bizzXceleration: Performance, Value and Profit

Why Corporate Layoffs Loom "It's all RIFs. A lot of RIFs." That's reduction-in-force. Business-speak for layoff. And in the words of one top corporate handler last week, the cuts are being prepared across the economy, just days before the presidential election. Impending cuts would follow in part from the past 12 months of economic woe. But a more acute link to layoffs has emerged in the past 12 days, a period when the credit markets have squeezed shut. Many seem to view these changes as arcane Wall Street machinations. If only. The credit connection is clear in a look at General Electric, a company at the top of the corporate pecking order. GE is regarded as such a stable, reliable company, that it also runs a bank. That stability helps it borrow at a very low cost, which it can then use to lend to others at a higher rate. One such type of borrowing is called commercial paper -- short-term, low-cost loans often made for just a month. Commercial paper is like the WD-40 of corporate finance, lubricating the joints of the financial system, helping sellers bridge costs between the time they deliver a product and when they get paid, for instance. Without commercial paper, the economy rusts over. Unless a sharp uptick in confidence sweeps through the markets, higher rates will cascade across less-solid companies, if they can get hold of cash at all. The scary part is that few companies have the same financial cushion as GE. And as their borrowing costs increase, they will have to scramble to cut their fixed costs. And what is the No.1 cost of business? People. Right now the unemployment rate is at about 6.1%, up substantially since the beginning of the year, but still well below the highs of the early 1980s. It was, in fact, late 1982 when unemployment reached its modern peak. Nearly 11 out of every 100 working-age Americans was without a job. Nearly 11 out of every 100 working-age Americans who wanted a job didn't have one. If these sorts of numbers still seem arcane, just wait. The RIFs will soon make them all too real.

Shipments tumble 52% A key index tracking commodities shipments has fallen 52% since the start of the month, a steep decline that suggests manufacturing activity will recede as the world economy slows further. The drop in the Baltic Dry Index underlines the extent of the U.S. financial crisis' impact on growth in emerging markets and puts into doubt the ability of these economies to expand with North American and European financial markets mired in uncertainty. A drop in the index creates a domino effect across commodity types, so prices are likely to fall further. Global markets are in turmoil as banks collapse and governments either take direct control or promise to bail out lenders. The BDI is a daily index of the 22 main dry-bulk routes shipping raw materials such as those needed in the production of steel, coal and grains. It is a predictor of global growth by showing demand for the raw materials required for manufacturing and construction. "The index is a good global growth proxy," said Michael Lewis, global head of commodities research at Deutsche Bank. Currently the market consensus is that global growth will be 3.5% this year, but the index is indicating growth will be closer to 2.5%, Mr. Lewis said. Iron-ore prices have declined in the past month by 25% between India and China and 24% between Brazil and China. Base metals are also down. Copper traded on the London Metal Exchange has fallen 31% since its July record high of $8,940 a ton and global steel prices in September were down 9.8% on the month. Chicago Board of Trade nearby wheat futures prices have fallen by roughly 16% since the end of August. Energy prices are expected to be the next commodity to post sharp declines, Mr. Lewis said. Deutsche Bank forecasts oil to fall toward $85 a barrel before the end of 2008.

Ford Motor's, Honda's September U.S. Auto Sales Tumble as Credit Tightens Ford Motor Co. and Honda Motor Co.'s U.S. sales of cars and trucks tumbled in September as tighter credit scared off consumers. Sales at Ford, the second-largest U.S. automaker, fell 35 percent from a year earlier, the Dearborn, Michigan-based company said in a statement today. Honda reported a 24 percent drop. Industrywide sales probably will fall for the 11th month in a row, the longest slide in 17 years, as the financial crisis caused lenders to toughen loan standards and consumers curbed spending. Sales already had dropped 11 percent through August, in part because of high gasoline prices. Ford's decline ``is an indicator of the state of the industry, with the credit problem hitting all segments, all types of vehicles,'' said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. ``People of all economic backgrounds are going to be impacted.'' The annual sales rate for September may drop to 13 million cars and light trucks, the average estimate in a Bloomberg survey of 36 analysts and economists. The rate was 16.2 million in September 2007, according to data compiled by Bloomberg. U.S. yearly sales reached a record 17.4 million in 2000 and averaged 16.8 million this decade.

