The industry has enabled socio-economic development, enhanced economic growth and productivity, reduced poverty, and improved standards of living across the board. It’s even helped develop nuclear power in India.

And the company standing at the top of India’s IT mountain is not Infosys Technologies Ltd (INFY) or Tata Consultancy Services. And it’s certainly not Satyam Computer Services (ADR: SAY).

It’s Armonk, N.Y.-based International Business Machines Corp. (IBM).

“They’ve beaten their competition relatively handily,” Kaufman Bros.’s Karl Keirstead told Bloomberg, who pointed to IBM’s brand name and experience as draws for potential clients. “There’s a cachet in using IBM.”

IBM’s model is the anti-model. Whichever country the company is working in, it has a game plan exclusively catered to it. It encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing.

And financing is crucial these days. IBM’s long history in the world’s markets has given the company a recognition and credibility abroad, helping to mitigate competitive threats from unproven newcomers.

Its presence in India will yield dividends as India’s economy emerges from the global financial crisis.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

At the beginning of 2009, 71% of IBM’s nearly 400,000 employees are working overseas – a 65% increase from two years prior.

In fact, IBM incorporates the words “global” or “world” in nearly every sentence of the business strategy outlined in its annual earnings report of 2008.

“The Internet has enabled communication and collaboration across the world and brought with it a new computing model premised on continuous global connection. In that landscape, companies can distribute work and technology anywhere in the world,” the report said.

It continues: “At the same time, the current economic crisis increases the pressure on both businesses and governments around the world to adapt…. Given these opportunities and economic challenges, IBM is working with its clients to develop new business designs and technical architectures that allow their businesses the flexibility required to compete in this new landscape.”

IBM Boosts Profits with Business Overhaul

In addition to global diversification, IBM has also successfully employed a versatile and aggressive business model. Between 2000 and 2008, IBM acquired more than 100 companies and poured more than $50 billion into research and development.

In 2000, the distribution of IBM’s business model was: Hardware (24%), software (25%), financing (10%) and services (40%).

But by the end of last year, the model had evolved to: Hardware (9%), software (40%), financing (9%) and services (42%).

The result was a 130% increase in annual earnings per share (EPS) on more than 22% annual revenue growth in that span.

For 2008 – by far one of the worst years for companies around the world – IBM posted an 18.4% increase in net income and 23.9% increase in earnings per share.

And IBM blew away analysts’ estimates with a fourth-quarter net income of  $4.4 billion, or $3.38 a share – a 12% increase from 2007. Analysts had expected IBM to earn only $3.03 per share.

What’s more is that the first quarter of 2009 is shaping up to be much better.

IBM said it expects a $9.20 EPS in fiscal 2009, up from the $8.93 it posted in 2008. It’s also forecasting an EPS in the range of $10 and $11 in 2010.

But more than anything else right now, investors want to first see the company’s first-quarter results, due Monday.

IBM’s Eventful First Quarter

IBM’s biggest news came in March, when the company made a $6.5 billion, or about $10 per share, bid for Sun Mircosystems Inc. (JAVA). IBM subsequently lowered its offer to $9 per share and talks fell apart.

According to a recent report by CNBC, Sun has attempted to restart negotiations, but IBM is wary of the government scrutiny that may result. A combined IBM-Sun business would dominate the server market with a near 50% share – something that could set anti-trust alarm bells ringing.

However, if IBM did move ahead with the Sun acquisition, the company would not only build on its hardware business and take control in the server market, it would further expand its software portfolio, which is the company’s most profitable business.

Regardless of whether or not it reaches a deal with Sun IBM has plenty of business to build on.

Big Blue is teaming up with tech giants to build 28-nanometer (nm) chips, a little more than a generation ahead of 45nm technologies used by industry leaders Intel Corp. (INTC) and Advanced Micro Devices (AMD), CNET reported.

It also recently inked a seven-year, $372 million deal to manage IT infrastructure of Canada’s National Financial Group (NA). That came three days after IBM announced a similar deal with of one India’s largest banks, Kurmanchal Nagar Sahakari Bank, which is planning to double the number of its branches in the next two years.

Finally, last week, IBM won an eight-year, $873 million contract with the state of Georgia to provide mainframes, servers, printers, service desk, end-user computing and disaster recovery.

Elliott Gue, editor of Personal Finance newsletter, wrote that IBM’s IT services are a steady revenue stream, and are a product of its long-established relationships with the world’s biggest companies.

And now – with spending tightening around the world – is the time they especially turn to IBM.

“Many of IBM’s key software and service offerings are designed to cut costs for companies and improve the efficiency of their IT infrastructure,” Gue wrote. “And during downturns, companies are always looking for ways to cut costs.”

Analysts polled by Thomson Reuters forecast first-quarter earnings of $1.65 a share on revenue of $22.6 billion. IBM earned $1.65 a share on revenue of $24.5 billion a year earlier.

Source: Hot Stocks: IBM’s Diverse Business and Global Presence Should Boost First Quarter Earnings

• Goldman Sachs Group Inc. (GS) created a $5.5 billion fund to purchase private-equity assets on the secondary market, Bloomberg reported. The GS Vintage Fund V – Goldman’s fifth private-equity-targeting fund – will acquire portfolios ranging from $1 million to $1 billion.

• Citing “current market conditions,” Current Media Inc., owner of youth-focused network Current TV, has withdrawn its plans for a $100 million initial public offering. “It’s still early for a young company in this sector to be coming to market with a new issue at this point,” David Joyce, an analyst at Miller Tabak & Co., told Reuters.

