Homes have stopped selling, banks have stopped lending, companies have stopped manufacturing, and people have started to line up to receive checks. The governments answer is to spend more, but investors have only shown mixed reaction to stimulus plans causing stock prices to swing in every direction.

United States economy shrank at its fastest pace in a quarter century from October through December, and no one has any clear answer as to when we will see improvement, with some economist know predict a turn won’t happen in 2009.

The nature of the global slow down is unlike any past recession, and could prove difficult to navigate using long standing tools such as Interest Rate reductions and currency manipulations.

Breakdown: Gross Domestic Product (GDP)

·          GDP shrank at an annual rate of 3.8% in the fourth quarter

“Decline would have been much steeper (more than 5%) if shipments of goods had fallen as sharply as orders “

“The difference between 3.8 and 5.1 percent is the inventory buildup,” Nigel Gault, chief United States economist at IHS Global Insight, said. “My only explanation is that companies could not cut production fast enough.”

Economists predict contraction in first quarter at more than a 5% annualized.

Breakdown: Fourth Quarter

·          Fourth Quarter exports declined 19.7%

·          Imports dropped 15.7%.

·          Fourth Quarter consumer spending fell 3.5%

·          Decreased 3.8% in the third quarter

“Employers reduced their corporate investments and capital goods by an annualized 19.1% in the fourth quarter.”

“Contraction in the fourth quarter was the steepest since 1982. The economy shrank at an annual rate of 6.4% in the first three months of that year”

Unemployment at 7.2%

“Economists predicted jobless rates could hit 9% as the recession spreads”

Read Article: Steep Slide in U.S. Economy as Unsold Goods Pile Up

Stock market volatile, talk of more stimulus, and general fear have all had their toll on the average investors, but it seems that Wall Street is still paying bonuses and foreign governments are still willing to buy US Debt.

“Treasury prices rose Friday after a report showed the nation’s economy shrunk in the fourth quarter and as economists continued to deliberate how to rescue the banking system.”

Breakdown:

·          10-year Treasury up 19/32 to 108-5/32, yield fell to 2.80%.

·          30-year up 1-5/32 to 117-8/32, yield fell to 3.55%.

·          2-year up 5/32 to 100, yield down to 0.89%.

·          3-month note yield was 0.23%.

“3-month bill has been used as a short-term gauge of confidence in the marketplace. Bond prices and yields move in opposite directions.”

Breakdown: Gross domestic product (GDP)

·          Fell 3.8% in the fourth quarter,

·          Biggest quarterly slowdown in 26 years

·          Largest drop in GDP since the first quarter of 1982.

“The government debt market has largely been shrugging off negative economic news – which typically creates demand for the safe haven of Treasuries and pushes prices higher. Instead, Treasuries prices have been trending lower since the start of the year.”

The deficit which is now expected to top $1 trillion in 2009, will have to be funded with the government selling Treasuries. The flood of new debt will pushes prices lower.

Breakdown: Debt

·          Record amount of debt being auctioned

·          30-year bond has fallen 25 points since December

·          Yield climbed more than a full percentage point

·          Treasury auctioned $135 billion worth of debt this week

·          $120 billion sale last week.

1.      Thursday, $30 billion worth of 5-year notes

2.      Tuesday, $40 billion worth of 2-year notes

2.

Breakdown: Lending rates

·          3-month Libor rate edged very slightly higher to 1.18% from 1.17%

·          Overnight Libor rate surged to 0.30% from 0.22%

·          More than $350 billion in assets are tied to Libor

Breakdown: Market Gauges

·          TED spread widened slightly to 0.95% from 0.94&

“The bigger the TED spread, the less willing investors are to take risks.

·          Libor-OIS spread, edged up slightly to 0.96% from 0.95% the day before.

“Libor-OIS spread measures how much cash is available for lending between banks. The bigger the spread, the less cash is available for lending.”

Read Article: Bond prices rally as GDP slows

As most of the readers of Whybanksfail already know, WBF is not a supporter of printing money. That said something needs to happen to get people working again. We’re not sure a $819 billion dollar stimulus is it. However we are going join the bandwagon for a minute and at least look at what the potential benefits of the plan might be.

