want a public discussion? Good cause here it is. Whoever suggested the Bank of Canada become "a pawnbroker of last resort" or "go crazy and go into markets and buy the index of stocks" should immediately be fired from whatever job that person has on grounds of being a bloomin' idiot. The article is worded such that I cannot tell exactly who made those suggestions.

Record Number of Hedge Funds Liquidated

Hedge Fund Research, a source of hedge fund information and performance data, said that 344 funds closed during the third quarter, topping the previous record of 267 set in the fourth quarter of 2006.

On an annualized basis, Hedge Fund Research said the current year is on pace for more than 920 fund liquidations, easily exceeding the 2005 record of 848 and far surpassing last year's liquidation total of 563.

The firm also said that 117 new funds launched in the third quarter, pushing the total to 603 for the year. The third quarter is the first period in which the industry experienced more liquidations than launches since the firm started tracking hedge fund data in 1996.

Detroit Court Changes Rules, Prepares for Big Filing

The federal bankruptcy court in Detroit, preparing for large reorganizations including possible filings by General Motors Corp., Chrysler LLC or Ford Motor Co., has changed some of its rules.

The U.S. Bankruptcy Court in New York, located just a few blocks from Wall Street, draws many of the biggest bankruptcies because it is regarded as business-friendly.
Bankruptcy judges in New York have allowed companies to reject union contracts and impose wage cuts while blocking unionized workers from striking.

Typically, companies without headquarters in New York put a New York-based unit into Chapter 11 and then file bankruptcy there, saying its other businesses are related cases, LoPucki said.

Medill [an employee-benefits law professor at the University of Nebraska] said an auto company would want to avoid, at all costs, filing in the Sixth U.S. Judicial Circuit, which encompasses the Detroit court as well as the rest of Michigan, Ohio, Kentucky and Tennessee.

U.K. Jobless Claims Rose at Fastest Pace Since 1991

U.K. unemployment rose at the fastest pace since 1991 in November and the Bank of England considered cutting interest rates to the lowest ever this month as the recession tightened its grip.

The number of people receiving jobless benefits rose 75,700 to 1.07 million, the highest level since July 2000, the Office for National Statistics said today in London. U.K. policy makers voted unanimously to cut the benchmark rate to 2 percent and refrained from a bigger reduction on concern it may prompt an “excessive” drop in the pound, minutes of their decision show.

The U.K. currency dropped to a record low against the euro after the reports. Bank of England Governor Mervyn King has signaled that the bank will cut the interest rate further if needed and Prime Minister Gordon Brown pledged today to do everything possible to counter joblessness.

“Unemployment will continue to rise sharply in 2009,” said Philip Shaw, chief economist at Investec Securities in London. “Rates will fall below 1 percent in the spring. The momentum of sterling means it’s vulnerable.”

I agree that the pound is vulnerable and will add that the Pound is far more likely to crash than the US dollar.

German December Business Confidence Lowest Since 1982

German business confidence dropped to the lowest in more than a quarter century in December as the credit crisis pushes Europe’s largest economy deeper into a recession.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, fell to 82.6 from 85.8 in the previous month. That’s the lowest reading for Ifo’s main index since November 1982. Economists expected a drop to 84, the median of 39 forecasts in a Bloomberg News survey shows.

Germany’s economy is on course for its worst contraction since 1993 next year as a global slowdown saps export demand, forcing companies to curb spending and hiring. Daimler AG, the world’s biggest maker of heavy trucks, said the recession may be “deep” and the European Central Bank this month cut its key interest rate by the most on record to stem the slump.

“There’s no way out of the situation over the coming quarters,” said Laurent Bilke, an economist at Nomura International Plc in London. “The ECB will certainly cut interest rates further.”
Still, ECB President Jean-Claude Trichet said on Dec. 15 that there’s a limit to how far the bank can cut borrowing costs. The Frankfurt-based central bank wants to “ensure that the 175 basis-point decrease that we have already decided is effective,” he said.

“While the ECB is currently keeping its cards close to its chest and indicating some reluctance to cut interest rates sharply further, we still believe that another reduction in January is more likely than not,” said Howard Archer, chief European economist at IHS Global Insight in London.