• India’s Tech Mahindra Ltd. emerged as the highest bidder for scandal-plagued Satyam Computer Services Ltd. (ADR:SAY). Tech Manhindra, which is 31% owned by Britian’s BT Group plc (ADR:BT), will pay $550 million for up to a 51% stake in Satyam, Reuters reported, giving the troubled IT company the chance to restore its profitability and reputation.

• Five investors filed an involuntary bankruptcy petition against Bernard Madoff to ensure that all of his assets are used to pay victims of his $65 billion Ponzi scheme. The petition against the convicted money manager was filed by five victims of the largest Ponzi scheme in U.S. history seeking to push Madoff into Chapter 7 bankruptcy. They hold $64 million in claims against Madoff, who pleaded guilty last month, Bloomberg reported.

• Express Scripts Inc. (ESRX), gained about 25 million new members yesterday (Monday) when it agreed to buy WellPoint Inc.’s (WLP), NetRx pharmacy-benefit management unit for $4.7 billion, Bloomberg reported. St. Louis-based Express Scripts, the third- largest manager of U.S. drug benefits, will pay with cash and as much as $1.4 billion in stock, the company said in a regulatory filing. The acquisition may add “slightly” to earnings this year, Express Scripts said.

• Citigroup Inc. (C), may be willing to sell its investment banking and asset management operations in Japan, in addition to retail operations previously put up for sale, Reuters reported, citing sources familiar with the matter. The retail brokerage, Nikko Cordial Securities, was put up for sale in February, drawing interest from Japan’s top three banks.

• The International Energy Agency slashed its forecast for oil demand, knocking crude oil futures down $1.24 to below $51 a barrel on Monday.  The prediction offset the impact of data showing Chinese crude imports rose to their second highest ever. The IEA said on Friday world oil demand would fall by 2.4 million barrels per day (bpd) this year compared with 2008 as fuel consumption dropped to levels last seen in the early 1980s.

Source: Global Investment News Briefs Tuesday, April 14th, 2009

• A team of economists estimate that China’s January exports likely fell 14% from a year earlier, which would be the biggest monthly decline in a decade, Bloomberg reported. With demand from the United States and Europe waning, “the implications for China’s industrial sector are severe because exports account for close to 20 percent of industrial output,” Isaac Meng, a senior economist at BNP Paribas SA in Beijing, told Bloomberg.

• Sales for appliance maker Whirlpool Corp. (WHR) fell 76% for the quarter, and the company said earnings would continue falling in 2009. Its debt ratings have also been downgraded to a notch about “junk” status, Reuters reported.

• Coffee giant Starbucks Corp. (SBUX) will begin an all-day value meal, pairing its beverages with two new sandwiches starting March 3, MarketWatch reported. “Our customers need to know that we are listening to them by making Starbucks an affordable everyday option,” Michelle Gass, executive vice president of marketing, said in a release.

• Venezuelan President Hugo Chavez said his country’s economy hasn’t been touched by the global economic crisis, despite the country’s second-biggest bank said GDP will expand 0.4% in 2009, down from 4.9% last year. Chavez is campaigning to amend the constitution so that he can seek another presidential term in 2012, Bloomberg reported.

• Defaults on prime-jumbo hybrid adjustable-rate mortgages could double in coming months according to JP Morgan Chase & Co. (JPM) analysts. The share of prime-jumbo mortgages at least 60 days late climbed 0.71% to 5.29% in the month covered by January bond reports.  Losses on so-called hybrid adjustable-rate mortgages backing 2006 and 2007 prime-jumbo securities will reach 8 to 10%, the analysts told Bloomberg.

• Satyam Computer Services Ltd. (ADR: SAY) will decide on a long-term action plan by next week, including a possible sale of the company, its chairman said, as the fraud-marred outsourcer struggles for survival.  Satyam was hit by massive fraud in India’s biggest corporate scandal as it disclosed that profits had been overstated for years.  Its founder and former chairman Ramalinga Raju resigned last month, Reuters reported.

Source: Global Investment News Briefs Tuesday, February 10th, 2009

• Best Buy Co. (BBY) crowned chief operating officer Brian Dunn as the electronics retailer’s new chief executive. Dunn, 48, started his career at Best Buy as a store associate in 1985 and will succeed retiring Bradbury Anderson, MarketWatch reported.

• IBM Corp. (IBM) will beat analysts’ estimates for its 2008 earnings. The company said yesterday (Wednesday) that its income will rise to at least $9.20 a share in 2009, ahead of the $8.75 average estimated by Bloomberg. “They’re using the current climate as an opportunity to cut costs. This is a pre-emptive strategy for improving profitability,” Gartner Inc. analyst Carl Claunch told Bloomberg.

• As global demand for commodities continues to fall, BHP Billiton Ltd. (ADR: BHP) is slashing 6,000 jobs and could face a $1.7 billion charge for closing a nickel mine in Australia. “It’s a sign that we are in for a pretty sustained downturn,” Ken West, a partner at Perennial Investment Partners Ltd., told Bloomberg. “They are trying to realign their cost base.”

• After a 77-year run, General Motors Inc. (GM) officially lost the crown as world’s largest automaker to Toyota Motor Corp. (ADR:TM), Reuters reported. Global vehicle sales for GM dropped 11% in 2008 to 8.35 million. Toyota’s global sales slipped 4% and to 8.87 million units.

• Investors pulled a record $155 billion out of hedge funds last year, according to Chicago-based tracking firm Hedge Fund Research. Hedge funds around the world now manage an estimated $1.4 trillion, the same sum they managed in 2006 and significantly less than the $1.93 trillion they controlled in the middle of 2008, The Associated Press reported.

