What's Important in the Financial World (12/7/2011) Citigroup Job Cuts, China’s Economy Slows

A New Bailout Fund. Rumors suggest that leading eurozone nations, particularly France and Germany, may have begun the process to create a large bailout fund for the financially weak nations in the region. It remains to be seen if this is another false start or the advent of a structure that could end the panic over the region’s sovereign paper. The present bailout fund has 440 billion euros available. A new proposal would add a second fund as large as 500 billion euros. The first of these facilities is known as the European Financial Stability Facility (EFSF); the second is called the European Stability Mechanism (ESM). The new action could be thwarted by the bickering between nations that has been part of the bailout process thus far. Additionally, Moody’s has warned it may downgrade its rating of the EFSF, which would, in theory, raise its borrowing costs.

More Bank Layoffs. Citigroup (NYSE: C) says it will cut another 4,500 jobs and take a $400 million charge. The action is part of a long, painful series of decisions to prune workers from the least profitable parts of the bank. Citi is not alone in this. Bank of America (NYSE: BAC) announced 30,000 layoffs two months ago. Investment bank business leader Goldman Sachs (NYSE: GS) also has announced job reductions. All of these firms are bracing for Federal Reserve stress tests early next year. As the Fed looks for weaknesses in the companies, one of its yardsticks will be costs. Banks have begun efforts to avoid that as an issue.

JCPenney and Martha Stewart. The New York Times reports that JCPenney (NYSE: JCP) will invest $36.5 million in Martha Steward Living Omnimedia (NYSE: MSO). This is an example of one drowning body grabbing at another. Martha Stewart has been hurt by its inability to improve its publishing division revenue. The company also has TV and licensing properties. Among them, sales have fallen recently and Martha Stewart has produced losses. JCPenney recently pushed out its CEO Myron Ullmann. He tried to improve the retailer’s fortunes by creating license arrangements with Liz Claiborne (NYSE: LIZ) and make-up company Sephora. None of these remedies worked. JCPenney has been unable to effectively compete with big-box retailers like Target (NYSE: TGT) or department stores like Macy’s (NYSE: M). JCPenney recently brought in former Apple (NASDAQ: AAPL) retail head Ron Johnson. There is no reason to think that he can turnaround such a troubled company. A license partnership and investment in troubled Martha Stewart is a poor beginning.

Slowing Chinese Economy. China has admitted its economic engine has slowed. Vice Commerce Minister Chong Quan said the government witnessed a pause in economic growth between October and November. PMI figures release last week demonstrated trouble in the manufacturing sector. There is little the People’s Republic can do to improve its fortunes. Large trade partners, especially Japan, the U.S., the UK and the EU all have struggled with their own GDP problems and unemployment. Austerity moves by governments in these regions likely will curb expansion further. Consumer activity by China’s newly created middle class is likely to flag as well. Wages probably will not increase as factory orders drop. The Chinese are savers more than spenders. An economic slowdown on the mainland will reinforce that habit.

Douglas A. McIntyre