A Melman Minute
By: Leonard Melman
August 1, 2008
News stories continue to pour in which indicate the
effects of the economic slowdown/fuel price increases are far from being
resolved and, in fact, are acquiring an almost unstoppable momentum despite the
best efforts of the political and bureaucratic establishments.
Last week, the financial world was stunned by the
loss of almost (all figures US$ unless otherwise noted) $9 billion by Ford Motor
Co. Well, that was small potatoes compared to the mammoth deficit just turned
in by General Motors. After calculating plummeting sales, rising expenses,
one-time buyouts of terminated workers and other liabilities related to auto
parts transactions, GM announced a Second Quarter 2008 deficit in the amount of
$15.5 billion! In addition, the company is considering the cutting of
an additional 5,100 white-collar jobs in the USA and Canada.
Clearly, continuing bad news has overcome recent
rally efforts in the stock and GM has now fallen to near record-low levels.
Another effect of the economic crisis as it applies
to the world of major financial corporations has been a slashing of annual
bonuses. While some may feel a sort of perverse joy at those over-paid lackeys
getting some sort of comeuppance, the news is hitting hard at the government of
the State of New York which is now joining even-more populous California in the
rising deficit department.
According to a Globe and Mail story from New York
written by Sinclair Stewart, we learn that "...rookie New York Governor David
Paterson...was forced to admit the state has plunged into recession.", and added
"...the state is suffering a mammoth collapse in revenue." Along with the
reduction in bonuses, the subprime mortgage mess also caused hundreds of
billions in write-downs and the loss of thousands of financial-based jobs. As a
result, we are told that, "...This week, the government announced its deficit
had swelled from $5 billion to $6.4 billion in less than 90 days."
The decline in state revenue from the financial
industry has been astounding. In June of 2007, the industry paid $173 million
in taxes to the state, but this June, the amount has shrunk to a minuscule $5
million. Multiply that by twelve and it gives us a hint of the seriousness of
the situation. And, matters appear unlikely to improve as the industry has been
reporting severe losses in recent quarters and companies that lose money pay
little or no taxes.
The credit crisis is also having yet another
far-reaching effect, this time in Las Vegas. One of the largest construction
projects ever planned for that dynamic city is the rebuilding of the downtown
area in what has been called the "City Center Project", planned as a joint
venture between MGM Mirage and Dubai World. When the project was originally
conceived several years ago, no one believed there would be any difficulty in
obtaining financing for the $11.2 billion complex of hotels, retail
establishments and casino. However, times are changing.
First, the banks which normally would have provided
the funding are now laboring under severe difficulties of their own. Final
financing was supposed to have been announced last month but several banks,
including Deutsche Bank and Credit Suisse Group, are delaying a final decision
as they continue to evaluate matters.
Second, the gambling industry itself is facing
difficulties. Although it was sound and rapidly expanding when the plans for 76
acre, 'city-within-a-city' were originally put together, a Bloomberg News
Service article just reported that "The Las Vegas casino industry has been
struggling, with revenue falling 16% in May, the fifth straight monthly decline,
amid near-record gasoline prices and rising U.S. unemployment (more on that in a
moment)."
The Las Vegas area, already hard hit by collapsing
real estate prices, had been counting on this huge project to generate a solid
increment of new economic activity. Given the decline in the industry and the
troubles now afflicting the world of international credit, that high level of
optimism might not be fulfilled.
Regarding the American employment scene, two items
are worth noting. First, a New York Times study has just revealed that, "...The
number of Americans who have seen their full-time jobs chopped to part-time
because of weak business has swelled to 3.7 million - the largest figure since
the government began tracking such data more than half a century ago."
The weak employment data continued with the
announcement by the Department of Labor this morning that the American economy
continued to shed jobs, losing another 51,000 jobs in July and the Unemployment
Rate reached a four-year high, rising to 5.7%.
All of these economic woes have not been lost on the
securities markets which have retreated from earlier gains. Near 9:00 AM PDT,
the Dow Industrials were down about 50 point and the TSX was close to
unchanged. Gold has recovered from sharp early losses and was ahead by about
one dollar to near $915 while silver was close to unchanged. However, the
non-monetary precious metals, platinum and palladium, have encountered heavy
selling as new and more negative calculations regarding demand have emerged, and
platinum is down almost $100 on today's session to just below $1,640 per ounce -
more than $600 below its peak, and palladium has now dropped to below $370,
giving the chart a profoundly negative appearance. Base metals are also lower
on balance.
In other markets, crude oil has regained some lost
ground, rising almost $3 to $127 per barrel while both interest rates and
currencies are trading close to unchanged.
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