By Jennifer Yousfi
Contributing Writer
Money Morning

Retail experts are predicting one of the most dismal holiday shopping seasons in decades this year – a crucial stretch that will set the stage for poor retail sales throughout 2009.

As the U.S. economy decelerates, pummeled by the aftershocks of the worldwide financial crisis, consumers have been hit from every direction: Unemployment has spiked, and will continue to rise, economy unwinds and continues to work through the aftershocks of the global credit crisis, consumers have been beset on all sides. Unemployment is up, home prices are down, and credit is hard to come by.

And although inflation is beginning to moderate somewhat – slowing to a pace of 3.7% year-over-year in October – it’s still well above the U.S. Federal Reserve’s desired target rate of 2.0%.

With rampant inflation no longer artificially propping up consumer spending figures, retail sales have really started to lose their luster. Sales figures are based on the value of goods sold – not the volume – so the recent decline commodity and energy prices will translate into a sharp decline in retail sales.

That decline will be dreadfully apparent in this year’s holiday sales, but it will also carry into 2009. The question, now, is how much worse consumer behavior will get.

"The great unknown is just how much lower can consumer spending go?" Piper Jaffray Cos. (PJC) analyst Jeff Klinefelter told Reuters. "With savings rates at historic lows and constraints on the availability of consumer credit, I just think there's concern that the perfect storm is brewing."

According to the Fed, a recession is already under way in the United States. Gross domestic product (GDP) shrank 0.5% in the third quarter, and the Fed predicts the economy will continue to contract in the first six months of 2009, and possibly beyond.

Tighter credit standards and lower home prices mean consumers have less of an ability to finance their purchases through debt. And even those with cash to spend are opting to save instead, as the economic outlook continues to dim. Would-be consumers are also scrambling to rebuild savings that were decimated by a bear market that has dragged the Standard & Poor’s 500 Index down more than 40% this year.

"We expect to see consumer spending to be flat before inflation," Gus Faucher, chief U.S. economist with Moody's Economy.com (MCO), told the Los Angles Times. That means once inflation is factored in, consumer spending will see a sharp decline in 2009, and retail sales will be left to twist in the wind.

Retail Laggards

According to a recent retail outlook report from Fitch Ratings Inc., personal consumption expenditures are projected to decline 1.6% in 2009.

A wave of consolidation and bankruptcies will spread through the retail sector as weaker chains fail and stronger brands shut down underperforming stores. Department stores and specialty stores will be hit especially hard, as consumers cut back on discretionary purchases in favor of staples.

Bankruptcies of stores such as Sharper Image Corp. (OTC: SHRPQ) and Circuit City Stores Inc. (OTC: CCTYQ) are having a negative effect on the sale of gift cards, which stores traditionally have counted on to boost sales after the holiday season. Gift card purchases are tallied when the card is redeemed, not when the card is purchased. In the past, the sale of gift cards have given New Year sales a healthy boost as gift card recipients go shopping after the holidays are over. 

But consumers are wary of getting left holding onto worthless cards while bankruptcy courts decide how to divvy up assets.

For the 2007 holiday season, 70% of consumers purchased gift cards. This holiday season, just 40% of consumers are projected to go the gift card route. And that’s going to weigh down sales and profits for the 2009 first quarter.

"I think you will see a six-point drop in sales for those first three months," C. Britt Beemer, chief executive officer of America's Research Group and author of “The Customer Rules,” told CRM Magazine.

Troubles Beyond the Big Brick-and Mortar Stores

While the big chains are struggling and grabbing the bulk of the headlines, small business owners are barely getting by. That might not seem like a big deal if the stock market is your focus, but small-businesses are integral to the economy.

According to the Small Business Administration, businesses with less than 500 employees account for almost half of private-sector employment. A recent National Federation of Independent Business survey showed 15% of small business owners anticipate layoffs in 2009, which will put even more strain on an already weak U.S. labor market.

And small business layoffs mean slower sales for big box stores like Best Buy Co. Inc. (BBY) and Target Corp. (TGT) as another wave of unemployed workers grapple with lost income.

Online retailers are starting to feel the pinch, too. Web sales have been one of the fastest growing retail sectors for years, but popular sites such as Zappos.com Inc., the No. 1 online shoe retailer, and QVC Inc., which sells online and on television, have each announced layoffs, as well as declining sales.

Amazon.com Inc. (AMZN), the top online retailer, also is struggling. Amazon’s stock is down 55% year-to-date, and the outlook is grim.

“[Amazon is] seeing a slowdown in their business that shouldn't really shock anybody,” Jeffrey Matthews, a general partner at hedge fund Ram Partners LP in Greenwich, Conn., told Bloomberg. “They sell books. They sell movies. They sell blenders. They don't sell magic potions or the fountain of youth.”

Retail’s Bright Spots

There are a few retailers that – while they don’t sell magic potions or the fountain of youth – have managed to position themselves as offering more value for the money, which has allowed them to buck this downward spiral in consumer spending have managed to buck dismal consumer spending. And that focus on value will continue in 2009.

The best example of this value exception is the world’s largest retailer: Wal-Mart Stores Inc. (WMT).

"This is Wal-Mart time," Chief Executive Officer H. Lee Scott Jr. told Wall Street analysts during an Oct. 27 presentation at company headquarters in Bentonville, Ark., BusinessWeek reported. "This is the kind of environment that Sam Walton built this company for."

The economic slump has found Wal-Mart returning to the basic strategies that the late founder made famous. The retail titan has given up on the brand-name designer strategy of competitors such as Target and Kohl’s Corp. (KSS) to offer rock-bottom prices on hundreds of consumer staples.

That bodes well, as consumers will continue to stretch household budgets and consolidate trips to save on gas.

“It is a great time to be Wal-Mart,” Howard Davidowitz, chairman of Davidowitz & Associates, told Bloomberg News. “It sells everything you need cheap.”

Stores like Wal-Mart, that can capitalize on this new value-seeking behavior will be able to turn a profit even in this bleak retail environment. And those that can’t, will be bought out or disappear.

News and Related Story Links:

• MarketWatch:
  Fitch U.S. Retail Outlook: Navigating a Difficult Path for Holiday and 2009

• Los Angeles Times:
  Federal Reserve sees recession to at least mid-2009

• Reuters:
  Retail sales worst in decades; holiday view cut

• Bloomberg News:
  Wal-Mart ‘Optimistic’ About Holiday Shopping Season

• BusinessWeek:
  For Exiting Wal-Mart CEO, a Victory Lap

• The Wall Street Journal:
  Consumer-Spending Report Is a Glimpse of Pain to Come

• destinationCRM.com:
  009 Holiday Retail Forecast: "It's Going To Be a Disaster."

• CNNMoney.com:
  Here for the holidays: Slow sales and layoffs

• Bloomberg News:
  Amazon.com Lowers Forecast as Wall Street Crisis Hits Web Sales.

• Time 100:
  Sam Walton.

By grabbing $26 billion in private pension money last month, Argentina may have put itself on track for its second debt default in a decade – ironically, the very situation that country’s government had hoped its bit of leisure-fund larceny had hoped to avoid.

“The misguided macroeconomic and monetary policies, especially the confiscatory tax policy and huge government spending – much of it inefficient – was doomed to catch up with the country someday,” says Horacio Marquez, a Wall Street veteran, emerging markets specialist and editor of two trading services affiliated with Money Morning: The Money Moves Alert and the Shadow Stock Trader services.

Argentina’s act of not-so-petty larceny was launched late last month when the government, in a surprise move, ordered Argentine pension funds to liquidate their foreign holdings, the first step in a plan to transfer that money into the state pension system. Argentine President Cristina Fernández de Kirchner said she abolished the 14-year-old private pension system to protect pension money at a time of global turmoil and denied the government had grabbed the cash to service its crushing debt, which officials told The Financial Times is now about $21 billion.

The reality is, however, that surpluses from the state system – known as “Anses” – already have been a key source of government funding, especially in the past year, after a surge in the number of workers returning to the state plan caused its holdings to surge substantially. Expect the use of those surpluses to continue.

Indeed, the government is clearly hoping that the addition of the assets from the private pension system will create an even-bigger surplus that it can use to service its debt. Otherwise, the government might have to cut back significantly on the spending programs that benefit Argentine citizens. And since 2009 is an election year, such cutbacks aren’t an option.

But the strategy is fraught with peril. First, the decision “effectively killed the primary institutional investor in its emerging capital market,” the World Bank said. “Confidence in this market has predictably suffered from this measure, the latest in a series of government meddlings.”

The move calls to question what the government will do about the $10 billion in private investments, including the shares of both foreign and domestic firms.

That makes Anses the country’s biggest investor in its capital markets, whose liquidity and depth will become greatly reduced, The FT said. And the disappearance of the private pension funds will raise a lot of concerns over how the government will be able to keep a steady supply of credit available to consumers, whose spending drives the economic growth in that country, as it does here in the United States.

The lack of available credit major combined with a downturn in confidence in the Argentine financial system might well be the double-whammy that pushes Argentina into a major downturn, which could easily translate into another debt default.

Haunted by Past Problems

To really understand what happened, we need to turn back the clock to 2001, when Argentina – Latin America’s second-largest economy – found itself on the brink of financial collapse. A loss of confidence in the country and its policies induced a surge in capital flight and a major run on the nation’s banks, as investors and Argentine citizens alike exchanged pesos for U.S. dollars, which they then sent abroad.

Argentina was forced to default on the lion’s share of its public debt, estimated at $93 billion. Even today, however, an estimated 30% of Argentina’s bondholders still refuse to accept the 70% discount the government offered to settle the default.

Even in a world not currently gripped by a global credit crisis, Argentina would likely have found it impossible to obtain the finding needed to finance its government operations. But the financial crisis is a stark reality, meaning that the few sources of funding that remain available in the world markets are not open to Argentina.

And with Argentina’s agriculture-heavy domestic economy slumping badly – and now certain to feel the sting of the plunge in food-and-commodity prices – the central government is left with a possible debt-payment shortfall of as much as $10 billion for next year.

“With the abrupt drop in commodity prices, it left Argentina’s ‘cleptocratic’ government little room other than to confiscate private savings in order to reduce its chances of defaulting again in 2009,” says Marquez.  

Default Déjà Vu?

There are some disturbing similarities between Argentina’s current economic crisis and the economic malfeasance that led the country to default on its debt in 2001.

Then, as now, the government faced accusations of corruption and mismanagement of debts. Argentina’s current president, Cristina Fernández de Kirchner, succeeded her husband, former President Néstor Kirchner, in December 2007. Like her husband, President Kirchner has been accused of employing dubious accounting tactics.

It is widely believed that the current president Kirchner has underreported Argentina’s inflation situation by replacing members of the state statistical office with handpicked analysts “friendlier” to the administration’s view.

During Kirchner's husband’s administration, which ran from 2003-2007, several industries were nationalized. Despite having campaigned on a socialist platform of “returning to a republic of equals,” he nevertheless oversaw the state takeover of the postal system, water works and railways.

The pattern of the Argentine government’s failure to acknowledge economic reality continues.

The legislature recently passed the budget for 2009, that bases its financial assumptions on 4.0% economic growth (as measured by gross domestic product growth), 8.0% inflation, and a currency valued at 3.19 pesos for each U.S. dollar (despite the fact that it currently takes 3.33 pesos to buy one U.S. dollar), MercoPress reported.

Many economists feel Argentina’s economic growth is likely to be much lower. JPMorgan Chase & Co. (JPM) predicts just 1.0% GDP growth for 2009. And some economists have predicted inflation as high as 20%.