• The National Association of Home Builders/Wells Fargo housing market index dropped one point to a record-low of 8 this month after stagnating at a reading of 9 for the previous two months. The index has been below 50 since May 2006 and below 20 since April. A reading higher than 50 indicates positive sentiment about the market.

• Satyam Computer Services (ADR: SAY) is seeking emergency funding and will hire an investment bank today (Thursday) to help the company explore its options. Goldman Sachs Group Inc. (GS) and JP Morgan Chase & Co. (JPM) are reportedly on the company’s shortlist.

• Oil prices edged up yesterday (Wednesday) as the market rebounded from Tuesday’s decline. Light, sweet crude for March delivery rose $2.23, or 6.11% to settle at $38.74 a barrel on the New York Stock Exchange.

Source:  Global Investment News Briefs Thursday, January 22nd, 2009

“We are considering all options and will soon announce definite steps to help the company overcome the current crisis as it is the question of saving jobs and an international brand,” Commerce and Industry Minister Kamal Nath said Monday. “The Prime Minister is closely monitoring the developments on Satyam.”

Indian authorities last Friday detained former Satyam Chairman B. Ramalinga Raju on charges of forgery, breach of trust and criminal conspiracy after the founder of India’s fourth-largest software exporter confessed to falsifying about $1 billion in cash on Satyam’s books and exaggerating his company’s profit margins.

The subsequent plunge of Satyam stock wiped out more than $2.2 billion of investor wealth, and sparked at least three class-action lawsuits in the United States, Bloomberg News reported.

However, the scandal also undermined India’s reputation for corporate governance and jeopardized the reputation of much of the nation’s prominent outsourcing industry, particularly in Satyam’s home base of Hyderabad. The government has responded with vigor -dismissing the company’s entire board of directors, and replacing it with a new three-man board.

The new, government-appointed board includes Deepak Parekh, chairman of the Housing Development Finance Corp., Kiran Karnik, former president of the National Association of Software Services Companies, and C. Achuthan, formerly of the Securities Exchange Board of India.

Parekh said earlier this week that Satyam has urgent “working capital issues” that need “immediate attention,” but noted that company accounts must first be re-audited before any real progress can be made there.

“No one has faith in the numbers being produced so far,” Parekh said. “Unless the accounts are restated, the outlook for Satyam can’t be the same.”

The board has named Deloitte Touche Tohmatsu International and KPMG International as auditors to replace PricewaterhouseCoopers International Ltd. in its first step to restore confidence at the company hit by fraud.

The new board must now hire new executives to fill the posts vacated by Raju and former Satyam Chief Financial Officer Srinivas Vadlamani, who was also arrested.

But it must also keep the company afloat while the delicate transition takes place -even as investor confidence wanes.

Satyam’s new board has already asked clients to accelerate payments, but the global financial crisis has left many businesses squeezed for cash and credit lines remain tight. If its situation doesn’t rapidly improve, Satyam could be faced with a mass exodus of clients, which would force the company to fold.

That would be a devastating development, for Satyam’s 53,000 employees would be lost. Those losses would not be limited to India, either. As many as 30% of Satyam’s employees -or about 15,900 people – live and work outside India, The International Herald Tribune reported.

The company’s demise would also disrupt such key operations as billing and computer-system maintenance among Satyam’s customers, which include some of the largest companies in the world. Most important of all, however, a collapse would undermine India’s vast IT sector, a showcase industry for the country with export earnings of more than $40 billion.

“The government cannot allow Satyam to plunge, as it will lead to the loss of jobs, hit foreign investment and the record economic growth,” C.L. Bansal, who teaches corporate law at Management Development Institute in Gurgaon, near the capital New Delhi, told Bloomberg. “The efforts at saving Satyam are aimed at actually salvaging the image of corporate India.”

With the jobs of 50,000-plus Satyam employees, as well as the health of India’s outsourcing industry, hanging in the balance, the government may have to intervene with a monetary bailout.

“The government stands ready to help out,” said interim board member Parekh. “But it depends on how big the hole is.”

Nath, the commerce and industry minister, said that the government will consider “topping up” the stimulus packages already under way in India.

“There are sectors not doing well and we are addressing those sectors by ensuring liquidity … perhaps another relief package for them which puts them in a level playing field in the global market,” Nath told reporters.

Source: Indian Government Ponders Satyam Bailout in Wake of Raju Scandal

Question is: Will the oft-dithering Congress actually take some action to enact this proposal? You can bet that the hallowed halls of the Capitol are buzzing with debate and counter-debate at the moment, but trying to get blustering lawmakers to agree on something requires the patience of a saint.

Meanwhile, Federal Reserve Chairman Ben Bernanke is 3,000 miles away, where he made a speech at the London School of Economics today. I was struck by this tasty soundbyte:

“It is unacceptable that large firms, which government is now compelled to support in order to preserve financial stability were among the greatest risk-takers during the boom period… The existence of too-big-to-fail firms violates the presumption of a level playing field among financial institutions.”

Unacceptable, yes. But apparently not unacceptable enough to bail them out anyway – and then going on record to advocate more of the same. I wonder if his helicopter ever runs out of fuel.

Specifically, Bernanke stated that, “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.” And in Fed-speak, that also means leaving the door open for more corporate bailouts for firms that don’t deserve it – but will get it anyway. In return, Bernanke says they must accept the additional regulation that will follow.

* * * * * * * * * *

Cash Grab

On Monday, almost-President Obama asked for the remaining $350 billion of the initial $700 billion bailout package to be released into the economy. And while Bernanke says Obama’s rescue package proposal should provide a “significant boost” to the economy, it might not be enough.

