If the accounts I’ve been reading are true (see Growing Prospects for Bailout for Greece), Greece might be the beneficiary of an imminent bailout. As reported by Bloomberg:

Olli Rehn, who takes over as European Union economic affairs commissioner tomorrow, said support for Greece will be discussed in coming days. Michael Meister, a German legislator from Chancellor Angela Merkel’s Christian Democrats, said lawmakers in that country are considering financial assistance.

The EU (in particular France and Germany) ought to be very careful in how it approaches the bailout so as to prevent moral hazard. And in this case I am not referring to moral hazard in the sense that the bailout provides Greece an incentive to behave badly again in the future, but moral hazard in the sense that Portugal, Ireland (maybe Italy too), and Spain now have the incentive to continue to behave badly. After all, if France and Germany come to the rescue of Greece, it sends a signal to other fiscally troubled European nations that they are likely to receive similar treatment, …and especially for the more consequential economies of Spain and Italy (see Euro Perspective).

If the EU comes to the aid of Greece, what incentive does Spain, Portugal, Italy, or Ireland have to bring their fiscal house in order. In fact, what’s to prevent them from going on a bigger fiscal bender? For after all, although Greece represents only a small fraction of European GDP, allowing Spain and Italy to falter could be disastrous for the Union.

Interesting cover story this week from The Economist about the Chinese economy (see China’s Economy: Not Just Another Fake). In that article, The Economist questions whether asset prices in China are becoming unsustainable, and if China resembles Japan circa the 1980’s. To be a bit of a spoiler (if you have no interest in reading on), their take-away is NO.

The similarities between China today and Japan in the 1980’s may look ominous. But China’s boom is unlikely to give way to a prolonged slump.

CHINA rebounded more swiftly from the global downturn than any other big economy, thanks largely to its enormous monetary and fiscal stimulus. In the year to the fourth quarter of 2009, its real GDP is estimated to have grown by more than 10%. But many sceptics claim that its recovery is built on wobbly foundations. Indeed, they say, China now looks ominously like Japan in the late 1980s before its bubble burst and two lost decades of sluggish growth began.

On the face of it, the similarities between China today and bubble-era Japan are worrying. Extraordinarily high saving and an undervalued exchange rate have fuelled rapid export-led growth and the world’s biggest current-account surplus. Chronic overinvestment has, it is argued, resulted in vast excess capacity and falling returns on capital. A flood of bank lending threatens a future surge in bad loans, while markets for shares and property look dangerously frothy.

Just as in the late 1980s, when Japan’s economy was tipped to overtake America’s, China’s strong rebound has led many to proclaim that it will become number one sooner than expected. In contrast, a recent flurry of bearish reports warn that China’s economy could soon implode. James Chanos, a hedge-fund investor (and one of the first analysts to spot that Enron’s profits were pure fiction), says that China is “Dubai times 1,000, or worse”. Another hedge fund, Pivot Capital Management, argues that the chances of a hard landing, with a slump in capital spending and a banking crisis, are increasing.

Scary stuff. However, a close inspection of pessimists’ three main concerns—overvalued asset prices, overinvestment and excessive bank lending—suggests that China’s economy is more robust than they think.

Start with asset markets. Chinese share prices are nowhere near as giddy as Japan’s were in the late 1980s. In 1989 Tokyo’s stockmarket had a price-earnings ratio of almost 70; today’s figure for Shanghai A shares is 28, well below its long-run average of 37.

China’s property market is certainly hot. Prices of new apartments in Beijing and Shanghai leapt by 50-60% during 2009.

Average home prices nationally, however, cannot yet be called a bubble. On January 14th the National Development and Reform Commission reported that average prices in 70 cities had climbed by 8% in the year to December, the fastest pace for 18 months; other measures suggest a bigger rise. But this followed a fall in prices in 2008. By most measures average prices have fallen relative to incomes in the past decade (see chart 1).

The most cited evidence of a bubble—and hence of impending collapse—is the ratio of average home prices to average annual household incomes. This is almost ten in China; in most developed economies it is only four or five. However, Tao Wang, an economist at UBS, argues that this rich-world yardstick is misleading.

Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash…China’s property boom is being financed mainly by saving, not bank lending.

Although I agree that there are some important differences between China today and Japan in the 1980’s (see my recent interview in the Effective Executive), I remain skeptical about whether China’s recovery is legit and that it is, in fact, not experiencing another bubble. For the flip side of the argument I point interested readers to the work of Andy Xie (see China has become a Giant Ponzi Scheme or Trapped Inside a Property Bubble):

Many would argue that China isn’t experiencing a bubble. The high asset prices just reflect China’s high growth potential…

I want to make myself perfectly clear on China’s asset markets today. They are a big bubble. Its bursting will bring very bad consequences for the country.