Current President Kirchner has chosen to blame the global financial crisis for the government’s need to grab of private sector assets – without acknowledging the role that her administration, and the domestic economy, have played in the current economic crisis.

“There was a [private] system that spectacularly collapsed. This was a policy of looting,” Kirchner said in an attempt to justify the nationalization, the AFP reported.

“It is evident that when nobody regulates the market, nobody controls it and it is allowed to do what it wants, we wind up with a financial disaster like the one the global economy faces,” she added.

But it’s widely acknowledged that without the projected $4.5 billion to $5.0 billion in worker inflows to the private pension system next year, coupled with the current $24 billion in deposits, the Argentine government would find itself dangerously close to another default.

Despite all of the similarities between Argentina’s past and current economic troubles, there’s one important difference for global investors.

During Argentina’s prior collapse, Mexico and Brazil – large Latin American economies and important Argentine trading partners – were faced with their own economic crises. It cast a pall over Latin American investing for emerging markets and international investors. But that’s not the case this time around.

“Argentina, unlike Mexico, China and Brazil, is a fairly closed economy,” says Shadow Stock Trader editor Marquez. “Therefore, the impact to other economies from the Argentine pension nationalization is almost negligible.”

Argentina’s Economic Isolation

Even with its strong average economic growth of 9% for the past several years, Argentina hasn’t been a smart place to park investments since the 2001 crisis.

During the prior economic collapse, large numbers of business owners and foreign investors alike yanked all of their cash out of the Argentine economy and sent it to safer havens aboard. Needless to say, this caused a capital squeeze, and many businesses of all sizes failed, causing unemployment to soar, and government receipts to plummet. With no sources of income, many struck out on their own, without the presence of the owners and their capital, as self-managed “cooperatives.” This helped create some economic and job growth where there was none, and eventually the economy started to rebound.

Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998 – the last year of growth prior to the recession. (the last year before the recession). Other macroeconomic indicators have have shown a similar rebound pattern.
Strong commodity prices fueled an economy that counts soy as its biggest export, but government mismanagement and questionable economic policies continue to make Argentina a poor investment.

Standard & Poor’s Inc. recently downgraded the country’s credit rating to B-, well below investment grade.

“It's a textbook definition of an economic disaster,” Nick Chamie, head of emerging-market research at RBC Capital Markets Corp. (RY) in Toronto, told Bloomberg News. The S&P ratings reduction “confirms what the rest of the market knows – that Argentina is close to default and that risk is very high.”

But the good news for global investors is that Argentina’s problems are unlikely to spill over into the economies of its healthier Latin American neighbors.

Even Brazil, Argentina’s largest trading partner, is likely to be unaffected by its Latin American neighbor’s current economic trouble. Argentina accounts for only 9% of Brazil’s exports. And the planned liquidation of foreign assets in Argentina’s pension funds will amount to just $540 million worth of in Brazilian equities – too little to have much of an impact on the Brazilian market.

“Argentina’s government does not pass the first ‘C’ of credit analysis: character,” says Money Morning’s Marquez. “It is not only the ability to pay [its debt-service payments], but the willingness to do it and the track record in doing this that matters.”  

Compared to the fiscal responsibility of neighbors Brazil and Chile, Argentina’s history of borrowing and default make it a bad bet.

Latin America still hosts several choice investment opportunities, but you won’t find them in Argentina.

“The nationalization of pensions in Argentina shows the escalation of confiscatory government policies,” says Marquez. “In this environment, where flagrant violations of property rights are escalating, Argentina is no place to invest.”

News and Related Story Links:

• MercoPress:
  Argentina’s prospects for 2009: flat growth and 20% inflation

• Reuters:
  Argentina says S&P ratings cut a mistaken decision

• Bloomberg News:
  Argentina's Inflation Probably Slowed in October

• Reuters:
  Argentine Senate votes 2009 budget into law

• The Wall Street Journal:
  Argentina's Property Grab

• Bloomberg News:
  Argentina's Lower House Approves Pension Takeover

• Time:
  More Woes for Argentina's 'New Evita

• AFP:
  Argentine lawmakers vote to nationalize pensions

• Financial Times:
  Argentine pension funds forced to shed foreign assets

• Bloomberg News:
  Argentine Debt Rating Cut by S&P Amid Default Concern

• Wikipedia:
  Argentine economic crisis (1999–2002).

• Global Trend Analysis:
  Argentina Default Looms, Pension Fund Seized.

• Bloomberg News:
  Argentine Bonds, Stocks Sink as Takeover Fuels Default Concerns.

• Reuters:
  Argentina's private pension funds system.

• The World Bank:
  The End of Private Pension Funds in Argentina

Exxon Mobil Corp. (XOM) set a U.S. profit record today (Thursday) when it announced its third quarter profit topped $14.8 billion on record-high oil prices.

Exxon Mobil, the largest U.S. oil company, earned $14.8 billion, or $2.86 per share, a 58% increase from the $9.41 billion, or $1.70 per share it earned in the third quarter of 2007. Exxon Mobil’s record-setting profit was enough to beat analyst expectations of $2.38 a share, according FactSet Research data.  

Exxon Mobil beat its own record for the largest quarterly profit for a U.S. company, which it had previously set in the second quarter of 2008 with a gain of $11.68 billion.

Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) also announced third quarter earnings today, beating Bloomberg’s average analyst estimates. Europe’s largest oil company saw a 22% increase in profit to $8.45 billion from $6.9 billion in the same period the year prior.

During the quarter, oil averaged $118 per barrel. But crude prices have since slipped nearly $80 from a record high of more than $147 per barrel in July, which means Exxon Mobil’s string of record-setting profits could end in the fourth quarter.

While profits will likely dip in the near-term, analysts remain bullish on the long-term prospects of oil majors.

“The oil majors are coming all above expectations, which means they have resilient qualities,” Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh, told Bloomberg News. “They show the benefit of being an integrated company, and they have the flexibility to weather the storm.”

High oil prices helped the oil majors to beat Wall Street expectations, despite production declines during the quarter. Exxon Mobil’s production dropped 8.2% during the quarter, while Shell’s output slumped 6.6%.

“This is a good outcome but some investors will be disappointed by the sluggish production volumes,” Tony Shepard, an analyst at London-based broker Charles Stanley, told the International Herald Tribune, speaking of Shell’s results. “Given the fall in the oil price, an issue for all oil and gas companies is current levels of capital expenditure.”

Exxon Mobil reaffirmed its capital spending budget of $25 million over the next five years, regardless of the subsequent trend of oil prices. However, Shell announced it would delay moving forward with developing its Athabasca oil-sands project in Alberta, Canada due to increased costs.

News and Related Story Links:

• Bloomberg News:
  Exxon Profit Rises, Tops Estimates, After Oil Surges

• Bloomberg News:
  Exxon, Shell Profits Rise More Than Estimated on Record Prices

• CNNMoney.com:
  Exxon Mobil: Biggest profit in U.S. history

• MarketWatch:
  Exxon Mobil breaks record with $14.8 billion profit

• Money Morning:
  Exxon Mobil and Shell Post Record Income but Demand and Production Weigh on Shares

Las Vegas Sands Corp. (LVS) shares more than doubled yesterday (Wednesday) after Singapore’s government pledged support for the completion of a local $4 billion casino project.

Las Vegas Sands stock hit a daily high of $10.97, before paring back to close at $8.91 with an 80% gain of $3.96 each.

The Singapore Tourism Board stopped short of pledging financial support for the project, but said it would “facilitate the success” of the project under construction in downtown Singapore.

“The Singapore Tourism Board is monitoring the situation and is aware that the current uncertain economic climate may give rise to concerns,” the agency board said in an e-mailed statement, Bloomberg News reported. The tourism board said it was “working closely” with Las Vegas Sands’ Singapore unit, Marina Bay Sands.

Las Vegas Sands Chief Executive Officer Sheldon Adelson has been desparate to raise cash as his company’s shares have plummeted more than 91% year-to-date. The gaming industry has been hit hard by dwindling disposable income.

Las Vegas Sands shares have a 52-week high of $148.76, but prior to yesterday’s rise were hovering close to their 52-week low of $4.32.

Adelson has gone so far as to invest $475 million on his own money into the struggling casino company whose flagship properties include The Venetian Resort Hotel Casino (The Venetian), The Palazzo Resort Hotel Casino (The Palazzo) and The Sands Expo and Convention Center (The Sands Expo Center) in Las Vegas, Nevada, as well as The Venetian Macao Resort Hotel (The Venetian Macao) in Macao, China.

While the news of the Singapore government’s support certainly helped to boost Las Vegas Sands stock, some analysts believe the stunning 122% intraday surge can be attributed to short-sellers scrambling to cover positions after the stock’s initial rise.

A similar situation unfolded earlier this week with Volkswagen AG (OTC ADR: VLKAY). [Please click here for a related story in today’s issue of Money Morning on the recent Volkswagen share movements.]

“Gaming is a heavily shorted sector in need of a catalyst,” Todd D. Jordan, a managing director at New Haven, Connecticut-based investment-research firm Research Edge LLC, said yesterday in a note to clients, Bloomberg reported.

News and Related Story Links:

• Bloomberg News:
  Las Vegas Sands Doubles After Talks With Singapore

• Online Casino Advisory:
  Las Vegas Sands Owner Among Troubled Casino Billionaires

• Reuters:
  Las Vegas Sands says to raise capital

Short-sellers scrambling for cover sent shares of Volkswagen AG (OTC ADR: VLKAY) rocketing up more than $1,000 each yesterday (Tuesday), to briefly give the German automaker the most valuable market capitalization in the world.

Volkswagen's Frankfurt-traded shares soared as high as $1,258 (1,005 euros) before closing at $1,186 (918 euros) yesterday.

On Monday, Porsche SE (PINK: POAHF) announced it had acquired options on 31.5% of Volkswagen's stock, in addition to the 42.6% direct stake it already controlled. With the German state of Lower Saxony controlling another 20.2% of Volkswagen stock, that left a very small amount of shares available for short-sellers who had bet on a decline in Volkswagen's share price – given the poor outlook for the global auto industry – to cover their "short" positions.

"We're getting a sense of the Sturm und Drang in the markets now," Michael Holland, the manager of Holland & Co., an investment management firm, told the International Herald Tribune. "When you get into panicked markets as we've had in the past few months, you get these vicious moves which happen on the downside and then to the opposite direction. It's incredible to watch."

The result was a zooming share price for Volkswagen as hedge funds and other institutional investors bought up shares to cover shorted positions.

Porsche announced today (Wednesday) that it would settle as much as 5% of the derivative contract that make up its indirect stake to increase the supply of VW shares in the marketplace and alleviate some of the pressure on short-sellers. That 5% stake has increased in value by $13.8 billion in the first two days of trading this week, Bloomberg reported.

"Porsche SE intends – depending on the state of the market – to settle hedging transactions in the amount of up to 5.0% of the Volkswagen ordinary shares," the company said in a statement.

The move sent Porsche shares up as much as 43%, as it investors began to realize that the Stuttgart-based luxury carmaker stands to make a sizable profit from Volkswagen's recent share movements.

"Porsche has many opportunities with their options," Robert Heberger, an analyst with Merck Finck, told Forbes. "They could just cash in the money without buying the shares, and this would give them billions of gains with their options, which they can hold in cash."

But some analysts have accused Porsche of manipulating the market to its advantage.

"Porsche has acted irresponsibly and that has damaged capital markets considerably," Henning Gebhardt, who helps manage the equivalent of $220 billion at DWS Investment GmbH in Frankfurt, told Bloomberg News. "Porsche snuck up on Volkswagen. They knew about the short sellers, and it must have been clear to them that there would be a massive short squeeze."

