Archive for July 24th, 2009

NEW YORK (Reuters) — Guaranty Financial Group Inc , the second-largest publicly traded bank in Texas, said it will probably fail after loan losses and writedowns left it “critically” short of capital.The bank, whose investors include Carl Icahn and Robert Rowling, is in talks with at least one investor group for a possible recapitalization, said a source familiar with the situation. The source requested anonymity because the talks are not public.”The company believes that it is probable that it will not be able to continue as a going concern,” Guaranty (GFG) said in a regulatory filing.The Austin-based lender has about 16 billion of assets and more than 150 branches in Texas and California, according to its Web site.On that basis, if it were to fail, Guaranty would be the largest U.S. bank to collapse in 2009. Guaranty is about half the size of IndyMac Bancorp Inc, which failed last July.So far 64 banks have failed this year, including seven on Friday, according to the Federal Deposit Insurance Corp. Friday’s failures include six bank subsidiaries of Security Bank Corp of Macon, Ga.In a regulatory filing late Thursday, Guaranty said it has been unable to obtain new capital from shareholders, and believes it will be ineligible for help from U.S. regulators.Its largest investors include companies run by billionaire Carl Icahn and by Rowling, whose investment firm owns the Omni Hotels chain.Won’t comply: Guaranty said it does not expect to raise enough capital to comply with an April cease-and-desist order from the federal Office of Thrift Supervision (OTS).It said losses and writedowns have left it “critically undercapitalized,” with negative capital ratios.Guaranty also said it has agreed to an OTS demand for the appointment of the Federal Deposit Insurance Corp as a receiver or conservator. That appointment has not yet happened, but the OTS is exercising “a significant degree of control” over what had been functions of the board of directors, Guaranty said.The company has not filed official results since the third quarter of 2008. It has estimated it lost 444 million in all of 2008 and another 256 million in the first quarter of 2009.0:00
/3:49Tracking TARPChief Marketing Officer John Wessman said in a statement that Guaranty is still working with regulators, and believes it can avoid disruptions to customers.Guaranty’s largest investors include Rowling’s investment firm TRT Holdings Inc, which has a 19.9% stake according to a regulatory filing. A company run by Icahn has a 17% stake, Reuters data shows.Icahn and Rowling did not immediately return calls for comment.Guaranty began operations in 1988, according to its Web site. It was spun off in December 2007 by Temple-Inland Inc. (TIN) , a corrugated packaging and building products company.The largest publicly traded bank based in Texas is Dallas-based Comerica Inc. (CMA)Guaranty shares closed down 7 cents, or 32%, at 15 cents on the New York Stock Exchange on Friday. Their 52-week high is 6.75, set last Sept. 18.

Source:CNN

NEW YORK: New York state regulators shut down a small regional bank Friday, the Federal Deposit Insurance Corporation said, marking the 58th bank in the United States to fail in 2009.Waterford Village Bank, of Clarence, N.Y., was shut down, and the FDIC was named the receiver. Evans Bank, N.A., headquartered in Angola, N.Y., took over all of the deposits of the failed bank. The last time an FDIC-insured institution was closed in New York state was more than five years ago. As of March 31, Waterford Village Bank had total assets of 61.4 million and total deposits of 58 million. The single branch of the failed bank will reopen Monday as a branch of Evans Bank, N.A. and customers will automatically be transferred over. Friday’s closure will cost the FDIC fund 5.6 million, bringing the total cost for failed banks to 13.41 billion this year. That compares with 17.6 billion in all of 2008. The number of bank failures so far in 2009 has more than doubled last year’s total of 25.Smaller regional banks have been especially hard hit during the recession. Many collapsed as local residents and commercial real estate developers that took out loans have been unable to pay them back.