The most basic approach in studying bubbles is to look at valuation. For property the most important measures are price to income ratio and rental yield. China’s average price per square meter nationwide is quite close to the average in the US. The US’s per capita income is seven times China’s urban per capita income. The nationwide average price is about three months of salary per square meter, probably the highest in the world. As far as I can tell, a lot of properties can’t be rented out at all.

The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn’t last.

from Trapped Inside a Property Bubble:

The biggest risk to China’s economy is the desire to maintain past economic growth rates by maximizing investments in property — an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital’s average productivity declines over time.

Bubbles exaggerate reality but are not formed out of thin air. Cheap money and strong growth are the usual ingredients for bubble-making. Both existed over the past five years. But now, China depends entirely on cheap money to support overvalued assets. Cheap money came from past exports and was warehoused in banks. Cash also came from hot money inflows due to the yuan’s peg to the dollar and weak Fed dollar policy.

Neither money source is sustainable.

So there you have it – two opposing views on China. Funny thing. These arguments sound vaguely familiar to me. They seem to parallel the ongoing debate as to whether the U.S. is experiencing a sustained recovery or whether its asset prices are similarly over-inflated. Nevertheless, when it comes to China, I think that asset prices are currently overheated and will likely experience a near-term correction. But there is no question in my mind that China is on a long-term growth path toward prosperity, …provided it can avoid political calamity.

I remember passing the National Debt Clock on frequent visits to New York City in the late 80’s and early 90’s. At that time, the National Debt Clock was located in Times Square. I also vividly remember when it was shut down — with rousing fanfare during the Clinton administration — because the U.S. started running a surplus and the national debt declined. Unfortunately, the National Debt Clock was reinstated once we began running fiscal deficits again in 2004. Although it is it now longer located in Times Square, you can now find it on the corner of 44th St. and 6th Ave.

But the Times Square National Debt Clock is so yesterday. Move over physical National Debt Clock, the digital National Debt Clock is available for all to behold (ht Matt). How fitting that the clock is now available on-line, and the timing with which the link arrived in my inbox could not have been more appropriate. Now that the financial crisis has largely abated, we can all watch, in real time, whether the banking crisis will morph into a sovereign debt crisis as Rogoff suggested (see Rogoff, Ferguson Say Financial Crisis Not Yet Over). To see the online National Debt Clock, click on the image below (or on the link underneath). And enjoy, …or not.

US National Debt Clock Online

In January of last year I predicted (see Notable Bankruptcies of 2009: Q1) that “major” corporate bankruptcies in 2009 would challenge the 383 mark set in 2001 (the high-water mark after the dotcom bubble). I even suggested that it was possible that we could exceed 400 “major” corporate bankruptcies in 2009.

It looked good for awhile, …but what a difference a year makes!!

Although corporate bankruptcies in 2009 were the greatest since 2002, we finished well shy of my predicted mark, and the pace of corporate bankruptcies, in fact, decreased as the year progressed. According to Bankruptcydata.com, “major” filings reached 249 in 2009, more than 100 bankruptcies shy of my prediction.

As I mentioned in a previous post (see Notable Bankruptcies of 2009: Q3), the stylized fact that the pace of corporate bankruptcies decreased through Q2, Q3, and Q4 begs the question of whether the underlying cause was a structurally improved economy or the massive Fed/Treasury liquidity programs keeping weaker firms on artificial life support. My sense is that it had more to do with the latter than the former, but we will find out for certain once the Fed/Treasury start to unwind their extraordinary liquidity programs.

With that in mind, it is my expectation that corporate bankruptcy filings will increase in 2010, for a couple of reasons. First, bankruptcies are a lagging economic indicator. As with employment, bankruptcies typically peak well after the economic trough. As an example, although the dotcom bubble burst in March of 2000, bankruptcies did not peak until 2001, and were elevated into 2002. Second, if fundamentally weak companies are being propped up by the provision of credit/liquidity to an economy that cannot structurally support them, it is only a matter of time before bankruptcies begin to reflect the true underlying economic fundamentals.

So my baseline (over/under) call for 2010 stands at 300 corporate bankruptcies.

