Weekend Edition October 31 2008 at 02:15 PM Chi-Chu Tschang and Harry Maurer
Top Stories of the Week
Consumers Are Pinching Pennies
As if to fortify its report yesterday that GDP declined in the third quarter, the Commerce Dept. today said that consumer spending dropped by 0.3% in September, the biggest fall in four years, following flat spending in July and August. Analysts had expected a drop of 0.2%. "Consumers have thrown in the towel," said Nahriman Behravesh, chief economist at IHS Global Insight. "This is going to be a fairly deep, long recession."
As might be expected in a slowing economy, inflationary pressures seem to be cooling. The Fed's preferred gauge, excluding volatile food and energy prices, ticked up 0.2% for a second month and was up 2.4% from September 2007, down from a one-year increase of 2.5% in August.
Source: Bloomberg
JP Morgan Chase Unveils Mortgage Program
The big bank said it would expand its mortgage relief program within 90 days to 400,000 more homeowners under threat of foreclosure. JP Morgan will suspend foreclosures while its new program is put into place. Then it will review each loan before it goes into default, offer new financing alternatives, and open regional counseling centers. The program is aimed at families holding some $70 billion in mortgages through JP Morgan Chase and the two institutions it recently absorbed, Bear Stearns and Washington Mutual. The bank says it has already offered help to 250,000 homeowners with $40 billion in loans since early 2007.
Source: CNNMoney.com
S&P Downgrades Argentina's Debt
Standard & Poor's cut Argentina's foreign currency rating to B- from B, the second downgrade in three months. The new rating is six levels below investment grade. Last week the country moved to nationalize its pension system, which was widely viewed as an attempt by the federal government to get its hands on $26 billion to help it pay its debts. That set off turmoil in local financial markets. Argentine bonds have tumbled as investors have fled, fearing default in the wake of the global financial crisis and sagging commodity prices.
Source: Bloomberg
A Rate Cut in Japan
The Bank of Japan cut its benchmark interest rate for the first time in seven years, joining the U.S. Federal Reserve and other central banks in efforts to ease a looming global downturn. The Japanese central bank's policy board voted to lower the overnight lending rate between banks by 0.2 percentage points to 0.3%. The cut was aimed at reducing borrowing costs to rekindle growth in the largest Asian economy. BOJ Governor Masaaki Shirakawa cast the deciding vote in a split decision, with four of the eight board members opposing the cut. Shirakawa came under pressure to lower borrowing costs after Japan's currency surged to a 13-year high last week and the Nikkei 225 Stock Average slumped to the lowest level since 1982. But the rate cut failed to halt a drop in the Nikkei index, which lost 5% on Friday, ending a three-day rally.
Source: New York Times, Bloomberg
U.S. Governors Call for Auto Industry Aid
Six U.S. governors and a group of chief executives called on the Bush administration to aid the embattled auto industry while the White House rebuffed a request for direct support of a merger between GM and Chrysler. An administration official said the focus instead would be on speeding up disbursement of $25 billion in low-interest loans for factory retooling, a step the industry's allies say does not go far enough to reverse a deepening industry crisis.
Source: Reuters
U.S. Banks Owe Billions to Executives
Troubled financial giants getting cash infusions from the U.S. Federal Reserve owe their executives more than $40 billion for unpaid salaries and pensions as of the end of 2007. Criticism of executive pay has gained momentum this election year with presidential candidates from both major parties lashing out over rich payouts for CEOs of companies that have suffered big losses in the U.S. housing market bust and ensuing credit crisis. The government has sought to rein in executive pay at banks getting federal money as part of the Bush administration's $700 billion bailout program.
Source: Wall Street Journal
Flush with Cash, Drugmakers Go on the Prowl
Drug companies, including giant GlaxoSmithKline and its midsize rival Wyeth, have amassed astonishing hoards of cash, which places them in an enviable position as the world slides into recession. But they will have to dig deep into their stashes to buy the growth that has eluded them for the past decade. That means choosing targets that are most likely to create blockbuster drugs and to open up whole new areas of disease treatment.
Source: BusinessWeek
Barclays Turns to Middle East
Barclays is raising up to $11.8 billion of additional capital in a share sale to an investor group, including Qatar and Abu Dhabi, in a move that will allow the UK bank to boost its balance sheet without turning to the British state for cash. The cash injection will largely fulfill Barclays' pledge to raise $10.5 billion in fresh capital as part of the state-sponsored recapitalization of Britain's largest banks.
Source: Financial Times
Google Considers Abandoning Ad Venture with Yahoo
Google may drop its proposed Internet-search advertising venture with Yahoo because it is reluctant to accept restrictions to avert a possible court challenge by U.S. antitrust officials, people familiar with the deal say. A collapse of the planned venture between the two biggest online advertising companies would deprive Yahoo of as much as $450 million in operating cash flow over a year. Microsoft offered $47.5 billion to buy Yahoo earlier this year.