The most pressing need appears to be an effort to remove the “large quantity of troubled, hard-to-value assets” from banks’ balance sheets. That would involve setting up what Bernanke calls “bad banks” to hold the assets in exchange for cash and equity in the bank. Another move could be for the Treasury to simply buy the assets (using public money, of course).

But until this situation plays out further and we see what kind of effect all this stimulus has, we simply don’t know whether it will work. In addition, there’s a real concern about how the economy and market reacts once the government begins to return to “normal” economic and monetary policy and some have questioned whether the Fed has an exit plan.

Bernanke is right about one thing, though: “The world is too interconnected for nations to go it alone in their economic, financial and regulatory policies… International co-operation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.”

* * * * * * * * * *

Tech Is Dead? Not At This Firm…

Speaking of international affairs, it’s rare to find a company whose quarterly profits just jumped by 33%… but that’s the case for Indian tech giant Infosys (Nasdaq: INFY).

Thanks to signing a range of new contracts, the firm raked in 16.4 billion rupees ($343.4 million) during the fourth quarter.

And despite Infosys CFO V. Balakrishnan calling it a “one-off event,” Infosys still stands to reap some reward from the fallout of the accounting fraud at its chief rival, Satyam Computer (NYSE: SAY), which boasts General Electric (NYSE: GE) and IBM (NYSE: IBM) among its clients.

Infosys is likely to continue to see growth in 2009, thanks to the Satyam situation, plus the recent multi-year contract it signed with Astra-Zeneca (NYSE: AZN), and the devaluation of the Rupee, which makes it more competitive.

Infosys is a current holding in the Xcelerated Profits Report (XPR) portfolio – one faring well for us, thanks to our strategy of selling covered calls against our shares, in addition to picking up a dividend on the stock.

To find out how you can join the XPR team and discover which companies you should add to your portfolio, check out this report.

* * * * * * * * * *

Profit Slump In U.K. As Economy Experiences “Frightening Deterioration”

In Britain, however, many firms aren’t faring as well as Infosys.

Accountants Ernst & Young said the number of publicly traded companies that issued profit warnings jumped by 17% in 2008 – a seven-year high.

And with the British Chambers of Commerce stating today that there’s a “frightening deterioration” in the U.K. economy (one report just out stated that the British GDP growth slumped by 1.5% during the fourth quarter – the worst performance in 28 years), it doesn’t bode well for an improvement in 2009.

In Japan, the situation is even worse…

* * * * * * * * * *

Japan: “Closed For Business”

Research firm Tokyo Shoko said today that corporate bankruptcies shot up by 27.7% in December, compared with a year earlier.

In all, 1,362 companies filed for bankruptcy, as the fallout from the financial crisis clobbered Japan’s economy. And 33 publicly traded firms also went out of business in 2008 – the most in postwar history – as the nation saw bankruptcies rise by 11% for the year – the most since 1997.

The news isn’t surprising, given the steep drop in Japanese exports like cars, and the fact that the country slid into its first recession in seven years during the third quarter.

Source: Stimulus, Bailouts, Bernanke… And The Great U.S. Cash Grab

We will borrow a term from a reader on the message board which seems apt. It is the credit depression. This amounts to a depression in the belief that tomorrow will be better than today. More on what this means economically in just a moment. But first, to the dictionary!

In Latin, a creditum is a loan or thing entrusted to another. The Latin for “to entrust” or “to believe” is “credere.” The word “creed” also has similar origins, as you can see.

So a credit depression is a period when belief or trust in a set of ideas falls to new lows. The basic creed itself (for example, the idea of fiat money) might even be, ahem, discredited.

We’d suggest that 2009 will be the year when a lot of previously and thoughtless held beliefs are discredited. Just ask Ramalinga Raju, the previous head of Satyam Computer Services (NYSE: SAY). Satyam is India’s fourth-largest software export services firm.

Raju is the former head of Satyam because he quit last week after telling investors the company’s profits had been falsely inflated for years. The stock price fell by nearly 80% after the lie was disclosed. He said about $1 billion of the company’s so-called cash-or 94% of the total on the books-was a complete fabrication (from the Latin Fabricare, to fashion or to build).

Now we are finding out how much of modern commerce and economic activity has been built on a lie. That is why etymologies are so useful. The names of things and what we actually call them tell us something about their nature (if they are aptly named). In these days of 24/7 news and digital media, we drift away from the origin of things and have little time to question where they came from.

Thank goodness we can take time out to reckon daily!

In any event, the credit depression is upon us. Raju, Madoff, Adolf Merckle…these are just the poster boys for the crisis. The collapse in real asset values and real wealth is going to cost a lot of people a lot more. But then you’ve heard that before from us, so we won’t dwell on it.

In Australia you won’t find a lot of obvious signs that the credit depression is upon us. After all, the National Australia Bank used the Rudd government’s guarantee of bank debt to raise $3.5 billion from U.S. investors yesterday. ANZ has managed to borrow $3.7 billion as well. In fact, according to Eric Johnston in today’s Age, Aussie banks have used the guarantee to secure over $37 billion funding.

But what does this really mean? “Secure funding” is just another way of saying “borrow money.” To the extent that the money is raised overseas, it’s both good and bad. It’s good if you believe it shows that foreign lenders trust the Aussie government guarantee and loan the banks money.

It’s bad, however, in that Australia banks are importing capital from foreign lenders. Capital is an increasingly scarce resource these days. And though the banks have been able to borrow, it’s been at higher rates than this time last year. How much of the foreign-sourced capital is going to make it back to Australian borrowers (both business and household?) Hmm.