Source:CNN

NEW YORK: As a growing number of jobless Americans default on their mortgages, the Obama administration is considering new ways to help them avoid foreclosure.Among the options being floated are giving the unemployed money, in the form of grants or loans, to cover their mortgage payments or allowing them to remain in their homes as renters after foreclosure.The plans remain in the formative stage and are likely to encounter resistance in Congress. The expanding unemployment rolls have long vexed policy makers focused on stabilizing the housing market. Existing foreclosure prevention programs, including those such as the president’s loan modification plan, generally do not help the jobless because they don’t have enough income to sustain even reduced monthly payments.”Unemployment is making the job of doing loan modifications more difficult,” William Apgar, a Housing Department senior adviser, told a congressional committee last week. “We are exploring other options related to how to provide assistance to unemployed folks.”Treasury and Housing Department officials declined to comment further.Unemployment problemThe mortgage meltdown originated when subprime borrowers started defaulting in large numbers after their adjustable-rate mortgage payments spiked. Now, however, it is being fueled by rising unemployment, which is causing a growing number of borrowers with good credit to default. The unemployment rate is 9.5%.0:00
/1:36Unemployment’s domino effectMore than 1.5 million homes received at least one foreclosure filing in the first six months of 2009, up nearly 15% from the same period a year ago, according to RealtyTrac. Unemployment-related foreclosures account for much of this increased activity.Prevention efforts, including President Obama’s plan to reduce monthly payments for eligible borrowers to no more than 31% of their income, are failing to stem the tide. That’s why the administration needs to go beyond loan modifications, experts say. “Loan modifications will not reduce by any sizable amount the number of homes going into foreclosure,” said Morris Davis, an assistant professor at the Wisconsin School of Business, who estimated in May that 10% unemployment would cause 1.9 million borrowers to default.To combat this rise, Davis advocates temporarily giving the jobless a housing voucher with their unemployment check. The amount would depend on the housing costs for the area. The benefit would stop when unemployment returns to “more normal levels.”It would cost 62 billion if aid is given to all the jobless, including renters, and 13 billion if given only to homeowners. The initiative would save 885,000 homes from going into foreclosure, Davis said.Davis’ plan is similar to one proposed by several Federal Reserve economists earlier this year. That plan suggests assisting those who have a loss of more than 25% of their income and whose homes are worth less than their mortgages. These people could get help either in the form of grants or loans, and the government share of the mortgage payment would equal the percentage of income lost.The benefit would stop after two years or when the homeowner’s income stream recovers. The program could cost 50 billion if grants were given and significantly less if aid were in the form of loans.Another goal of both plans is to get help to troubled borrowers without going through loan servicers, who are now struggling to handle a flood of loan modification applications.”If you think the overriding goal is to stop foreclosures, this would be an effective way to do it,” said Paul Willen, a senior economist with the Federal Reserve Bank of Boston and co-author of the Fed economists’ proposal.Legislation being readiedTo get the ball rolling in Congress, Sen. Jack Reed, D-R.I., plans to introduce a bill that calls for providing mortgage assistance payments to the unemployed through state housing finance agencies.”This is a way to provide support for people who, though no fault of their own, have seen their job vanish and their house in jeopardy of foreclosure,” Reed said in an interview.The funds, which could be in the form of grants or loans, would go only to homeowners who have reasonable prospects for re-employment. Others could get money for relocation. The state agencies would determine who would qualify and what form the aid would take.Reed’s program is similar to one he introduced in 2007, which focused only on helping delinquent homeowners cover arrears. That plan would have cost 260 million. He has not yet determined the cost for the updated initiative, which would allow borrowers to use the money for future payments.A new foreclosure prevention program, however, could have a tough time getting through Congress. Some lawmakers see these efforts as a waste of money since they have low success rates.”Any measures taken to help people avoid foreclosure will only prolong the pain by using taxpayer money to prop up unsustainable mortgages,” said Kurt Bardella, press secretary for California Rep. Darrell Issa, the top Republican on the House Committee on Oversight and Government Reform. “The best thing we can do for the unemployed is adopt policies that will create jobs,” Bardella said.How has President Obama’s 787 billion stimulus program affected you or your community? Are you seeing a benefit from the Making Work Pay tax cuts or the additional 25 in unemployment benefits? Are you seeing construction jobs or other stimulus-funded work in your neighborhood? Do you still have a job because of stimulus funds? We want to hear your experiences. E-mail your story to realstories@cnnmoney.comand you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here.