Anyhow, below you can find an updated list of what I see as the “noteworthy” corporate bankruptcies of 2009 (as reported by Bankrupctydata.com). New additions since October appear in RED (please note that this is not an exhaustive list):

• 1st Centennial Bancorp (Banking)
• AbitibiBowater Inc. (Paper)
• Accuride Corporation (Trucking)
• Adamar Inc. dba Tropicana Casino & Resort (Gambling)
• Advanta Corp. (Banking/Finance)
• Altus Pharmaceuticals (Pharma)
  
• American Community Newspapers Inc. & LLC (Newspapers)
• ARG Enterprises, Inc. (Restaurants)
• Aurora Oil & Gas Corporation (Energy)
• Aventine Renewable Energy Holdings, Inc. (Energy)
• BankUnited Financial Corporation (Banking)
• Barzel Industries, Inc. (Manufacturing)
• Baseline Oil & Gas Corp. (Energy)
• Bearingpoint, Inc. (Consulting)
• BI-LO, LLC (Supermarkets)
• Bruno’s Supermarkets, LLC (Supermarkets)
• Butler International, Inc. (IT Services)
• California Coastal Communities, Inc. (Real Estate)
• Cape Fear Bank Corporation (Banking)
• Capital Corp of the West (Banking)
• Capmark Financial (Banking)
• CCS Medical, Inc. (Medical)
• Champion Enterprises, Inc. (Real Estate)
• Charter Communications, Inc. (Telecom)
• Chemtura Corporation (Chemicals)
• Chrysler LLC (Automobiles)
• CIB Marine Bancshares, Inc. (Banking)
• CIT Group (Banking)
• Citadel Broadcasting (Media)
  
• Colonial BancGroup, Inc. (Banking)
• Cooperative Bankshares, Inc. (Banking)
• Cooper-Standard Holdings (Automobile)
• Crescent Resources, LLC (Real Estate)
• Cynergy Data, LLC (Banking)
• deCODE Genetics, Inc. (Biotech)
• Eddie Bauer Holdings, Inc. (Retail)
• Edge Petroleum Corporation (Oil & Gas)
• Ennis Homes, Inc. (Real Estate)
• Extended Stay Inc. (Hotels)
• Fairpoint Communications (Telecom)
• Filene’s Basement, Inc. (Retail)
• Finlay Enterprises, Inc. (Jewerly)
• Fleetwood Enterprises, Inc. (Recreational Vehicles)
• Fortunoff Holdings, LLC (Retail)
• Fountainbleu Las Vegas, LLC, (Hotels)
• Freedom Communications Holdings, Inc. (Media)
• Fulton Homes Corporation (Real Estate)
• General Growth Properties, Inc. (Real Estate)
• General Motors Corporation (Automobiles)
• G.I. Joe’s, Inc. (Retail)
• Goody’s LLC (Retail)
• Gottschalks Inc. (Retail)
• GSI Group, Inc. (Semiconductors)
• Guaranty Financial Group Inc. (Banking)
• Herbst Gaming, Inc. (Gambling)
• Holley Performance Products, Inc. (Automotive)
• ION Media Networks, Inc. (Television)
• Idearc (Publishing)
• Imperial Capital Bancorp (Banking)
• Irwin Financial Corporation (Banking)
• JL French Automotive Castings, Inc. (Automotive)
• Journal Register Companies (Newspapers)
• Lazy Days RV Center, Inc. (Recreational Vehicles)
• Lear Corporation (Automobile)
• Lyondell Chemical Company (Chemicals)
• MagnaChip Semiconductor LLC (Semiconductors)
• Magna Entertainment (Gambling)
• Majestic Star Casino, LLC (Gambling)
• Masonite Corporation (Real Estate Manufacturing)
• Metromedia International Group, Inc. (Media)
• Midway Games, Inc. (Entertainment Software)
• Monaco Coach Corporation (Recreational Vehicles)
• Muzak Holdings LLC (Entertainment)
• Nortel Networks, Inc. (Telecom)
• NTK Holdings – Nortek, Inc. (Construction)
• NutraCea (Health/Nutrition)
  
• Oscient Pharmaceuticals Corporation (Pharma)
• Pacific Energy (Oil & Gas)
• Penn Traffic Company (Supermarkets)
• Philadelphia Newspapers, LLC (Newspapers)
• Proliance International, Inc. (Manufacturing)
• RathGibson, Inc. (Manufacturing)
• Reader’s Digest, Inc. (Media)
• Recycled Paper Greetings, Inc. (Greeting Cards)
• R.H. Donnelley Corporation (Marketing)
• Ritz Camera Centers, Inc. (Retail)
• Samsonite Company Stores, LLC (Retail)
• Security Bank Corporation (Banking)
• Shane Company (Jewelry)
• Silicon Graphics, Inc. (IT/Computing)
• Silver State Bancorp (Banking)
• Simmons Company (Bedding)
• Six Flags, Inc. (Entertainment)
• Smurfit-Stone Container Corporation (Paper Manufacturing)
• Source Interlink Companies, Inc. (Marketing)
• Southern Community Bancshares, Inc. (Banking)
• Spectrum Brands (Consumer Products)
• Star Tribune Companies (Newspapers)
• Station Casinos, Inc. (Gambling)
• Sun-Times Media Group, Inc. (Newspapers)
• Tarragon Corporation (Real Estate)
• Team Financial, Inc. (Banking)
• Temecula Valley Bancorp (Banking)
• Teton Energy Corporation (Oil & Gas)
  
