Financial Crisis is Accelerating

October 24, 2008

There is so much bad news right now it’s impossible to keep track of it all. If you are still debating whether this is a crisis and whether the stock market can go any lower – I assure you – it is a crisis and world markets will go lower. We haven’t yet seen the stampede – but there are many, many people around the world who are inching closer to the door. The same problems exist throughout the world. We are watching a slow motion train wreck – that is rapidly picking up speed.

The following excerpts were taken from Articles in the Wall St. Journal over the past 2 days:

“A new wave of fear seized investors and trading floors around the world Friday, resulting in an across-the-board drop in stocks. The Dow Jones Industrial Average was recently down 352.26 points, or 4.1%, at 8338.89, hurt by declines in all 30 of its blue-chip components. The S&P 500 tumbled 4% to 871.64. All its sectors traded lower, led by energy, off 6.3%, and technology, off 7%. Health care, a traditional investor haven, saw more modest losses and was down 2.1%. The selling was prompted in part by signs that economies around the world are beginning to crack.”

“Disappointing corporate earnings and intensifying recession worries slammed Asian stock markets Friday, leading to drops of 10.6% in South Korea and 9.6% in Japan and capping a tough week for the region's investors. Asian markets slumped across the board, with Mumbai down 9.4% intraday and Hong Kong ending 8.3% lower. Singapore was down 8.7% near the end of the trading day.”

“European shares tumbled Friday as fears of a long and deep recession grew, with the auto sector slumping after profit warnings from Renault and Peugeot-Citroen as well as weak results from Swedish truck maker Volvo. The pan-European Dow Jones Stoxx 600 Index dropped below 200 for the first time since mid-2003, falling 8.4% to 191.21. Among regional markets, the U.K. FTSE 100 Index dove 8.4% to 3746 and the German DAX Xetra Index dropped 9.1% to 4109.48. The French CAC 40 index was down 8.8% at 3021.26.”

“Tempting as it is to ascribe the heavy sell-off in blue-chip European stocks Friday to fear and panic, there is one good fundamental reason why the stock market rout continues. Recent robust revenue growth for Europe's biggest companies has come largely from emerging markets, after years of heavy investment in new capacity and purchases of local rivals. Macroeconomic data tell the story of corporate Europe's emerging-market push. EU exports to China, India and Southeast Asia rose 56% to 228 billion euros between 2000 and 2007, with China and India accounting for 44% of that total. But now emerging-market bets are off. The credit crunch has caught up with developing economies with big current deficits and open financial markets with sickening speed. It's created a widespread crisis, from Argentina and Hungary to the Persian Gulf and South Korea. Suddenly, the engine of double-digit topline growth for many European companies seems to be about to stall. That's why investors Friday wiped out nearly a fifth of the value of banks such as HSBC, Barclays, Societe Generale and UniCredit, all of whose emerging-market business has helped them do relatively well through the credit crunch. That business now looks like an extra liability.”

“Russia's currency fell to a new two-year low despite billions being spent by Moscow to prop it up, and the country's fast-shrinking mountains of reserves and oil revenues threatened to reduce its credit rating, a key marker of its recent resurgence. The new wave of problems -- coming on top of a stock market fall of 70% from its May peak -- highlights how quickly the global financial crisis has reversed Russia's fortunes. Worried about the turmoil, Russians have hurriedly taken to converting their ruble savings into dollars and euros, driving street exchange rates even lower than the official one.”

“Underscoring the growing impact of the global financial crisis on Latin America, central banks in Mexico and Brazil deployed billions of dollars of reserves on Thursday to stem steep currency declines that are testing the region's hard-won economic stability. The simultaneous moves provided a snapshot of a region caught off-guard by the swiftness and depth of currency plunges prompted by the U.S. financial crisis. Now, policy makers are scrambling to reduce the potential for economic wreckage, seeking to reduce volatility as their currencies lurch toward new postcrisis levels. "These are exceptional times, and they call for exceptional measures," says Paulo Leme, a senior Goldman Sachs economist who follows Latin America.”

“South Korea's stock market and currency took another beating Friday amid mounting global fears at the toll that recession will take even in countries like this one, which is unlikely to tumble into negative growth. The benchmark Kospi Index fell 10.6% to below 938.75, its lowest level since July 2005. The close also marked the Kospi's first dip below 1,000 since then and its worst week on record, in which it finished down 20.5% for the week and is off 35.2% so far this month. Meanwhile, the South Korean won plunged to 1,424 per U.S. dollar, its lowest level since June 1998 and down 33.8% against the dollar this year. And the Bank of Korea reported that South Korea's third-quarter gross domestic product expanded at a seasonally adjusted 0.6%, the weakest level in four years.”

