General Motors — facing a deadline to restructure its beleaguered operations — will shut down 13 of its 20 North American plants for several weeks this summer as the carmaker tries allow its dealers to sell down overstuffed inventories.
The shutdowns will reduce GM’s planned North American output by 190,000 units.
"While sales have been performing at or close to our plan estimates, and dealer inventories have been reduced accordingly, we want to more closely align inventories with even more conservative market assumptions," said Troy Clarke, GM (GM, Fortune 500) North America president, in a company statement.
Currently, GM has about 767,000 vehicles in U.S. dealer stock, the carmaker said. While that’s 12% lower than the inventory last year, GM sales are about half what they were last year at this time.
GM plants ordinarily close for two weeks in the early summer. These weeks will be added to that. The closures will be staggered and will vary in length.
GM’s Arlington, Texas, plant, which manufactures the Chevrolet Tahoe and GMC Yukon SUV, will be closed for eight additional weeks, as will the Flint, Mich., plant that makes GM’s full-size pickups. GM’s Fort Wayne, Ind., truck plant will close for nine additional weeks.
Other plants will be closed for one to four additional weeks.
The shutdown is also intended to help GM prepare for potential supply disruptions caused by problems at bankrupt auto parts supplier Delphi instant payday loan. GM said in the announcement that it has proposed solutions that would help Delphi "ensure GM’s source of supply under fair and reasonable terms."
Delphi’s lenders have rejected those terms, GM said in its announcement. That sets the stage for potential supply disruptions.
During a conference call with reporters, Clarke declined to detail GM’s proposals for Delphi.
Clarke would also not say how many employees will be affected by the plant shutdowns. Union workers at these plants will continue to receive full pay through a combination of state unemployment benefits and support from GM.
Pay support is also available for salaried employees affected by the shutdowns, Clarke said.
Some plants will be adding production at the same time, however. GM’s Lansing Delta Township plant in Michigan, which makes popular crossover SUVs, will continue to operate during the usual two-week shutdown period.
The Fairfax, Kan., plant, which builds the popular Chevrolet Malibu, will operate during the second week of the two-week shutdown period.
GM has received $13.4 billion in federal loans and could receive an additional $5 billion before May 30. By that date, President Obama has said GM must significantly restructure in order to be eligible for further financial aid.
Morgan Stanley reported a much bigger-than-anticipated loss in the first quarter Wednesday, as the revenue at the bank’s bread-and-butter equity sales and trading business plunged 74% from a year ago.
The firm was also hit by its exposure to the tanking commercial real estate market. But executives emphasized their market share gains in recent quarters, cited their strong capital ratios and said they would like to repay the money they received from the government last fall.
Morgan Stanley (MS, Fortune 500) shares dropped 3% in midday trading.
The Wall Street investment bank said it lost $177 million, or 57 cents per share, in the quarter ended March 31. Analysts were expecting a loss of 8 cents a share, according to Thomson Reuters.
Counting the payment of $401 million in preferred dividends, the bank reported a net loss to common shareholders of $578 million.
The company also slashed its quarterly dividend by 81%, to 5 cents from 27 cents, in a bid to conserve $1 billion in cash annually.
The latest results extend the firm’s losing streak, and stand out from the rest of the major banks’ earnings, which have been generally better than expected — if sometimes of questionable quality. Last quarter, Morgan Stanley posted a $2.3 billion loss.
Nonetheless, finance chief Colm Kelleher said during a conference call that Morgan Stanley remains "uniquely positioned to benefit" from what he called the "profound cyclical and structural changes" in the economy and the financial markets.
Despite the latest quarterly loss, he said Morgan Stanley is "more than comfortable" with its capital cushion against future losses and would like to repay the $10 billion it got last fall from the Troubled Asset Relief Program.
"All we will say is we would like to repay TARP capital," he said. Some of the bank’s biggest rivals, notably Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), have said they want to repay TARP funds.
Mixed bag
In a statement, CEO John Mack focused on strong performances in Morgan Stanley’s fixed-income trading and investment banking businesses.
He said the bank was the top performer in the merger-and-acquisition rankings during the quarter, and like its peers made significant sums trading plain vanilla fixed income products in the interest rate, commodity and credit arenas.
But those gains were offset by $1 billion in losses on real estate investments, and $1.5 billion of lost revenue tied to changes in the value of the bank’s liabilities.
Meanwhile, Morgan Stanley said revenue in its equity sales and trading group plunged to just $900 million from $3.4 billion a year earlier.
Those setbacks help to explain part of the huge decline in Morgan Stanley’s first-quarter revenue, which plunged 62% from a year ago to $3 billion.
The commercial real estate loss is particularly notable, for analysts have been warning that big banks could take a big hit this year in that once-hot market fast payday loans.
Goldman Sachs analysts wrote earlier this year that they expect commercial real estate to be the biggest problem asset class for banks in 2009. Analyst James Fotheringham forecast a 21%-26% price decline, which he said would lead to tens of billions of dollars of loan losses for banks and brokerage houses.