The volatile price swings caused the Frankfurt Stock Exchange to reduce Volkswagen's weighting in the German blue-chip stock DAX Index to 10% from 27%. That move caused the share price to drop, as asset managers sell Volkswagen shares to rebalance indexed-portfolios.

Volkswagen shares closed Friday at $271.21 (210.52 euros).

Volkswagen is best-known as the producer of the hugely successful VW Beetle – which was a huge commercial winner, with more than 20 million vehicles sold, and which also became a cultural icon during the Flower-Power era of the 1960s and the gas-line-era of the 1970s. Porsche has developed such winning sports cars as the 356, the 911 and the Turbo Carrera.

The 356 hasn't been built for more than four decades and yet still has an international following spearheaded by a special club.

News and Related Story Links:

• International Herald Tribune:
  Wild ride takes Volkswagen shares to new peak and back down

• Bloomberg News:
  Porsche Gains, Volkswagen Drops on VW Stock Supply

• Forbes:
  Porsche To Profit From Volkswagen Squeeze

• Wikipedia:
  Sturm und Drang.

• Wikipedia:
  Volkswagen Beetle.

In the depths of a bear market that has carved between $500 billion and $2 trillion from U.S. retirement accounts so far this year, as many as two-thirds of all Americans have stopped contributing to their retirement plans, a new study shows.

And that’s precisely the wrong decision to make at the wrong time. No matter how poorly the financial markets are performing, saving for retirement has to remain a top priority.

“It's not a time for people to stop contributing,” Diane Young, director of retirement and goal planning at TD Ameritrade Holding Corp. (AMTD), the Omaha, Neb.-based brokerage firm that conducted the retirement study, said in an interview with Bloomberg News. “Because time is money, it's important to stay on track.”

According to the Ameritrade study – released yesterday (Tuesday) – 63% of Americans have completely stopped contributing to their retirement plan. Financial strain due to the economic downturn was cited by half (50%) of those who say they have reduced or stopped contributing to their retirement plan. Unemployment (32%) and healthcare costs (25%) also were cited as key factors affecting their ability to contribute to their retirement plan.

Only 54% of survey respondents, which included senior citizens, indicated they had a retirement account. Of that number, one out of three had less than $50,000 in investment assets.

But slacking off on retirement savings now is only going to hurt you more down the road.

Chipping Away at Retirement Assets

Giving up the power of compounding can be the most costly mistake an investor can make when it comes to investing for retirement, but unfortunately that’s just what many are doing in light of the dismal market performance.

And those dismal returns aren’t the only factor hammering the bottom line of retirement accounts these days. Retirees and those close to retirement are feeling as if they are under attack from all sides due to the factors that threaten a comfortable retirement.

The main source of income for many retirees continues to be the Social Security Administration. But the Social Security program has been at risk for years as life expectancies continue to grow and the number of retirees advances in kind. The program will only come under more pressure as the baby boomer generation edges closer to retirement.

"Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires," the most recent trustees’ report said.

Many retirees depend on dividend payments from investments to supplement income. But with a growing number of companies reducing or eliminating dividend payments in the face of poor earnings or a changing business landscape, that income stream is dwindling.

Even companies with long track records of dividend growth, such as General Electric Co. (GE) and Bank of America Corp. (BAC), have been paring back.

Given the current market conditions, selling a stock that has eliminated its dividend is no longer as likely to make up for that lost income. 

“If I'm down 25% in dividend income, but the stock is down 35%, if I sell the stock, can I afford to lose another 10 to 15% by selling?" Howard Silverblatt, a senior index analyst with Standard & Poor’s, told The Associated Press. “Younger investors can wait the market out and sell the stock when it bounces back. But older people are really stuck in a bad spot.”

Companies with poor earnings are also cutting back on company contributions to 401(k) plans, which can downright wreck your expected retirement calculations. General Motors Corp. (GM) recently announced that it would discontinue company-matching contributions for non-union employees until economic conditions improve.

According to a recent survey by Watson Wyatt Worldwide Inc. (WW), 2% of companies surveyed have already decreased 401(k) contributions, while another 4% are planning to do so in the 2009.

Retirees with defined benefit or pension plans aren’t in much better shape.

According to Adrian Hartshorn, an actuary with Mercer, a business consultant subsidiary of Marsh & McLennan Companies Inc. (MMC), the pension account assets of companies in the S&P 1500 are shrinking. At the end of 2007, the companies Hartshorn tracks had a collective surplus of $60 billion. But stock-market losses have transformed that $60 billion surplus into a $35 billion deficit.

Protecting Your Retirement

If you find yourself the victim of a cutback in company contributions or a loss of dividend income, make sure you take the initiative to safeguard your retirement. 

“Redo your financial planning and figure out if you need to save more now,” Robyn Credico, Watson Wyatt's national director of defined-benefit consulting, told The Washington Post.

Here are some more steps you can take to help protect your retirement account, even during difficult market conditions:

• Be Aware: AARP’s website has a number of interactive financial calculators that will help you estimate everything from how much you need to save for retirement to how much income you can expect during retirement. While you want a long and healthy life, you don’t want to outlive your money, so be sure you don’t underestimate your time horizon.

• Be Proactive: If you think you’re going to come up short when it’s time for retirement, reconsider your options. Some workers are delaying retirement to give their assets more time to grow. Other retirees are supplementing their income with part-time work or curbing expenses by cutting back on unnecessary expenditures.

• Be Thrifty: Save as much as you can. Make sure you’re getting the most out of your company 401(k) plan by maximizing the company match. And try to save the maximum annual limit for your company’s 410(k) plan or your traditional IRA. Contributions to your retirement account often reduce your taxable income, so it might not be as much of a sacrifice as you think. Indeed, some investors do double damage to themselves by ending their retirement plan contributions, but forgetting to also adjust their tax withholding. That can make for an ugly surprise at tax time – either with a smaller-than-expected tax refund or a bigger-than-expected tax bill.

• Be Investment Savvy: Align your retirement investments with your time horizon and risk tolerance. Generally, younger investors can tolerate more risk, while those closer to retirement need to choose more stable options. Money Morning Investment Director Keith Fitz-Gerald recently recommended American Century Capital Preservation Fund (CPFXX) as a “safety-first” investment choice for investors close to retirement. And don’t be overly dependent on dividend income or a company pension fund, both of which could be affected by overall poor market conditions or weak company earnings.

News and Related Story Links:

• The New York Times:
  A Strategy for Retirement Portfolios That Have Sagged

• The Salt Lake Tribune:
  Stock market's decline is cracking nest eggs

• Reuters:
  Calpers to tap public employers for money -WSJ

• Bloomberg News:
  Weak Economy Cuts Saving for Retirement, TD Ameritrade Says

• The Washington Post:
  The Latest Bad News For Your 401(k)?

• CNNMoney.com:
  Dividend cuts eat away at retirement income

• The Washington Post:
  Our Wobbly Retirement Reality

• Money Morning:
  Four Ways to Sidestep the Damage Wall Street’s Big Money Movers are Inflicting on Main Street

U.S. equities rallied yesterday (Tuesday) as the U.S. Federal Reserve convened for the first day of a two-day meeting of its monetary policy committee.

At the New York close, all three major U.S. indices had sizeable gains:

• The blue-chip Dow Jones Industrial Average Index soared 889.35 points, an increase of over 10%, to close at 9,065.12.
• The tech-laden Nasdaq Composite Index jumped 143.57 points, an increase of 9.5%, to reach 1,649.47.
• And the broader Standard & Poor’s 500 Index shot up 91.59 points, an increase of over 10%, to settle at 940.51.

“The valuations are extremely compelling right now,” Dan Veru, who helps manage about $2 billion at Palisade Capital Management in Fort Lee, New Jersey, told Bloomberg News. “When you’re in extreme oversold conditions, the market is prone to these types of wild swings. The key thing is, can we hold these gains?”

It was the second-biggest daily point gain for the blue-chip Dow, which had a record-setting 936-point one-day gain earlier this month.

With a “lack of selling pressure” late in the afternoon, “the buyers began to ride in on their horses, and that brought in some additional buyers and short-covering,” Robert Pavlik, chief investment officer at Oaktree Asset Management, told MarketWatch.

All sectors posted gains across the board with energy, up 11.76%, and basic materials, up 11.74%, marking the largest gains.

The Fed’s Federal Open Market Committee (FOMC) is expected to release its statement on monetary policy tomorrow (Wednesday) afternoon.

The Fed is widely expected to reduce its benchmark Federal Funds target rate as the likelihood of a U.S. recession continues to increase and inflation pressures have abated.

The Fed Funds rate currently stands at 1.50% and a cut of 25-50 basis points is expected.

"The cut is already in the market," John Ryding, economist at RDQ Economics told AFP.

“The question is whether it’s 25 or 50 basis points."

News and Related Story Links:

• Money Morning:
  Dow Zooms to Record Gain Yesterday on Reports The Government Will Reveal Banking Bailout Plan Details Early Today

• MarketWatch:
  Stocks in massive rally to bring Dow above 9,000

• AFP:
  Fed likely to cut rates again to help sentiment

• Money Morning:
  Fed to Cut Rates at Next FOMC Meeting as U.S. Recession Appears Likely

Tighter credit for farmers could worsen a global food crisis as smaller crop sizes cause prices to soar.

Many farmers have traditionally bought pre-season supplies such as seeds and fertilizer on credit and then paid off the debt with the proceeds from the year’s harvest. But with a growing number of farmers unable to obtain the credit they need, crop yields will suffer.

Global wheat production will likely be 4.4% less next year, Dan Basse, president of AgResource Co. in Chicago, told Bloomberg News. Basse believes the world’s corn and soybean crops will also see declines.

 “The credit situation is worrying even the biggest and best farmers,” Brian Willot, a former University of Missouri commodity analyst who now grows soybeans in Brazil, told Bloomberg. “For the financially weak, credit has dried up completely. For the strong, credit has been delayed and interest rates are higher.”

The risk-aversion of Wall Street is spreading out into other industries, as the main sources of lending for farmers – rural independent banks and crop processors such as Cargill Inc. and Archer Daniels Midland Co. (ADM) – tighten credit requirements by charging higher interest, demanding more collateral or in some cases, discontinue lending completely.

“We certainly could see tight credit having an effect on agricultural production,” U.S. Agriculture Secretary Ed Schafer said earlier this month. “The costs of farming operations today are huge, and that backs up to the banks that have balance sheets that are tight, it backs up to elevators that have credit stretched out.”

Worse, drops in agriculture yields could be devastating to more than just the agriculture industry.

“Stockpiles are going to be extremely tight,” AgResource's Basse told Bloomberg. “The world cannot afford any dislocation in production next year, or there will be a real shortage.”

The United Nation’s World Food Programme says the world is already gripped in a “silent tsunami” of hunger. And every drop in production pushes more of the world’s hungry towards the brink of starvation.

“It is estimated that more than 100 million people in the world have been forced into poverty and hunger because of the dramatic increase in food prices,” said Benjamin Senauer, a professor of applied economics at the University of Minnesota, author and researcher, MarketWatch reported. “Millions of American families' food budgets have been stretched to the limit and beyond. Food stamp enrollment is up and food banks are seeing unprecedented demand.”

Smaller crops could mean higher prices at a time when consumers were just starting to see some slight signs of relief in the grocery store checkout line.

The change in food and beverage prices, as tracked by the U.S. Department of Labor, had moderated slightly in August and September after the record-highs of the summer. But even off the summertime highs, the overall Consumer Price Index increased 4.9% for the 12 months ended September 2008. In the food and beverage category, the increase was 6.0% year-over-year.

