Just like you never want to hear a doctor say "oops" in the operating room, you never want to see a going-concern statement in a financial report about a company you own. Accountants throw these in when they've been over the books, talked to customers, and checked the horoscopes and have concluded there is "substantial doubt" about a company's ability to remain in business. In short, don't blame the accountants if the company files for bankruptcy protection.

You¿d reckon that a going-concern statement would be enough to send investors running to the exits, but it's not. True, many large institutions automatically bail when an existing company gets slapped with one of these, but many individuals (often wrongly) take a chance they know more than the bean counters.

During the tech boom of the late 1990s, many companies actually went public even though they had been hit with going-concern statements. Many of those companies subsequently disappeared. Enough said.

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Friday, September 05, 2008

Unemployment Rate Surges to 6.1%

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Adam Samson

FOXBusiness

The unemployment rate jumped to a five-year high of 6.1% in August, far exceeding economists’ expectations that it would inch higher to 5.8%.

The Labor Department reported Friday that employers shed 84,000 non-farm jobs, exceeding the consensus estimate that the economy would lose 75,000 jobs. Job losses were widespread, as the manufacturing, services and construction sectors were slammed. Particularly damaged was the auto industry, which lost 39,000 jobs in manufacturing and 14,000 jobs in retailing.

The health care, government and education sectors all gained jobs -- however, not enough to offset the decline.

Average hourly earnings edged seven cents upward to $18.14. The modest increase of only 0.4% compared with July, and 3.6% compared to August last year, suggests workers are having difficulty pushing for higher salaries. Indeed, the FOX Business Shopping Cart, a measure of food price inflation, has jumped by nearly 8% in the past year. This trend of skyrocketing prices and stagnating wages shows that the workers, the cornerstone of the economy, are in a grim situation.

“The report confirms that the improvement in [economic growth] in the second quarter was just a head-fake,” said Nigel Gault, chief U.S. economist of Global Insight.

Economists often refer to a “multiplier effect,” wherein problems in separate parts of the economy feed on each other and make the overall picture worse than they would have done on their own. As workers are pinched, they might begin spending less, choking the economy’s ability to expand. A look at economic statistics show that the multiplier effect might have already begun to take its toll.

The unemployment rate has increased by 1.4 percentage points since August 2007; since World War II, every time the unemployment rate has jumped by a full percentage point or more in the course of a year, the economy has fallen into a recession.

What’s bad for workers might actually be a relief for the Federal Reserve. Since price inflation has not yet seeped into wages, policymakers might be able to hold interest rates steady at 2% for a longer period to promote economic growth.

“For the Fed, the report confirms that the notion of a rate hike to combat inflation is fanciful--the question now is rather whether the Fed might need to cut again,” Gault said.