And what about the retail economy? November retail sales figures were better than expected. But according to Steve Scott in today’s Financial Review, once you strip out food sales from the figures, it was actually the worst November on record for retail sales. Ouch.

“How bad do you think it will get,” asked a friend in an e-mail yesterday. Our friend has a Master’s Degree in Classics (Latin and Greek). We know that when he starts wondering what’s going on in the economy there are probably a lot of other people starting to sit up and question their basic economic beliefs too. Here is what we told him.

“First, our long national love affair with debt is over. When you first fall in love, you’re happy to ignore all the little blemishes, faults, and habits that later drive you insane. The dependence on revolving credit, home equity lines of credit, and zero percent financing didn’t seem like a bad thing as long as people had steady incomes and could pay the interest.

“But now, asset values are falling…but the principal on the debt remains. People will shake themselves vigorously and wake up to the credit depression we live in. They will learn to live within, or even below, their means. Wherever that level is, it’s a lot lower than today. The upside is that it’s probably more natural and relaxing and less stressful. Stress kills the brain. So people may be poorer and hungrier. But some of them may actually be happier. Not all, mind you.

“Second, as people dial back their spending and consumption habits, it sends ripples throughout the economy. For example, tomorrow’s jobs figure in the U.S. will likely be the worst in sixty years. Over 700,000 Americans will have lost their jobs in December. This is on top of 400,000 in November.

“A million people axed in two months. Job losses result in fewer incomes, and incomes are the source of business profits. As jobs and incomes fall, so do business profits, and thus business hiring. A feedback loop.

“Plus, in these kinds of times, people save more and spend less. In an economy based on consumption (not production) lower levels of spending are bad for stocks and jobs. The government will try to fix this by giving people more money to spend. But the problem isn’t with people. It’s with the model. An economy structurally oriented to consumption is not one that produces real wealth or long-term capital assets. It just produces people who have debts they cannot pay, albeit in a house with a nice TV and great digital programming.

“As household and business consumption (spending) fall, the government, under the banner of Keynes, will take to the field en masse. The armies of Fed money will be deployed, street by street, to patrol the economy in little platoons of stimulation. The ammunition for these armies will come from either Japanese or Chinese savers (via bond purchases) or from nowhere (the Fed creating more money).

“Either way, the result seems unambiguously bad. If borrowed, the stimulus money must be repaid, and presumably at increasingly higher rates of interest the more rapidly America’s fiscal position erodes. Either way, with interest expense already nearly 10% of the Federal budget, you can expect it to rise when the U.S. government has to pay interest on a trillion dollars of new borrowing.

“To meet these interest payments, the government is going to have to raise taxes or cut spending. Of course that’s hard to do when you’re deliberately spending more to begin with. If spending is going to be cut, it’d have to be from Defense, or Social Security and Medicare/Medicaid benefits (raising the retirement age, means testing benefits).

“But even with more borrowing and higher taxes, it’s likely the Fed is going to have to simply print new money to conduct its unconventional monetary policy. Money supply will grow. And what does that really mean? Inflation. Much higher inflation. Rising prices for everyday goods like food and fuel and clothes.

“Inflation is also a huge tax on savers and those who live on a fixed income. You know, the prudent people who saved for their own retirement. Inflation accelerates the depletion rate of their accumulated savings by steadily reducing purchasing power. $10,000 saved in 1970 ain’t what it used to be. This should be good for gold, however.

“As inflation punishes those living on a fixed income, it will also push them closer to needing some sort of government aid. This in turn raises the percentage of federal spending going to Social Security and Medicare and Medicaid. It’s a transfer of old age and pension provisions from the private sector to the public sector.

“But can America really afford it? Clearly not, which more than sucks for people who’ve lived their whole adult lives believing they’d be able to retire comfortably through a combination of a diversified portfolio and a supplementary check from the Social Security Administration.

“It’s looking more and more like the entire project of spending a quarter of your adult productive life idle and living off the income generated from your assets (houses, stocks, savings) is…well…dead. It simply ain’t gonna happen for most people. And by most, we’re talking 99%. People will work longer, harder, and leave leaner and meaner than they ever thought they’d have to.

“The rest of the world will not be ready to continue funding America’s desire to live beyond its means. Why would Chinese and Japanese savers continue to invest in U.S. bonds and notes (effectively keeping U.S. interest rates low AND loaning Uncle Sam the money he needs to keep the promises he’s made?)

“In a world where investors are focused only on annual rates of return on their capital, you could argue that global savers would pour money into the U.S. govt bond market now and until the cows come home. It’s the safest bet in the world.

“But that’s not the world we live in anymore. In the world in which we live—the one with a credit depression—capital (accumulated savings…or surplus income from your hard work) is a scarce and jealously guarded asset. You have to reckon people will be more worried about the return OF their capital than the return ON their capital.

“All of which means America’s days of borrowing at low rates of interest from the rest of the world in order to build an economy based on buying things…are over. So you should find a job with a real skill that people are willing to pay for. Get your money out of stocks (though they’ll bounce in the next few months probably). Look for a home you can really live in and want to own (and aren’t trying to flip). But generally, your greatest assets will probably be your real skills that can be traded for goods or services (and not financial instruments you hold in a portfolio). It’ll be hard for people to live off income generated from financial assets…mostly because those assets are going to keep falling in real terms for quite a while.

“So that’s how bad it could be. But human beings are hardy and resourceful. We’ll find a way to put food on the table. Speaking of which, it’s lunch time! Gotta go!”