Source: Bloomberg
Nissan Cuts Profit Forecast
Nissan reported a 39% drop in fiscal second quarter profit, as a strong yen and a contraction in the U.S. market combined to batter earnings at Japan's No. 3 automaker. Tokyo-based Nissan also drastically lowered its net profit forecast for the fiscal year through March 2009 to 160 billion yen ($1.6 billion), down 67 percent from the previous year. Earlier, Nissan had expected a 340 billion yen ($3.5 billion) profit for the fiscal year.
Source: Associated Press
The U.S. Economy Is Shrinking
U.S. gross domestic product shrank in the third quarter at a 0.3% annual rate, the Commerce Dept. reported. That's a smaller dip than economists had predicted but still further indication that the economy has entered a recession. Most observers expect a sharper contraction in the fourth quarter. One particularly worrisome aspect of the report is that consumer spending dropped at a 3.1% annual rate, the largest drop since the second quarter of 1980. Businesses also cut spending on equipment and software at a 5.5% annual pace. In hopes of offsetting the downturn, exacerbated by the financial crisis, Congress is holding hearings aimed at passing another economic stimulus package that may include aid to states and extended unemployment benefits.
Source: USA Today
ExxonMobil's Record Profit
One company that isn't hurting: ExxonMobil, which reported third-quarter earnings of $14.83 billion, shattering its own record for the biggest quarterly profit ever. The third-quarter number was 58% higher than that for the corresponding period last year and handily beat analysts' expectations, but it was boosted by a $1.62 billion profit on the sale of a natural-gas business in Germany. The company's stock fell in early trading, down more than 3% around midday.
Source: Associated Press
Major Layoffs at AmEx
The largest U.S. credit-card company by volume of purchases will slash 10% of its workforce, or 7,000 workers, and will take a charge of up to $290 million in the fourth quarter because of the cuts. American Express will also freeze new hires and management raises and cut spending on technology and marketing, hoping to save $1.8 billion in 2009. The company has lost about half its market value in the past year as default rates rise on its cards.
Source: Bloomberg
Foreclosures: Feds to the Rescue?
The Federal Deposit Insurance Corp. and the Treasury Dept. are working on a major program to prevent widespread foreclosures that would include government guarantees of home mortgages. The plan would use $50 billion from the recently passed bailout package to provide as much as $500 billion to $600 billion in government guarantees on up to 3 million at-risk mortgages. It might require banks and savings and loans to offer loans with lower interest rates for a five-year period, while shifting to the government any risk if the home doesn't recover its full mortgage value within that time. Without giving details, FDIC Chairman Sheila Bair discussed the program on Oct. 29 at an international deposit insurers' conference in Arlington, Va. She said the agency has developed "a federal program to help more borrowers avoid foreclosure..Such a framework is needed to modify loans on a scale large enough to have a major impact."
Source: BusinessWeek
The Fed Cuts Again
It came as no surprise, and Wall Street had already celebrated in advance, but the Fed cut its benchmark rate from 1.5% to 1% in a bid to alleviate the economic slowdown. It also indicated that more cuts may be in the offing despite the now rock-bottom level, noting that "downside risks to growth remain." The Big Board, which saw the Dow rocket up nearly 11% yesterday, barely budged on the news, remaining flat at 3 p.m., where it has been most of the day. The benchmark rate not stands at a level last seen about a year after the 2001 recession ended, and if rates go even lower they could hit levels not seen since the 1950s. Earlier today, China cut rates for the third time in six weeks, Norway also cut, and Japan, the European Central Bank, and the Bank of England are expected to follow suit soon.
Source: Wall Street Journal
Consumer Confidence Caves In
The Conference Board's measure of U.S. consumer confidence plunged to an all-time low in October. The overall confidence rating fell as astonishing 23.4 points, from 61.4 to 38, the third-biggest drop in the 41-year history of the survey. It's not hard to figure out why consumers suddenly got a bad case of the blues: the financial crisis bit hard, unemployment is rising, and the value of many families' investments is sinking with the stock market. It's also major bad news for the economy, since a drop in confidence usually goes along with a drop in shopping, and consumer spending accounts for two-thirds of U.S. economic activity.
Source: USA Today
New Homes Sales Perk Up in September
Sales of new homes rose 2.7% in Septemberas builders cut prices to their lowest levels in four years, the Commerce Dept. reported on Oct. 27. But year over year, sales were still 33.1% lower than last September. The median price of a new home stood at $218,400-a 9.1% decline from a year ago.
Source: The Wall Street Journal
In Your Face: Tips for Entrepreneurs
Reader Stephanie Dube Writes: "First point: 'Love what you do.' If you don't love your work, then you'll never make it through the inevitable setbacks and tough times!"
Tell Us: How to Keep a Downturn from Crushing Startups?
Hot Topic on the Business Exchange: 2008 Election
The 2008 U.S. Presidential Election is already historic. This topic covers all of the issues relating to the 2008 election. Peter Elstrom and others are sharing their insights.
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