Debt -- How it is Manifesting at Corporate Level
by Jess Miller

The plan is rolling along just fine. I don't believe anything can stop a US financial calamity, although the timing is unsure as Greenspan is printing more Dollars than is physically possible and flooding them into the economy and financial markets. Sabre rattling at China over Taiwan (let's all look over there) whilst the markets teeter on the brink - shades of Crinton.

Unemployment is rising.

Not only is the stock market not delivering income, the economy is not producing jobs. Lucent is laying off 16,000 workers. Motorola 22,000, Nortel 20,000, Ericsson 15,000, Verizon 10,000, Cisco 8,000 and JDS Uniphase another 5,000. Even Old Economy companies are getting into the act - Daimler-Chrysler is enclosing pink slips with 26,000 of its workers' paychecks...Proctor & Gamble is laying off 9,000. Whirlpool 6,000. And J.C. Penny - 5,000. Jobless claims for last week totaled 408,000 - the highest level since '92. How will consumers spend when they don't have jobs?

Debt --personal and corporate-- is a ticking time bomb. Telecoms in particular have a mountain of debt that now has to be serviced out of declining (or negative) earnings. The FDIC reports that over the last two years, median expected default rates on telecom loans have climbed 170%. Telecoms raised $160 billion in the debt markets in the last two years. And banks extended over $300 billion in syndicated loans to the industry. If the telecoms start defaulting on that debt, look out. The banks could be left holding the bag.

The telecoms aren't the only ones trying to ignore the big pink debt elephant either. Fortune points out in its April 30 issue that "...a series of big defaults could shake investors' faith in financial stocks... We won't have to wait long to see how the scenario plays out. Some $28 billion in high-risk debt is set to come due this year, according to Moody's. And there's another $53 billion rumbling down the pike in 2002, and even more in 2003. Anyone feel a tremor?" With so much debt outstanding, it's hard to believe that even layoffs and cost- cutting can forestall the day of reckoning.

Finally, capital spending continues to decline. This is one of those numbers you hear about all the time. But its meaning is seldom explained or understood. In a nutshell, capital spending produces profits. Business investment in income-producing assets leads to higher profits and higher wages. Cost-cutting and layoffs work in the short term. But for the long term, the aggregate effect is that the economy gets poorer if all firms resort to cost-cutting and layoffs to restore profitability.

Greg Weldon, of Weldon's Money Monitir, reports to us that during the recession in 1991, capital expenditures by non-financial companies declined by 4.9%. Too much debt borrowed to create too few earnings led inevitably to a point where companies couldn't invest in capital anymore. The business cycle kicked in. And the economy retrenched. The same dynamic is taking place now, but on a MUCH larger level.

Sun's Michael Lehman says, "our results reflected the sharp decline in capital spending, principally in the United States, although we did see moderation of (capex) demand in Europe and Asia Pacific." But it's not just the telecoms and techs that have stopped investing to create profits and wages. 3M decides to lay off 3,000 workers and its CEO James McNerney says "We have identified opportunities to streamline our supply chain and achieve other structural improvements, especially important now in light of the current, difficult economic situation..."

Not encouraging words. In the current macro-economic climate, the market is on thin ice. And even though trillions of dollars in market cap have been wiped out, stocks didn't get much cheaper. Valuations now are still incredibly high.

The big picture? Debt, capital spending, and layoffs spell a gloomy picture for most investors.

Jess Miller is the author of:
We're All in this Together

by Jess Miller

A How-To Guide on overcoming fear, stress, anxiety and depression, by one who did.

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