Let’s hope that this money is not just simply a way to push social issues, and not a concert plan on how to fix the economy in the short-term.  Let’s not forget that the reason we are in the current mess is because we borrowed and borrowed with no way of paying it back. If we continue to borrow, printing money will be the only way out, drive down the value of the dollar.

In an article on the New York Times online edition, we read how Components of Stimulus Vary in Speed and Efficiency

The House Stimulus bill is 647-page bill

Breakdown: How stimulus might work

·          Initiatives that can be carried out relatively fast, like tax cuts, tend to provide less bang for the buck in terms of generating jobs and economic growth

·          Initiatives likely to spur more robust activity, like public works projects, can take so long to get under way that they arrive too late.

Breakdown: Tax Cuts

·          Tax cuts, totaling $275 billion, roughly a third of the package

·          Cut would provide a credit of up to $500 for individuals and $1,000 for couples

·          Republicans say the cuts are too small

·          Democrats say, ill designed to appease House Republicans,

Economist say the plan should include more effective tax cuts and more of them, Should also address specific problems like the weak housing market

“People are going to spend 30, 40 cents on the dollar, so the multiplier is going to be low,” said Adam S. Posen, deputy director of the Peterson Institute of International Economics.

Breakdown: Checks

No one time Stimulus Checks

Lower tax withholding, $12 or $13 a week for many American workers paychecks

Unemployed benefit checks due to stop will keep coming, along with an extra $25 a week

Breakdown: Aid to States

·          $87 billion provision increasing the federal contribution for Medicaid

·          79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010.

Breakdown: Infrastructure

·          $30 billion for highway construction

·          Tens of billions for other transportation projects, water projects, park renovation, military construction, local housing projects and more.

Breakdown: Spending

·          Congressional Budget Office analysis found that only 64% of the bill’s spending would be completed within 19 months

·          Spending on construction projects was among the slowest

Breakdown: Education, Health Care & Alternative Energy

·          $140 billion spending on education

·          $13 billion each over two years for Title I schools, which serve impoverished students, and for special education under the Individuals With Disabilities Education Act

·          $20 billion for school renovations

Breakdown: Automatic Stabilizers

·          Family of four on food stamps could find up to $79 more a month on their government-issued debit card

·          Unemployment benefits and food stamps are such useful stimulus tools that budget analysts refer to them as “automatic stabilizers.”

·          $20 billion over five years on added food stamps

·          $43 billion over two years to extend and increase unemployment benefits

·          Provision adds 33 weeks of benefits, for states with the highest unemployment rates

When talking to a child about what it should do with its life, make sure to put Banker on the top of the list. Where can you systematically do a poor job, and continue to be paid a ridiculous amount to do it.

It seems that Wall Street never has enough, and although most companies are worth less then 70% of their all time highs, their still going to give themselves a bonus that is the 6^th largest on record. The idea is that you have to keep the most talented people from leaving.

The question that the rest of us have; if these are the most talented people, then how come they did not see this one coming? How come they where not smart enough to protect their companies.

Wall Street is still under the impression that current crisis is caused by some external factor, and the fundamentals are still strong, with the right people in place. But the problem is that the fundamental problem is Wall Street, and it’s continued ignorance and failure to not only protect clients and investors, but to protect and police itself.

“Wall Street firms slashed cash bonuses for New York City employees by 44 percent in 2008”

Breakdown:

·          Bonuses fell to $18.4 billion from $32.9 billion in 2007

·          Largest decline ever

·          Biggest percentage drop in more than 30 years

·          Size of the bonus pool is the sixth-largest on record

·          Average bonus fell 36.7%, to $112,000

·          Average decline was smaller than the drop in the overall bonus pool

·          Pool was shared among fewer workers due to jobs cuts

“Losses from traditional broker-dealer operations of New York Stock Exchange member firms topped $35 billion in 2008, more than triple the record set a year earlier.”

Breakdown: Jobs

·          Wall Street shed 19,200 jobs, or 10.2%

·          Over the last 14 months

·          Ending the year with 168,600 workers

“What were the five largest Wall Street banks no longer exist in the form they began 2008. Goldman Sachs and Morgan Stanley became commercial banks, Bear Stearns was bought by JPMorgan Chase, Lehman Brothers ) went bankrupt and Merrill Lynch was acquired by Bank of America.”

