Economic Data Indicate Strength

A rise in productivity showed companies continue to keep costs controlled and offered hope for jobs growth, while disparate U.S. economic reports noted continued growth in the service and manufacturing sectors.

Productivity increased while labor costs fell for the second consecutive quarter at the end of 2010, though many economists expect that a stronger economy means that businesses won't be able to keep squeezing more output from the same workers.

"There is a good chance that productivity will slow further this year, as firms are increasingly forced to hire more workers to expand output," said Paul Ashworth, chief U.S. economist at Capital Economics.

Nonfarm business productivity rose at a 2.6% annual rate in the October to December period after rising by a revised 2.4% in the third quarter, the Labor Department said Thursday. For the full year, productivity was up 3.6% in 2010 and 3.5% in 2009.

http://online.wsj.com/article/SB10001424052748703652104576121843066398666.html?mod=WSJ_economy_LeftTopHighlights

Credit Markets: The Default Deluge

This year will see a record volume of default in corporate debt, in line with expectations, as the U.S. continues to be the epicenter of economic and credit-market weakness

From Standard & Poor's RatingsDirect

http://www.businessweek.com/investor/content/sep2009/pi20090921_877700.htm

Following the end of the summer, the final stretch of 2009 offers a good opportunity to take stock of the events that roiled the economy this year and assess the tone of the financial markets for the rest of the year.
Buoyed by an encouraging stream of positive economic data, sentiment in the financial markets has been relatively upbeat. Much of the recovery has stemmed from the monetary and fiscal stimulus the government pumped into the financial system in copious amounts to revitalize critical pipelines of money and credit.
However, this year will see a record volume of default in corporate debt, in line with expectations. In the first eight months of 2009 a total of 216 corporate issuers defaulted (both nonfinancials and financials), affecting rated debt worth $523 billion. If this pace continues, the global default tally will reach 324 in 2009, the highest annual total in 28 years—since the inception of our data series on defaults. The volume of debt affected by these defaults also soared to a record high.
Other key takeaways from the year thus far:
• The U.S. is the epicenter of economic and credit-market weakness. At the beginning of the year our 12-month forward baseline prediction for the U.S. speculative-grade default rate was 13.9% by yearend, with an upper bound of 18.5% and a lower bound of 10.0%. The default rate hit 10.4% in the 12 months ended in August 2009, giving us reason to believe it is headed toward our predicted range by the end of the year. Corporate default incidence (by count) within the population or rated companies has been highest in the U.S., which blazed ahead with 158 defaults in 2009 (through Sept. 16). Of the remainder, the EU recorded 15, the other developed markets (mainly Canada) 12, and the emerging markets 31.
• Consumer discretionary sectors lead the global default count, though industrials and housing-related sectors also are reporting numerous casualties. Companies in leisure/media are in the lead globally (mainly because of the U.S.), with 53 defaults in 2009 (through Aug. 31). Next in line is the aerospace/auto/capital goods/metals category (35 defaults), followed by forest products and building materials (26 defaults), and consumer/service (24 defaults). When factoring in only speculative-grade ratings, homebuilders and forest products led with a global default rate of 18% for the trailing 12 months ended in August.
• Defaults continue to emerge from the lowest rungs of the ratings ladder. This is true not only in a single year but also on a cumulative basis. More than four-fifths (86%, or 187 entities) of this year's defaults year-to-date emerged from the speculative-grade domain, with an initial rating of BB+ or lower.
• Companies with an original rating of B face maximum default risk exposure. Among this year's defaulters, entities with an initial rating in the B rating category (which includes B+, B, and B-) accounted for the largest number of defaults, at 122. Next in line were entities with an initial rating in the BB rating category, with 54. Companies with a first rating of CCC+ or lower accounted for 11 of this year's total default count.
• An avalanche of low-rated rating originations during the credit boom indicates that considerable default risk still resides in the pipeline. For example, a total of 1,340 new speculative-grade ratings were originated globally from 2006 through the first half of 2009, of which only 100 have defaulted. This indicates a survival rate of 92.5%, which is expected to erode over time as more casualties occur and more issuers age. It is difficult to pinpoint the exact timing for such casualties because forbearance measures can delay the day of reckoning, particularly as financing conditions ease.
• The flow of distressed-debt exchanges has accelerated substantially and likely will reach an all-time high in 2009. Plummeting liquidity and deteriorating fundamentals set in motion a flurry of corporate distressed exchanges. In part, the increase reflected a pragmatic reaction to the shortage of financing options in the throes of the financial crisis. Of this year's 216 defaults, 81 were defined as distressed exchanges, by far the single leading default trigger across both developed and emerging markets. With $71.0 billion in rated debt, Ford Motor (F) was the largest issuer (by par volume) so far in 2009 to implement a distressed exchange. CIT Group (CIT), with $42.1 billion, came in second.
• By contrast, formal bankruptcy filings have been lower. The liquidity crunch created several bottlenecks for exit financing options and hastened the use of alternative pragmatic strategies, including prepackaged bankruptcies, distressed exchanges, and standstill agreements. Only 54 formal bankruptcies have been recorded globally this year, of which 48 were in the U.S., affecting rated debt worth $150.5 billion. With $53 billion in rated debt, General Motors was by far this year's biggest bankruptcy, followed by Charter Communications, with $22.5 billion.
•Troubled leveraged buyouts (LBOs) from prior years remain a fertile source of defaults this year. The actual volume of LBOs has dropped precipitously, totaling only $21.9 billion in the U.S. in the first half of 2009, compared with a peak of $433.7 billion in full-year 2007, according to Standard & Poor's Leveraged Commentary & Data. Moreover, in contrast with 2006, new deals in the U.S. are increasingly being funded with higher equity contributions and smaller shares of senior debt. Nevertheless, prior-year deals continue to emerge as casualties. In Europe, for example, 42 of 48 defaults recorded in the first half of 2009 were LBO-related.