NEW YORK: Americans may be saving more nowadays, but they certainly aren’t getting paid for it.Over the past year, interest rates offered by banks on a wide variety of accounts have steadily declined, only to sink to their lowest levels in years in recent weeks.A survey by Bankrate.com published this week revealed, for example, that rates on a six-month certificate of deposit stood at 0.77% – the lowest level since the firm started tracking data in January 1984.Attractive rates are even tough to come by for consumers willing to part with their money for a longer period of time. Depositors putting their money in a 5-year CD earn, on average, a 2.16% annual return on their money.With deposit rates that low and banks being able to charge much higher interest rates to people looking to borrow money, many banks are generating sizable returns from their lending business.During the first quarter alone, U.S. banks and thrifts earned 99 billion on loans, an increase of 4.7% compared to the same period a year ago, according to the Federal Deposit Insurance Corp. “That has been a pleasant reality for a lot of banks,” said Curtis Carpenter, managing director of Sheshunoff & Co. Investment Banking.Times have changedIt was not long ago that banks were trying to lure consumers with some eye-popping deals in what was a fierce battle for deposits.Back in early 2007, online banks like ING Direct, for example, were offering new customers a 3% yield for its Electric Orange checking account. HSBC Direct, the online banking arm of British bank HSBC, were paying customers a 6% yield on money kept in online savings accounts. Nowadays, consumers parking their cash in some of those same accounts are fetching just a fraction of what they did two years ago. HSBC’s online savings account, for example, currently offers an annual rate of just 1.55%.0:00
/1:21Dump your bankMuch of that decline was driven by the Federal Reserve’s decision to start cutting interest rates in the middle of 2007 in an attempt to keep the U.S. economy afloat. The Fed slashed rates to near zero percent last December and have left them there since then.But at the same time, banks have had little incentive to raise rates.Following the drastic plunge in the stock market last fall, consumers have piled into the security of U.S. Treasury bonds and cash in the hopes of merely preserving their savings. Even a paltry 0.5% return in a savings account was much more attractive to some consumers than watching their money fritter away in stocks.Last year’s decision by the Federal Deposit Insurance Corp. to raise its coverage limits to 250,000 per account also offered a greater sense of security for people willing to stash their money in a bank account.At the same time, banks have been relatively reluctant to make a lot of new loans as the recession drags on, making the need to attract more deposits less urgent, notes Kevin Fitzsimmons, a regional bank analyst at Sandler O’Neill & Partners.”None of these companies are really growing their balance sheets all that aggressively,” Fitzsimmons said. “They do not need deposits so badly.”Reacting to ratesBut it’s what the Federal Reserve does with monetary policy in the coming months that will ultimately determine where CD and savings account rates go from here, according to experts.Fed chairman Ben Bernanke indicated to lawmakers during his semi-annual address to Congress this week that an increase in interest rates was unlikely any time soon. As a result, interest rates on some short-term savings accounts could move even lower. Greg McBride, a senior financial analyst at Bankrate.com, said that the rates on accounts with shorter maturities are particularly likely to fall further. The rate for a one-year CD is hovering just above its record low rate of 1.04%, which was last reached in July of 2003. “We are going to get there,” McBride said. At the other end of the spectrum however, there are signs that bankers are already gearing up for an eventual rate hike. This week, the national average for 5-year CDs moved off their lows of 2.15%, according to Bankrate.com’s latest survey.What that ultimately means, said Sheshunoff’s Carpenter, is that banks will one day be at it again, trying to poach one another’s customers for their deposits.”As the economy heals and problems in the banking industry go away, competition is going to return,” he said.That day can’t come soon enough for savers.Talkback: Are you frustrated by low rates offered by banks for savings accounts? Share your comments below.

