Bloody Monday: Over 71,400 jobs lost in massive layoffs by seven companies - 27-Jan-2009 - Generational Dynamics

On Monday morning, I listened to the Caterpillar, Inc., conference call with investors and analysts. It was extremely depressing. Here are some excerpts from the transcript:

"With the drop in commodities and deterioration in the world economy in general, we started taking significant actions in the fourth quarter. In fact, we started by taking a step we've never done before, particularly on this scale. We asked dealers around the world to look at what they had on order and readjust based on a gloomier economic picture. They did and they made substantial order cancellations. ...

As you might expect, to deliver the profit number, we need to take action. The $40 billion of sales and revenues reflects the sales volume decline for new machines and engines of about 30%. We need to sharply lower production schedules and our manufacturing cost structure to respond to the declining demand. In addition, we are reducing SG&A and R&D costs by about 15%.

To move the manufacturing cost structure down with sharply lower volume and to make major cuts in SG&A and R&D, we are taking action. We expect nearly 20,000 people, who are with us as we started the fourth quarter, to be out of the business, most by the end of the first quarter.

That includes actions we have already initiated; like the elimination of almost 8,000 temporary contracts and agency workers, actions we’ve already put in place around the world, voluntary separations of 2,500 support and management employees and voluntary and involuntary separations and layoffs of about 4,000 production employees, and we expect further layoffs of support and management employees of about 5,000.

In addition to these actions, we have many facilities working shortened work weeks and thousands more people will be affected by temporary layoffs and full and partial plants shutdowns around the world. We have suspended salary increases for the vast majority of salaried and management employees. And with profit at $2.50 a share excluding the redundancy cost, our short-term incentive plan would not trigger repayment next year. That would generate a considerable cost reduction from 2008.

Executives and Senior Managers will see significant reductions in total compensation. We are cutting discretionary expenses, we are delaying R&D programs and we are cutting CapEx almost 40%. ...

Our production volume in the first quarter will be very depressed. That coupled with most of the people-related cost reductions, not being fully effective until the second quarter and with most of our full year expectation for redundancy costs coming in the first quarter that means that first quarter profit will be under severe pressure and in fact we may have a loss in the first quarter."

It was just one of many depressing events in a very bloody Monday, which saw one large company after another announce massive layoffs.

There were over 71,000 layoffs announced on Monday alone. Last week, 40,000 job cuts were announced. More than 200,000 job cuts have been announced so far this year, according to company reports. Nearly 2.6 million jobs were lost over 2008, the highest yearly job-loss total since 1945.

That's just the start of the gloomy news. Moody's and S&P are predicting record corporate defaults in 2009, including dozens of retail store chains.

This is no surprise whatsoever in view of the continuing collapse in corporate earnings from 2008. These earnings are used by investors in the computation of price/earnings ratios (also called "valuations"), and this is the major factor analyzed by most automated stock buy/sell programs.

As regular readers know, for the last few quarters I've been posting the table of S&P 500 average corporate earnings estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters. These tables have shown sharp falls in corporate earnings estimates from week to week in each of the past five quarters.

Estimates appear to be falling far more rapidly than in previous quarters. Right now, it looks like the final value is going to end up somewhere around -40%.

And don't forget something important: These percentage changes for the fourth quarter of 2008 are based on the fourth quarter of 2007, and that quarter ended 21% down from 2006. Thus, we might end up with corporate earnings down 65-70% from two years ago.

One person in the Generational Dynamics forum criticized this statement, saying that investors aren't interested in earnings, because earnings look backwards rather than forwards.

It's true that individual investors -- and I mean real human people -- make buy/sell decisions based on all kinds of "forward-looking" measures -- whether you like the company's products and think they'll sell, whether you like the company's management, and think they'll do well next year.

But billions and billions of stock shares are traded every day, probably in tens of millions of individual transactions. It seems clear from that volume of trades that the overwhelming preponderance of trades are not being made by individual investors evaluating the companies' products and management. They have to be executed by computerized buy/sell algorithms. There just aren't enough humans around for that volume of trades.

And those kinds of touchy-feely evaluation measures are not available to computer programs. The only consistently and reliably available statistic on which to base buy/sell decisions is reported earnings.

And reported earnings IS a forward-looking measure -- in the sense that the best indicator of next year's earnings is last year's earnings.

But some people will point out that even a computer program can use analysts' recommendations to make buy/sell decisions. To that I say "HAH! You've got to be kidding."

Take another look at the table estimating 4Q earnings, a few paragraphs back. Analysts started the fourth quarter predicting that earnings would grow almost 50% from the previous year. How time flies! Now we see that earnings are estimated to be falling 28% from the previous year. Any computerized buy/sell program that depends on analysts' recommendations is going to screw you. You'd be better off using the computer's random number generator to make buy/sell decisions.

One of these days, in the next week or two, these latest estimated earnings results are going to be factored into the computerized buy/sell algorithms, and that's got to mean another leg down in the stock market.

From the point of view of Generational Dynamics, the world is really just chugging along at a fairly even keel, as we await the generational panic and crash. These have occurred at regular intervals throughout history, the last one in 1929, and we're overdue for the next one. I've described many times what I expect to see happen; here's a summary: An elemental force of nature, where millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly try to sell everything in a mass panic. This will bring down computer systems for hours, perhaps even for a day or two, as people watch tv in glazed horror as their life savings disappear.

This might happen next week, next month, or next year, but it's coming with absolute certainty.

Generational Dynamics Web Log for 27-Jan-2009
Bloody Monday: Over 71,400 jobs lost in massive layoffs by seven companies

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Generational Dynamics Web Log for 27-Jan-2009 Bloody Monday: Over 71,400 jobs lost in massive layoffs by seven companies

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Generational Dynamics Web Log for 27-Jan-2009
Bloody Monday: Over 71,400 jobs lost in massive layoffs by seven companies