“On Wednesday, it was Hungary's turn to take desperate measures. As the financial shock that began in the U.S. reached deeper into emerging markets, Hungary's central bank took the dramatic step of raising interest rates by a steep three percentage points in order to prevent a run on its currency. Its move came as Belarus and Pakistan said Wednesday they are seeking large infusions of aid from the International Monetary Fund, while Ukraine suggested it is close to getting one. The Brazilian and Argentine stock markets each fell about 10% Wednesday, outpacing a steep drop in U.S. stocks. The growing rout in emerging markets is dashing hopes that developing nations would prop up world economic growth at a time when the U.S. and Western Europe are experiencing the worst financial instability in decades. Instead, many emerging markets are the world economy's new problem children.”

“German banks have bled billions of euros in the U.S. subprime-mortgage debacle. Now they face another potentially big bill from a costly misadventure in Iceland. The Icelandic bet is the latest illustration of how German banks -- including once-sleepy regional lenders -- ranged far and wide in recent years in search of yield to escape stiff competition and low profit margins on their home soil. By June of this year, before Iceland's spectacular financial meltdown, German financial institutions had lent $21.3 billion to Icelandic borrowers, according to the Bank for International Settlements. That was well over a quarter of all foreign lending in Iceland, and roughly five times as much as Britain, the next-largest creditor country. Iceland's three largest banks -- and the country's main debtors -- collapsed this month, plunging the country into crisis. Kaupthing Bank, Iceland's biggest, missed a coupon payment this week on 50 billion yen ($512 million) of bonds in Japan, heightening default concerns.”

“The Icelandic government is likely to ask the International Monetary Fund for financial help over the weekend, as the country's foreign-exchange market remains dysfunctional and questions mount over Iceland's near-term debt obligations, a key government official told Dow Jones Newswires Friday. Financial markets worry about the government's ability to meet debt obligations as Iceland drastically shakes up its financial system. The Icelandic Financial Supervisory Authority, or FME, confirmed that the principal of a $750 million corporate bond from nationalized Glitnir Banki Hf. that matured Wednesday went completely unpaid. FME spokeswoman Kate Hill said the FME, the government and advisers are in the process of sorting out Icelandic bank assets and liabilities.”

“China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust. How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines. While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year. But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.”

“The U.K. economy slumped in the third quarter amid the global financial crisis, becoming the latest developed nation to experience an economic contraction. The Office for National Statistics said Friday that the economy contracted a far-bigger-than-expected 0.5% in the third quarter, compared with zero growth in the second quarter. It is the first time the economy has contracted since the second quarter of 1992 and the biggest drop since the fourth quarter of 1990.”

“Transportation companies are reporting sharply lower freight volumes, a sign that the pipelines of global commerce have begun to slow. Goods shipped by truck, train and ship have all fallen off in volume, and freight companies are now forecasting a slump as the credit crisis slows manufacturing and puts the brakes on consumer spending. Shipping companies are considered a barometer of economic health, which makes the current downturn particularly worrisome.”

“At the same time, the median U.S. home price was $191,600 in September, down 9.0% from $210,500 one year ago. That $191,600 median price is the lowest since April 2004. The median price in August this year was $203,100.”

“Employers grappling with the financial crisis and a slowing economy are accelerating and broadening job cuts in multiple industries, potentially deepening the economic downturn. Xerox Corp., General Motors Corp. and bottler Coca-Cola Enterprises Inc. disclosed new job cuts Thursday, following layoff announcements earlier in the week by Chrysler LLC, Merck & Co. and Yahoo Inc., among others. The economic slowdown, previously concentrated among housing- and finance-related employers, is spreading to once-sheltered sectors like health care and technology.”

“Chrysler LLC told employees Friday it will cut 25% of its white-collar jobs next month. In a letter to employees, Chief Executive Robert Nardelli said the cuts are necessary because of the deep downturn in the economy and the tightening credit situation, which are choking off auto sales. Mr. Nardelli said the company is facing the "most difficult economic period any of us can remember."

“Despite the darkening outlook for the U.S. economy, few banks have taken extra precautions to protect against sharply higher bad-loan losses…. Additions to loan-loss reserves are an expense on the income statement. As a result, moves to beef them up could crush banks' earnings power.”

“Denmark's central bank Friday raised its key policy rate for the second time this month to prop up the country's struggling currency as the global financial crisis continues to wreak havoc. Danmarks Nationalbank said it increased its key lending rate and the interest rate for certificates and deposits to 5.5% from 5% "as a result of continued intervention to support the Danish krone."