NEW YORK (Fortune) — Regional banks can no longer ignore the elephant in the room — their exposure to the commercial real estate bust.Though housing markets remain weak, analysts expect credit problems over the next year to center on commercial real estate — mortgages on office and apartment buildings and shopping malls, as well as construction, development and industrial loans. U.S. banks hold some 1.8 trillion worth of commercial loans, according to Federal Reserve data. Big regional banks, including PNC (PNC, Fortune 500) of Pittsburgh, KeyCorp (KEY, Fortune 500) of Cleveland and BB&T (BBT, Fortune 500) of Richmond, Va., have more than half their loan books in commercial loans. With financing markets locked up and the economy still mired in recession — unemployment is at a 26-year high while capacity utilization, a key measure of industrial production, recently hit a record low — observers fear a wave of loans will go bad in coming quarters. “The problems facing commercial real estate are severe and will likely take many years to resolve,” Deutsche Bank analyst Richard Parkus told the Joint Economic Committee of Congress this month. He said the biggest losses are likely to come from banks’ 550 billion of construction loans, such as loans to homebuilders.Banks are already bracing for impact. Higher credit costs led to second-quarter losses at banks ranging from Atlanta’s SunTrust (STI, Fortune 500) to Delaware’s Wilmington Trust (WT). Zions Bancorp (ZION), which operates primarily in Utah, California, Texas and Nevada, was among those forecasting deeper losses on problem commercial real estate loans. “It is still a pretty crummy economy out there and we are seeing deterioration in all of it,” Zions Bancorp chief financial officer Doyle Arnold said in a conference call with analysts and investors. Accordingly, banks have been adding to their reserves for future credit losses. But with more borrowers falling behind on their loans, it’s not clear that these so-called reserve builds will be enough.SunTrust, for instance, added 161 million in the latest quarter to its loan loss reserve, citing continuing housing market deterioration and “increasing economic stress in the commercial market.” But nonperforming assets rose even more, jumping to 4.48% of total loans from 2.09% a year earlier. As a result, the bank’s loan loss reserve tumbled to 55% of nonperforming assets from 70% a year earlier. Investors like to see a number nearer 100%. BB&T, for instance, has 101% coverage.Thin reserves mean SunTrust “may face material provisions ahead,” according to a report from analysts at research firm CreditSights. That could take a toll on profits over the next year. Similar trends are playing out at Comerica (CMA), whose loan loss reserve has fallen to 78% of nonperforming loans from 91% a year ago, and Zions, which fell to 65% from 79%. The increase in nonperforming assets comes as some real estate players complain that banks are sitting on bad loans rather than liquidating them — a trend they claim is suppressing new lending and compounding the problems in a falling market. 0:00
/3:05Commercial real estate’s decline”The rate at which these troubled loans are being resolved has been sluggish,” James Helsel, treasurer of the National Association of Realtors, told the Joint Economic Committee July 10. “Over 60 billion in assets have become distressed this year but only 4 billion worth of commercial loans have been resolved so far.” Though the banking industry succeeded in raising tens of billions of dollars in new equity in the second quarter, some expect the financing picture to remain cloudy, adding to price declines. Office rental rates have fallen 23% in New York and 11% in Washington from their 2008 highs, commercial property manager Jones Lang LaSalle said in its monthly market perspective newsletter this month. Meanwhile, office vacancy rates jumped to 14% in Manhattan and 11% in Washington in the first quarter, reflecting the economic slump. “Debt will remain constricted as banks continue to adopt the ‘delay and pray’ approach to their real estate holdings, extending loan terms in the hope that better economic conditions will obviate the need to foreclose,” Jones Lang LaSalle said in its report. For their part, bankers blame the problems on weak loan demand and deny they’re kicking the can down the line on troubled credits.”We are managing these problem loans effectively,” Comerica chief executive officer Ralph Babb said in the bank’s second quarter earnings statement. Still, the banks have underestimated their problems before. Comerica forecast in January that this year’s credit-related charge-offs, or writedowns of uncollectible loans, would be in line with last year’s level of 472 million. But the bank said last week that charge-offs were 405 million in the first half alone, with even “modest” improvement not expected until the fourth quarter.