Agriculture futures for corn, wheat and soybeans are trading lower from earlier 2008 highs, but a steep decline in crop yields could cause future prices to reverse course.

News and Related Story Links:

• Bloomberg News:
  Farm-Credit Squeeze May Cut Crops, Spur Food Crisis

• Associated Press:
  Farmers' new trouble at the ranch: tighter credit

• Money Morning:
  Six Ways to Protect Yourself – and Profit – From a Global Food Crisis That’s Here to Stay

• MarketWatch:
  Americans Increasingly Concerned about Food Prices, U.S. Ethanol Policy, According to The 2008 Hormel Hunger Survey

• Reuters:
  Tight credit could nip farm sector: USDA's Schafer

U.S. markets tumbled Friday as a global sell-off spread from Asia and Europe, as fears of a worldwide recession intensified.

At the New York close on Friday, the blue-chip Dow Jones Industrial Average Index had plunged 312.62 points (-3.6%), to trade at 8,378.63. The tech-laden Nasdaq Composite Index shed 51.88 points (-3.23%), to reach 1,562.03. And the broader Standard & Poor’s 500 Index dropped 31.45 points (-3.46%), to hit 876.66.

 “It's a bear market on steroids,” David King, a money manager at Putnam Investments, who helps manage about $137 billion, told Bloomberg Television. “It's very accelerated by the pace of financial markets today.”

Prior to the New York opening bell, pre-market traded futures for all three major U.S. indices fell their maximum allowed daily limit, causing safety measures to kick in and halt futures trading until the market’s open. Dow futures crashed 550 points, or 6.27%, to 8,224. The S&P 500’s futures index plunged 60 points, or 6.56%, to 855.20, and Nasdaq futures skidded 85 points, or 6.20%, to 1,175.75.

But despite the bleak picture futures painted, the U.S. markets recovered from the day’s deeper lows to close higher than originally indicated.

Commodities tumbled on fears of demand destruction from weak economic growth. Gold traded down to $681.00 an ounce from an opening level of $713.30. Oil also declined despite production cuts from the Organization of Petroleum Exporting Countries (OPEC). [For a related story in Money Morning on OPEC’s production cut, please click here.]

“Selling is across all asset classes,” Robin Bhar, a commodities analyst at Calyon in London, told Bloomberg News. “A month ago we were on the edge of a cliff and now we're in freefall.”

In overseas markets, Japan’s Nikkei Index had an 811.90-point decline to close at 7,649.08, its lowest level in over five years. Hong Kong’s blue-chip Hang Seng Index plummeted 1,142.11 points to close at 12,618.40, its lowest level since August 2004.

"The market is pretty desperate and at a loss. Four days running of big losses, though the turnover is quite low," Howard Gorges, vice chairman South China Securities, told Reuters, speaking of the Hong Kong markets. The Hang Seng Index has dropped 55% so far this year.

"People are just standing aside. These are dangerous markets to play around with. That's the main reason for getting into cash," Gorges said.

In Europe, major indices sunk on news that the United Kingdom’s gross domestic product contracted more than expected with a decline of 0.5% in the third quarter.

“We are obviously not sure exactly how this whole situation will develop. We’ve had some quite deep and severe recessions in the UK before, and hopefully we can avoid that sort of situation in the current circumstances, but the risks of that have increased,” Andrew Sentance, a member of the Bank of England’s rate-setting monetary policy committee, told BBC Radio Leeds.

The FTSEurofirst 300 Index of blue-chip European shares skidded 4.9% to close at 829.73 points, its lowest closing level since May 2003, Reuters reported.

The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit losses.

At the New York close, the dollar had gained ground against the euro [up 2.46%] and the pound sterling [up 2.02%], but lost ground against the yen [down 2.94%].

News and Related Story Links:

• Reuters:
  China, EU see severe economic shock

• Bloomberg News:
  U.S. Stocks Drop on Concern Over Fallout From Credit Crisis

• The Financial Times:
  Data confirm UK on brink of recession

• Bloomberg News:
  Oil, Gold, Commodities in `Freefall' as Economic Slump Deepens

• Reuters:
  Stock Market News & Quotes

Fear of a global recession is quickly becoming reality as world markets have lost $10 trillion in value in the month of October and the U.S. economy almost certainly contracted in the third quarter.

“The growing reality is that this is not just a slowdown, but a true recession,” Joel Naroff, president and chief economist of Naroff Economic Advisors told Money Morning Friday. “Europe and Asia can no longer deny U.S. problems are also hitting there.”

Friday was the 79th anniversary of 1929’s “Black Thursday,” when U.S. stocks were decimated at the start of the Great Depression. And while U.S. markets weren’t quite as hard hit on that date in 2008 as they were in 1929, the overall global effect was chilling.

This October is on track to be the worst since the crash of 1987.

The MSCI World Index has been decimated as each of the 48 developed nations tracked by MSCI Inc. (MXB) have marked a decline so far this year, with 22 of those nations down more than 50%, Bloomberg News reported.

Emerging markets, the global superstars of growth in 2007, are also slowing. Of the “BRIC” nations of Brazil, Russia, India and China, Russia has been hit the hardest. Russia’s Micex Index is down more than 73% year-to-date. China’s stock market is down more than 60% from its peak.

All three major U.S. indices have racked up steep losses for the month of October and are deep in bear market territory for the year.

• The blue-chip Dow Jones Industrial Average Index is down 22.8% for the month and 36.8% year-to-date.
• The tech-laden Nasdaq Composite Index is down 25.8% for the month and 41.5% for the year.
• And the broader Standard & Poor’s 500 Index has dropped 24.7% in October and is down 40.3% so far this year.

The month has seen unprecedented government intervention into the private markets, including coordinated interest rate cuts and widespread bank recapitalization measures, but global stock indices continue to fall. The U.S. Federal Reserve is slated to begin a two-day meeting tomorrow (Tuesday).

"The outlook for the market really depends upon what type of action the Fed may take," Doug Roberts, chief investment strategist for Channel Capital Research in Shrewsbury, New Jersey, told Reuters. "I wouldn't rule out the possibility of something on a coordinated basis globally as well."

Widening Swath of Recessions

Friday’s steep sell-off was sparked in part by the British Office for National Statistics’ announcement that, after a flat second quarter, U.K. gross domestic product (GDP) contracted 0.5% in the three months ended Sept. 30. It was a sharper decline than expected, as median economists’ estimates projected a 0.2% decline, according to Reuters.

Howard Archer, economist at Global Insight Inc., said the reading indicates that the United Kingdom is in a recession.

“The depth of the decline means that we are there to all intents and purposes. Indeed, there can be no doubt that further marked GDP contraction will occur in the fourth quarter as consumers retrench in the face of major headwinds and investment is pared back sharply,” Archer told The Financial Times.

Other European nations have already succumbed to recession, while still more are teetering on the brink of economic contraction. Germany, the EU’s largest economy, is expected to see a 0.2% contraction in gross domestic product (GDP) for the third quarter after a 0.5% contraction in the second quarter. And the nation of Iceland is dangerously close to bankruptcy.

In Asia, Japan – the world’s second largest economy – is also dangerously close to recession. Japan’s GDP contracted 2.4% in the three months ended June 30 after expanding 3.2% in the first quarter.

Worse, the United States could be next.

U.S. Economic Peril

U.S. GDP for the second quarter clocked in at a surprisingly strong 2.8%. But the advance estimate for third quarter U.S. GDP is slated for release this coming Thursday, and according to Naroff, the world markets could very well be in for another shock.

“U.S. GDP contracted significantly in the third quarter,” Naroff said. He predicts GDP may have fallen as much as 2.5% – 3.0%. “Such a sharp slowdown is not expected.” 

Global investors might not expect such a sharp decline, but a dire stream of economic indicators has been flooding in for months and they haven’t painted a pretty picture.

“We expect our number next week not to be a good one, and the next quarter could probably be tough as well,” White House Press Secretary Dana Perino said at a White House briefing on Thursday, referring to the upcoming GDP announcement, Bloomberg News reported.

“The president knows that we're in for a rough ride,” Perino said. 

According to Bloomberg data, median economist expectations predict a 0.5% contraction in U.S. GDP for the third quarter.

U.S. unemployment continues to rise and a slowdown in consumer spending, which is responsible for two-thirds of GDP, is bound to slowdown.

“I don't see how the consumer can do anything but retrench,” Robert McTeer, former president of the Fed Bank of Dallas, said in an Oct. 24 Bloomberg Television interview. “If they all do it at the same time, it will really tank the economy.”

Analysts from Citigroup Inc. (C) predict the United States could see an entire year of contraction before the economy gets back on track, shrinking throughout the first half of 2009.

“We are now expecting one of the sharpest recessions in the post-war period,” Citigroup's Geoffrey Dennis and Jason Press wrote in a report to clients on Oct. 21.

Dennis and Press also predicted that U.S. unemployment could reach as high as 8.5%.

News and Related Story Links:

• Reuters:
  China, EU see severe economic shock

• The Financial Times:
  Data confirm UK on brink of recession

• Bloomberg News:
  Oil, Gold, Commodities in `Freefall' as Economic Slump Deepens

• Money Morning:
  Iceland’s Economy in Hot Water After Commercial Banking Collapse

• Bloomberg News:
  U.S. Stocks Drop on Concern Over Fallout From Credit Crisis

• MarketWatch:
  Stocks off session lows after global plunge

• Money Morning:
  Surprise! Despite its “Black” Reputation, October Isn’t the Worst Month for Stocks.

• Bloomberg News:
  White House Expects `Tough' GDP Numbers Next Week

• Reuters:
  For stocks, October can't end soon enough

• Bloomberg News:
  U.S. Stocks Plunge, S&P 500 Heads for Worst Month Since 1938

• Bloomberg News:
  GDP Probably Contracted as Spending Fell: U.S. Economy Preview

Equity markets around the world nosedived today (Friday) as fears of a global recession intensified.

At noon ET today, the blue-chip Dow Jones Industrial Average Index had plunged 267.46 points (-3.08%), to trade at 8,423.79. The tech-laden Nasdaq Composite Index shed 34.67 points (-2.16%), to reach 1,569.24. And the broader Standard & Poor’s 500 Index dropped 28.63 points (-3.15%), to hit 879.48.

The S&P 500 is 45% down from its peak.

“It's a bear market on steroids,” David King, a money manager at Putnam Investments, who helps manage about $137 billion, told Bloomberg Television. “It's very accelerated by the pace of financial markets today.”

In overseas markets, Japan’s Nikkei Index had an 811.90-point decline to close at 7,649.08, its lowest level in over five years. Hong Kong’s blue-chip Hang Seng Index plummeted 1,142.11 points to close at 12,618.40, its lowest level since August 2004.

"The market is pretty desperate and at a loss. Four days running of big losses, though the turnover is quite low," Howard Gorges, vice chairman South China Securities, told Reuters, speaking of the Hong Kong markets. The Hang Seng Index has dropped 55% so far this year.

"People are just standing aside. These are dangerous markets to play around with. That's the main reason for getting into cash," Gorges said.

In Europe, major indices sunk on news that the United Kingdom’s gross domestic product contracted more than expected with a decline of 0.5% in the third quarter.

The FTSEurofirst 300 Index of blue-chip European shares skidded 4.9% to close at 829.73 points, its lowest closing level since May 2003, Reuters reported.

The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit losses.

At midday, the dollar had gained ground against the euro [up 1.60%] and the pound sterling [up 2.47%], but lost ground against the yen [down 4.37%].