Breakdown: Tax’s

·          Cut into tax revenue,

·          NY State Legislators trying cut potential $15.4 billion budget deficit

·          Tax revenue could fall by $1 billion in New York State

·          $275 million in New York City

Read Article: Wall St. Bonuses Fall 44%, Report Says

The economy is not only about the facts and figures, most of the time it’s about the feeling that people have about the future that matters more. While we know that the 74,000 who got the pink-slip yesterday are not so happy today, the vast majority of Americans still have their jobs. But how do the rest of them feel. After all, most of our decisions are based on feeling. If they were not, no-one would have a Flat screen TV, or a Mercedes in the drive way.

Turns out the rest of us are not so happy either.

Breakdown: Consumer Confidence Index

·          January consumer confidence index fell to 37.7

·          Upwardly revised 38.6 in December.

·          The data go back to 1967.

Breakdown: Jobs

·          People saying jobs are “plentiful” rose to 7.2% from 6.5%

·          Those saying jobs are “hard to get” fell to 41.1% from 41.5%

·          Looking six months ahead, 9.4% of consumers expect more jobs

·          Compared with 9.8% in the prior month

·          Proportion expecting fewer jobs fell to 36.7% from 40.6%

Breakdown: Business Conditions

Consumers’ view of current conditions worsened slightly in January

People saying business conditions are “bad” rising to 47.9% from 45.8%

People expecting to add to their income falling to 10% from 12.7%

Consumers’ view on inflation in 12 months improved

Rate of 5.6%, compared with 5.8% reported for the prior month

Breakdown: Buy things

·          People looking to buy an automobile within six months rose to 5.3% in January

·          4.8% in December

·          Plans to buy a home fell to 2.5% from 2.6%,

·          Plans to buy major appliances fell to 23.2% from 27.1%.

·

Read Article: Consumer confidence at record low

Mounting additional pressure on the American, another country has started to do more to help its companies directly. “The Japanese government on Tuesday outlined a plan to inject state money into ailing companies in exchange for equity stakes, a move that echoes the partial nationalization of some troubled financial firms in the United States and Europe.”

With all the layoff announced yesterday, and the continued difficult that medium and small business are having raising capital, how long before these governments will have to take over and nationalize the whole game.

Bad companies need to be allowed to fail. And the strong allowed to build.

Breakdown:

·          Steady stream of profit warnings

·          Job losses in every sector

·          Bankruptcies jumped 24% in December, from a year earlier

·          33 listed firms among the victims, highest in last 60 years

·          State-owned “Development Bank of Japan” buying shares in companies

·          Government to guarantee investments, should companies go bankrupt

Breakdown: Banks

·          Japan’s banks had low exposure to the mortgage-related products

·          Economic downturn/last year’s stock market rout, begun to eat into Japanese financials

The problems in Japan reach out beyond the banking sector to other parts of the economy.

Breakdown: Nomura

·          Largest brokerage

·          $3.8 billion loss in the fourth quarter of 2008

·          Costs related to acquisition of the Asian/European/Middle East operations of Lehman Brothers

Breakdown: Government Plan

·          4.8 trillion yen, or $53.7 billion, stimulus plan

·          Japan’s central bank to lower interest rates to near zero

·          Shore up Japanese credit markets by buying commercial paper directly

·          Dealing with small and medium-sized companies

·          Employing 70% of the country’s work force

Read Article: Japan to Take Stakes in Ailing Companies

Today might go down in history as DarkGray Money.  It seems that companies across all industries have decided to trim their work force today. “Companies today announcing at least 72,500 job cuts.”

Whybanksfail is speechless, wanting to know how spending more money, giving more bailouts, paying for more wars is going to soften the blow to these 72,500 people. What will the 300 dollars in tax rebate check do for us now?