The results and the dividend cut reflect a decline in the profitability of Morgan’s core business. Still, Morgan Stanley’s capital ratios remain strong - the bank said its Tier 1 capital, a measure favored by regulators, is 16%, and its Tier 1 capital excluding the $10 billion it got last fall under the Treasury’s Troubled Asset Relief Program is 13%.
Regulators consider a bank with 6% Tier 1 capital well capitalized.
Good news, bad news
Mack also said the latest-quarter loss was partly attributable to something that would normally count as good news.
He said Morgan Stanley would actually have reported a first-quarter profit if not for "the dramatic improvement in our credit spreads — which is a significant positive development."
Tighter credit spreads reflect reduced investor anxiety over the prospect that the company might default on its obligations, and result in lower borrowing costs for the company.
But they also obligate the company to write up the value of those liabilities, in light of the increased amount Morgan Stanley would have to pay to repurchase those debts.
Kelleher told investors on the conference call that the bank would have made 37 cents a share in the first quarter if not for lost revenue tied to the credit spread improvement.
In last year’s first quarter, Morgan Stanley posted $1 billion in gains by writing down the value of its obligations as credit spreads widened.
The disappointing first-quarter report comes as investors puzzle over what course Mack will chart in the coming year. Like Goldman, Morgan Stanley became a Federal Reserve-regulated bank holding company last year to ease worries about its access to funding.
Unlike Goldman, which has said it intends to stay focused on its investment business, Mack has said Morgan Stanley might seek to buy a regional bank to expand its deposit base.
Kelleher said Wednesday that Morgan Stanley is looking to make acquisitions that would expand its high-net-worth customer base, rather than ones that would bring it a big loan portfolio.
Morgan Stanley said deposits rose 67% in the latest quarter, while total assets fell 45% from a year ago to $626 billion, reflecting a continuing focus on deleveraging.
Kelleher added that Morgan, like Goldman, held a huge cash balance in the first quarter, in the name of prudence. He said the bank’s liquidity position during the quarter amounted to $152 billion and represented nearly a quarter of its balance sheet.
Soft-drink maker PepsiCo offered about $6 billion on Monday to buy the shares it does not already own in its two largest bottlers, Pepsi Bottling Group and PepsiAmericas, to cut costs and secure control of its brands as growth switches to new non-carbonated drinks.
The U.S. company’s plan to consolidate its bottling business underlines an industry trend and would give it control of 80% of its North America beverage distribution volume. PepsiCo also reported better-than-expected quarterly earnings.
"Both Pepsi and Coke need control over their routes to market given the slow growth and premium that is placed on getting new brands to market," said John Sicher, editor and publisher of industry publication Beverage Digest.
"It is also imperative for Pepsi and Coke that they have as many of their own brands carried by their bottlers as possible."
PepsiCo said it was offering $29.50 per share in cash and stock for The Pepsi Bottling Group and $23.27 per share for PepsiAmericas, representing a 17.1% premium to Friday’s close.
The offers consist of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share of Pepsi Bottling, and $11.64 in cash plus 0.223 shares of PepsiCo for each share of PepsiAmericas.
"Non-carbonated drinks, which have different economics and different distribution systems than carbonated soft drinks, have become a much bigger factor in the industry and in our own portfolio," PepsiCo Chief Executive Officer Indra Nooyi said in a statement, adding that the deal will improve its competitiveness and growth prospects.
"The main driver of this deal would appear to be synergies which are estimated to be over $200 million pre-tax and include: reducing redundancy costs, scale efficiencies and realizing new revenue opportunities," said Citi analyst Philip Morrisey.
PepsiCo said it expects the deal to add to its earnings by at least 15 cents a share with the synergies.
"PepsiCo’s decision to purchase the outstanding stock of the Pepsi Bottling Group is likely to be received well by the market, especially after reporting positive quarterly earnings," Manoj Ladwa, senior trader at ETX Capital in London said, adding that deal will increase PepsiCo’s hold on the beverage distribution market faxless payday loan online.
Pepsi Bottling (PBG, Fortune 500) said it will evaluate PepsiCo’s proposal. The bottler was spun off from PepsiCo in 1999 and according to its website, Pepsi Bottling accounts for more than half of the Pepsi-Cola beverages sold in North America and about 40% of the Pepsi-Cola beverages worldwide.
According to a regulatory filing with the U.S. Securities and Exchange Commission, as of Feb. 13, PepsiCo’s ownership in Pepsi Bottling represented 33.1% of the outstanding common stock and 100% of the outstanding Class B common stock.
PepsiAmericas (PAS) advised shareholders to take no action pending review of the proposal by its board.
According to a regulatory filing, PepsiCo owns about 54 million shares in PepsiAmericas, or 43.2% of common stock, as of March 10. PepsiAmericas accounts for about 19% of all PepsiCo beverage products sold in the U.S.