U.S. Manufacturing Expected to Grow in January

Manufacturing in the U.S. probably grew in January for an 18th consecutive month as the expansion strengthened at the start of the year, economists said before a report.
The Institute for Supply Management’s factory index was little changed at 58 last month from an eight-month high of 58.5 in December. Readings greater than 50 signal growth. A separate report could show construction spending rose 0.1 percent in December.
The manufacturing index reached 60.4 in March 2010, the highest point in nearly six years, as industrial output rose and helped the economy rebound. The index bottomed out at 33.3 in December 2008, the lowest point since June 1980.
A reading of 58, while lower than the previous month, would still signal solid growth at U.S. factories. Greater consumer spending on cars, household appliances and furniture, among other goods, has given manufacturers a boost. Manufacturers actually added 136,000 jobs last year, the first annual net employment gain for the sector since 1997.
Consumer spending rose 4.4 percent in the October-December quarter, the fastest pace in four years, the Commerce Department said last week. The economy grew at a 3.2 percent annual rate in that same period. Despite manufacturing’s strength, economists don’t expect the sector will do much to reduce the nation’s 9.4 percent unemployment rate.
Also at 10 a.m., the Commerce Department will release data on construction spending. Projections in the Bloomberg survey ranged from a drop of 1.3 percent to a gain of 0.5 percent, following a 0.4 percent increase in November.

Leasing- A Smart Option for New and Used Equipment

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Mazuma Capital will work on crafting a lease to help minimize your federal income tax liability, maximize your accounting objectives and customize cash-flow solutions to your budget.  Our Associate Structuring Group has expertise in all these areas and will help guide you to the best structure for your situation.

• Tax oriented leases “true or guideline” leases
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From technology and medical equipment to renewable energies, leasing is a great option. There's no limit to the type of equipment available for leasing. Even a one-person operation can lease equipment. Unlike loans, leases do not require a down payment. You're required to pay for the use of the equipment during the lease term. You may also be responsible for routine maintenance and other costs as well. When the lease expires, the equipment goes back to the leasing company, you can opt to purchase however you choose to complete your obligation.
Lease payments are considered an expense that you deduct from your business income, just like any other expense.

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The Equipment Leasing and Financing Association, a trade group of leasing companies and financial services companies, has a special section that explains the basics of leasing at its website, elfaonline.org. You'll also find guidance on leasing options and benefits, loan/lease differences, leasing terminology.

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