The List

Caterpillar Inc                       - 20,000 jobs

Sprint Nextel Corp               - 8,000 jobs,

Home Depot Inc                  - 7,000 jobs,

Pfizer Inc                                - 19,000 jobs

Breakdown: Caterpillar

Peoria, Illinois-based

World’s largest maker of construction equipment

Cutting 20,000 jobs

Fourth-quarter profit fell by 30%

Breakdown: Pfizer Inc

New York, New York-based

Drug-maker

Acquired competitor Wyeth for $68 billion

Will close five factories

Eliminate 19,000 jobs, or 15 % of the combined workforce

Breakdown: Sprint Nextel Corp.

U.S. wireless carrier,

Eliminate 8,000 jobs, or 14 %

Reduce expenses by $1.2 billion a year

Breakdown: Home Depot

World’s largest home-improvement retailer

Will cut 7,000 jobs, or 2% of its workforce,

Close down Expo home-décor business

Breakdown: General Motors Corp

Largest U.S. automaker

Will eliminate shifts at Michigan and Ohio plants,

Shedding 2,000 jobs 

“American jobless claims hit a 26-year high, reaching 589,000 in the week ended Jan. 17,”

Breakdown: Europe

ING Groep NV

Biggest Dutch financial- services company,

Will reduce workforce by 5.4%

Eliminating 7,000

Royal Philips Electronics NV

Europe’s largest maker of consumer electronics,

Will cut 6,000 positions

Corus

Unit of India’s Tata Steel Ltd

Europe’s second-biggest steelmaker

Will reduce workforce by 8%, or 3,500 jobs

Read Article: Caterpillar, Sprint, Pfizer Slash Jobs as Sales Fall (Update1)

Announced this morning, Pfizer will be buying out Wyeth for a total of $68 billion cash, stocks and debt.  

That’s right, banks have agreed to put up $22.5 billion for the Pfizer buyout of Wyeth.

Now we know where our money is going, mega mergers.  

Not only is Pfizer taking some money from the banks to finance this, but they are also cutting the quarterly dividend in half.  

Amazingly, this happens after Pfizer reported a 90% drop in quarterly net profit.  However, it is still earning a profit.  Maybe that’s all it takes in this economy.  

I feel this is good news, as the financial industry needed a “bone” to be thrown — maybe to get things started again.  After all, there is a lot of money made in a merger or acquisition.  

On the horizon for Pfizer is losing most profits from it’s top selling drug, Lipitor.  The cholesterol fighting drug’s patent, that I swear everyone is taking, will expire in 2011.

Maybe “Revolution” is overstating it, but the failure of the economic system in Iceland has caused a series of events that have, this weekend, led to the announcement of early elections.

It can’t be any more real than this. 

As people of the United States, we are buffered from many of the troubles people around the world face.  Myself included.  

We have just witnessed a major, and stable, nation — collapse from economic issues.  After all, what else do unemployed people have time for?  Why not protest?

Ramifications of the present economic crisis in Iceland have resulted in currency collapse in October.  The International Monetary Fund had to intervene.  The IMF sent $827 million.  

The revolution comes in the form of a cleaning out of the ruling people.  An election will be called 2 years ahead (the article says may, but it has been confirmed since) of the next planned election.  The next election was supposed to have been in 2011.  Fortunately the currently elected leaders placed the well being of the nation ahead of their own interests, and felt that resigning would be the best way to regain the people’s trust in the government.

I’m impressed by this.  

At the same time, here in the United States we also had our own peaceful transition of power.  While it was a planned election, we can’t help but assume the results were somewhat swayed by the massive financial collapse back in September.   

It feels good to live in a democracy, even with all the problems — just knowing that unpopular leaders, can be shuffled out of power in an organized manner.

Nationalizing any industry is a scary concept for Americans. It goes against the very core of our economic ideology. Nationalization goes against the ideals of our freedoms, and our lazy-fair approach to business. But it is a reality in the United States, as shown in the nationalization of the rail-roads, electricity, telephones, city and local services such as firefighters, police forces, and our national defense.  

As the robber-barons of the late 19^th century learned, if you mismanage a vital public asset, such as a railroad or a say a bank for today’s world, it can easily become so important to the safety of the nation, that nationalization is the only clear option.

Whybanksfail does not general believe that government should be in the business of buying banks, but rather allowing the banks to simply fail, then developing ways for the smartest people to develop new banks, the Swedish example might have some merit.  