In some territories, the company sells and distributes products under brands licensed by companies other than PepsiCo. PepsiCo-related revenue accounted for about 80% of its total net sales in fiscal year 2008.
Results beat the street
PepsiCo also reported better-than-expected quarterly results and reaffirmed its outlook for the year. The outlook did not include the impact of the proposed bids for its bottlers.
PepsiCo (PEP, Fortune 500) said its reported earnings per share grew 3%, while net revenue fell 1 percent to $8.26 billion.
The company’s core earnings were $1.11 billion, or 71 cents a share, for the quarter, while analysts, on average, were expecting the soft drinks maker to earn 67 cents a share, according to Reuters Estimates.
Shares of PepsiCo closed at $52.13 on Friday on the New York Stock Exchange. Pepsi Bottling shares closed at $25.20, while Pepsi Americas shares closed at $19.88.
PepsiCo’s financial advisors for the deal were Centerview Partners, Banc of America Securities and Merrill Lynch.
Mortgage applications to finance the purchase of homes and to refinance existing loans fell last week even as U.S. home loan rates treaded water just above record lows, the Mortgage Bankers Association said on Wednesday.
Requests for new loans dropped in the Good Friday holiday week after five straight weekly increases.
"The MBA does not provide a holiday adjustment for the Easter/Passover weekend, which may have contributed to this week’s decrease in application volume," the trade group said in a statement.
During the prior five-week run, average 30-year mortgage rates sank by as much as a half percentage point before starting to trend up again.
The total mortgage applications index fell 11% in the week ended April 10 to a seasonally adjusted 1,113.2. The purchase index fell 11.3% to 264.1 and the refi index dropped 10.9% to 6,071.7.
After swiftly tumbling from interest rates as high as 6-1/2% in October on sweeping government actions to revive housing, home loan borrowing costs have stagnated over the past month.
In the week ended April 10, the average rate for fixed-rate 30-year mortgages dipped to 4.70% from 4.73% the prior week. It hit an all-time low 4.61% two weeks ago, the trade group said.
As the critical spring home selling season heats up, the response by home shoppers to current loan rates will be keenly monitored.
Existing owners looking to slice costs have been the biggest beneficiaries of falling rates, applying en masse to refinance loans to shave monthly payments and in some cases avert foreclosure.
Purchase demand has been lagging well behind but applications had also risen in the previous five weeks.
The main impediments to buy, even with affordability at a record high, are fears of job loss and hopes of greater bargains as prices sink.
Some potential homeowners may also be waiting for loan rates to ratchet down further.
The Federal Reserve’s pledge to buy up to $1 easy cash.45 trillion in mortgage-related securities and $300 billion of U.S. Treasuries this year has already tugged housing costs lower. The Fed is only about one-quarter of the way through these purchase programs, and the Treasury is also consistently buying mortgage bonds each month.
"We think the Fed and Treasury buying programs have produced mortgage rates that are significantly lower than they would have been otherwise," wrote Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. "But given all of the variables at work, there are limits to the effectiveness of any program aimed at pushing mortgage rates lower still."
Still, there are signs that the array of government programs aimed at breathing life into the worst housing market since the Great Depression is gaining traction.
Nearly 568,000 of all 2008 tax returns filed as of March 6 claimed a first-time home buyer credit, the National Association of Home Builders said, citing data from the Treasury Inspector General for Tax Administration.
First-time buyers who purchase a home starting Jan. 1, 2009, and before Dec. 1, 2009, are eligible for up to an $8,000 tax credit as part of President Barack Obama’s housing stimulus.
Also, while the MBA’s refinancing index slipped last week it has nonetheless doubled since the end of February.
The index is approaching its previous peak of 7,400 from January 2009 though it is well below the 10,000 level it almost reached during the major refi wave of 2003, Barclays Capital wrote in a recent report. As the administration’s Home Affordable Refinance Program gets fully underway, the refi index could take another leap in coming months.
China’s foreign-exchange reserves, the world’s biggest, had their smallest gain in eight years as exports slumped and the slowing economy deterred investment from abroad.
Foreign-currency holdings rose about $7.7 billion in the first quarter to $1.9537 trillion, the People’s Bank of China said today on its Web site. That was the smallest increase since the second quarter of 2001 and compares with a $40 billion jump in the fourth quarter.
China’s first-quarter trade surplus shrank 45 percent from the previous three months and foreign direct investment tumbled as the global recession choked off demand. Slower growth in the reserves may limit Chinese purchases of U.S. Treasuries just as the Obama administration seeks to sell record amounts of debt to fund a $787 billion stimulus package.
“The trend of slower expansion in reserves will continue throughout the rest of this year because it will be hard for exports to recover,” said Xing Ziqiang, an economist in Beijing at China International Capital Corp. “Smaller increases in reserves certainly mean less demand for U.S. debt.”