Source: The Credit Depression

Obama previously estimated that his estimated $800 billion strategy for winching the American economy out of its year-long recession could save or create 3 million jobs, but the new study has found that the actual number would range between 3 million and 4 million.

The analysis was submitted by Christina Romer, head of Obama’s council of economic advisors, and Jared Bernstein, the economic advisor to Vice President-elect Joe Biden. The analysis directly follows an official government report showing that U.S. employers slashed more than half a million jobs in December, pushing the unemployment rate to 7.2% and bringing the number of jobs lost last year to 2.6 million — the worst showing since 1945.

“The jobs we create will be in businesses large and small across a wide range of industries,” President-elect Obama said on his weekly radio and Internet address. “And they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long term.”

With President-elect Obama’s inauguration set for Jan. 20 – a week from tomorrow (Tuesday), expect around-the-clock discussions about the stimulus package (and potential tax cuts), as the political bickering begins in earnest.

Because of the plan’s high cost and proposed tax cuts, Obama has faced opposition from Republican and Democratic lawmakers. The incoming president’s top aides visited Capitol Hill on Friday to attempt to allay lawmaker concerns. The plan would combine the tax cuts, aid to states and public-works projects.

Obama said his plan would create nearly 500,000 jobs by investing in clean energy, by committing to double the production of alternative energy in the next three years and by improving the energy efficiency of 2 million American homes. However, he also warned yet again that the economy is likely to get worse before it gets better and that any recovery will not happen overnight.

“These made-in-America jobs building solar panels and wind turbines, developing fuel-efficient cars and new energy technologies pay well, and they can’t be outsourced,” Obama said during his address.

In excerpts from an interview with ABC News to be broadcast on Sunday, President-elect Obama said Americans will have to scale back and make personal sacrifices.

“I want to be realistic here, not everything that we talked about during the campaign are we going to be able to do on the pace we had hoped,” he said in a taped interview with ABC’s “This Week with George Stephanopoulos.”

“Everybody’s going to have (to) give,” Obama said.

Obama also said the proposal:

• Showed the recovery plan would put nearly 400,000 people back to work repairing infrastructure like crumbling roads, bridges and schools and adding miles of broadband network cable.

• Would include bipartisan extensions of unemployment insurance and health care coverage, a $1,000 tax cut for 95% of working families, and assistance to help states avoid deep-and-painful budget cuts in essential services like police, fire, education and health care.

“We won’t just create jobs, we’ll also provide help for those who’ve lost theirs, and for states and families who’ve been hardest-hit by this recession,” Obama said.

Investors will be tested in the coming weeks as earnings season approaches and corporations share their “gloom and doom” of the past quarter – Intel Corp. (INTC) and Wal-Mart Stores Inc. (WMT) offered investors a sneak peak.

The monthly inflation gauges should depict additional energy price contraction, which actually has served as an unofficial stimulus package at the pumps (though no one ever talks about it).  Traders who thought oil had set a floor around $40 a barrel may have to reassess their views. Cuts by the Organization of Petroleum Exporting Countries (OPEC), Middle East turmoil, Russian/Ukrainian disputes … nothing seems capable of halting the slide in oil prices.

Instead, the eternal pessimists focus on deflation, fearful that consumers will hold off on all purchases (regardless of pricing) and the economic downturn will continue well into 2009.  On that note, the retail sales data should offer few positive surprises.  At least, that new “chief performance officer” represents job expansion. But as Money Morning’s investing gurus have demonstrated, it is inflation – not deflation – that will be the big worry.

Market Matters

Six days and counting. Just how will equities perform in 2009? According to the January Effect: As the first five days of January go, so goes the market for the year. Often investors sell stocks late in the year to lock in capital losses. When they reinvest during the first five days (stocks rise), they believe the markets will increase and look to take advantage of the appreciation. When stocks fall during that week, investors are less optimistic about the future of the markets. In 2008, both the Dow Jones Industrial Average and Standard & Poor’s 500 Indexes dropped by more than 5% during the initial five trading sessions, a highly negative (but accurate) precursor of the year to come.  However, in 2009, the predictor turned out to be less clear; the Dow dropped by 0.39%, while the S&P 500 rose by 0.72% (though both were lower after Day Six).  The market uncertainty continues into the New Year.

In corporate news, published reports state that Citigroup Inc. (C) and Morgan Stanley (MS) are looking to combine their brokerage units. Morgan Stanley could pay $2 billion to $3 billion or more for a controlling stake in Citigroup’s Smith Barney retail brokerage business.

Terms of the deal are still being worked out, sources familiar with the matter said, adding that Citi may put its toxic assets into a separate unit as a preliminary step toward shedding them.

Under the current plan, Citigroup and Morgan Stanley would set up a joint venture for their combined retail brokerage businesses. Morgan Stanley would own 51%, control the venture, and would expect to buy Citigroup’s remaining share over the next five years.

The cash would be a big boon for Citigroup, which is under tremendous pressure from the U.S. government to shore up its balance sheet after taking $45 billion of government capital in October and November, the sources told Reuters.
The bank is considering multiple options in addition to the Morgan Stanley deal.
“Everything is on the table,” the sources said.

Dismantling the rest of Citigroup would be difficult, since not many are in the market for big-ticket financial assets now. A few smaller businesses or groups may be sold off – Citi has internally discussed the possibility of selling its Banamex Mexican banking unit, for example. But splitting up Citigroup completely is unlikely.

