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The Economy That Stole Christmas

It was just as bad as experts had feared—and maybe even worse. Retail sales for the Nov. 1-Dec. 24 season sagged between 5.5% and 8% from 2007, according to MasterCard (MA) SpendingPulse, which tracks credit-card, cash, and check outlays. Wintry weather on the weekend before Christmas added insult to injury. E-commerce suffered least, down only 2.3%, boosted by healthy sales at Amazon's (AMZN), Apple's (AAPL), and Wal-Mart's (WMT) sites. Now, get set for the fallout: The International Council of Shopping Centers projects 73,000 stores will shut their doors in the next six months. On Dec. 28th, Parent Co. (KIDS), a baby products company, filed for Chapter 11.

Kuwait Spurns Dow

Dow Chemical (DOW) CEO Andrew Liveris has a dream: Steer clear of commodity chemicals. But his plan to move in that direction got whacked on Dec. 28 when Kuwait canceled a $17.4 billion joint venture just days before it was to take effect. That puts Dow's $18.8 billion acquisition of specialty chemicals maker Rohm & Haas at risk because Dow was counting on $9 billion in cash from the Kuwait deal to help finance the purchase. Dow is locked into the Rohm deal, so its best hope of avoiding an untenable debt load, analysts say, may be to negotiate a lower price. Dow shares fell nearly 19% on Dec. 29.

See: Dow Chemical's Kuwait Deal Fizzles

GMAC Gets a Tow

The local GM dealership may soon be able to finance car sales again. On Dec. 29, GMAC, the auto lending company owned by private equity firm Cerberus and General Motors (GM), was given a $5 billion infusion from the Treasury, which will receive preferred stock in return. GM itself got $1 billion from the Fed to pump into GMAC. The lender qualified for funds after being certified as a bank holding company. To maintain that status, GMAC has to convert 75% of $38 billion in debt into equity, a process it was trying to complete when Treasury released the money to head off a collapse.

Valley Blues

Silicon Valley ain't what it used to be. A little over a decade ago, BusinessWeek published a special report, "Silicon Valley: How it Really Works," that celebrated the region as "the world's high-tech epicenter." While it remains a global tech capital, some industry leaders warn that the Valley's vitality, and that of the entire tech industry, is at risk. That potentially has huge consequences for the future of U.S. productivity, job growth, and competitiveness. These problems have been brewing for years, but they've been amplified by the economic downturn.

The Madoff Mess

As the list of Bernard Madoff's celebrity victims keeps growing—actors Kevin Bacon and his wife, Kyra Sedgwick, are among the latest—the trustee overseeing the liquidation of Madoff's firm on Dec. 30 won permission from a judge to move ahead with a plan to sell off its assets. And there's a new twist to the alleged Ponzi scheme: Even investors who managed to redeem money years ago from hedge funds that invested with Madoff may not be free and clear. Securities experts say it's likely the trustee will seek to recapture much of those redemptions.

Japan in a Funk

The world's No. 2 economy looks more battered by the day. With Japan already in recession as global demand tanks, Tokyo said on Dec. 26 that industrial output fell 8.1% in November from the previous month, a record drop. Toyota in November made the deepest cuts in domestic car production in 30 years. Adding to the gloom, the jobless rate rose to 3.9%, from 3.7% in October, and inflation fell to 1%, prompting fears of deflation in 2009. Then there's the stock market: The Nikkei average tumbled 42% this year, its worst showing ever.

Apple's Big Partner

iPhone. Wal-Mart. Doesn't exactly sound like a natural fit, but the computer company and the world's No. 1 retailer are betting they'll make sweet ringtones together. Wal-Mart on Dec. 28 started selling the phone at 2,500 of its stores, expanding its bid to dominate consumer electronics by adding more cutting-edge products. For its part, Apple aims to grab share in the growing market for smartphones, where it faces stiff competition from Nokia (NOK) and Blackberry maker Research In Motion (RIMM). Despite rumors that Wal-Mart would sell iPhones for as little as $99, it's offering just a $2 discount: the 8G model for $197 and the 16G for $297.

U.S. Housing Slides?

When you find your home is worth way less than you thought, it colors your mood. That helps explain a pair of reports released on Dec. 30. The Standard & Poor's/Case-Shiller 20-City Composite Home Price Index fell 18% in October from a year earlier, putting it more than 23% below its mid-2006 peak and back to where it was in March 2004. And the Conference Board said its Consumer Confidence Index slid to 38 in November—the gloomiest Americans have been since the gauge was born in 1967.

...and Britain's Sinks, too

The U.S. has company in the real estate depths. In formerly frothy Britain, average home prices have fallen 8.7% this year, and sales volumes are off by 45%, reports market watcher Hometrack. Recession-stricken London has seen even bigger declines in its nosebleed prices, down more than 10%. Blame job losses, depressed consumers, and severely constrained lending. The good news: Predicting a further 10% price decline next year, Hometrack says home affordability will reach levels last seen in the early 1990s. Time to snap up a flat in Mayfair? (Bloomberg)

Mideast: Death and Oil

Fed up with rocket attacks, Israel on Dec. 27 unleashed its fiercest strike in years on Hamas militants in the Gaza Strip. At press time, several days of air strikes had left more than 360 Palestinians dead and Israeli tanks were massed on the border. Fearing supply disruptions in the Mideast, oil traders pushed prices north of $40 a barrel on Dec. 29, but they fell again to $39.03 the next day as bad news about the global economy and rising crude inventories weighed on the markets. Still, prices could get a boost in the New Year. OPEC members vowed in mid-December to cut 4.2 million barrels per day of output, and so far they seem to be meeting targets. Some analysts think the cartel could make even more aggressive cuts in January.

Liquidity Squeeze Ahead

Despite the Fed's banging on the spigots with a sledgehammer, credit for companies in the Americas won't get much looser in 2009. So says ratings firm Moody's (MCO), which looked at more than 1,500 nonfinancial outfits in the U.S., Canada, and Latin America that have ratings of B3 and above. The firm figures 10% will face liquidity squeezes, meaning cash on hand and revolving credit lines won't cover debt payments due. The likely result? More defaults. (Moody's Investors Service)

Selling Some of the Sox

It always seemed—well, unseemly: a New York paper owning part of the Boston Red Sox. Now that may end. The Wall Street Journal said on Dec. 24 that New York Times Co. (NYT) wants to sell its 17.5% stake in New England Sports Ventures, which owns the Sox, a cable channel, and fabled Fenway Park. Analysts say the Times' stake could fetch around $150 million. Previously, Times Co. rejected an offer to sell The Boston Globe for hundreds of millions of dollars, a price vastly greater than what that asset would bring today. Times Co. declined to comment.

The Hunt for IndyMac

Hedge fund operator John Paulson made a fortune on his early bet that the market for subprime and other exotic mortgages would collapse. Now he's looking to make another one by reviving one of the biggest underwriters of such loans. Paulson and two partners, buyout investors J. C. Flowers & Co. and Dune Capital Management, are negotiating to buy failed IndyMac Bank from the government. According to The Wall Street Journal, the expected $14 billion deal would require the FDIC to cover loan losses beyond a preset level.


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