Posted on 10/02/2002 5:04:51 PM PDT by rohry
Market WrapUp for the Week The Week in Graphs Storm Watch Geopolitical News Energy Resource Page Precious Metals Raw Materials Wednesday, October 2, 2002 Corporate Indebtedness The consequences are now unfolding as corporate defaults keep setting new records. Even more worrisome has been the downward spiral in corporate profits. It is profits and the cash flow from an enterprise that supports those debt payments. With profits in decline bankruptcies are rising. According to the Commerce Departments latest revision of non-financial business profits, they fell from $504.5 billion in 1997 to $333.7 billion in 2001, a drop of 34%. By the first quarter of this year they fell by 42%. This is an unmitigated profit disaster and goes a long way to explaining the now rising trend in corporate debt defaults. Strangely this is given little attention in the financial press. The media and Wall Street tend to remain fixated on pro forma earnings per share, which are absolutely meaningless. In fact, all of the actual forecasts for a strong economic recovery and the constant blather on what great shape the American economy is in completely ignores this debt phenomenon. The more credit that is created, the more debt that business and consumers take on, which is applauded. The fact that very few analysts or economists pay any attention to this matter is of even greater concern. Our economy and financial markets have run on debt so long that the consequences of a debt implosion are outside the radar screen of most analysts. Only when you get a spate of defaults, such as what we had at the beginning of the year, does it make front-page news. As quickly as it grabbed attention, it has just as quickly faded away. Yet the growth of debt related to income goes on unabated. For example, in 2001 personal income grew by $386.3 billion while personal debt expanded by $614.6 billion. During the bubble years of 1995-2000 household debts grew by $2,164 billion in comparison to household income, which grew by only $1,675 billion. Personal savings in this country are 0.2% of GDP. Americans dont save; they just borrow money. The fact that very few are concerned with this matter is all the more surprising. In policy debates one political pundit after another is calling for more government remedies to keep the economy out of recession. We have just gone on the largest debt and spending spree in this nations history. Yet nobody expects there to be a hangover. The cost of carrying debt has fallen for most households. Rising debt burdens has offset this. In the case of businesses, credit spreads continue to widen and credit default premiums continue to rise. Signs of financial stress are everywhere, but we still hear talk about 3-4% economic growth. The recent downturn in major business indicators is signaling another economic downturn much worse than the previous recession. Consumer retrenchment will be added to business retrenchment to broaden the decline. Now everyone is calling for the government to take action to keep the economy from falling back into recession. No one wants to experience a hangover. However, the government may be powerless to do anything about it. What can they do but reduce interest rates to zero as in Japan, or to start monetizing debt. The best thing government can do is to stand out of the way and allow the economy to cleanse itself. The government could reduce spending and reduce taxes and allow the private economy to regenerate itself. Initially there would be pain, but eventually a renewed cycle would begin that would be much sounder than the present one which is overburdened with debt. Unfortunately, lower taxes and lower spending are not in the works in a town that makes its living by redistributing wealth and expanding the public trough, so a hard recession now is inevitable. Today in the Markets Todays news was headlined by more charges and arrests in the corporate world. Enrons former chief financial officer, Andrew Fastow, was charged with masterminding a fraud at Enron that cost investors billions. In other developments, Martha Stewarts broker at Merrill Lynch pleaded guilty to a misdemeanor and is expected to be singing like a canary. The New York District Attorneys office is expected to make more announcements of further charges and possible arrests. This may lead to a new TV reality show called, Youve got cuffs. Defendants would be brought before a judge like Judge Judy, plead their case, and to add spice to the show, the sentencing would be left to the audience. Viewers could choose from a list of multiple choices for penalties. The show could assuage investor anger, and in the process lift network ratings. Spin-offs could include, Youve got stripes, On the rocks, to You got nailed. Other possible choices could include guest appearances of Ana Nicole Smith as a sit-in judge. Guest celebrity judges could also help draw in viewers. In the US the political views of entertainers now carry major political clout. Why not afford them the opportunity to be judges as well. Markets resumed their downward trek, falling for the third day out of four as more corporate earnings disappointments generated renewed selling. Dow Chemical started things off by warning that Q3 profits would be below forecast. Drug companies got hammered on speculation that Schering- Plough will disappoint on their earnings tomorrow. Confidence is evaporating on earnings. Already this week pro forma profits have been lowered even further this quarter to 6.5%, down form 17% in July. Fourth quarter estimates have also been lowered to 19.1% from 27.7% on July 1st. Major indexes gave back most of their gains from yesterday on above average volume. Two stocks fell for every one that rose on the NYSE. On the Nasdaq losers outdid winners by a 3 to 2 margin. Volume came in at 1.66 billion shares on the big board. The VIX rose by 3.23 points to close at 43.36. The VXN, up 0.91 points, finished at 58.15. Overseas Markets Japan's Nikkei 225 Stock Average fell to a 19-year low. Banks including Mizuho Holdings Inc. dropped after Mitsubishi Tokyo Financial Group Inc. said it will post a first-half loss, raising concern other lenders may lower their earnings forecasts. The Nikkei lost 1.2% to 9049.33. Treasury Markets © Copyright Jim Puplava, October 2, 2002 |
"NEW YORK, Oct 02, 2002 (AP Online via COMTEX) -- Bear Stearns placed an erroneous order to sell $4 billion worth of stock late Wednesday at the New York Stock Exchange, but most of the order was canceled before it was executed.
The NYSE said a clerical error caused the brokerage house to enter the order to sell $4 billion worth of Standard & Poor's securities at about 3:40 p.m. - 20 minutes before the stock market closed. The order should have been for $4 million.
All but $622 million of the $4 billion transaction was canceled prior to execution, the NYSE said in a statement.
The NYSE had no further comment. Officials at Bear Stearns were not immediately available for comment."
Richard W.
I figured that the traders were working hard all day trying to keep the averages pumped up in spite of all the bad news coming out. I'll bet that their blood ran cold when they saw that sell order. Must have been a Kadak moment.
Richard W.
I'm with you on that. The market is kind of like a casino, which may be why so many people just can't seem to stop playing it. It is just so clear to me that it is being manipulated, yet any hint of a rally and people can't help themselves and pour more money in.
Richard W.
CSCO is worth $8 or less, so it is still 20% overvalued.
Richard W.
Clearly the presence of Democrats in positions of power leads to more taxes, more regulation, and more economic misery.
At first blush you say "no--this can't be that bad an immediate problem because Bush can always invoke Taft-Hartley and end the strike for 80 days" (and incidentally the cooling off period usually results in a settlement--I have not reviewed the numbers lately but I believe in most cases, the strike has been over for good when the President exercises the power).
Here, however, Bush sees himself under an impediment to use the Taft Hartley provisions because of the impending election--White House thinks shutting the strike down will impair Republican performance in Wisconsin, New Jersey and a couple of other union jurisdictions.
My guess is that at the point the pressure raises a little, Bush will get the injunction but the risk is that they will misestimate the damage and the end result will be a more serious impact on the economy than they expect.
Knock, Knock, Knockin' on Heaven's Door
Richard W.
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