World of Pain

The slow erosion continued this week:  the S&P slid another 2% making this the third down week in a row.  Even worse, the low point approached 800,  only 60 points away from the November bottom.  Supporting the price drop, volatility inched up for the week as well. 

The economic data was limited, but still downbeat:  building starts and permits touched multi-decade lows, weekly jobless claims spiked and continuous claims crept higher. 

The big news was corporate earnings.  Major names from the Dow and S&P disappointed: Microsoft, US Bancorp, GE, Capital One, and State Street reported poor Q4 results, and more importantly, pessimistic guidance.  Microsoft announced thousands of layoffs, something it didn’t have to do when the tech bubble blew up earlier in the decade.

Even the winners, like IBM, admited that things weren’t so rosy: although IBM’s earnings beat expectations, it benefited from a one-time lower tax rate and suffered from a 6.4% revenue drop.  Quietly, IBM has begun to layoff employees.

Around the world, ominous signs are building.  The official slowdown in China’s growth rate may be even worse than officials care to admit.  According to Nouriel Roubini, China is in recession.   South Korea is reeling, and Japan is staring at a recession more severe than any since its bubble burst in 1990.

Britain is officially contracting and the pound fell to a 24 year low against the US dollar.   The British government may nationalize several major banks after they reported massive losses bringing them close to insolvency.  Germany is contracting.   The original BRIC nations are being displaced, in the headlines, by the PIIG’s:  Poland, Iceland, Ireland, Greece and Spain.  Iceland is essentially bankrupt; Ireland’s sovereign obligations have ballooned, and both Greece and Spain were downgraded by Standard & Poor’s.  Not to be outdone, Italy’s national debt levels are soaring and France’s woes are growing:  unemployment is rising as are social tensions.

In many past downturns, when one developed nation suffered a major contraction, there were usually others, with healthier economies, to which the sick nation could turn to for support.  Not so today, when it seems as if the entire globe is circling the drain.

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