News and Related Story Links:

• Reuters:
  China, EU see severe economic shock

• Bloomberg News:
  U.S. Stocks Drop on Concern Over Fallout From Credit Crisis

• The Financial Times:
  Data confirm UK on brink of recession

• Bloomberg News:
  Oil, Gold, Commodities in `Freefall' as Economic Slump Deepens

• Reuters:
  Stock Market News & Quotes

PNC Financial Services Group Inc. (PNC) became the first U.S. bank to make use of the government’s Troubled Assets Relief Program (TARP) with its plans to purchase National City Corp. (NCC).

Pennsylvania-based regional bank PNC announced today (Friday) that it would purchase Ohio-based National City in an all-stock transaction that values the struggling regional bank at $5.2 billion. Shareholders will receive 0.0392 PNC share for each National City share, or $2.23 per share, 19% less than National City’s closing price yesterday (Thursday).

In order to help facilitate the purchase, PNC will sell $7.7 billion in preferred stock and warrants to the Treasury Department’s bank recapitalization program.

"The acquisition of National City will increase our core deposit base to $180 billion, making PNC the fifth largest U.S. bank by deposits. At a time when core funding is key, we see our deposit strength as an important success factor,” said James E. Rohr, chairman and chief executive officer of PNC, in a company statement announcing the deal.   

With the funds from the TARP, PNC’s Tier 1 capital ratio, a measure of a bank’s stability, will increase to approximately 10%.

Regulators have been pushing for a sale of National City for months. The bank has been hard hit by the subprime mortgage crisis due to its ill-timed expansion into the Florida market, an area where the housing market slowdown has been particularly tough.

Analysts applauded the PNC deal and were optimistic about the TARP’s role in the transaction.

“It certainly beats having these troubled banks end up being taken over by the government,” David Havens, a credit desk analyst at UBS AG (UBS) in Stamford, Conn., told Bloomberg News. “It's better for just about everybody that you have a private-market solution and the government facilitating to make sure it happens.”

National City Chief Executive Officer Peter Raskind will remain on as a vice chairman at PNC.

News and Related Story Links:

• Bloomberg News:
  PNC Financial to Buy National City for $5.2 Billion

• The Financial Times:
  PNC to buy National City for $5.2bn

• Reuters:
  PNC to buy ailing National City for $5.6 billion

Foreclosures continue to plague the U.S. housing market, but government agencies are working to develop a plan to aid struggling homeowners, and in turn, strengthen the U.S. economy.

Foreclosure activity saw a huge spike in the third quarter, as one in every 475 U.S. homes either received a default or auction sale notice, or was repossessed by a bank, according a report released yesterday (Thursday) by industry group RealtyTrac. It was a 71% jump over third quarter foreclosure activity in 2007 and a 3% increase from the second quarter of this year.

Foreclosure filings actually decreased 12% in September from August, but not due to an improving housing market.

“Much of the 12% decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James J. Saccacio, chief executive officer of RealtyTrac, in the statement announcing the results.

A California law that requires lenders to give homeowners 30-days notice prior to filing a notice of default led to a 51% drop in that state.

The U.S. Treasury Department is working to implement a program that will modify the loan terms of struggling homeowners and guarantee those loans for banks that participate in the new program. The incentive for the government to stem the flood of foreclosures includes much more than just helping people hold onto their homes.

“We have never seen a foreclosure cycle like this one before,” Rick Sharga, RealtyTrac senior vice president, told CNNMoney.com.

A slowing economy generally precedes periods of elevated foreclosure rates. However, “in this cycle, we have foreclosure problems that have caused an economic downturn,” Sharga said.

Speaking in testimony before the Senate Banking Committee yesterday, Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC) and Neel Kashkari, head of the newly formed Office of Financial Stability, both spoke in favor of government assistance to homeowners facing foreclosure.

“We are passionate about doing everything we can to avoid preventable foreclosures,” Kashkari said.

Bair outlined how the government’s $700 billion bailout legislation includes provisions to help homeowners.

“Loan guarantees could be used as an incentive for servicers to modify loans,” Bair said in her prepared testimony, The Associated Press reported. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

Bair pledged the FDIC’s support for the eventual Treasury Department plan.

News and Related Story Links:

• CNNMoney.com:
  Foreclosure filings spike 71%

• The New York Times:
  F.D.I.C. Chief Points to Efforts to Aid Homeowners

• Reuters:
  Foreclosures up 21 percent from year ago

• The Associated Press:
  Official: mortgage plan coming soon

• Money Morning:
  Fears of Mortgage Rate Re-Sets May Fuel LIBOR Manipulation and Mask Deeper Banking System Problems

It takes more than a globally competitive economy to have a sound banking system.

For the third straight year, the United States finds itself at the top of the Global Competitiveness Index (GCI), published by the World Economic Forum (WEF) as part of its annual Global Competitiveness Report.

“Once the global economy emerges from the current financial crisis, which it will, the countries that do well on our index are those that are best prepared to bounce back and perform well in the longer term,” Jennifer Blanke, director of the WEF’s global competitiveness network told The Financial Times.

And the United States is at the top. That’s the good news.

The bad news is that the safety of U.S. banks dropped to 40th this year from 26th in the WEF’s 2007 – 2008 report.

“Despite rising concerns about the soundness of the banking sector and other macroeconomic weaknesses, the country's many other strengths continue to make it a very productive environment,” the report said of the United States.

But such a fall in the rankings for bank safety is a bit frightening for U.S. banking customers already spooked by the collapse of investment bank such as Lehman Brothers Holdings Inc. (OTC: LEHMQ) and regional banks such as IndyMac Bancorp Inc. (OTC: IDMC).

Summing a Country’s Competitive Balance Sheet

The WEF analyzes 110 economic indicators in 12 different categories for each of 134 countries to come up with its overall GCI ranking. One of those 12 areas is financial market sophistication, which is made up of factors such as “venture capital availability,” “strength of investor protection” and even “regulation of securities exchanges.”

But perhaps the most important factor in this category is the soundness of banks.

Confidence in a nation’s banks is what keeps citizens from stuffing dollars under a mattress. Banks need deposit assets to keep the wheels of U.S. industry turning, as deposit assets are used to fund the short-term credit markets that are so vital to the daily operations of many corporations.

And it’s an area where the United States ranks a disappointing 40.

Coming in behind such well-developed nations as Canada, which tops the list, or even Hong Kong in the 11th spot, might not seem so bad. But even the small African nation of Namibia ranks in at 17, illustrating the United States has some definite room for improvement.

While there are plenty of surprises at the type of the bank safety list, there aren’t many such surprises at the bottom. Algeria comes in dead last with Libya just above it.

Of the “BRIC” nations – Brazil, Russia, India and China – most moved up the list this year against better-developed nations. China landed in the top 30 for the first time as it moved up four spots to reach 30, but China’s banking system is still near the bottom of the list at 108. India, however, slipped two spots to 50 from 48 due to a widening budget deficit. India’s banks also slipped, falling to 51 from 46. 

Meanwhile, Brazil was the biggest mover with an eight-spot jump to 64 on the overall list, and also tops the United States when it comes to the soundness of its banks with its 24th spot on the banking safety list. Oil revenues gave Russia a gain of seven to move to 51 from 58 the year prior, but Russia’s banks clocked in at 107 on the soundness rankings.

Slipping Bank Titans?

The United States wasn’t the only nation to find its ranking slipping in the bank safety category. The United Kingdom made a stunning plunge from 4th in the 2007 – 2008 survey, to 44th in the current one, after the emergency nationalization of banks such as Northern Rock PLC (PINK: NHRKF).

Even Switzerland, synonymous with banking to many, was hit hard by the global banking crisis, as it slipped from its top spot in last year’s banking soundness rankings to 16th this year. Swiss giants such as UBS AG (UBS) got caught with over-exposure to U.S. subprime mortgage-backed securities that necessitated government intervention while #2 rival Credit Suisse Group AG (ADR: CS) was forced to raise fresh capital.

Nations from Sweden to the United Kingdom to the Netherlands have all introduced government-sponsored packages to help support ailing domestic banks and avoid the fate of nearly bankrupt Iceland and Pakistan.

The United States $700 billion bailout package is by far the largest, but even that might not be enough to return the domestic banking industry back to safety.

The U.S. financial landscape has been changed forever as firms such, as Lehman Brothers – old enough to have weathered the Great Depression – toppled under the crushing weight of a credit market. The strong – Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) – have bought out the weak.

Bank of America bought both mortgage lender Countrywide Financial Corp. (CFC) and former standalone investment bank Merrill Lynch & Co. Inc. (MER). JPMorgan bought both regional bank Washington Mutual Inc. (OTC: WAMUQ) and the failed Bear Stearns Cos. Inc. Wells Fargo is buying Wachovia Corp. (WB).

But in the wake of such massive acquisitions, the United States is left with huge nationwide banking complexes dangerously close to the 10% regulator’s cap any one bank is allowed to have of domestic market share. 

And with 117 financial firms on the Federal Deposit Insurance Corp.’s (FDIC) “Problem List” at the end of the second quarter, more bank acquisitions and rescues could be on the way. The FDIC’s list for the third quarter won’t be published until November.

The FDIC’s coffers have already taken a hit from the rescue of IndyMac and with the recent bailout law raising the cap for FDIC-insured deposits, it doesn’t seem like much of a stretch to imagine the nation’s banking insurance coming up short if one of the largest banks were to fail.

Bank Safety Plays

The FDIC doesn’t publish the names of the banks on its watch list, but luckily there are some simple ways to help ensure your banking deposits are safe. Here are three quick and easy steps from Money Morning Investment Director Keith Fitz-Gerald that you can take to determine if your bank is safe or not:

1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. “If your bank doesn’t make the cut with a higher rating, then switch to one that does,” says Fitz-Gerald.

2. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. “But remember,” said Fitz-Gerald, “this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.”

3. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. “Like most things the government doesn’t make this easy, so that means more paperwork,” Fitz-Gerald said. 

News and Related Story Links:

• World Economic Forum:
  The Global Competitiveness Report 2008 – 2009

• Reuters:
  Canada rated world's soundest bank system: survey

• Seeking Alpha:
  Are Big Banks Too Big to Fail?

• The New York Times:
  Too Many Banks ‘Too Big to Fail’

• The Financial Times:
  US retains top competitiveness ranking

• Bloomberg News:
  U.S. Economy Still Most Competitive Despite Crisis, WEF Says

• Money Morning:
  Credit Crisis Safety Plays: Three Steps to Take to Make Sure Your Bank is Safe

The U.S. Federal Reserve yesterday (Tuesday) announced a new program that will provide as much as $600 million in emergency funding to money-market funds should the ongoing global financial crisis once again cause the short-term credit markets to freeze out borrowers.

The newly created Money Market Investor Funding Facility (MMIFF) will help money market funds meet redemption needs and keep from “breaking the buck” – dropping below the normal $1 in net asset value – as The Reserve Primary Fund (RFIXX) did after the collapse of Wall Street investment-banking giant Lehman Brothers Holdings Inc. (OTC: LEHMQ). Struggling money-market funds that have seen more than $500 billion in redemptions since Lehman’s demise.

“The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed statement announcing the new program read. 

Losses on Lehman debt caused The Reserve Management Co. to mark down its Primary Fund’s net asset value (NAV) to 97 cents. It was the first time a money market fund had been forced to lower its NAV below $1 in 14 years. What followed was a half-trillion-dollar outflow from money market funds as institutional investors pulled their cash out of the funds to seek out the safety of U.S. Treasuries.

“By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments,” the Fed statement read.   “Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.”