Trichet has already decided 175 basis-point decrease will be effective. That's pretty funny. The market seems to have decided otherwise. Expect to see more cuts from Trichet, and with them the Euro will head back lower.

One in Five Households Fell Behind on Utility Bills Last Winter

One in five U.S. households was behind on its utility bills coming out of last winter, a new survey concludes, raising fears that the current heating season could be even worse. One in 20 households had its utility service terminated in 2007.

Results were gleaned from statistics submitted by utility commissions in 41 states and the District of Columbia, the largest sample size ever analyzed by the organization. Utilities included in the survey serve roughly half of all U.S. households. The federal government doesn't collect data on delinquencies, so Naruc stepped in to fill the void. Although the association considers the data imperfect, it believes the survey provides a valuable snapshot.

"We know the economy is in worse shape than when the numbers were taken, and we know people are struggling," said Rob Thormeyer, spokesman for Naruc in Washington, D.C.

On Wall Street, Bonuses, Not Profits, Were Real

“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”

— E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Credit Suisse to pay bonuses in toxic debt

Credit Suisse has hatched a cunning plan to avoid public condemnation over executive bonuses this year: it is going to pay top managers not in cash, but in the toxic mortgage assets that caused the credit crisis.

Thousands of managing directors and directors will be handed a slice of a new internal hedge fund, into which the bank is transferring some of its $5bn (£3.3bn) in illiquid investments.

These are the complex mortgage derivatives and leveraged loans whose collapsing value has cost the global finance industry $800bn in writedowns in the past 18 months, triggered recessions around the world and caused a public outcry over Wall Street excess.

Credit Suisse is the first bank to use the debt to pay employees, who were told about the plan in a memo from Brady Dougan, the chief executive, and Paul Calello, the head of the Zurich-based investment bank. "While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009," they wrote.

The new Partner Asset Facility is expected to be run as a mini-hedge fund and could take on debt of its own from Credit Suisse. If the troubled assets rebound in value, employees stand to gain from future payments; if they decline, it will be the value of employee bonuses that will be eroded – Credit Suisse will not have to book the losses.

Credit Suisse's move is the biggest shock so far in an already-traumatic bonus season for Wall Street employees. Most banks are significantly scaling back the size of their payouts, even for relatively junior employees, and the payments are more likely to be made in shares than in cash this year.

Goldman Sachs was reported yesterday to have slashed the value of bonuses to its partners by 80 per cent after reporting its first quarterly loss since the Great Depression.

Many if not most of those getting a bonus do not deserve a bonus at all. In fact, they ought to return the bonuses they received for the past 5 years.

Only 17% of 8th Graders in Schools Overseen by Obama Education Secretary-Designee Can Read at Grade Level

In 2007, only 17 percent of eighth graders tested at or above grade level in reading in Chicago Public Schools – the school system administered by Arne Duncan since 2001.

President-elect Barack Obama on Tuesday tapped Duncan to become secretary of education in the upcoming administration.

Duncan, hailed by Obama as a reformer, said he would like to take the lessons he learned in Chicago with him when he moves to Washington. “I'm also eager to apply some of the lessons we have learned here in Chicago to help school districts all across our country," Duncan said after Obama formally named him to the job in Chicago.

This could be nip and tuck with "no child left behind" for core incompetency.

Bank of Japan May Cut Rate, Pump Funds Into Economy

The Bank of Japan may trim interest rates today and introduce new ways of pumping funds into the banking system to bolster the ailing economy.

Governor Masaaki Shirakawa and his colleagues may lower the overnight lending rate from 0.3 percent, the second reduction in two months, economists said. The bank may also offer to buy more government bonds from lenders, start purchasing commercial paper from them and broaden the range of collateral it accepts.

Lunacy is everywhere. Furthermore who cares if interest rates are cut when the starting point is .3%. If anything it suggests complete ineptitude for even thinking it could possibly matter. Nonetheless the BOJ did follow through as the following headline shows.

BOJ Lower Rates to 0.1 Percent

“The BOJ has done what’s necessary given the state of the global economy,” said Masahiro Sato, joint general manager of the treasury division in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest publicly listed lender. “The yen is weakening against the euro as monetary policy in Europe isn’t as loose as in Japan.”

Good Grief. What's become of us? Countries are now bragging about how loose their monetary policy is.

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