The currency reserves plunged by $32.6 billion in January, the biggest monthly decline since Bloomberg started compiling data in 1996. The holdings shrank by $1.4 billon in February and expanded $41.7 billion in March.
Treasuries, Euro
Today’s numbers compare with a record $154 billion gain in the first quarter of last year, when China’s currency, the yuan, was appreciating against the dollar and the economy was growing at a faster pace, encouraging inflows of capital. Economic growth slowed to 6.8 percent in the fourth quarter, the weakest in seven years.
China has allowed the yuan to fall 0.16 percent this year, after it gained every year since a peg against the dollar was scrapped in July 2005. The yuan closed at 6.8336 per dollar in Shanghai yesterday, according to the China Foreign Exchange Trade System.
The size of the reserves is affected by trade, investment flows and currency movements that determine the valuation of the nation’s non-dollar assets.
The declines in January and February were mostly due to falling Treasury returns and a weaker euro, according to China International Capital’s Xing. Merrill Lynch & Co.’s U.S. Treasury Master index fell 0.5 percent in February, after a 3.1 percent decline in January. The euro dropped 8.3 percent against the dollar in January and 1.1 percent in February.
Wen’s Concern
The U cash till payday advance.S. has been the biggest investment destination for the reserves. China’s Treasury holdings climbed 52 percent in 2008 and now stand at about $740 billion, according to U.S. government data.
Premier Wen Jiabao said on March 13 that he was “worried” about the safety of the nation’s holdings and called on the U.S. “to guarantee the safety of China’s assets.” Central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.
Treasuries have declined this year partly on concern that the U.S. government’s spending plans will spur inflation.
“Those governments that have foreign reserves, especially those holding Treasuries, should demand that the U.S. links the purchases of Treasuries with inflation,” Zheng Xinli, deputy director at the policy research office of the ruling Communist Party, said at a conference in Beijing today. “If the dollar depreciates and there’s inflation, the U.S. should pay more.”
Still, China has “no other choice” but to continue buying Treasuries, China International Capital’s Xing said.
Oil Spending
Foreign direct investment in China fell 26 percent in the first two months and the trade surplus plunged to $4.8 billion in February, the least since 2006, before rebounding to $18.56 billion last month.
Spending by China on oil and other natural resources may also have prevented larger gains in the reserves.
As much as $50 billion may have flowed out of China this year, largely because of the nation’s deals to acquire natural resources, according to Wang Tao, an economist with UBS AG in Beijing.
China may agree next week on lending $10 billion to Kazakhstan in return for the right to take a stake in an oil producer in the Central Asian country, an official at China National Petroleum Corp. said yesterday. The official declined to be identified because of internal rules.
Rosneft, Russia’s largest crude producer, and Transneft, an oil pipeline operator, agreed in February to supply China with oil for 20 years in exchange for loans.
Chinese companies have announced $21 billion in spending on Australian companies this year. Australia approved Hunan Valin Iron & Steel Group’s A$1.3 billion ($920 million) investment in Fortescue Metals Group Ltd. last month.
U.S. consumer spending will falter after a first-quarter spurt and recover only gradually toward the end of the year, a monthly Bloomberg News survey showed.
Purchases will drop at a 0.5 percent pace from April to June and grow at an average 0.9 percent rate the next six months, according to the median of 51 projections in a survey taken from March 30 to April 8. The estimated 0.5 percent first- quarter gain would break the longest slide since 1991.
Soaring unemployment and tattered household finances are forcing Americans to pay off debt and save more, preventing the economy from gaining traction. What’s shaping up to be the worst global recession in the postwar era means companies are also cutting back and foreigners are buying fewer U.S.-made goods.
“We are going to have an economic recovery, but it won’t feel like one most of us are used to,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “The positive consumer numbers are being offset by a little weaker business investment and a lot weaker numbers on exports.”
Unemployment will end the year at 9.5 percent, a percentage point more than last month’s 25-year high of 8.5 percent, according to the survey median. Employers cut payrolls by 663,000 workers last month, and 5.1 million Americans have lost their jobs since the recession began in December 2007, the Labor Department reported last week.
Subdued spending will constrain the economy for much of the year. Gross domestic product fell at a 5 percent annual pace last quarter and will drop at a 2 percent rate in the following three months, according to the survey. The economy will then grow at a 0.4 percent pace in the third quarter, and only improve at a 1.5 percent rate in the last three months of 2009.
Worst Since 1946
For the entire year, the world’s largest economy is projected to shrink 2.5 percent, the same as estimated last month and the worst performance since 1946.
“We’re ever so slowly climbing out of the depths of an extremely deep recession,” said Richard Yamarone, chief economist at Argus Research in New York. “You have stimulus in the pipeline and energy prices that are not restrictive.”
A gallon of regular gasoline at the pump has averaged $1.90 so far this year, down from a record $4 cheap credit report.11 in July 2008, according to AAA, the nation’s biggest motoring association. The drop has given consumers extra cash even as the loss of jobs causes incomes to soften.