The Fed selected JPMorgan Chase & Co. (JPM) to oversee the new program. JPMorgan will set up five “special purpose vehicles” through which money market fund managers can access Fed funds in exchange for dollar-denominated certificates of deposit, bank notes and commercial paper with maturities of less than 90 days.

Despite the half a trillion dollars in redemptions, the money-market industry still accounts for $1.7 trillion in assets. Cash outflows have slowed since August, Reuters reported, but money market funds have been left with very slim liquidity margins.

The Fed will supply $540 billion, with a remaining $60 billion to be raised from commercial paper sold by the five newly formed units.

“In terms of the redemptions money-market funds are seeing, and hedge funds as well, any of these moves by the Fed are going to help,” Mike Holland, chairman and founder of Holland & Co. LLC in New York, said in an interview with Bloomberg Television.

Holland predicted redemptions would ease with the creation of the MMIFF program.

News and Related Story Links:

• Bloomberg News:
  Fed Sets Up New Program to Buy Money-Fund Assets

• MarketWatch:
  Fed unveils new plan to assist money-market funds

• Reuters:
  Fed launches new plan to help money market funds

• Press Release:
  Federal Reserve announces the creation of the Money Market Investor Funding Facility (MMIFF)

U.S. markets soared yesterday (Monday) after U.S. Federal Reserve Chairman Ben S. Bernanke endorsed another domestic stimulus package, sending the Dow Jones Industrial Average to its first close above 9,000 in four consecutive trading sessions.

At the close in New York, the blue-chip Dow had gained 413.21 points (4.67%) to close at 9,265.43. The tech-laden Nasdaq Composite Index jumped 58.74 points (3.43%) to close at 1,770.03. And the broader-based S&P 500 Index racked up a 44.85-point (4.77%) gain to close at 985.40.

In testimony before the House Budget Committee yesterday, Bernanke said that due to the poor economic outlook, additional government assistance could be needed.

“Any fiscal action inevitably involves tradeoffs” that may “burden future generations,” said Bernanke, Bloomberg News reported. Yet “with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.”

In February, the federal government approved a $168 billion stimulus package that sent checks to qualified taxpayers. The checks, which were mailed through May, were largely responsible for surprisingly strong gross domestic product (GDP) growth in the second quarter. But the economic boost in GDP has now passed and some legislators feel additional action is needed.

“Effectively, the Fed chairman is giving Congress a green light to go ahead with an additional fiscal stimulus package,” Brian Bethune, chief U.S. financial economist for research firm Global Insight, told CNNMoney.com.

House Speaker Nancy Pelosi, D-Calif., has been one of the most vocal proponents of a new stimulus package.

“Chairman Bernanke made it clear that a new economic recovery package is critical to boost our weakening economy,” Pelosi said in a statement on her website released yesterday. “ [He] added his voice to the chorus of economists, experts and policymakers who insist that America needs a job-creating recovery package to get our economy back on track and to restore consumer and investor confidence.”

News and Related Story Links:

• Bloomberg News:
  Bernanke Backs More Stimulus, Citing ‘Weak’ Outlook

• CNNMoney.com:
  Bernanke: It's time for stimulus plan

• MarketWatch:
  Stocks gain as Bernanke supports more stimulus

• Money Morning:
  2Q GDP Buoyed by Exports and Rebate Checks

ING Groep NV (ADR: ING) shares jumped more than 20% in early afternoon trading yesterday (Monday) after the Dutch financial firm announced a $13.4 billion (10 billion euro) capital injection and the sale of one of its life insurance subsidiaries.

ING shares gained $2.24 for the day, a 21% gain, to close at $12.89.

Yesterday’s gain was almost enough to erase Friday’s 27% loss in ING’s Netherlands-traded shares after the company announced it would post its first quarterly loss in more than 50 years.

ING projected a third-quarter loss of $665.6 million (500 million euros) after $2.1 billion (1.6 billion euros) in writedowns, partially due to exposure to Lehman Brothers Holdings Inc. (OTC: LEHMQ) debt and incredibly tight short-term credit markets.

“Our capital position was in line with previously targeted levels and regulatory requirements,” ING Chief Executive Officer Michel Tilmant, said in a statement, The New York Times reported.

“However, market conditions have changed dramatically in recent weeks and have led to an internationally recognized belief that going forward, in this market environment, capital requirements for financial institutions should be higher,” Tilmant said.

Societe Generale SA (OTC ADR: SCGLY) analyst Michael van Wegen said the Netherlands capital infusion for ING is more shareholder-friendly than some other government plans, MarketWatch reported. The government will purchase non-voting preferred shares, which ING can repurchase at 150% of the issued value or convert the shares to common stock after three years. The government will also appoint two members to the ING board of directors.

In a separate announcement today (Monday), ING said it would sell its Taiwan life insurance unit to Taipei-based Fubon Financial Holding Co. Ltd. for $600 million.

Despite its third-quarter loss, many analysts expect ING to be able to redeem the government shares in a relatively short timeframe. As one of the world’s largest financial firms, ING has more than 75 million customers and $450 billion (338 billion euros) in account deposits.

“Although ING does not say so explicitly, the buy-back option suggests that it believes that it does not really need this capital injection,” wrote analyst Ton Gietman in a note upgrading the company to "Buy" from "Hold," The Associated Press reported.

“In our view, the shares should no longer trade at a multiple that includes a huge fear-discount,” Gietman added.

The $13.4 billion cash infusion will raise ING’s Tier 1 capital ratio – a measure of a bank’s stability – to 8 from 6.5.

“ING had little choice but to raise capital over the weekend,” wrote Duncan Russell, an analyst at JPMorgan Chase & Co. (JPM), in a note to clients, Bloomberg News reported. “It is wise in our view to raise significantly more than the minimum needed so as to take the issue completely off the table.”

Russell has an “overweight” rating on ING shares. 

News and Related Story Links:

• BusinessWeek:
  ING shares rebound after state invests euro10B

• MarketWatch:
  ING shares surge after 10 billion euro capital deal

• The New York Times:
  The Netherlands to Provide $13 Billion to the ING Group

• Bloomberg News:
  ING Jumps After $13.4 Billion Injection From State

• Money Morning:
  LIBOR Drops But Short-Term Credit Markets Remain Tight

• Wikipedia:
  Tier 1 capital

Short-term lending rates fell after a week of unprecedented government intervention in the global financial markets helped to encourage banks to resume lending.

The dollar-denominated three-month London Interbank Offered Rate (LIBOR) dropped 40 basis points over the course of the week to 4.42% – its first such decline since July. Short-term rates quoted in euros and yen also dropped.

The overnight rate hit 1.67% – reaching its lowest level since September 2004 – after it dropped slightly more than a quarter percentage point last week.

“LIBOR rates continue to edge down, bringing the prospect of some rejuvenated interbank lending that little bit closer, even if it is still some way distant,” Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking arm of French lender Credit Agricole SA, told Bloomberg News.

Despite last week’s decline, LIBOR remains well above central bank target rates. At 4.42%, the rate is well above the benchmark U.S. Federal Funds rate of 1.50%.

“Contrary to what most people think, the Fed Funds rate is a ‘target;’ it is not an absolute number that anyone actually has to follow,” Money Morning Contributing Editor Shah Gilani said in a recent analysis.

The Fed, along with other central banks, has lowered target rates in hopes of encouraging lending in the short-term credit markets. But it’s taking time for the effects of the Fed’s Oct. 8 rate reduction to work its way into the global financial system.

Earlier this week, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. announced plans to recapitalize U.S. banks with $250 billion in cash infusions. Switzerland, the United Kingdom and others announced similar plans to help ailing financial institutions.

But for now, banks remain risk-averse and are holding onto cash. The commercial paper market, which many companies use to fund daily operations, continues to shrink. For the week ended Wednesday, the Fed announced the amount of commercial paper outstanding shrank by $40.3 billion, reaching $1.51 trillion on a seasonally adjusted basis.

The short-term market, which is usually highly liquid, is down from $1.81 trillion in late September, and down from the peak of $2.2 trillion reached in the summer of 2007, The Associated Press reported.

“The market is starting to believe that central banks' policy actions are taking out some of the financial systemic risk,” Craig Saalmann, a Sydney-based credit strategist with JPMorgan Chase & Co. (JPM), told Bloomberg.

While it’s taking out some of the risk, it certainly isn’t squeezing out all of it: The short-term credit market won’t return to more normal conditions until banks can regain confidence in their peers, Money Morning’s Gilani wrote in his Oct. 10 analysis of the Fed Funds target rate.

“Just because the Fed floods banks with cash doesn’t mean that banks will lend each other money – at the targeted Fed Funds rate, or at any rate,” Gilani wrote. “Banks are all fearful of each other – I’m talking on a worldwide basis – they are increasingly hoarding cash as a cushion against their own upcoming losses.”

News and Related Story Links:

• Bloomberg News:
  Dollar Libor Logs First Weekly Drop Since July on Cash Funding

• Reuters:
  Overnight interbank dollar rates continue to inch lower

• The Associated Press:
  Rates edge lower, but commercial paper drops again

• Money Morning:
  Credit Crisis Update: Rising LIBOR Hints at Bigger Problems to Come

• Money Morning:
  LIBOR Sends Another Shaky Signal to the Global Financial Markets

• Money Morning:
  Inside the Credit Crisis: How the Fed’s Efforts to Lower the Fed Funds Rate May Leave it Powerless to Stop the Financial Meltdown

• Money Morning:
  Paulson Announces New Plans to Buy Equity Stakes in Banks and Revive Credit Markets.

• Money Morning:
  Federal Reserve Joins Central Banks Around the World in Cutting Rates, but Is It Too Late? 

Consumer prices held steady as the credit crisis took a toll on the sluggish U.S. economy and dampened inflation.

The Labor Department announced yesterday (Thursday) that the Consumer Price Index (CPI) was unchanged in September after declining 0.1% in the prior month. Year-over-year, consumer prices increased 4.9% for the 12 months ended September 2008, down from a 5.4% increase in August. 

Oil prices made up the bulk of the decline in consumer prices as the cost of crude has dropped by over half from its record high of $147 per barrel in July.

So-called core CPI, which excludes volatile food and energy prices, increased 2.5% year-over-year in September, the same rate as the previous month.

“The credit crunch is intensifying, and enough damage has been done to ensure the next couple of quarters will be much weaker,” James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Conn., told Bloomberg News. “The pendulum has swung sharply to the downside risks to growth rather than inflation.”

In a separate report, the Federal Reserve Bank of Philadelphia yesterday announced that its general economic index had a drastic decline to –37.5 from 3.8 in September. A negative reading indicates a contraction in economic growth.

Production at U.S. factories was down 2.8% in September due, in part, to factory closures from hurricanes Gustav and Ike, as well as a protracted strike at aerospace firm The Boeing Co. (BA).

“The data suggests the U.S. economy is mired in recession and things are getting worse rather than better,” Sal Guatieri, an economist for BMO Capital Markets in Toronto, told Reuters.

Earlier this week, the government announced that the Producer Price Index (PPI) fell 0.4%. PPI measures the wholesale prices manufacturers pay for materials to produce finished goods.

Declines in both wholesale and consumer prices could give U.S. Federal Reserve Chairman Ben S. Bernanke and the other members of the Federal Open Market Committee more incentive to lower interest rates at their next monetary policy meeting slated for Oct. 28 – 29.

The Fed lowered its target rate to 1.5% from 2.0% at an unscheduled meeting on Oct. 8 after the stock market suffered historic losses at the onset of the month.