Honda, Nissan Join U.S. Auto Sales Slump; Toyota Declines Most Since 1980s Honda Motor Co. and Nissan Motor Co., the only big automakers still adding U.S. sales through 2008's first eight months, couldn't escape an industrywide plunge in September as the credit crisis kept buyers away from showrooms. Sales for Asia-based brands fell 30 percent, led by Toyota Motor Corp.'s 32 percent tumble, Honda's 24 percent drop and a 37 percent decrease for Nissan. Toyota and Honda haven't posted declines that large since the 1980s.The results dragged U.S. market share for Japanese and South Korean automakers to the lowest since April 2007 after lenders tightened standards and bank failures chilled demand. Last month's total was 39.9 percent, down from 42.1 percent a year earlier, according to industry-research firm Autodata Corp. Even companies with compelling new products aren't finding buyers, said Jesse Toprak, director of industry analysis for automotive research firm Edmunds.com in Santa Monica, California. ``The main reason for the decline is the lack of consumer confidence,'' Toprak said in an interview. ``A lot of consumers have the ability and desire to make a purchase, but are going to wait and see how things turn out.''

Manufacturing in U.S. Contracts at Faster Pace Than Economists Estimated Manufacturing in the U.S. contracted in September at the fastest pace since the last recession as the credit crisis spread beyond Wall Street. The Institute for Supply Management's factory index dropped to 43.5, the lowest level since October 2001 and below economists' forecasts, the Tempe, Arizona-based group reported today. A reading of 50 is the dividing line between expansion and contraction. Today's figures show that manufacturing, which had weathered a domestic slowdown because of record exports, is now starting to buckle as expansions from Japan to Germany falter with the global financial crisis. The housing slump has already spread to autos, and other industries may follow as mounting foreclosures, tougher lending rules and rising unemployment choke off spending. ``Manufacturing could be on the brink of a collapse,'' said Lindsey Piegza, a market analyst at FTN Financial in New York. ``There are no orders, no jobs and there is really no incentive for businesses to invest. The credit crisis is compounding the problem.''

 Banking crash hits Europe as ECB loses traction The Dutch-Belgian bank Fortis, Britain's Bradford and Bingley, and Iceland's Glitnir, were all partially or fully nationalized after failing to roll-over debts in the short-term money markets, while the French state pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage. Germany's Hypo Real Estate, a commercial property lender, was rescued with a €35bn lifeline from a consortium of local banks. The lender has $560bn in liabilities, almost as much as Lehman Brothers. Europe's credit markets have come close to seizing up as three-month Euribor jumped to a record 5.22pc and OIS spreads rocketed to 113 basis points. "The interbank market has collapsed," said Hans Redeker, currency chief at BNP Paribas. "We're now seeing a domino effect as the credit multiplier goes into reverse and forces banks to cut back lending to clients," he said. Mr Redeker said the latest alarming twist is a move by banks to deposit €28bn in funds at the European Central Bank in a panic flight to safety. This has jammed the mechanism used by the authorities to shore up the financial system in a crisis. "The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days," he said. The euro plunged on Monday as the wave of bank failures hit the newswires, dropping 2pc to $1.43 against the dollar. It recovered slightly as the US Federal Reserve flooded the markets with $630bn of dollar funding with fellow central banks in the biggest liquidity blitz in history. Analysts say German finance minister Peer Steinbrueck may have spoken too soon when he crowed last week that the US would lose its status as a superpower as a result of this crisis. He told Der Spiegel yesterday that we are "all staring into the abyss". Germany - over-leveraged to Asian demand for machine tools, and Mid-East and Russian demand for luxury cars - is perhaps in equally deep trouble, though of a different kind. Carsten Brzenski, chief economist at ING in Brussels, said the global crisis was now engulfing Europe with devastating speed. "We are at imminent risk of a credit crunch. Key markets are not functioning properly. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish too," he said. Data from the IMF shows that European banks hold 75pc as much exposure to toxic US housing debt as US banks themselves. Moreover they have mounting bad debts from the British, Spanish, French, Dutch, Scandinavian, and East European housing markets, where property bubbles reached even more extreme levels that in the US. The interest spread between Italian 10-year bonds and German Bunds have ballooned to 92 basis points, the highest since the launch of the euro. Bond traders warn that the spreads are starting to reflect a serious risk of EMU break-up and could spiral out of control in a self-feeding effect.
Freeze in lending extends to fourth quarter