Lots of Stimulus
President Barack Obama signed into law a $787 billion stimulus plan on Feb. 17 that included tax cuts and spending on infrastructure projects that he pledged will create or save 3.5 million jobs. The Treasury Department is also moving to repair the damaged financial system and lower record foreclosures, while the Federal Reserve is flooding markets with cash to boost borrowing and spending.
Fed Chairman Ben S. Bernanke last month said unemployment could top 10 percent in a worst-case scenario. Job cuts are spreading from manufacturers such as General Motors Corp. and Caterpillar Inc. to health-care operators and state and federal agencies. The central bank has brought its key lending rate close to zero and is buying Treasuries to push down borrowing costs and boost purchases of houses and cars.
Lower interest rates on mortgages and business loans led Bernanke to tell CBS Corp.’s “60 Minutes” on March 15 that he sees “green shoots” in some financial markets, and that the pace of economic decline “will begin to moderate.”
The threat of deflation, or an extended drop in prices, will lessen as the economy begins to grow again. Consumer prices will rise 1.2 percent this year, according to forecasts, after being almost stagnant in recent months.
Lid on Prices
Wal-Mart Stores Inc. is among merchants keeping inflation low. The world’s biggest retailer plans to sell more than 80 new products, including thin-crust pizza, under its store brand to draw in bargain hunters.
Some economists fear the surge in government spending and the trillions of dollars the Fed has pumped into financial markets will eventually cause prices to flare.
“Right now, it is too early to worry about inflation,” said Wachovia’s Silvia. “I am concerned longer term. Both Obama and Bernanke are going to be severely challenged to pull all this stimulus in once the economy starts to fully recover in the middle of 2010 and early 2011.”
Investors shouldn’t mistake an economy that’s sliding less rapidly downhill for one that’s poised to start climbing, say Bank of America Corp.’s David Rosenberg and Deutsche Bank AG’s Joseph LaVorgna.
Improvements in consumer spending and home sales have been taken by some investors as signs that the recession, now in its 17th month, may be near a turning point. Partly as a result, the Dow Jones industrial average climbed as much as 22 percent from the recession low it set on March 9.
The data, however, are at best a signal that the worst of the contraction is over, said Rosenberg, chief North American economist at Banc of America Securities-Merrill Lynch in New York.
“Investors seem to have confused an actual recovery with the fact that the economy isn’t detonating anymore,” Rosenberg said in an interview yesterday. “Markets right now are dangerously extrapolating an improvement in the rate of change to an improvement in the actual level of economic activity. These are two very different events.”
The Dow Jones industrials lost 186.29 points, or 2.3 percent, to close at 7789.56 in yesterday’s trading. The index still stands 19 percent above its March 9 level.
The economy shrank at a 6.3 percent annual pace in the fourth quarter, the worst performance since 1982. Economists surveyed by Bloomberg estimate that the rate of contraction slowed in the first three months of this year to 5.2 percent. The Commerce Department will report its initial estimate of first-quarter growth on April 29.
Rate of Decline
“In most cases, what we’re seeing is the rate of decline in activity is diminishing, not that the level of economic activity is rising,” David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York, said in an interview yesterday.
He points to business surveys such as the Institute for Supply Management’s factory index as evidence of a slowing rate of decline. The ISM index has climbed for three months in a row, while still remaining below 50, the dividing line between contraction and expansion.
“There is a pronounced improvement in key aspects of the surveys, but they remain at levels consistent with steep contraction,” said Hensley.
Similarly, an index of consumer confidence, as measured by the Conference Board, increased to 26 in March from a record low of 25.3 set in February.
‘Not Here Yet’
Even when the economy does hit bottom, it may take a while before robust growth resumes, LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, said in an April 6 interview. “A bottoming out is no longer consistent with an imminent recovery, as it has been in the past. Investors are making the assumption history will repeat itself, yet recovery is not here yet.”
That hasn’t kept investors from viewing better-than- forecast economic indicators as an opportunity to buy. A March 12 Commerce Department report that retail sales decreased 0.1 in February, less than the 0.5 percent drop economists had forecast. The data helped spark a 4.1 percent rally in the Standard & Poor’s 500 Index that day faxless payday loan.
“It’s good to see anything in the economic front that beat expectations,” David Heupel, who helps manage $60 billion at Thrivent Financial for Lutherans in Minneapolis, said that day. “Any news that is not bad right now is good for the market.”
Not every investor buys that view.
‘Very Low Levels’
While the market’s rally shows a sense of some economic stabilization, “we’re talking about stabilization admittedly at very low levels,” Leo Grohowski, chief investment officer at Bank of New York Mellon Wealth Management, which oversees $140 billion, said in an interview on Bloomberg Television yesterday. “Investors should continue to position their portfolios for a prolonged period of subdued economic growth.”
The Dow added 178 points, or 2.5 percent, on March 17 after a government report that housing starts unexpectedly jumped 22 percent in February from the previous month, snapping the longest streak of declines in 18 years.
