December 6, 2012
The "fiscal cliff" row between the Obama White House and Congressional Republicans continues to create uncertainty in the economy well beyond an election that was supposed to set a more clear path, one way or another. Increasingly, it looks like a deal won't happen before damage is done...if it isn't already, as some assert. Still, one business segment in the United States appears to be somewhat immune, at least in recent weeks.
Automotive sales surged at the best clip in more than four years, according to statistics unveiled December 4. Sales in the sector increased by 15% to a level of just over 1.1 million for November, as consumers ignored the potential for tax increases and a government standoff in deference to replacing aging cars and (non-industrial) trucks. Experts also note that the Hurricane Sandy aftermath helped substantially in providing a regional bump in the Northeast.
The news was positive, somewhat surprising and almost certainly helpful since it came after the Institute for Supply Management (ISM) reported domestic manufacturing levels at their lowest since summer 2009. The disappointing results, unlike that of auto statistics, were pinned almost exclusively on the "fiscal cliff" budget issues in Washington, D.C. The ISM index wasn't just a little off either—the troubling 49.5 reading was below the 50 mark that divides expansion from contraction. Even during the recession's early and less-than-fruitful recovery days in 2009 and 2010, manufacturing generally tracked above the 50 level.
"The markets are not taking the delays and arguments very well," said Chris Kuehl, PhD, NACM economist. "The assumption is that the U.S. economy will go off the cliff and will experience a 'brief plunge' in a few weeks before the powers that be find a way to compromise. There is nothing to suggest that either side is willing to compromise on any of their core principles. The markets are reacting to the prospects for the future, and that has imposed a cost already." Kuehl suggested it can be seen not only in the aforementioned industrial sector, but also metal and oil markets as well as the rate of employment, which had been rebounding in most months leading up to Election Day in early November.
- Brian Shappell, CBA, NACM staff writer
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On a 92-4 vote, the Senate today approved H.R. 6156, a bill already passed by the House that would establish permanent normal trade relations (PNTR) with Russia. The bill now heads to President Barack Obama's desk for signature into law.
Since August, when Russia joined the World Trade Organization, the country has been able to discriminate against U.S. exports because of the presence of the Jackson-Vanik amendment on U.S. books. The amendment is a Cold War relic, regularly suspended as a matter of course, that makes U.S. preferential tariff rates on Russian products conditional on that country allowing Jews and other minorities to emigrate freely.
According to WTO rules, that discrimination represents a breach of normalized trade relations between the U.S. and Russia, meaning Russia can increase tariffs on products entering the country until the U.S., its fellow-WTO member, repeals the amendment.
In addition to repealing Jackson-Vanik, H.R. 6156 also normalizes trade relations with Moldova and imposes sanctions on Russian human rights violators, particularly persons identified as responsible for the detention, abuse or death of Russian human rights lawyer Sergei Magnitsky, who died under mysterious circumstances in a Russian prison in 2009.
The White House has been reluctant to endorse the so-called Magnitsky Act provisions that were included in H.R. 6156 for fear of angering the Kremlin, which has vocally opposed the Act. Nonetheless, President Obama is expected to sign the bill as is.
- Jacob Barron, CICP, NACM staff writer
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Timing is everything, and it's hard to argue that there could be a worse time for a West Coast port strike than during a holiday shopping season dependent, for better or worse, on products exported from China and other Asian nations. But that's what happened over the last week before a December 4 deal was struck.
A deal was reached with the striking International Longshore and Warehouse Union Local 63 Office Clerical Unit enabling the busiest U.S. port, in the Los Angeles/Long Beach area of California, to get back to work. Some 75% of the port's capabilities were shut down for just over a week. Some estimates noted that upwards of $1 billion in goods per day were blocked during the dispute. While the deal is welcome news, the standoff is a case of the damage already being done in some ways.
"The shutdown is already having a significant negative economic impact on retailers trying to bring in merchandise for their final push for holiday sales. The work stoppage not only impacts retailers, but is also affecting their product vendors—many of which are small businesses—and other industries like manufacturers and agricultural exporters that rely on the ports," said National Retail Federation President Matthew Shay.
Shay had blasted both sides in the stalemate and was among retail group representatives pleading publicly for the Obama Administration to intervene. Given the timing, he called the situation a "national emergency" for U.S. businesses prior to the strike's end.
- Brian Shappell, CBA, NACM staff writer
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An American Bankruptcy Institute (ABI) Commission has found that the current Bankruptcy Code, enacted in 1978, is in need of modernization.
In a conference call this week, ABI examined the progress of their Commission to Study the Reform of Chapter 11 and discussed the ways in which the 1978 Code is outdated. Such issues were identified by practitioners and academics who participated in the five public hearings held by the Commission throughout 2012.
"The community recognizes that the Bankruptcy Code is strong and durable and works, but, as I've often said, it's somewhat like using a typewriter," said Commission Member Richard Levin of Cravath, Swaine & Moore LLP. "It could be improved, it could be more efficient and more balanced in many ways, while providing the kinds of protections that creditors and debtors alike need to preserve jobs and preserve value."