News and Related Story Links:

• Bloomberg News:
  Inflation in U.S. Wanes; Consumer Prices Unchanged

• Bloomberg News:
  U.S. Economy: Manufacturing Slumps by Most in Decades

• The Wall Street Journal:
  Inflation Pressures Eased in September

• Reuters:
  Consumer prices flat, jobless claims data mixed

• Money Morning:
  U.S. Markets Dive on Deepening Recession Fears

• Money Morning:
  Oil Slides to New 13-Month Low Increasing Chances of an OPEC Cut

Southwest Airlines Co. (LUV) has always been extremely proud of its string of profitable quarters, which began in the spring of 1991, and traversed a major recession and the massive drop-off in air travel that followed the 2001 terrorist attacks.

But when the much-admired carrier bet that oil prices would continue their record climb – and they plummeted instead – the Dallas-based Southwest was forced to report its first quarterly loss in 17 years.

Southwest yesterday (Thursday) reported a net loss of $120 million, or 16 cents per share, for the third quarter, down from a net gain of $162 million, or 22 cents per share, for the same period the year prior.

Despite the loss, the airline’s shares were up 48 cents each, or 4.15%, to trade at $12.04 at 11:54 a.m. in New York – even though the Dow Jones Industrial Average was down 1.25%. Southwest shares closed up 93 cents yesterday, with an 8% gain, at $12.49.

Jet fuel costs for Southwest increased 52% during the quarter, but oil’s dramatic fall from its record highs in July forced Southwest to write down its jet-fuel hedging portfolio by $247 million. Applying mark-to-market accounting rules to its bets against rising oil costs resulted in a quarterly loss for the Dallas-based air carrier.

Excluding one-time charges, Southwest posted a profit of $69 million or 9 cents per share, which would have been enough to beat median analyst expectations of 7 cents per share, according to Reuters data.

Southwest revenue increased 12% to $2.89 billion.

“Falling energy prices are a great thing for Southwest Airlines,” Chief Executive Officer Gary C. Kelly said on a call with reporters, Bloomberg News reported. “We simply have to manage our hedges as a component of our overall fuel costs.”

Southwest’s fuel-price hedging program helped the airline dodge the fallout from high summer fuel costs, when crude oil traded as high as $147 per barrel. Southwest says it has hedged its fuel needs through 2012, MarketWatch reported.

“Even with the drop in prices, our fuel hedge remains 'in the money'” Kelly said.

Southwest has been one of the only airlines that has yet to implement such unpopular charges as fees for checked bags. Struggling rivals have been forced to charge passengers special fees for services that used to be complimentary, in order to try to make up some of the profit shortfall caused by high jet fuel costs.

News and Related Story Links:

• BusinessWeek:
  Southwest Airlines posts 1st loss in 17 years

• FinancialWeek:
  Fair value pushes Southwest into the red for the first time in 17 years

• Reuters:
  Southwest rises after quarter results

• Bloomberg News:
  Southwest's Loss on Fuel Ends 17-Year Quarterly Profit Streak

• MarketWatch:
  Southwest swings to quarterly loss

• Money Morning:
  Oil Slides to New 13-Month Low Increasing Chances of an OPEC Cut

• Money Morning:
  By Relaxing “Mark-to-Market” Rules, Has the U.S. Switched Off its Financial Crisis Early Warning System?

By Jennifer Yousfi
Managing Editor
Money Morning

The Coca-Cola Co. (KO) yesterday  (Wednesday) reported a double-digit increase in third-quarter earnings – a showing that topped analyst estimates and muscled aside a global slowdown that tripped up its archrival.

Just one day after beverage nemesis PepsiCo. Inc. (PEP) posted a 9.6% decline in third-quarter earnings, announced 3,300 layoffs and said it’s closing six plants, Coca-Cola posted a 14% increase in profit for the three months ended Sept. 26 – with strong international sales offsetting a weak domestic economy.

The upbeat results sent Coke shares up, even on a markedly down day for stocks. Coca-Cola stock hit a daily high of $47.33 yesterday, before closing at $44.21 – up 48 cents each and still good enough for a 1.1% gain on a day the Standard & Poor’s 500 Index plunged 9.03%.

“We once again demonstrated our ability to perform consistently, delivering our eighth-consecutive quarter of double-digit comparable earnings growth, despite an incredibly challenging economic environment,” said Muhtar Kent, president and chief executive officer, in a company statement.

Coca-Cola, the largest global soft drink maker, reported net income of $1.89 billion, or 81 cents per share, up from $1.65 billion, or 71 cents a share, for the same period the year before. The consensus analyst estimate was for Coke to earn 77 cents.

“The ongoing global slowdown is not yet evidenced in Coke's business,” Deutsche Bank AG (DB) analyst Marc Greenberg wrote in a research note. However, Greenberg quipped, the report left him wondering “whether it was the last great quarter or if Coke runs the last great consumer staples business.”

It could well be the latter. While it’s true that beverage sales are declining in the United States – one of the problems that caused Pepsi to stumble, Coca-Cola’s strong international presence more than makes up for it. On a volume basis, Coca-Cola sales increased 7% internationally, which more than offset a 2% domestic decline.

(Story continues below…)

Coca-Cola’s strong marketing campaign, centered on the Beijing Summer Olympic Games, helped to boost sales. The Atlanta-based soft-drink maker rang up double-digit sales increases in such emerging markets as China, Turkey, India and Nigeria for the quarter, Reuters reported. The company also got a currency boost from a relatively weak U.S. greenback, which increases the value of non-dollar denominated sales.

Coca-Cola also has been more adept than its rivals at targeting key shifts in consumer taste. While its core soda brands – Coke, Diet Coke, Sprite and Fanta – saw a 3% global increase for the quarter, such other products as Minute Maid-brand juices and Glaceau vitaminwater experienced a 10% increase.

“We anticipate that the operating environment, especially in North America, will continue to be challenging as we finish 2008 and move into 2009,” Kent, the CEO, said in the statement. “However, we have been diligent in taking the evolving landscape into account as we are planning for 2009, and believe that the solid fundamentals of our business, our strong balance sheet and cash generating capability, the experience of our management team and the strength of our brands will drive the business through these difficult economic times.”

The 2008 third quarter was Coke’s first with Kent at the helm. He took over on July 1 as president and CEO.

Kent worked his way up from his position as president of Coca-Cola International, and before that he was president of the company’s North Asia, Eurasia and Middle East Group. So he may well be the perfect candidate to steer Coca-Cola through the current economic landscape in which emerging markets offer the best growth potential.

Coke shares have certainly taken some lumps this year, along with the rest of the market, as the blue-chip Dow Jones Industrial Average component is down 28% year-to-date. But the Dow itself is down more than 35% so far this year. And with Coke’s strong results appearing to maintain the safety of its 38-cent quarterly dividend, some analysts believe it’s time to take advantage of this international beverage powerhouse.

“There may be economic disruption in the near-term, but Coca-Cola always tends to come up on the other side of it in fairly decent shape,” Greggory Warren, an analyst with Morningstar Inc. who recommends buying Coca-Cola shares under $50, said in an interview with Bloomberg News prior to the earnings release.

News and Related Story Links:

• Bloomberg News:
  Coca-Cola Profit Rises on Higher International Sales

• MarketWatch:
  International strength boosts Coca-Cola's profit

• Reuters:
  Coca-Cola profit tops view; shares rally

• Barron’s:
  Futures Fade; JPM Still Excels, Pays Price; Coke & A Smile

• The Wall Street Journal:
  International Sales Boost Coca-Cola's Results

• Company Press Release:
  The Coca-Cola Company Reports Third Quarter And Year-To-Date 2008 Results

• Money Morning:
  Hot Stocks: Intel Posts Earnings Surprise Because the “Atom” Was No Bomb

• Money Morning:
  Hot Stocks: IBM Bucks the Earnings Trend as Tech-Sector Stocks Trade Down to Bargain Levels

• Money Morning:
  Hot Stocks: Can AMD’s Future be Fabulous if it’s Fabless?

Weak U.S. retail sales sent domestic markets plunging yesterday (Wednesday), as worries about a deepening recession intensified. 

All three major U.S. indices ended the day with heavy losses. At the New York close, the blue-chip Dow Jones Industrial Average Index had posted a steep decline of 733.08 points (-7.87%), to close at 8,577.91. The tech-laden Nasdaq Composite Index dropped 150.68 points (-8.47%), to reach 1,628.33. And the broader Standard & Poor’s 500 Index lost 90.17 points (-9.03%), to settle at 907.84.

All sectors were down with the consumer basic materials sector (-14.05%) and the energy sector (-14.48%) posting the largest declines.

“I don't think things can get much worse,” Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts, told Bloomberg News. “September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.”

Retail sales in September declined 1.2%. It was the largest one-month slide in three years and worst than median economist expectation of a 0.7% decline. The drop in consumer spending came before the heavy stock market losses of October. 

“The consumer shut up shop even before the markets got crushed and that is not good news for the economy,” Joel Naroff, president and chief economist of Naroff Economic Advisors, said in a research note yesterday.

With consumer spending responsible for the bulk of U.S. gross domestic product (GDP), the unexpected decline in retail sales in the last month of the third quarter strengthens the possibility that GDP declined in the third quarter as well, signaling the U.S. economy contracted.

In a separate report, the government announced yesterday that the Producer Price Index (PPI) fell 0.4%. PPI measures the wholesale prices manufacturers pay for materials to produce finished goods.

“Price pressures will likely start easing going forward as the full extent of the slowdown hits home,” said Naroff.

With inflation on the wane and the risk to economic growth heightened, the U.S. Federal Reserve could have leeway for further easing at the next meeting of its monetary-policy-setting Federal Open Market Committee, slated for Oct. 28 – 29.

"The question on everyone's minds is how deep of a recession (will there be)," Kathy Lien, director of currency research at GFT Forex in New York, told Reuters.

"Today's (retail sales) number indicates a very strong chance of negative GDP growth for the third quarter and would certainly pave the way for another 25 to 50 basis points of easing (of monetary policy) over the next few months, and the PPI number confirms that as inflation is coming down as well," Lien said.

News and Related Story Links:

• Reuters:
  Retail sales, inflation fall; factories weak

• Bloomberg News:
  U.S. Economy: Retail Sales Slide Signals Deepening Recession

• CNNMoney.com:
  Worst retail sales in three years

• BusinessWeek:
  Stocks Plunge on Gloomy Data

Shares of Ford Motor Co. (F) and General Motors Corp. (GM) posted gains yesterday (Tuesday) on speculation that consolidation in the U.S. domestic auto industry could be the struggling sector’s saving grace.

Over the last three trading sessions, Ford shares are up almost 18%, while GM shares are up over 37% on reports of possible merger talks and asset sales.

Both stocks have been hammered year-to-date, with Ford shares having plunged over 63% and GM shares down a staggering 74%. Declining sales have seen the automakers’ stocks touch lows not seen in decades.

Waning U.S. consumer spending and high oil prices have hit domestic automakers that have long relied on large trucks and sport-utility vehicles (SUVs) as the cornerstones of their product offerings. U.S. firms have been slower than their foreign counterparts, such as Toyota Motor Corp. (ADR: TM), in adopting the now popular fuel-efficient hybrids and smaller car models.

But both GM and Ford have said that bankruptcy is not an option they will consider. The automakers are aggressively pursuing two different paths to try to return to profitability. While GM seeks out a potential merger, Ford is selling off assets.

GM and Chrysler in Talks: WSJ

The Wall Street Journal reported over the weekend that GM has had talks with private-equity firm Cerberus Capital Management LP over a possible sale of the hedge fund firm’s 80.1% stake in Chrysler LLC. In addition to its marquee Chrysler brand, the automaker produces the Dodge and Jeep lines.

