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The Specter Of Recession


Economists had figured U.S. employment would rise by 113,000 jobs in August. Well, hello: On Sept. 7 the Labor Dept. reported the first monthly employment decline in four years—a dip of 4,000. Manufacturing and construction were particularly hard hit. The lousy number was the strongest indication yet that housing market termites are gnawing at the foundations of the economy.

That puts the Federal Reserve under more pressure to fix things by cutting the federal funds rate at its Sept. 18 meeting. Trouble is, a Fed rate cut could juice inflation. The markets took note: Gold, an inflation hedge, moved above $700 an ounce for the first time in 16 months, and the dollar continued its slide. The Fed's core problem is that it can't accelerate activity as much as it once did. The economy's speed limit is lower now because productivity growth has slumped from its boom levels of the late 1990s and early 2000s.

On Sept. 10 vandals blew up oil and gas pipelines in Mexico, hurting industry across the country. A left-wing guerrilla group that carried out similar attacks in July claimed responsibility. The explosions alarmed already edgy oil markets, and they weren't soothed by OPEC's surprise agreement to open the spigot by 500,000 barrels a day as of Nov. 1. After the U.S. reported low stockpiles on Sept. 12, oil futures closed in New York at a record $79.91.

See "What's Behind OPEC's Production Hike"

First, all eyes were on the HD Supply (HD) deal, which got done at a reduced price. Now, Wall Street is watching to see if Kohlberg Kravis Roberts will make concessions to achieve its $26 billion buyout of credit-card processor First Data (FDC). Talks will likely continue through September. But people familiar with the deal say KKR has agreed to a covenant in a $14 billion loan that was considered "covenant-lite" because of its easy repayment terms. BusinessWeek has learned that there is also talk of tightening the terms on $1 billion in "payment-in-kind" bonds, which allow borrowers to pay off the debt with securities instead of cash.

What's hotter than a steaming cup of McDonald's (MCD) coffee? The chain's sales. While rivals like Wendy's (WEN) stumble, McDonald's said on Sept. 11 that same-store sales popped a better-than-expected 8.1% in August. The world's No. 1 fast-food company, now in the fifth year of a global comeback, credited the gain in part to its boffo breakfast business and its fast-selling chicken snack wraps.

See "McDonald's Sales Jolt Higher"

It was quite a week for new Chrysler CEO Robert Nardelli, who continued to raid rivals for top executives.

Are beaten-down financial stocks bargains? Joseph Lewis, the British investor who recently bought about 7% of troubled Wall Street firm Bear Stearns (BSC) for an estimated $860 million, seems to think so. Lewis, based in the Bahamas, shuns the limelight but is reported to have made most of his $2.5 billion fortune trading currencies. In the mid-'90s he bought nearly 30% of auction house Christie's, which he eventually sold to French tycoon François Pinault.

Advanced Micro Devices (AMD) on Sept. 10 unveiled its new Barcelona energy-sipping server chip, which squeezes four processor cores onto one die. It's the key to a counterstrike against a surging Intel (INTC), which on the same day said its quarterly revenue will be higher than expected. Intel recently showed off its own quad-core chip.

See "AMD's Latest Intel Counterattack"

Harvard University may have the fattest endowment in the world, at $35 billion, but overseeing the stash seems to be no easy job. For the second time in two years, Harvard needs a new chief investor. Mohamed El-Erian, who came from bond giant Pacific Investment Management in February, 2006, said on Sept. 11 that he's quitting at yearend to rejoin his old firm. That should help beef up returns at Pimco, where top bond fund manager Bill Gross has struggled since El-Erian left.

It may be Merck's (MRK) biggest Vioxx win yet. On Sept. 6 the New Jersey Supreme Court ruled that lawsuits by insurance companies against the maker of the painkiller can't be bundled into a class action. The ruling could limit damages levied against Merck, which pulled Vioxx after it was linked to heart attacks.

Crippled by corruption scandals, Japanese Prime Minister Shinzo Abe said on Sept. 12 that he'll step down as soon as his Liberal Democratic Party names a successor. It probably didn't help that gross domestic product shrank at an annual rate of 1.2% in the quarter ended in June, Tokyo reported on Sept. 10. China, Asia's No. 2 economy, faces altogether different pressures. On Sept. 11, Beijing said inflation hit a 6.5% annual rate in August, a 10-year high.

See "Japan's Prime Minister Resigns"

It's hell being a Kremlinologist. President Vladimir Putin fired his Cabinet on Sept. 12 and baffled observers by naming relative unknown Victor Zubkov Prime Minister instead of one of the men expected to get the nod as Putin's heir apparent prior to elections in March.

See "Putin Positions Himself for Influence "

"Businesses have the power to do good." That was the credo of Body Shop founder Anita Roddick, who died of a brain hemorrhage on Sept. 10 at age 64. She certainly did her best to practice what she preached. The British cosmetics entrepreneur was one of the first to champion socially responsible business. She shunned animal testing of Body Shop products, bought ingredients from environment-friendly producers in the Amazon rainforest, and kept packaging and promotional material to a minimum. Among her more controversial offerings: hemp-based oils and soaps that caught the attention of regulators in France and Canada worried about anything related to marijuana. Roddick, who started Body Shop in 1976 and sold it to France's L'Or??al Group 30 years later for $1.14 billion, remained a crusader to the end. The last post on her Web site called for the release of two inmates in Louisiana's Angola prison.


Steve Ballmer, Power Forward
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