“There’s a feeling that maybe the economy has hit the bottom,” Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource-company bond portfolio, said that day. “For the first time in a while we aren’t looking at mostly negative headlines.”
Even so, economists warn that the negative will continue to dominate the news for months.
Warsh’s View
“Though the pace of decline is likely to abate, I am decidedly uncomfortable forecasting a sharp and determined resumption of growth in the coming quarters,” said Federal Reserve Governor Kevin Warsh in an April 6 speech in Washington.
Rosenberg agrees. “I really don’t believe the contours of this recession will achieve clarity until we’re in the opening months of 2010 at the earliest,” said Rosenberg. That leads him to predict a stock market bottom sometime in the fall.
Since 1949, the average time between the stock market cycle low, as measured by the S&P 500 Index, and the end of a recession is 5.3 months, according to Westport, Connecticut- based Birinyi Associates Inc. In 2001 the economy turned up just 2.3 months after the stock market did.
Between the crash of October 1929 and the market’s bottom in July 1932 there were five rallies of 20 percent or more, with one of them a 48 percent jump.
“There were peaks where that market got started again only to get knocked back down,” said Charles Geisst, a professor of finance and economics at Manhattan College in New York and author of “Wall Street: A History.” He said this stock market reminds him of the early years of the Great Depression.
“There’s a false optimism out there,” Geisst said in an interview yesterday. “It’s a sign that we don’t understand much about what’s happening in the economy.”
Treasury Secretary Timothy Geithner said he’s prepared to oust executives and directors at banks that require “exceptional” assistance from the U.S. government.
“If in the future, banks need exceptional assistance in order to get through this, then we will make sure that assistance comes,” while ensuring taxpayers are protected, Geithner said yesterday in an interview on the CBS “Face the Nation” program. “Where that requires a change in management and the board, then we will do that.”
Geithner noted that American International Group Inc., Fannie Mae and Freddie Mac had their chief executives removed after it became clear the companies couldn’t survive without government rescues. The Treasury is reviewing how much capital the biggest U.S. financial companies need in order to endure a severe economic downturn.
“Where we’ve had to do exceptional things,” the government has replaced management and boards, Geithner said.
Geithner’s pledge comes as signs emerge that the world economy may be stabilizing. Confidence among U.S. consumers climbed last month from the lowest level on record, according to the Conference Board. U.K. house prices rose in March for the first time since October 2007, while Chinese manufacturing increased, reports last week showed.
Stress Tests
Federal bank regulators will meet early this week to discuss how to interpret the results of the so-called stress tests that are being conducted to determine how much capital the nation’s 19 largest banks need, the Wall Street Journal reported yesterday, citing unidentified people familiar with the matter.
Geithner, in the CBS interview yesterday, vowed to enforce congressional legislation that limits pay at companies receiving government loans. Geithner said the Obama administration has no intention of letting banks get around the rules.
“Our obligation is to apply the laws that Congress just passed,” he said. “We want the American taxpayer’s assistance going to generate greater lending, not providing excess compensation.”
Treasury last month proposed a public-private partnership to spur investors to buy — and banks to sell — the illiquid real estate assets clogging lenders’ books. The program relies on financing from the Federal Reserve and debt guarantees from the Federal Deposit Insurance Corp., and it could use as much as $100 billion from the government’s bank-rescue fund individual health insurance.
‘Do What’s Necessary’
Geithner, responding to a question about whether rules approved by the Financial Accounting Standards Board last week may deter banks from participating, said the Treasury will make sure companies do what’s needed to clean up their balance sheets.
“We will do what’s necessary to make sure our banking system emerges out of this stronger,” he said. He declined to say whether Treasury will force banks to sell assets.
Norwalk, Connecticut-based FASB voted on April 2 to let banks use “significant” judgment in gauging how much securities are worth. Richard Dietrich, an accounting professor at Ohio State University, said the change may discourage financial companies from selling securities because it may allow them to avoid writing down the value of their holdings.
Geithner, who accompanied President Barack Obama to London last week for the meeting of the Group of 20 policy makers, also said the administration will “keep acting as forcefully as we can” to pull the nation out of a recession.
‘Turning Point’
At the summit, the world leaders called for tougher oversight of hedge funds, executive pay, credit-rating firms and derivatives trading. They also boosted funding for the International Monetary Fund, increasing its resources to $1 trillion.
Obama called the event “historic” and predicted it will be a “turning point” for economic recovery across the world.
Geithner is pushing for an overhaul of financial rules that calls for putting big hedge funds and private-equity funds under stricter federal supervision, as well as regulating derivatives markets. He’s also seeking new powers for the government to seize and wind down nonbank financial companies whose size poses threats to the stability of the financial system.
The World Bank is warning of an “unemployment crisis,” and the U.S. lost 663,000 jobs in March, the Labor Department said April 3. The jobless rate jumped to 8.5 percent, the highest level since 1983.