“In a matter of weeks, the tempest in global markets has undone years of hard-won gains by emerging economies. Over the past month, borrowing costs for governments in emerging markets have ballooned to levels that haven't been seen in six years, and they continued to rise Thursday. Investors are especially frightened of countries with financing needs and weakening economic fundamentals that could tip into a deeper crisis, like some in Eastern Europe. But even countries with comparatively solid balance sheets are seeing their outlook darken as access to credit tightens and global economic growth slows sharply.”

“European central bankers signaled interest rates are likely to head lower as the financial crisis nudges Western Europe closer to recession.”

“Eager to rein in a dramatic slide in oil prices, OPEC decided Friday to make a deep cut in oil production, taking 1.5 million barrels a day off global markets as it embarks on the challenging task of managing prices amid a potential global recession.”

“Driven by once insatiable demand from China and other developing countries, service center owners and metal dealers built vast stockpiles of scrap steel, aluminum, copper and nickel, expecting prices to continue rising. But in the last six weeks, scrap steel prices have fallen nearly 60% to about $400 a ton. Prices for aluminum scrap has dropped 33%, copper 25% and nickel about 15%. Peter Marcus, metals analyst for World Steel Dynamics, says, "We aren't near the bottom yet."

“Liz Claiborne Inc. slashed its 2008 earnings view and said it is curtailing capital spending amid slumping sales. The apparel retailer also said it will post a third-quarter loss due to restructuring charges. Liz Claiborne, like other retailers, is struggling as consumers cut back on discretionary spending due to the weakening economy. The company warned that it may cut its outlook further if the deterioration in demand continues.”

“Samsung Electronics Co. said its third-quarter net profit fell 44% as its major divisions recorded smaller operating profits simultaneously for the first time since mid-2005. Samsung's semiconductor business, for years its biggest profit contributor, experienced the sharpest decline and was barely profitable because of a prolonged cycle of tight pricing for memory chips used in computers and other gadgets. Profits in its cellphone and flat-panel-display units also tightened. Samsung expects the fourth quarter, usually the best for electronics makers, to be "an even more challenging period," said Chu Woo-sik, the company's investor-relations chief. He cited rising component costs and the effect that the global economic slowdown would have on consumer purchases of electronics.”

“Microsoft Corp. reported a 2% increase in fiscal first-quarter net income on a 9% rise in revenue, and lowered its financial forecasts for the rest of the year because of the gloomy economy.”

“Citing the global economic turmoil and a strengthening yen, Sony Corp. sharply lowered its outlook for its fiscal year ending March 2009, a blow to the company whose nascent recovery was already looking fragile. The Tokyo-based electronics giant warned that the deteriorating business climate could force the company to scale back capital spending, close plants and cut jobs to shore up profit.”

“Amazon.com Inc. reported a 48% increase in profit and a 31% revenue jump for the third quarter, but issued a cautious projection ahead of the key holiday season. The revised sales outlook comes just three months after the Seattle-based Internet retailer had raised its revenue forecast for the year, showing how quickly the consumer spending environment has declined. Amazon shares fell more than 13% after hours on the news.”

“Gannett Co.'s third-quarter net income slid 32% as the media company grappled with slumping advertising sales and higher newsprint prices. Gannett, which publishes 85 daily newspapers and operates 23 television stations, posted net income of $158 million, or 69 cents a share, down from $234 million, or $1.01 a share, a year earlier.”

“Credit Suisse Group, one of the few banks to skirt massive credit losses, said in-house bets contributed to a third-quarter loss, signaling the challenges banks face in navigating volatile markets. The bank said 2.43 billion Swiss francs ($2.09 billion) in write-downs on mortgage securities and unsold buyout loans, as well as a 1.7 billion franc trading loss, left it with a 1.3 billion franc net loss for the quarter. The results sting CEO Brady Dougan, who has been steering pretty successfully through the credit crunch. Mr. Dougan called the results "clearly disappointing."

“The shift is being echoed across Silicon Valley, where executives at startups—which form the foundation of the tech economy—are now deferring expansion projects, taking voluntary pay cuts, delaying hiring plans and slashing expenses. The shift is a turnabout for the region's young companies, which have traditionally focused on go-go growth by grabbing customers early and being first to market with new technologies. The change is being spurred by the souring economy and market gyrations, which have hit startups' main source of funding: venture capital.”

“College seniors may have more trouble landing a job next spring than recent graduates, as employers trim their hiring outlooks in response to the slowing economy and financial-sector turmoil. Employers plan to hire just 1.3% more graduates in 2009 than they hired this year, according to a survey by the National Association of Colleges and Employers. That's the weakest outlook in six years and reflects a sharp recent downturn. Just two months ago, a survey by the same group projected a 6.1% increase in hiring.”

jg