However, Chrysler is the weakest of Detroit’s “Big Three” and its line of Dodge Ram pick-ups and Jeep SUVs have been poor sellers in the current economic environment, which casts doubt on the validity of that report.

“Ford and even GM have been trying to shed unprofitable brands, so why would CEO Rick Wagoner go out and purchase brands that are struggling?” David Silver, an analyst at Wall Street Strategies Inc. (OTC: WSSSQ), told MarketWatch. “Chrysler is burning through cash at an alarming rate, and that coupled with GM's cash burn would just push GM closer to disaster.”

Efraim Levy of Standard & Poor's Equity Research agreed that a merger might not be the best route to take for beleaguered GM.

“Given the marketplace and restructuring challenges faced by the automakers, we think a merger would be counterproductive," Levy said, MarketWatch reported. “On the other hand, if GM would get access to Cerberus's capital, we could see positives for the automaker.”

Labor unions have also expressed their discomfort with a possible deal between GM and Chrysler would be beneficial.

“We have not had any discussions formally with any of the companies,” United Auto Workers President Ron Gettelfinger said yesterday on Detroit radio station WWJ, Bloomberg News reported. “I personally would not want to see anything that would result in a consolidation that would mean the elimination of additional jobs.”

But with U.S. auto sales at 15-year lows, job cuts at automakers are likely to occur with or without a potential merger, which could lead to eventual capitulation from the union.

“I think you could convince them,” David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, said of the unions, Bloomberg reported. “Profitability over the long term is the only job security these guys have.” 

Another Ford Divestiture

GM approached Ford about a potential merger, as well, according to news reports, but the company founded by automobile pioneer Henry Ford is determined to go it alone.

After having already sold Land Rover and Jaguar to Indian carmaker Tata Motors Ltd. (ADR: TTM) for $2.3 billion, Ford is now shopping its one-third stake in Japan’s Mazda Motor Corp. (PINK: MZDAF). Ford owns approximately 33.4% of Mazda and would like to sell a 20% share of the Japanese automaker.

And the buyer is likely to be one of Japan’s own, as Mazada’s main bank Sumitomo Mitsui plans to “do whatever they can to prevent this from happening” if Ford selects an unwelcome buyer, according to Credit Suisse Group AG (ADR: CS) analyst Koji Endo, BusinessWeek reported.

Two leading Japanese trading houses, Sumitomo Corp. and Itochu Corp., are the most interested bidders at the moment. It seems likely one of the two will come out on top as the winner for the Mazda stake.

Ford could certainly use the cash and the sale could also have benefits for Mazda, according to Takaki Nakanishi, JPMorgan Chase & Co. (JPM) analyst. Nakanishi feels the sale will allow Mazda more freedom in decision-making, while mainting its close ties to Ford.

“The synergy between the two companies is very significant, but we think they can produce this synergy without the management control inherent in its parent-subsidiary relationship,” Nakanishi said in a research note dated yesterday, Reuters reported.

News and Related Story Links:

• MarketWatch:
  GM, Ford rally on reports of industry merger talks

• BusinessWeek:
  Ford Still Shopping Mazda Stake; Tata Uninterested

• Reuters:
  Analysts see Mazda silver lining if Ford sells stake

• Reuters:
  General Motors says bankruptcy not an option

• TheStreet.com:
  GM-Chrysler Merger Talks Exaggerated by Media

• Bloomberg News:
  Auto Union Chiefs Say They Wouldn't Back GM-Chrysler Merger

• Money Morning:
  Buy, Sell or Hold: Ford Motor Co.

• Wikipedia:
  Henry Ford

Overseas markets surged early today (Tuesday) as government-backed bank-bailout plans in the United States, Europe and Japan persuaded investors to jump back into stocks.

Japan’s Nikkei 225 Index set a record one-day gain today, soaring 14.2%, or 1,171.14 points, to close at 9,447.57, after being closed yesterday (Monday) for a holiday. Hong Kong’s blue-chip Hang Seng Index extended its 10% rally from yesterday with a 3.2% gain this morning, adding another 520.72 points to close at 17,832.88.

Stock markets in the Philippines, South Korea and Australia also saw gains today.

“The U.S. and Europe now seem to be promising unlimited support to remove the deep-rooted disbelief in the financial system,” Yoo Byung Ok, who oversees the equivalent of $3 billion at Mirae Asset Investments Co. in Seoul, told Bloomberg News. “The key issue here is whether these market gains can be sustained or not. I believe more time is needed to dispel worries about the ripple effect on global economies.”

Europe enjoyed similar strong results, with the FTSEurofirst 300 Index closing up 2.8% for the day after earlier being up as much as 6.8%. The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit gains.

Russia’s Moscow Interbank Currency Exchange, or MICEX, where the bulk of Russian trading occurs, climbed 11.2% before regulators halted trading, The Associated Press reported.

These global gains were a response to international efforts to recapitalize banks, as well as some easing in the short-term credit markets. The dollar-denominated three-month London Interbank Offered Rate (LIBOR) fell slightly today, down 0.12% to 4.64%. LIBOR’s euro and pound counterparts also fell, albeit by slightly smaller amounts.

“We are now seeing solvency being dealt with, we are seeing huge amounts of liquidity being thrown at the market,” Simon Ballard, a senior portfolio manager at Fortis Investments, said in a Bloomberg Television interview. “Banks will little by little start to face one another in the interbank market.”

In Japan, the central bank pledged unlimited dollar funds to shore up capital positions, according to a Washington Post report.  The Japanese government will also relax rules that prevent companies from buying their own stock, Finance Minister Shoichi Nakagawa said. The government will immediately cease the sale of any of the $33 billion in bank stocks it acquired during that country’s “Lost Decade,” Nakagawa added.

Europe announced its bank recapitalization plan yesterday, while the United States announced its own $250 billion plan this morning.

News and Related Story Links:

• Money Morning:
  Dow Zooms to Record Gain Yesterday on Reports The Government Will Reveal Banking Bailout Plan Details Early Today

• Reuters:
  Nikkei surges over 14 pct in record 1-day gain

• Bloomberg News:
  Asian Stocks Gain on Bank Stakes Plan; Nikkei Surges Most Ever

• Washington Post:
  Asian, European Markets Continue Upbeat Rally

• Reuters:
  HK shares advance 3.2 pct amid global rally

• Associated Press:
  World stocks soar as credit markets ease

• Time:
  Will Europe's Bank Bailout Plan Really Work?

• Money Morning Special Investment Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it.

• Money Morning Special Investment Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it for Profit.

Panicked international investors fled the markets as a steep sell-off circled the globe today (Friday), but a late-afternoon rally helped the U.S. market pare the bulk of declines.

“A lot of institutions are deciding to come back into the market,” Michael Nasto, the senior trader at U.S. Global Investors Inc., told Bloomberg News. “We've been beaten down so much. Some people feel this is the bottom.”

After plunging below 8,000 earlier in the day, the Dow Jones Industrial Average reversed course. At the New York close, the blue-chip Dow posted a reduced loss of 128.00 points (-1.49%), to close at 8,451.19. The tech-laden Nasdaq Composite Index eked out a 4.39- point gain (0.27%), to close at 1,649.51. And the broader Standard & Poor’s 500 Index lost 10.70 points (-1.18%), to settle at 899.22.

While the loss was smaller than earlier feared, the Dow – seen by many as a key indicator of U.S. economic health – is down more than 18% for the week. It’s the biggest weekly decline in history for the stock market bellwether – and for the broader-based S&P 500, which was also down 18% for the week.

"I'm more convinced now than ever that this market has made a bottom. The capitulation came when we breached 8,000," Peter Cardillo, chief market economist at Avalon Partners, told MarketWatch.com.

"It doesn't mean we can't go back and revisit that level," Cardillo added.

In overseas markets earlier today, Japan’s Nikkei Index dived 9.6%, with an 881.06-point decline, to close at 8,276.43. Hong Kong’s blue-chip Hang Seng Index plunged 7.2%, with a decrease of 1,146.37 points, to close at a new three-year low of 14,796.90.

Europe’s blue-chip stock index, the FTSEurofirst 300 Index, plummeted 7.6%. The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit declines.

Emerging markets fared equally poor, and in many cases, much worse. Stock exchanges were closed today in Iceland, Indonesia and Russia, while steep sell-offs in Thailand, Austria, Romania and Brazil halted trading, MarketWatch reported.

In India, the Sensex Index fell 7%. China’s Shanghai Composite ended 3.6% lower.

Worries about the world’s economic health sent crude oil prices sharply lower as oil futures hit a new 13-month low. Crude oil for November delivery dropped $8.89 to close at $77.70 per barrel.

"People have to remember oil used to trade for the longest time at $35 to $40 a barrel," James Cordier, founder of OptionSellers.com, referring to prices not seen since 2004, told CNNMoney.com. "The consumption that we saw back then, we could see it again."

"Factories are closing, jets are on the ground, a lot of the expansions in China and India are probably going to be curtailed," said Cordier.

Credit Crisis Cleanup

In a speech Friday morning, U.S. President George W. Bush tried to reassure Americans that the federal government was using every tool possible halt the steep market declines.

“We are a prosperous nation with immense resources and a wide range of tools at our disposal,” Bush said. “We're using these tools aggressively.”

More than 350 banks and financial institutions will have to pay 91.375 cents on the dollar for credit-default swaps related to bankrupt Lehman Bros. Holdings Inc. (OTC: LEHMQ), Bloomberg reported.

The auction could result in $270 billion in payments, according to Andrea Cicione, a strategist for BNP Paribas SA (OTC ADR: BNPQY).

While the figure is higher than anticipated, “I don't think it buries anybody,” said Brian Yelvington, a strategist at CreditSights Inc., a bond research firm in New York.

Because the value of Lehman bonds had been declining for some time prior to the investment bank’s collapse, most financial firms will have already taken necessary write-downs and set aside the collateral to honor obligations tied to Lehman debt.

Due in part to the lack of surprises concerning Lehman, the financial sector sparked a late-afternoon rally to end up 0.28% for the day. JPMorgan Chase & Co. (JPM) gained $4.96 a share, an increase of 13%, to close at $41.64. Bank of America Corp. (BAC) shares rose 6%, or $1.24 each, to close at $20.87.

There was no such good news for battered Morgan Stanley (MS), as investors continued to worry about surprises that might still be lurking in the former investment bank’s books. Shares plunged more than 22%, with a decline of $2.77, to close at $9.68 for the day Friday. The firm’s market capitalization is down to just $10.74 billion.

Goldman Sachs Group Inc. (GS) fared a bit better, with a 12% decline of $12.55 per share. It’s shares closed Friday at $88.80.

Even so, Goldman’s shares are down 65% from their 52-week high of $250.70.

Moody’s Investor Services (MCO) put both Morgan and Goldman on alert that their credit ratings were being reviewed on concerns that the investment bank model is no longer viable, Reuters reported.

“The fear is mainly due to the fact that this happened once before (with Lehman Brothers) and could happen again – a bank went down, and others could too,” Marino Marin, managing director and banker at Gruppo, Levey & Co., told Reuters.

“This overall environment isn't helping. The government has announced plans but hasn't actually done anything,” Marin said.

News and Related Story Links:

• MarketWatch:
  President Bush's statement on the economy

• MarketWatch:
  Emerging markets tumble amid global stock rout

• MarketWatch:
  Stocks slide sharply amid shattered confidence

• CNNMoney.com:
  Oil prices hit 1-year low

• Bloomberg News:
  Lehman Credit-Swap Auction Sets Payout of 91.38 Cents

• Reuters:
  Wall St. giants buried in global stock market panic