Source:CNN

NEW YORK: Question 1. How are people able to get their student loans down to 2%? Two of my children have student loans and we’d be very interested to know this. Thank you very much. — Diane, North Dakota We got a LOT of e-mail from folks wondering the same thing. If your children have older variable rate Stafford or PLUS loans that were issued before July 1st 2006 and they haven’t been consolidated, you may be able to consolidate them now so you can take advantage of that 2% interest rate. That’s a historic low. But, if you have loans that were originated after that date, your interest rate will be the weighted average of all your loans combined (generally that will be 6 to 8.5%). For more information, call your lender.Question 2. How do you get a credit rating when you have no credit history? What things should I be considering before going ahead? — Joan The truth is you’ll need to get a credit card in order to start creating your credit history. To start, become an authorized user on someone else’s card. An “authorized user” is someone who uses someone else’s credit card without being responsible for the bill. A lot of people do this to help their kids or their spouses build good credit. Shop around for the best credit card terms at cardratings.com or creditcards.com. And to make sure that once you get that credit card that you always pay your bills in full and on time. Eventually you’ll build up a stellar credit history. Question 3. What is your advice on Reverse Mortgages for seniors over 83, who need more income to maintain? –Faye A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. You’re essentially taking out the equity of your home. And these products may be a good idea if you have a lot of equity in your home and you’re not going to move. But there can be a lot of fees associated with this kind of loan, so make sure you go to aarp.org for more information.

Source:CNN

NEW YORK (Fortune) — The legal setbacks just keep coming for News America Marketing, the 1 billion unit of Rupert Murdoch’s News Corp. that does supermarket in-store promotions and produces newspaper circulars. After settling for an undisclosed amount with competitor Floorgraphics in March, the company yesterday was ordered by a Michigan court to pay competitor Valassis Communications 300 million in compensatory damages.A jury found the company guilty of interference and unfair competition; it was the second case relating to unfair business practices that the company has lost, and may not bode well for its chances in a similar case filed by Insignia Systems (ISIG), another rival. Virtually all of News America’s remaining competitors have filed some form of legal challenge to the company’s business practices.0:00
/2:21All the news fit to e-printAlthough Valassis (VCI) had asked for 1.5 billion and had essentially gambled the company’s future on the outcome, spending millions on legal fees, CEO Alan Shultz claimed to be satisfied with the results. “I am very proud of the efforts of our employees, who have been competing on this uneven playing field for nearly a decade,” he said in a press release. News America CEO Chris Mixson offered the opposite take in a statement. “We are disappointed with today’s decision, which rewards a company that turned to litigation as its business strategy rather than compete.” He vowed to appeal.Although it may take years for such an appeal to wend its way through the judicial system, News America is officially on the hot spot. After settling with Floorgraphics, losing an appeal against Theme Promotions, and facing two more suits from Valassis as well as the Insignia case, the company’s methods of doing business have been severely put into question. The Valassis trial reportedly featured testimony from News America executives admitting that they charged higher prices to companies like Unilever (UL) and Kraft (KFT, Fortune 500) if they refused to bundle their coupon and in-store business only with News America.Moreover, the in-store promotions business has lately been evolving into a model in which the large consumer-product companies have more clout than the middlemen such as News America and Valassis. All of which suggests that it may be time for News Corp. (NWSA) CEO Murdoch to take a break from the woes of his media businesses and focus his efforts a bit more on a business unit whose tactics appear to be costing the company a lot more than it has gained — both in reputation and in cold, hard cash.

