US markets have again shaken off more poor news on the economy — Wall Street is now up by more than 20% since the 12 year low on 9 March. That squealing sound is coming from short sellers who sold the market in late February and early march, believing the slow recovery wouldn’t last.
Nearly three weeks later, they were wrong: You don’t hear any supporters of short sellers claiming that they were helping in “price discovery” by shorting bank and other shares (plus home builders and big industrials).
Now they have been busy scrambling to cover their short sales, especially those who went truly short and naked. Without the protection of a falling market, it’s got kind of cold out there.
The news flow from the US was again mixed: Google is laying off 200 people because of contracting business levels, IBM is looking at cutting 5000 across the board in the US. Jobless figures for last week rose back above 650,000 people and for the four weeks to last Friday, were again well above 5.5 million and another all time high.
The US Government revealed its wishlist for regulating all financial groups, including hedge funds and other members of the “shadow banking system.” It’s sweeping, huge in fact. With so many vested interests in the US financial sector, and their mates in Congress and other areas of the establishment (especially at state level), its hard to see these ideas taking root.
The Financial Times Lex column said:
“Not modest repairs at the margin, but new rules of the game.” Thus Tim Geithner aims to recast America’s archaic regulatory framework. The Treasury secretary wants to harness shock and dismay to push for comprehensive change. The intent to override “turf wars” is a clear hint to Congress that political rivalries will not be allowed to stymie reform.
Mr Geithner’s challenge is to ensure bold talk does not dissolve into empty rhetoric. The administration can ill-afford distractions, such as the 90 per cent bonus tax. No wonder nerves are frayed by the intent to issue standards for compensation across the financial sector. Ultimately, though, privately owned companies must control their own destinies. … Mr Geithner must beware of over-promising. The greatest failures, after all, have been of closely regulated banking entities. No regulatory system can prevent every collapse or detect every fraud, however intricate, adaptable or heavy-handed. The first new rule of the game must be an awareness that all regulators are fallible.
The debate on regulation and the AIG bonuses story rumbles on, overshadowing grim news from the economy where 4th quarter growth was confirmed at a fall of 6.3%, barely more than the 6.2% in the second estimate last month. The fall quarter on quarter was around 1.7%.
The recession and financial crisis saw corporate profits fall 16.5% in the quarter, or a massive $US250 billion from the third, the biggest drop since 1953. US economists estimated that 70% of the fall was due to asset write downs by the financial sector.
The decline in corporate profits also meant lower taxes for Governments: taxes paid on corporate income fell 33.1% in the 4th quarter of last. in fact all but a handful of the Standard & Poor’s 500 companies lost money or had lower profits in the 4th quarter. Overall, the 500 companies in the Index lost money for the first time ever (I.e. losses outweighed profits). Big losses by banks and others in the financial sector, plus a slew of asset impairment charges in the media and similar industries, contributed.
Next week sees another test for the US economy: the March and first quarter car sales figures are due for release.
According to early reports, car sales in the first half of March were still falling at around the rate of 40%. The JD Power market research company said there was no sign of any significant lessening in the slump.
So it probably comes as no surprise that there are now reports GM is preparing a new, leaner version of its survival plan to put to the US Government next week because of the lack of any pick up in sales.
GM announced overnight that 7500 workers had accepted offers to have their contracts bought out and accept early retirement. Now reports say the new survival plan, will be published early next week to coincide with the March 31 deadline for GM and Chrysler to prove they are meeting conditions set by the US government bail-out.
GM’s original plan last December was based on it breaking even at US light-vehicle sales of 12.5 to 13 million units a year. That original estimate was cut to 11.5 to 12 million in February. But industry sales in the first two months this year have been running at an annual rate of only 9.3 million and JD Power says the annual rate for March will be 9.2 million units.
Ford, GM, Chrysler, Honda, Toyota and other makers have already been slashing production to try and bring stocks into line. They will have more cuts to make if there’s not an improvement soon, including more job losses.
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