Banks and financial institutions worldwide have reported more than $1.2 trillion in credit losses and writedowns. Many of those stemmed from mortgage-related investments that declined with the collapse in the U.S. housing market.
The U.S. unemployment rate jumped in March to the highest level since 1983 and service industries shrank at a faster pace, indicating the economy remains trapped in what’s likely to be the longest recession since the 1930s.
Federal Reserve Vice Chairman Donald Kohn said both the Obama administration and central bank must remain “flexible and open” to further measures because the economy and financial markets aren’t “out of the woods yet.” The labor-market rout will make it tougher for President Barack Obama to follow through on his pledge to save or create 3.5 million jobs.
The economy lost 663,000 jobs in March, bringing losses since the slump began to about 5.1 million, the worst in the postwar era, Labor Department figures showed in Washington. The 8.5 percent jobless rate was consistent with the forecasts of 79 economists surveyed by Bloomberg News. The Institute of Supply Management’s non-manufacturing index unexpectedly dropped.
“We could continue to see a few more months of really bad employment numbers before it starts to ease,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. Behravesh projected the jobless rate will peak between 10 percent and 10.5 percent in early 2010. “We aren’t there yet, but we are getting closer to a bottom,” he said.
Treasuries, Stocks
Treasuries slumped after the jobs report was no worse than what economists had forecast, with benchmark 10-year note yields rising as 2.84 percent at 11:42 a.m. in New York, up from 2.77 percent late yesterday. The Standard & Poor’s 500 Stock Index fell 0.3 percent to 831.82.
Job cuts have been spreading from manufacturers such as Johnson Controls Inc. and Dana Holding Corp. to service providers like International Business Machines Corp. and even the U.S. Postal Service.
In addition to cutting jobs, companies also reduced hours for those still on payrolls. The average number of hours worked fell to 33.2 per week, down six minutes from February and the fewest since records began in 1964.
Revisions subtracted 86,000 workers from January payrolls while February’s drop of 651,000 was not revised.
The last time the unemployment rate was at 8.5 percent was in November 1983, when the economy was recovering from the 1981- 82 recession that pushed the rate to almost 11 percent. Then Fed Chairman Paul Volcker boosted interest rates to quell soaring inflation following the 1970s fuel crisis.
Payroll Forecast
Payrolls were forecast to drop by 660,000, according to the median of 80 economists surveyed by Bloomberg News. Estimates ranged from losses of 525,000 to 750,000. Forecasts for the jobless rate ranged from 8.2 percent to 8.7 percent.
“The hope and expectation is that things will get a little less dire in the second quarter as various stimulus efforts kick in,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc classic car insurance. in New York, who used to work at the Fed.
Today’s report showed factory payrolls fell by 161,000 after declining 169,000 in the prior month. Economists forecast a drop of 160,000. The decrease included a loss of 17,500 jobs in auto manufacturing and parts industries.
The manufacturing slump that began more than a year ago may intensify should General Motors Corp. be forced into bankruptcy, economists said. As many as 1 million additional auto-industry jobs may be lost and unemployment would climb to 11 percent, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.
Auto Slump
The auto slump has already rippled through the industry. Johnson Controls, a maker of car interiors and batteries, said last month it will shut 10 factories and cut about 4,000 jobs. Dana, the truck-axle manufacturer that exited bankruptcy in 2008, said it will boost its payroll reduction to 5,800 this year, 800 more than previously announced.
“We are taking the difficult actions necessary to survive,” Dana’s Chief Executive Officer John Devine said in a March 16 statement.
Service industries, which include banks, insurance companies, restaurants and retailers, cut 358,000 workers after a 366,000 decline in February. Financial firms cut payrolls by 43,000, after a 44,000 decrease the prior month. Retail payrolls decreased by 47,800 after a 50,800 drop.
The ISM’s services index, which covers almost 90 percent of the economy, fell to 40.8, the lowest level of the year, from 41.6 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.
The measure was projected to increase to 42, according to the median forecast in a Bloomberg News survey of 67 economists. Estimates ranged from 38 to 45.
Fewer Orders
The ISM index of new orders fell to 38.8 from 40.7 the prior month, and its gauge of employment dropped to 32.3 from 37.3.
For many Americans, this employment slump has been an unfamiliar experience. Sarah Opple, 42, was fired in February from a sales position at Gaylord Hotels in Chicago after holding a series of jobs in the hospitality industry since she was 17 years old. “It’s more real to me now,” she said in a March 26 interview. “This recession is way more tangible than the others. It makes everyone feel they could be next.”
Since taking office Jan. 20, Obama has enacted a series of measures aimed at stemming the recession. He signed into law a $787 billion stimulus plan on Feb. 17 that included spending on infrastructure projects to boost hiring.
The Treasury Department is also moving to repair the damaged financial system and lower record foreclosures, while the Fed is flooding markets with cash to boost borrowing and spending.