While the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) partially revised the Code, the 1978 Bankruptcy Reform Act established its current iteration, completely replacing the last version of the Code established by the Nelson Act in 1898.
The two most pressing developments in the bankruptcy process that the Commission believes the 1978 Code is ill-equipped to handle are "the prevalence of secured credit and the explosion of claims trading," according to Commission Co-Chair Robert Keach of Bernstein Shur, who was quick to note that while these have been identified as issues, the Commission isn't necessarily opposed to them. "There's been an assumption by some, an incorrect one, that because we identified those two externalities—claims trading and the growth of secured debt—that we were identifying them as problems to be solved," said Keach. "Those are events and enterprises that were not present in the 1978 Code."
Still, Levin noted how drastically these developments have altered the Chapter 11 process. "They've changed the entire dynamic of the process," he said. "There's no longer a situation where the creditors who lent the money or sold the goods are sitting at the table negotiating the restructuring, and that just changes how people approach these things."
Other ways in which the 1978 Code lacks the tools necessary to properly govern today's bankruptcies are more fundamental to the process. "One of the other major externalities has been the changes in communication and information technology," said Keach. "When the 1978 code was passed, one of the only ways for unsecured creditors to get information about the company or about what debt was trading for was through the vehicle of the creditors' committee. That's far less true today."
"Those are all the kinds of changes that have to some degree undercut the basic premises of the 1978 Code and led us to this effort to modernize," he added.
- Jacob Barron, CICP, NACM staff writer
The ABI Commission will host one of its 2013 hearings on Chapter 11 reform at NACM's 117th Credit Congress in Las Vegas. For more information on next year's Credit Congress program, or to register, click here.
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A couple of years ago, it would have been a nearly laughable prediction, but the four countries comprising the vaunted bloc of emerging economies known as the BRICs (Brazil, Russia, India and China) appear to be moving in the wrong direction as much as the right one, as the new global downturn shows increasing signs of taking hold. Brazil might be the most vexing of the bunch, seeming to jump from the dubious position as the most disappointing BRIC one week to the one with the best chance of a rebound the next. Late last week, the Brazilian Institute of Geography and Statistics (IBGE) unveiled third-quarter statistics that showed growth tracking at just about half of its forecast expectations. IBGE noted on its website that highlights included the agriculture and livestock farming sectors, but notably absent was talk of its natural resources activities, which were expected to provide a boon for the key Latin American economy. Overall, Gross Domestic Product growth in the third quarter was a disappointing 0.6%, seasonally adjusted.
The again disappointing performance can undoubtedly be traced back to the global recession hinging particularly on problems with the European Union's debt crisis. However, it has also reignited certain concerns raised shortly before the election of Brazilian President Dilma Rousseff. Rousseff, before her more mainstream political career, was known as a pro-labor leftist, leading market watchers to wonder publicly if she was the right person to guide a period of hot business and economic growth for a nation known to often shoot itself in the foot with poor, inflation-boosting policies.
Then, after the bleak analysis, Brazil got some better news in the form of statistics showing its services sector growing at the best rate in five months. The HSBC Purchasing Managers' Index for Brazil's service sector tracked at 52.5 in November, a sizable bump from the 50.4 registered the previous month. A separate HSBC study also noted that job creation and business optimism have been rising in recent months, lending firepower to those who believe the disappointing growth in Brazil throughout the year can't be left at the feet of Rousseff and her government.
- Brian Shappell, CBA, NACM staff writer
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The European Commission imposed a record-breaking €1.47 billion fine on firms for fixing prices on television and computer monitor cathode-ray tubes for a decade.
According to the Commission, between 1996 and 2006, companies including LG Electronics, Philips, Samsung SDI, Panasonic and Toshiba fixed prices, shared markets, allocated customers between themselves and restricted their output, creating two cartels, one focused on creating color picture tubes used for televisions and another for display tubes used in computer monitors. The infringements found by European Union antitrust regulators took place on a global basis, covering the entire European Economic Area (EEA).
The total €1.47 billion penalty, which amounts to USD $1.92 billion, will be spread out among the companies. Dutch-based Philips will pay the largest fine of €313.4 million, followed by LG with €295.6 million. One defendant, Taiwanese firm Chunghwa Picture Tubes, received no fines because they blew the whistle on the cartels.
The details of the case are fascinating in that the anti-competitive actions were deeply ingrained and extraordinarily well-organized. For almost 10 years, according to the Commission, "the cartelists carried out the most harmful anti-competitive practices including price fixing, market sharing, customer allocation, capacity and output coordination and exchanges of commercially sensitive information."
Top management level meetings of companies in the cartel were referred to as "greens meetings" because they were often followed by a game of golf. They typically began with a review of demand, production, sales and capacity in the main sales areas, then discussed prices, including for individual customers, which is as illegal in the EU as it is in the U.S., if not more so.
The Commission's investigation also proved that the companies were well aware that what they were doing was against the law, finding a warning in one document that read "Everybody is requested to keep it as secret as it would be serious damage if it is open to customers or European Commission." Other documents said "Please dispose of the following document after reading it."
- Jacob Barron, CICP, NACM staff writer
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