“The Swedes have a simple message to the Americans: Bite the bullet and nationalize.”

“Sweden’s center-right government pulled off a rapid recovery in the early 1990s after their banks fail. The government was able to making money in the long run for the taxpayers and put there banks on better financial standing in the longer run. “

“Former government officials in Sweden, many of whom come from the market-oriented end of the political spectrum, say the only way to solve the crisis in the United States is for the government to be prepared to temporarily take full ownership of the banks.”

Breakdown: Bad Bank

·          Sweden placed troubled assets into a so-called bad bank

·          Sold over time, when market conditions improved

·          Used taxpayer money to provide capital to allow banks to resume normal lending

·          In the process wiped out existing shareholders

“Swedish state took on all the assets that were worthless or impossible to value at the time, and then managed them or sold them with the aim of getting as good a deal as possible for the taxpayer.”

Breakdown: Fears of bank nationalization

·          Skeptics worry that nationalization would cost too much,

·          The government would not run banks effectively

·          Nationalization would be too complicated

Read Article: Sweden’s Fix for Banks: Nationalize Them

Looks like the economist have official told us what we all new. Great Britain is in recession, and it’s the worst one since the 1980’s

With the collapse of the mortgage market in October, international government attempted to fight off recession by pouring money into financial institution through bailouts. However as the months have gone by, it’s been shown that those efforts have done little but to shore up the books for some of the worlds wealthiest banks. The banks have continued to show large loses, making none of them safe from failure.

Breakdown:

·          First recession since ‘91

·          Fourth-quarter GDP decline steepest since 1980

·          Even worse than most economists’ pessimistic expectations

Breakdown: GDP

·          GDP shrank by 1.5%, in the final three months of the year

·          0.6% quarterly contraction in the July-to-September

·          Definition of a recession is two consecutive quarters of declining GDP

·          GDP shrank 1.8% compared to the final quarter of 2007

·          Full-year 2008 growth was just 0.7%

·          Britain’s worst post-war slowdown

The pound has fallen to the lowest level against the dollar since 1985, giving Brits fear of a return to the 80’s when England was forced to take help from the IMF, to restore its currency and rebuild their economy. The difference today is that recession is Global.

“Economists consensus forecast for a 1.3% quarterly decline and 1.4% annual fall.

Data underlined fears the economy would contract by 2.5% in 2009. “

Breakdown: Sectors

·          3.9% quarterly fall in industrial output

·          Manufacturing down 4.6%.

·          1% quarterly drop in the much larger services sector

Read Article: Britain plunges into first recession since ‘91

Iconic motorcycle builder, Harley-Davidson is feeling the pinch of the global economy, and has decided to let some people go.

Turns out that most of the people buying their products are not the 20 something punks, but rather dads/moms with three kids a mortgage and a job in finance. Exactly the people most hurt by the current crisis. I hear they sell a lot of bikes in Japan and Germany as well. (Hence the problem with global recession, ouch)

Harley-Davidson said it would cut 1,100 jobs as its fourth-quarter profit fell by more than a half.

Breakdown: Layoff

·          One-time charges of $110 million to $140 million over 2009 and 2010

·          Effort to produce annual savings between $60 million to $70 million

·          800 hourly production positions

·          300 non-production – salaried positions

·          70% of the workforce reduction will take place this year

Breakdown: Earnings

·          2008 4^th Quarter earnings dropped to $77.8 million or 34 cents a share

·          From $186.1 million, or 78 cents a share a year-ago

·          Missed targets of 57 cents a share in a survey of analysts

·          Revenue fell to $1.29 billion from $$1.39 billion

Breakdown: Reductions

·          Consolidate two engine/transmission plants in the Milwaukee into Menomonee Falls, Wis.

·          Consolidate paint and frame operations at its assembly facility in York, Pa.

·          Close distribution facility in Franklin, Wis.,

·          Consolidating Parts/Accessories and General Merchandise distribution through a third party.

Read Article: Harley-Davidson laying off 1,100 as profit falls sharply

The British government has found out that even if they want to help Barclays, by putting in more investment, they can’t. Turns out that a “clause inserted during the Abu Dhabi Royal Family’s investment in Barclays last October has made it practically impossible for the Government to take a meaningful stake in the bank’

Barclays raised £7.3 billion from Abu Dhabi and Qatar, and to do so had to take on unfavorable terms.

