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:

Celgene

Raytheon

Burlington Northern Santa Fe

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%.

All of the data coming in lately appears to show that the U.S. and worldwide government rescue of the financial industry has come too late to avoid a severe recession.  I am not arguing that government intervention, and especially government investment, in banks should not have been undertaken.  For if it had not, we would be discussing an impending global economic depression.  Instead, it simply took to long to recognize the damage that had been done to the credit markets, and then too long to react.  As a result the entire world economy is being punished, and no sector seems to be spared.

So here we are, the future shrouded in uncertainty. Stock markets continue to fall as traders lower the values of companies on increasingly lowered earnings expectations, and also because hedge funds keep blowing up, requiring them to liquidate their holdings in order to return investors’ money.  The term “challenging” appears most often when corporations describe the future business environment.  Even Apple, Inc., used the word in its earnings release.

Economic information and insight gathered by RGE Monitor tells a sad tale of what we may expect in the next six to nine months:

Since the U.S. economy is already in recession, intensification of financial crisis (and impact of credit tightening on households and firms) might deepen and lengthen (longer than the avg 12 months in past decades) the downturn leading to a U-shaped recession

Bernanke: Marked slowdown in consumption, investment, labor market; economy might be weak for several quarters with risk of a protracted slowdown; time of recovery will depend on pace of improvement in credit and financial markets

Roubini: U.S. will suffer worst recession in 40 yrs lasting 18-24 months with unemployment rate rising up to 9%, credit losses hitting close to $3 trillion and home prices falling another 15%

Fed’s Yellen: Economy might contract from Q3-09 to Q1-09 as financial shock hits every sector of the economy and housing is still far from bottoming out

Merrill Lynch (not online): Growth will be flat in Q3, negative in Q4-08/Q1-09, 2008: 1.6%; 2009: -0.3% with a recovery by mid-2009 at the earliest; ‘saucer-shaped’ recovery–>longer duration of recovery a bigger risk than magnitude of decline in growth

Morgan Stanley: Economy might contract by 1% or more in the year ending in Q2-09; UBS: growth in contract in Q3/Q4 2008 and Q1-09 growing 1.4% in 2008; 0.3% in 2009

JPMorgan: Growth will be flat in Q3-08 (0%), contract -0.5% in Q4-08/Q1-09; 2008: 1.6%, 2009; 0.6%; Deutsche: GDP will contract in Q3/Q4 growing at 1.4% in 2008, 0.0% in 2009

Goldman Sachs (not online): credit tightening unlikely to ease soon, will impact economic activity causing severe and longer recession, 8% unemp rate by end of 2008 and Fed rate cut of 1% or lower; consumer spending will contract during 3Q08-1Q09 recovering only in 2H09; GDP growth will contract in 4Q08/1Q09 and remain flat in 3Q08/2Q09; GDI (a better indicator) is showing more weakness than GDP

NABE: Credit-market deterioration will push the US economy into recession (-1.1% in Q4-08, -0.5% in Q1-09); without the $700bn bailout plan, growth in 2009 would be 0.75% lower, unemployment rate would be 0.5% higher by 2009-end

After stronger than expected growth in Q2-08 boosted by rebate induced consumer spending and export growth, domestic demand and GDP growth will weaken significantly during H2-08/H1-09 as consumption will contract starting Q3 (first time in 17 yrs on rising job losses, falling real wage/asset income, high debt, tight credit), capex will decline in H2-08 and contract through 2009 since residential and even non-residential construction spending are in negative territory (on high borrowing cost, weak corporate earnings, elevated production costs); large inventory liquidation; non-manufacturing ISM stagnating; export orders at 2-yr low, contribution of exports to GDP will soften ahead (on slowing G-7, EM growth, stabilizing USD); correction in home price till 2010 will keep putting pressure on consumers and banks

The numbers may vary somewhat from one analysis to another (for instance, different shapes are suggested for the look of the recession), but it is undeniable that the next six to nine months for most, if not all, of us looks…well…challenging.

In a recent post, I promised to write an article discussing inflation and deflation.  I will get to that soon, but I also want to explore in more detail some investment strategies outside of the stock market, as well as some possible indicators to look for in advance of an end to the recession.  So I have a lot of work ahead of me.

In the meantime, I have some required reading for my dear readers.  Please take the time to review this article from the Economist about bear markets.  There are at least two important takeaways from the article: (1) we have been in a bear market since 2000 (yes, the 2003-2007 bull run was a classic bear market rally!); and (2) two of the best years in U.S. stock market history occurred during the Great Depression (excellent example as to why buying on major dips and selling into the rallys during bear markets works, and simply holding stocks does not).  Enjoy the article!