Wal-Mart Stores, Inc. (WMT) joined the ranks of depressed retailers by missing December sales projections and then cut its outlook for the quarter.  Toyota Motor Corp. (ADR: TM), General Motors Corp. (GM) and Ford Motor Co. (F) reported sales declines of 30% (or more) last month, while Volkswagen AG (ADR: VLKAY) and Bayerische Motoren Werke AG announced plans for greater expansion in the U.S. market to take advantage of their struggling domestic competitors.

Alcoa Inc. (AA) added to the gloomy unemployment picture by reducing its work force by 15,000 jobs. Intel again warned that the economy is hindering its operations as consumers and businesses shy away from technology purchases.  Indian high-tech giant Satyam Computer (ADR: SAY) pulled a “Madoff” by informing investors that its chairman had been falsifying financial results and exaggerated his $1 billion cash balance.  Even Madoff himself was appalled (as he attempted to mail $173 million of checks to loyal investors and send $1 million in jewelry to friends and family).

Oil surged above $48 a barrel early in the week as war escalated in Gaza; however, a mid-week report depicted higher-than-expected inventories and prices plunged 12% in a day – and ultimately dropped below $40 for the first time in 2009.

Stocks gave back those gains from the first trading day as investors (over)analyzed the retail numbers and other data. On the fixed income front, bond investors appear more willing to accept risk as $750 million flowed into high-yield (junk) funds during the last two weeks of 2008.

Economically Speaking…

So what’s $1.2 trillion between friends? After entering office with a budget surplus, the fiscally conservative President Bush will leave his successor with a $1.186 trillion deficit (that is sure to rise with the afore-mentioned Obama stimulus package). For his part, Obama promises to “put government on the side of taxpayers and everyday Americans” as he created a new position – chief performance officer – to eliminate waste wherever it exists in the federal budget.

Good luck with that, Mr. President (elect).

While the economic calendar was quite hectic, economists and investors alike eagerly awaited (rather, reluctantly feared) the late-week unemployment and non-farm payroll releases. In December, the jobless rate surged to 7.2%, its highest level in 16 years, as another 524,000 jobs were eliminated from the economy.

For all of 2009, 2.6 million jobs were lost, the biggest contraction since 1945, though the labor force has tripled since that time. While new claims for unemployment benefits has shown some improvement over the past few weeks, continuing claims rose to a 26-year high, revealing that laid-off workers are having significant difficulties finding new jobs during the recession.

Factory orders fell for the fourth straight month as the weak (and getting weaker) auto sector continued to restrict any progress in manufacturing.

Consumers borrowing declined by a record amount in November, as individuals remained afraid to make any purchases or add to debt positions during these dire times.  Unfortunately, the surest way to work our way out of this recession is for those individuals and businesses (who are able) to pour money back into the economy and that is simply not happening. The minutes from the December U.S. Federal Reserve meeting were released and policymakers appear highly pessimistic about growth prospects for 2009 and implied that rates could remain just above 0% for the foreseeable future.

Meanwhile, the Bank of England cuts its rate to the lowest level in its 315-year history.

Weekly Economic Calendar

Source: $800 Billion Obama Stimulus Will be Topic of Debate Through Inauguration

The Reserve Bank of India cut its overnight lending rate from 9% to 8%, according to a government statement issued in Mumbai yesterday. The “surprise move” that came days before a regularly scheduled meeting of its policy board came after India’s central bank reduced the cash reserve ratio by 2.5 percentage points to 6.5% – retroactive to Oct. 11, Bloomberg News and MarketWatch.com both reported.

The so-called “repurchase rate” is the discount rate at which India’s central bank lends money to commercial banks to infuse liquidity into the market. India’s rupee weakened while bonds reversed losses after the central bank’s announcement. The Bombay Stock Exchange rose 2.5% for the day – closing at 10,223.09 – although it jumped as high as 5.6%, BBC News reported. On Friday, India’s key stock index fell to its lowest close since June 2006.

“By lowering rates, thereby liquefying the system and offering stimulus to deflect slowing growth, India may be ahead of the curve for the first time in making the correct monetary policy decisions to prevent a recession which it cannot afford,” said Rahemtulla, a frequent Money Morning contributor who serves as the editor of such financial publications as The Smart Profits Report and the Xcelerated Profits Report.

In late May 2007, the Bombay exchange became the third emerging stock market after China and Russia to surpass $1 trillion in market value – a surge that was helped at the time by the nation’s fastest economic growth in six decades, a flood of foreign investment and a strengthening rupee, Bloomberg reported at the time. On the day it achieved that milestone, the 30-stock Sensitive Index, or Sensex, closed at 14,508.21 – 1% below its then-record high.

“India has been one of the [world’s] largest recipients of foreign direct investment, which accounted for the boom in the stock market over the past five years,” Rahemtulla said.

Clear Fears

India today clearly fears that the ongoing turmoil in the worldwide credit markets remains a threat to drop much of the global economy into a planet-wide recession. China’s economic growth slumped to a five-year low last quarter and Vietnam reduced borrowing costs yesterday, as JPMorgan Chase & Co. (JPM) and UBS AG (UBS) said the world economy is sliding into its first recession since 2001.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai, told Bloomberg. “One way to look at it is that the global problem has begun to affect us.”

Fluctuations in India’s bond yields this month were the widest in more than five years as the central bank took steps to ease a liquidity crunch. India Reserve Bank Governor Duvvuri Subbarao will review his monetary policy on Friday. Ironically, just one day after the central bank cut rates for the first time in four years, an employee strike at the Reserve Bank of India that started yesterday shut down bond trading in Mumbai, meaning traders at primary dealers and banks were unable to bet on additional interest-rate reductions, according to a Bloomberg report.

