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How the current crisis affects the normal companies

Today (Oct 16) has seen the Dow Jones and the major indices again going down, showing a total lack of confidence of the investors in the current market situation. And of course Henry Paulson wants our feedback about the government’s insurance program for troubled assets, and its role in restoring “liquidity and stability to the financial system.”

Big words, little effect. Dow Jones went today below 9000, 936 points below the Monday level, a weekly swing unseen in the history of the modern stock exchanges. What brought it down was not only the lack of confidence in the markets, but also the corporate reports on their earnings. JPMorgan Chase and Wells Fargo reported third-quarter profit going straight down — 84 percent for JPMorgan and 23 percent for Wells — although chip-maker Intel Corp. beat analysts’ estimates with a profit increase of 12 percent, according to the AP.

Last week’s stock market trading reduced shareholder wealth by about $2.5 trillion, and took the Dow back to its lowest level since April 2003. This really hurts the companies, who find financing harder than ever. The CFO’s across the globe mention that the life should go on as usually, the projects as well. Pacific Gas and Electric’s CFO Chris Johns announced in a CFO magazine article a dividend a few days ago, exactly on these grounds. He actually mentions that companies should try to strive to get back to the basics – to present their development plans, to pursue them and to do their best in their own businesses. His biggest fear is of course the access to credit, which has become in the current financial blow both costlier and more difficult, with less banks willing to lend in the current situation.

His faith in that the market rationality will triumph (and that people will start investing again in the stock exchanges) is shared by other chief financial officers, from Genesis Lease’s ltd Alan Jenkins to First Capital’s Mark Hoggard.

But the things are not so simple as they may seem. A simple credit shortage might actually mean that the non-financial companies could tighten their belts for several months and endure the wrath of the markets, whilst their businesses could go on as usual. This is not actually the case. Moody’s Investor Services issued a 3rd quarter report showing that actually the biggest effects will come from the lethal combination of a high leverage (definition: leverage = the debt to equity ration which influences the cost of capital for a company) and a disappointing sales cash inflow. It actually spells out that consumers will trim their spending (on which all the non-financial companies count). This trimming will actually reduce the sales and maybe cause some companies to go below their breakeven points, since most of the today’s multinational behemoths have huge fixed costs which need to be covered. It is like putting with the head under water all the companies for much longer than usually – the ones that will survive will be few and weakened.

Interestingly enough, so far this year the speculative grade defaults in the EMEA region have been very rare for the companies. So have been the non-financial companies defaults for going out of business, except maybe for the much publicized US auto industry troubles, which is now asking for a financial package help of $25 billion (peanuts besides the $1 trillion pumped into the US banking system). But as mentioned above, the crisis has only just begin and investors are only now plugging out their hard-earned money out of the stock exchanges.

But the bad news is that the US recession might be only at the beginning. Industrial production in the U.S. fell in September by the most in almost 34 years as hurricanes and an aircraft strike combined with the credit crunch to weaken manufacturing. And the US market demand is worsening, making the productivity of the industrial behemoths measured in terms of capacity utilization to go down from 78,4% to 76,4%. Coupled with the lower earnings forecasted for the next quarter, this will not make any investor happy, unless they can wait. But the patience seems to have run out of the markets these days and everybody acts irrationally

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