Source:CNN

BRUSSELS (Reuters) — Microsoft has offered to let users choose their own browser and provide more interoperability information to third parties in a bid to resolve two antitrust cases, EU regulators said on Friday.The European Commission charged the U.S. software company on Jan. 15 with seeking to thwart rivals by bundling the company’s Web browser with its Windows PC operating system, thus harming innovation and reducing consumer choice.And in January last year, the EU executive had launched a probe on a complaint by industry body ECIS alleging that Microsoft (MSFT, Fortune 500) had refused to disclose information that would allow third parties to design programs compatible with its products.The Commission welcomed both proposals by Microsoft.It said the browser offer was in line with proposals in its January 2009 charge sheet, the so-called statement of objections, and would be valid for Windows 7, due to be launched in October.”The proposal recognizes the principle that consumers should be given a free and effective choice of Web browser, and sets out a means — the ballot screen — by which Microsoft believes that can be achieved,” the Commission said in a statement.It said the company also planned to disclose more interoperability information related to Windows and Windows Server. The Commission said it would investigate both proposals before making a decision.Microsoft has been involved in a long-running dispute with the Commission and has been fined 1.68 billion euros to date for infringing EU antitrust rules.

Source:CNN

NEW YORK (Reuters) — Strong corporate results have done wonders for market confidence this week, pushing investors to ditch the safe-haven dollar for higher-yielding currencies, but the greenback may be due for a modest rebound in the week ahead.The second quarter has been kinder to U.S. companies than many had expected, with the likes of Goldman Sachs (GS, Fortune 500), Intel (INTC, Fortune 500), JPMorgan (JPM, Fortune 500) and Apple Inc. (AAPL, Fortune 500) all surpassing market estimates.That, coupled with strong business sentiment and factory data from the 16-country euro zone, helped boost foreign currencies at the expense of the dollar and sent the Dow industrials above 9,000 for the first time since January.But there were worrisome signs, too. Microsoft (MSFT, Fortune 500) and American Express (AXP, Fortune 500) results disappointed the market, while the UK economy shrank more than twice as fast as expected between April and June, knocking the wind out of sterling Friday.”Next week could be one for consolidation. We’ve had such big gains, and if equities fall back a bit, we could see some flows pour back into the dollar,” said Boris Schlossberg, director of FX research at GFT Forex in New York.The dollar has weakened over the last year in times of market optimism that have stoked buying of higher-yield currencies and assets, but it has rallied when doubt about global economic health grows.Brown Brothers Harriman strategist Meg Browne said several currencies and equity indexes have rallied toward key technical levels, suggesting a pullback may be coming.The euro failed to test 2009 highs above 1.43 even on Thursday when Wall Street soared, suggesting momentum may be fading a bit, she said.Morgan Stanley (MS, Fortune 500) currency strategists also expect the yen could firm against the dollar next week, helped by proposed margin limits on FX retail trading in Japan and Japanese profit repatriation.Correlation cracksGFT’s Schlossberg said markets have seen “the first hints of decoupling between equities and currencies” and said traders may start looking a bit more closely at economic fundamentals to drive their currency allocations.Strong euro zone data this week helped the euro, he said, while the pound fell after data showed that Britain’s economy contracted 0.8% in the second quarter and 5.6% in the 12 months to June, the steepest fall since such records began in 1955.Investors next week will focus on the U.S. economic calendar, with Friday’s U.S. second-quarter gross domestic product report topping the week’s offerings. Most economists expect to see contraction in the neighborhood of 1.5%, though many see a return to positive growth later in the year.Vassili Serebriakov, a strategist at Wells Fargo (WFC, Fortune 500), said a number that beats expectations would likely whet investor risk appetite for now, to the detriment of the dollar.”Eventually, the correlation between equities and the dollar will break and positive news for the U.S. economy will also help support the dollar instead of hurting it,” he said.But for now, he said, those links remain fairly durable, adding the euro may make another run at breaking 1.4337, its 2009 high, before dollar buyers reenter the market.Browne said she was still bullish on the Canadian dollar, which was approaching its 2009 high against the greenback, but said caution is in order.”There’s room for a pullback, but (equity and foreign currency) gains may still have legs,” she said. “So the way to trade is to be very cautious, to put in fairly tight stops in case there’s a big correction.”