Breakdown: The Clause

If Barclays needs to raises fresh capital before 6/30/09, investors would receive a greater number of shares for their original investment without paying more, automatically handing over almost 50% of the bank to the Middle Eastern investors.

If the government wanted to invest in Barclays without allowing Abu Dhabi to take the larger stake it would “have to do so by paying more than 153p for Barclays shares — which were trading at just 66.1p”.

However of the government choose to pay the larger sum, ‘the Treasury would face accusations of wasting taxpayers money, and bailout the wealthy family.”

Breakdown: The books

·          Barclays pressed on with contingency plans

·          Bring forward its annual results amid growing investor unease

·          Barclay’s will publish earnings on February 17

·          Traders fear £1.4 trillion balance sheet could contain more hidden problems

Read Article: Government prevented from taking Barclays stake by deal with Abu Dhabi

We have been talking about the United State printing money for some months now, but it looks like Britain has been drinking the same cool-aid. Someone will have to pay for these bailout outs. The Taxpayer.

Regulation is needed, not protection, and definitely not bailouts. Pumping good money into bad will not fix anything. It might for a time prop-up the banks, but ultimately these institutions will fail, get bought up or simply wither away into obscurity.

The only question is weather we choose to feel the pain now, or let our children deal with it.  

Stagnation, prolonged period of slow economic growth (traditionally measured in terms of the GDP growth).

As we become more aware of the problems the British banks face, we see the “parallels between Iceland’s recent financial downfall and Britain’s trajectory.”

Breakdown:

·          Bulked up on debt and lived beyond its means.

·          Pound down nearly 29%, against the dollar, from a year ago.

·          A financial system edging toward nationalization.

The British banks are requiring additional larger injections of taxpayer cash, and there no sign that their condition will improve. More concerning, the banks are fully tied to the rest of the world, and without a global recover, a local English one seems more and more out of reach.

The rest of the world is now watching Britain, “to see what bank nationalization might look like, and what it might suggest for American banks.”

The final cost of the British rescue effort could be at least £350 billion. “While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarms many analysts and economists.”

Breakdown: Pound

·          Pound at a multi-decade low

·          Pound down nearly 29%, against the dollar, from a year ago.

·          Pound fell to $1.3618 lowest level against dollar since September 1985

·          Recovered to $1.3922.

Breakdown: Debt

·          Household debt as a percentage of disposable income hit 177% in 2007

·          Compared with 141% in the United States.

Breakdown: British Economy

·          Economy expected to shrink by 2.9% this year

·          Compared with a 2.6% drop in the euro zone

·          2.1% contraction in the United States, according

·          Predictions for budget deficit at 9.4% of GDP in 2009

·          Compared with 4.9% in the euro zone \

·          8.4% in the United States.

Breakdown: Banks

·          Government controls majority in Royal Bank of Scotland

·          RBS shares plunged 64% in the last three days

·          Barclays down 33%

·          Lloyds Banking Group off 54%.

·          Prospect of a full nationalization of the bank is worrying investors

·          British bank assets total about 4.5 times the country’s GDP

Read Article: Falling Pound Raises Fears of Stagnation

Just in, Microsoft plans to eliminate up to 5,000 positions over the next 18 months.

The news follows an 11% drop in net income.  Revenue increased 2% to $16.63 billion (still not bad from my perspective, given the adoption issues with Vista, and what seems like a speed up in development of “Windows 7″).  Net income decreased 11%, operating income dropped 8%, and earnings per share dropped 6% from the same period the previous year.

Microsoft has a global work force of 89,809.  That amounts to 6% of the employees being eliminated.  We have not identified where theys jobs will be cut from.  In the back of my mind, I have to say the job cuts will likely be in the US.  

The news comes after news that US initial jobless claims have matched the highest since 1982.  In the week ending January 17, 2009 claims increased by 62,000 to 589,000.

More bad news, as we all feel the hurt from the holiday season.  Circuit City won’t be the last one to shut down this year.