When John Maynard Keynes came to Washington in 1934 to persuade President Franklin Roosevelt to spend more to revive the U.S. economy, Roosevelt didn’t pay the British economist much attention, Thomas Worsley recalls. He hopes President Barack Obama won’t repeat Roosevelt’s mistake.
Worsley, then a 23-year-old about to take a job in the Treasury Department, says Roosevelt balked at too much economic stimulus, and even allowed conservative Democrats to talk him into reining in federal outlays in 1937.
Now, at 97, Worsley is watching as Obama wrestles with the deepest economic slump since the Great Depression and is coming under fire from critics at home and abroad over his spending plans. Ultimately, Worsley said, only World War II delivered the U.S. from its hard economic times, and he advises Obama to keep pumping money into the economy.
“That vindicated Keynes’s argument,” Worsley said during an interview at his brick townhouse in Alexandria, Virginia, where his framed economics degrees from the University of Virginia, including a doctorate, are displayed. “You have to get enough spending going to get private enterprise interested in taking chances on investing.”
The similarities between the current crisis and the Depression are clear, said Worsley. Speculation and a failing banking system stoked both disasters. The two presidents confronted competing pressures over whether to spend more money or cut taxes. A lack of regulation contributed to the mess.
And neither president had an obvious path to success.
Rare Perch
Worsley’s is only one view, though from a rare perch. He worked in the government during the greatest economic meltdown and lived to see federal officials try to staunch another one.
His counsel for Obama is straightforward: Keep spending until it has an effect — then start paying attention to the deficit.
It’s a warning that Obama’s administration is heeding so far. Christina Romer, chairman of the White House Council of Economic Advisers, told a congressional panel this week that a lesson of the Great Depression is to “beware of cutting back on stimulus too soon.”
As an economist contracted by then-Treasury Secretary Henry Morgenthau, Worsley conducted a farm-income study and surveyed bank conditions in Cleveland in 1935. Then he served in other government jobs during the New Deal before becoming an academic.
Now, when he comments on the parallels of the two economic emergencies, he quotes from Keynes to draw comparisons.
‘Profit Inflation’
“The people that had lost a lot of money in the speculation that led up to the Great Depression, the Roaring Twenties, had made out like bandits; they had what John Maynard Keynes called ‘profit inflation,’” said Worsley, who sported a navy cardigan that a professor might wear and a collared shirt. “Those at the bottom were ‘the forgotten man.’ Obama is dealing with much the same situation now.”
During his Treasury stint, Worsley interviewed bankers and borrowers to determine how to remedy the credit crunch. He recalled that bankers — “very unpopular with the general public” — were eager to explain why they weren’t lending business card design.
Worsley remembers the bold action Roosevelt took, including shutting the banks shortly after he was sworn in.
“All of the VIPs who came to the inauguration couldn’t cash checks at the hotels they were staying in,” he said. The government solved the credit problem by lending money to private businesses and creating the Federal Deposit Insurance Corp., which made the banks feel secure in lending again.
A New World
Still, Worsley said changes in the national economy might complicate Obama’s efforts to right the situation quickly.
Public debt is higher as a percentage of the economy. The failing banks are global institutions, not the smaller local lenders that went bust during the Depression. And the root causes of this crisis — complex financial instruments such as derivatives — didn’t exist in the 1930s.
It’s also unlikely Obama can rely on what Keynes called a “massive external shock” like a war, Worsley said. “The question is, can we spend enough with peacetime spending to get us out?”
Another lesson from the Depression is that the nation’s mental state is almost as important as its policies, he said.
Roosevelt’s ability to boost morale was among his greatest contributions, he said. And Obama is “doing an excellent job of explaining things.”
“He’s not having fireside chats with the radio. He’s using the TV, a little bit better instrument.”
Watching the Babe
A native of Columbus, Georgia, Worsley spent much of his youth on his grandfather’s cotton plantation, where his favorite toy was a goat cart. He arrived at the University of Virginia in 1929, a month before the stock market crashed. His memories of the era are vivid — watching Babe Ruth play in Yankee Stadium in 1927, driving a Model T, listening to Glenn Miller perform at his university.
Another parallel with Obama is Roosevelt’s draw with young people. Worsley was part of an army of youth who flocked to Washington because they were inspired. “Everybody felt sort of close to him,” said Worsley, who had listened to Roosevelt’s fireside chats at his college fraternity house.
‘Have a Blast’
Now an amateur historian, he collects presidential biographies and Civil War histories. At 94, he published a memoir.
He retired in 1973 and, since then, has served as a consultant and sat on numerous civic boards, including the Northern Virginia Association for History.
Today Worsley, who enjoyed ballroom dance until he was 94, keeps busy. He’s trying to get a national monument to James Madison and recently sent a letter to Obama asking for support. It’s part of his prescription for longevity.
On the final page of his memoir, Worsley sports a T-shirt reading: “Have a blast while you last.”
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