Hello! Welcome to a new feature on Raw Finance: The Economic Roundup. At the end of each week, I will highlight three areas of the economy that made news during the week, with a brief analysis and summary to examine what the news may be signaling about the future.
On the inaugural roundup, we have news about layoffs, a look at a couple of positive earnings reports, and rising defaults on corporate bonds. If you happen to be reading this in the morning, grab a bowl of Credit Crunch, and let’s get to it.
As feared employee layoffs have arrived, with several companies reporting job cuts. This will only put a further drag on consumer spending, and, depending on the severity of the cuts, a much longer recession. The one hope is that, should the economy show signs of life, companies will rush to re-hire for these lost positions, thus keeping the negative effect of these layoffs to more of a short-term shock, rather than a protracted loss of consumer spending. On the bright side, The Wall Street Journal reports that, for those whose jobs remain safe, there are no reported plans for salary reductions. Below, I have listed the headlines about job layoffs, with links to the stories for those interested in more detail.
Jobs Claims Move Higher as New York Reports Biggest Rise (The Wall Street Journal)
GM Prepares for Involuntary Layoffs of Workers (CNBC.com)
Goldman to Cut 10% of Jobs as Downsizing Wave Grows (The Wall Street Journal)
Xerox Plans to Cut 3,000 Jobs (The Wall Street Journal)
Wall Street Layoffs Could Surge Past 200,000 (CNBC.com)
Next Year’s Paycheck Looks Safe – If Your Job Survives (Wall Street Journal)
Next up, three companies, Celgene, Raytheon, and Burlington Northern Santa Fe reported positive earnings, and, they offered a relatively upbeat outlook. Hopefully, they are being honest and not simply contrary. In any event, it’s good to see that there are companies that are optimistic about next year. As anyone who reads this blog regularly knows, I do not make specific stock recommendations, but these companies are worth a look. Don’t forget to do your homework on the earnings, and watch those price-to-earnings ratios, especially in the current environment. This market is unforgiving if it believes a stock is overvalued.
Below are links to articles about these companies earnings:
Finally, looking back on what seems like a long time ago, I wrote summary of the origins of the credit crisis, in which I noted that corporate defaults would likely be a harbinger of more bad things to come. Well, it seems my concerns, which are shared by many economists, are becoming reality. Below is a summary of sources, put together by RGE Monitor, warning of problems in the high-yield corporate bond market. These are debt instruments issued by corporations that have less-than-perfect credit ratings. This is usually a very lucrative investment, except in rare times like these when one’s investment does not get repaid:
- Oct 23: Fitch believes that recent events are among a number of worrisome factors that suggest that the coming high-yield default wave may be the most severe on record–> In fact, a surge in corporate defaults has already taken place. The par value of U.S. high yield bond defaults alone has increased to $25 billion year to date through September from $3.5 billion for all of 2007,and including bonds affected by Lehman Brothers Holdings Inc.’s bankruptcy filing and Washington Mutual Inc.’s collapse, pushes the par value of corporate bond defaults above $100 billion, a level comparable to 2002 defaults.
- Oct 16: Edward Altman: Currently, U.S. corporate defaults are running at just over 2% YTD whereas the high-yield markets are pricing in a default rate of around 11% one year from now. Loose covenants during credit boom and refinancings are delaying defaults (and will moreover hurt recovery values later on of so-called ‘Zombie’ companies.)
- Moody’s (via FT): The number of companies with debt trading at distressed levels, a leading indicator of default rates, hit a five-year high at the end of the third quarter–> distressed index, which measures the percentage of junk-rated issuers that have debt trading at more than 999 basis points over safe government bonds, has risen to 29.6 per cent – the highest level since November 2002.
cont.: The ratings agency also said global default rates of junk rated companies will rise to 4.2 per cent by the end of the year and 7.9 per cent a year from now.- Moody’s (via WSJ), Fitch: U.S. defaulted volume YTD in 2008 at $4-5bn already more than all of 2007.
- Roubini: By now dozens of LBOs announced in 2007 have been either restructured, postponed or cancelled altogether; also seven actual medium sized LBOs have gone into bankruptcy this year alone and many more of the bigger ones may also go bust.
- Edward Altman predicts 4.64% of the $1.1 trillion in junk bonds outstanding will default this year, up from 0.51% at the end of 2006.
- Moody’s (via FT): the global speculative-grade or junk-grade default rate will jump 10-fold to 10% by the end of the year in the event of a US recession – well above the historic average default rate of 5% and currently 1%.
Gregg D. Killoren
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