About 25,000 employees of the central bank walked off their jobs to demand higher pensions. Subbarao ordered the surprise rate cut to shield India from the global financial crisis that was touched off by the collapse of the U.S. housing market.

The near-collapse of the banking systems in both the United States and Europe this month prompted the International Monetary Fund (IMF) to throttle its worldwide growth forecast for 2009 from an earlier estimate of 3.9% all the way back to 3.0% — a point the IMF itself has labeled as the dividing line between global expansion and a global recession.

After growing at an estimated rate of 9.3% in 2007, the IMF says the growth rate of the Indian economy may slow to 7.9% this year and all the way down to 6.9% next year.

Subbarao, India’s 22nd central bank governor – and who took office just last month – is scheduled to release his first quarterly monetary policy statement on Friday. He can likely afford to reverse four years of tighter credit as declining commodities prices ease inflationary pressures.

India’s key wholesale price inflation number slowed more than economists expected to 11.44% in the week through to Oct. 4 – a four-month low. Crude oil prices have been cut in half since their peak in July – a reality that’s actually forcing the Organization of the Petroleum Exporting Countries (OPEC) to hold an emergency meeting on Friday, Money Morning reported yesterday. U.S. oil prices, which hit a record of $147.27 a barrel in July, have since plunged by more than 50%, actually hitting a 16-month low of $68.57 last week. The Reuters/Jefferies CRB Index of 19 commodities dropped to its lowest in four years on Oct. 17.

“We expect a further reduction in wholesale price inflation in the next two months,” Prime Minister Manmohan Singh told lawmakers in parliament yesterday. “Nevertheless, we must be prepared for a temporary slowdown in the Indian economy. Increased public expenditure is an important part of the solution.”

Singh had been under mounting pressure to speak publicly about the issues facing India’s financial markets. And with good reason: India’s stock market has lost more than half its value this year, the rupee has fallen to new lows and cash flow problems have crippled banks – leading to jitters among investors, The BBC reported.

India’s commerce minister, Kamal Nath, said he was confident India could remain a strong force on the economic stage and told The BBC that the country’s growth rate was “not as yet” being threatened: Unlike its U.S. counterpart, none of India’s banks have gone bust due to the Asian country’s “stricter norms,” Nath told Britain’s well-known global broadcaster

Also key: Foreign-direct investment remains strong, and export growth soared 31% in September.

That export growth could pose a problem, said Rahemtulla, the newsletter editor.

“India’s economy, while insulated somewhat from the global crisis because of its minimal reliance on outside trade, may still suffer from the current malaise because of its growing export sector,” Rahemtulla said. “The rate cuts, which will likely be followed by more cuts, are being made to ensure India’s competitiveness by allowing rupee depreciation, which helps its strong outsourcing and tech sectors.”

That, in turn, will directly benefit such companies as Infosys Technologies Ltd. (ADR: INFY). Wipro Ltd. (ADR: WIT), Tata Motors Ltd. (ADR: TTM) and global IT-services provider Satyam Computer (ADR: SAY), Rahemtulla said.

Tata Motors recently gained global fame when it introduced a fully functional $2,500 car called the “Nano” for the India market.

Finance Minister Palaniappan Chidambaram asked India’s parliament for approval to spend an additional $49 billion (2.4 trillion rupees) on rural jobs, food and oil subsidies in the year ending March 31 to boost the economy, which has advanced at a record 8.8% annual clip since 2004, according to Bloomberg.

India’s leadership “must have been worried about global growth, big economies and [the fact that other key economies in] the region [are] slowing,” Sailesh Jha, senior regional economist at Barclays Capital (ADR: BCS) in Singapore, told Bloomberg yesterday, referring to gross domestic product (GDP) report for China.

Hit “The BRICs” for Superior Profits?

Although central banks in the United States and Europe have pared interest rates in an attempt to avoid a worldwide recession, only India and China among the so-called “BRIC” economies of Brazil, Russia, India and China have joined global policymakers in that battle. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

Back on Oct. 8, easing inflationary pressures in China enabled that nation’s central bank to pare interest rates for the second time in three weeks. It reduced the one-year lending rate from 7.2% to 6.93% on the same day that the U.S. Federal Reserve, European Central Bank (ECB) and three others lowered rates in an unprecedented coordinated worldwide action. China also reduced the proportion of deposits that lenders must set aside as reserves by 0.5 percentage points.

China’s economy, the biggest contributor to global growth, zoomed along at a 9% clip in the third quarter, that country’s statistics bureau announced yesterday.

In a report released last week, the Macquarie Research unit of Macquarie Group Ltd. said that Indian real-estate developers are facing a shortage of funds, which may slow demand for steel, cement and transportation products and services.

“The capital crunch has hit the real estate sector very hard,” Macquarie analysts Unmesh Sharma and Bharat Rathi said. “We believe the tightness will continue for a few more months, given the difficulty in raising capital through bank debt, equity markets and (more recently) private equity.”

The decline in demand is already showing in India. The nation’s output at factories, utilities and mines rose 1.3% in August from a year earlier, after a revised 7.4% gain in July, as rising borrowing costs have dampened demand from consumers.

Rajeev Malik, a regional economist with the Macquarie Group in Singapore, recently said that the “downside risks to India’s growth have increased, while the upside risks to inflation have receded. We expect inflation to continue improving, thereby facilitating a shift in the RBI’s monetary stance.”

Source: With its Surprise Interest-Rate Cut, India Puts Itself “Ahead of the Curve,” India Expert Rahemtulla Says