Entries Tagged 'Stocks' ↓

Last week the Dow Jones Industrial Average finally clawed its way back above the 10,000 point mark, a level that has not been seen since long before the current financial crisis. So with the benchmark index reaching new heights does this mean we’re finally out of the woods and can breathe easy once again? Or is this a false spike that will only lead to another downturn?

Leading economists and analysts are mixed in their outlook, but there is plenty of evidence to suggest continuing storm clouds up ahead. While the stock market may be celebrating, the larger economy still has a long way to go.

Here’s a few things to look out for:

• Unemployment is still worsening. When the national unemployment rate goes above 10% (which is already has in many states) will this further contract consumer spending? In the U.S. consumer spending still acount for 70% of GDP. In the U.K. that figure is only 65% of GDP, so perhaps we still have a ways to go down.
• The specter of inflation. The U.S. has $50 trillion (yes, trillion) in unfunded liabilities. Many analysts fear this will lead to significant inflation in the next three years.
• What about innovation? The credit crunch has most impacted small businesses and entrepreneurs, the seat of innovation in the U.S. The number of patents files has been declining, not a good sign for America’s future innovation.

So if the stock market rally isn’t indicative of the weakness in the broader economy, what’s causing it? Many argue that we’re simply seeing the effect of massive government spending. When that spending stops will the economy be able to pick up the slack?

New vehicle sales plunged in September, following two bust months of car buying thanks to the government’s cash-for-clunkers program. Now that the federal buyback program has ended, most automakers experienced a double-digit decline in sales as compared to a year ago.

General Motors announced its sales dropped 45 percent, and Chrysler reported a 42 percent decline from September a year ago. Ford fared a bit better with car sales declining only 5 percent from September 2008. However, Ford did register a 5 percent uptick in sales for the entire 3rd quarter, the company’s first quarterly increase in four years.

Overseas automakers were also hard hit in September. Sales dipped 20 percent at Honda, 7 percent at Nissan, and 13 percent at Toyota.

Korean carmaker Hyundai was the lone bright spot in the industry. Hyundai said its sales rose 27 percent in September. Due to its low priced cars, the automaker has been gaining sales momentum throughout the recession.

The federal cash-for-clunkers program generated almost 700,000 sales in July and August, bolstering carmakers. The program provided up to $4,500 in credits to consumers who traded in an older, inefficient vehicle and bought a new one with better gas mileage.

In the context of health care reform, health insurance companies have gotten a very bad name as money hungry profiteers. In an interesting post on the New York Times Economix blog today, Uwe E. Reinhardt, an economics professor at Princeton, looks at just how much money insurance companies make.

The short answer is: not as much as you might think. According to Fortune magazine’s ranking of the 50 most profitable industries in the United States, health insurers’ after-tax profits were only 2.2 percent of revenues in 2008. Of course, even though we’re talking about a fairly small profit margin, there’s still a huge amount of revenue involved, so the profits are high in absolute terms.

For example, Wellpoint, Inc., a large insurer selling mainly group-insurance policies to relatively large employers, had revenues last year of $61.572 billion. That, by any measure, is a lot of money and we’re talking about just one insurance company here. 93% of Wellpoint’s revenue came in the form of premium payments.

WellPoint’s after-tax profits in 2008 were 4.07 percent of total revenue. The year before the profit margin was 5.47 percent. So yes, insurance companies do make a lot of profit, but as a percentage of total revenues it’s not huge.

The recession hasn’t been bad to all business. MasterCard, the second largest international network of credit cards, recently reported a profit of $349 million for the second quarter.

Last year, during the same period, the company announced losses of 747 million dollars. MasterCard’s profit was generated by increasing fees on customer accounts and reducing internal costs.

In contrast to this year’s profit, MasterCard reported a loss of $5.7 billion for the first six months of last year.

This year, the company’s American group expenses decreased by 13%, reaching 722 million dollars. The company also reduced funds allocated for advertising and marketing by 36% and trimmed administrative and staff costs.

Higher commissions and increased use of credit cards by customers increased Mastercard’s revenue by 2.7%, reaching up to 1.3 billion dollars. Value of MasterCard transactions processed increased by 7.9% to 5.6 billion dollars.

As a result of the recession, many consumers are turning to prepaid credit cards.

The German Daimler Group recorded a net loss of 2.34 billion euro in the first half of this year, compared to a net profit of 2.72 billion euro in the same period last year, as sales collapsed because of a strong decline in demand in the car market.

Auto sales by the carmaking giant – owner of Mercedes-Benz – decreased by over 23% in the first half of the year to 38.29 billion euro from 50 billion euro in January-June period of 2008.

Daimler sales dropped by about 270,000 vehicles to 732,800 cars in the first half of this year compared to over one million units sold in the corresponding period last year.

Daimler eliminated over 17,000 employees and had 257,000 on staff as of June 30th. At last midyear, Daimler had 275,000 employees.

Mercedes-Benz, which generates over half of the business group’s revenues, registered a decrease of 22.7% in sales in the first half to 19.63 billion euro from 25.41 billion in the same period of past year.