Source:CNN

NEW YORK: I want to believe that this earnings-fueled stock rally of the past few weeks is for real. But when you look more closely at corporate results, you have to scratch your head and wonder — just like the old lady in the famous Wendy’s commercials from the 1980s — where’s the beef?In this case, “the beef” is sales growth. Companies are reporting decent profits, but many have done so only because they’ve taken a chainsaw to costs. According to figures from Thomson Baseline, the average revenue decline for companies in the S&P 500 during the past quarter was 7.5% from a year ago. Sure, you’ve got some companies that have managed to grow their top and bottom lines. Apple’s (AAPL, Fortune 500) sales and profit were both up sharply. Ditto for Goldman Sachs (GS, Fortune 500).But the bigger trend in second-quarter results was exemplified by companies such as IBM (IBM, Fortune 500), McDonald’s (MCD, Fortune 500) and Starbucks (SBUX, Fortune 500). Their profits increased, but their revenues were down.The rest of the year isn’t looking too pretty, either. Revenues for S&P 500 companies are expected to drop 9.5% from a year ago in the current quarter. For the full year, sales are expected to be down 5%.Now don’t get me wrong, every company should take a close look at their expenses and find areas that they can pare back. Businesses that had bloated cost structures before the recession should be able to easily juice their earnings by trimming fat. And any recovery in profits has to start somewhere. Talkback: Have companies gone too far with layoffs? Are there other areas where they should cut costs? Leave your comments at the bottom of this story. But at some point, investors may tire of the cost-cutting story — even though they currently appear content to cheer positive earnings surprises any way they can get them. “Stocks could continue to rally because of how far down they were earlier this year, but eventually you’re going to need an increase in demand and sales,” said Mark Oelschlager, manager of the Red Oak Technology fund. Such demand may be hard to come by though. That’s because one of the most notable sources of cost cutting this year for Corporate America are payrolls. People.The wave of layoffs has pushed the unemployment rate to 9.5%, a 26-year high. And it’s almost certain that the jobless rate will rise into the double digits before long. That’s going to make it tougher for companies to keep beating profit expectations.People can talk all they want about how unemployment is a lagging indicator, meaning that the economy will resume growing even while people are still losing their jobs. That may be true. But the recovery may very well be muted. As long as consumers, who’ve been busy saving more in the past few months, keep losing their jobs or remain worried about their job security, they are likely to save more and not spend. “It’s a positive that cost cutting has stabilized the situation for many companies. But if you have high unemployment, that could keep consumer spending depressed.” said Subodh Kumar, an independent market strategist with Subodh Kumar & Associates in TorontoThat may just exacerbate the problem that corporations are facing right now. Businesses won’t feel the need to hire more people, invest in new growth opportunities and produce more stuff. So the “recovery” may not feel like much of a recovery. And that’s something that investors need to think about.0:00
/3:02How strong is the bull?”It’s going to take time for demand to normal levels. We need the unemployment rate to stop rising. Eventually it will but it could be awhile before we see the job market snap back,” Oelschlager said.Plus, companies can only slash costs for so long. The goal of any business is to generate sales by providing consumers a product or service that they need or want. If companies keep cutting workers and holding off on investing in themselves, the quality of product or services they sell will eventually suffer.”There is a growing school of thought that after last September, big corporate CEOs and small business owners were caught like deer in the headlights by the dysfunctional credit markets. Perhaps they cut too much,” said Quincy Krosby, a market strategist with Prudential Financial. “When you are in a downturn, it’s difficult to believe you will ever get out of it. But in the past companies that continue to focus on research and development are better prepared for recoveries,” she added.The good news is that most companies have probably cut costs by such a vast degree already that they should be able to easily post very strong increases in profits once sales do rebound. “Businesses are doing what they need to do in order to manage their bottom line. So when revenue growth does pick up, it should flow straight to the bottom line,” Krosby said.But the problem is that it may take a lot longer for sales to pick up than investors might be expecting.”The revenue declines are unprecedented,” Kumar said. “You’re not going to see any revenue growth until 2010, and probably won’t see a return to normal sales growth until 2011.” Talkback: Have companies gone too far with layoffs? Are there other areas where they should cut costs instead?