• Thornburg Mortgage, Inc. (Banking)
• TLC Vision Corporation (Vision/Eye Care)
• Trump Entertainment (Gambling)
• UCBH Holdings (Banking)
• U.S. Shipping Partners L.P. (Marine Transportation)
• Velocity Express Corporation (Delivery)
• Vineyard National Bancorp (Banking)
• Visteon Corporation (Auto Supplies)
• Walking Company Holdings, Inc. (Footwear)
• Wall Homes, Inc. (Real Estate)
• WL Homes, LLC (Real Estate)
• Young Broadcasting, Inc. (Television)

In addition to “major” corporate bankruptcies (e.g., those firms with assets greater than $50M) tracked by Bankruptcydata, the U.S. government tracks all bankruptcy filings by type (e.g., Chapter 7, Chapter 11, Chapter 13). You can find detailed bankruptcy statistics at the U.S. Courts website. I will update the charts that I presented earlier in the year when the final 2009 numbers are released, which should be sometime in March (see Notable Bankruptcies of 2009: Q1).

In the aftermath of Dubai World’s near default, The Economist magazine ran an interesting article that examines the so-called “Hybrid” organization (see The Rise of the Hybrid Company). According to the Economist:

The travails of Dubai Inc have left commentators struggling for the right phrase to describe Dubai World and its various siblings. They have come up with various formulations—state-controlled, state-supported, quasi-state, parastatal—without ever quite capturing what they are talking about. And Dubai is not the only place that is challenging the business vocabulary in this way.

Wherever you look you can see the proliferation of hybrid organisations that blur the line between the public and private sector. These are neither old-fashioned nationalised companies, designed to manage chunks of the economy, nor classic private-sector firms that sink or swim according to their own strength. Instead they are confusing entities that seem to flit between one world and another to suit their own purposes.

MY COMMENT: For examples from the U.S., see Fannie and Freddie, pre-nationalization. France, in the form of their national champions, also engages in the practice. So do many emerging economies: China (and their SOE’s), Russia, Malaysia, Vietnam, Brazil, etc.

What should we make of these hybrid organisations? Their supporters have long argued that they enjoy the best of both worlds: the security of the public sector and the derring-do of the private sector. They can use their global reach to provide their home countries with the pick of the world’s resources. They can borrow money at a favourable rate thanks to “implicit” government guarantees. They can use their political muscle to outperform their less well-connected rivals.

MY COMMENT: I have never been a fan of Publicly-Backed Private Companies (PBPC’s). Although they may be able to borrow at lower rates because they are “implicitly” backed by their home governments, they often grow too large, become too bureaucratic, and eventually crater under their own inefficiency (thereby costing home-country taxpayers dearly in the process). In addition, their objective function is not always clear. Are they meant to profit-maximize for shareholders/bondholders, or are they meant to serve a larger social purpose?

The most interesting part of the Dubai World saga (in contrast with Freddie and Fannie) is that the government of Dubai has seemingly repudiated Dubai World’s debt. So much for that “implicit” guarantee. If this becomes the norm rather than the exception, you can soon say goodbye to the last remaining benefit of Public-Private hybrid companies – the ability to borrow at favorable rates.

I have nothing, in principle, against government-backed companies. Although they are generally inefficient and often do not make sense, there are instances in which they might be appropriate — e.g., in instances of severe market failure. However, if there is severe market failure such that the government must become involved to prevent perverse societal outcomes, my intuition is that private companies operating in a system of more stringent governmental oversight and regulation perform better than a system comprised of public-private hybrids.

In this sense then, I agree with the conclusion of the Economist:

The clearer the line between the state and the private sector, the better it is for those on both sides.

Below are some links and teasers to articles that I found interesting:

Selling Foreign Goods in China (The Economist)

Every year, says Paul French, head of Access Asia, a research firm based in Shanghai, the same company buys the same report from him on the market for a particular product in China. That is because each year the company in question sends a new executive to China with instructions to break into the local market, who soon departs in despair—having failed to find an opening given the (brief) time and (insufficient) resources allotted.

The promise—and frequent disappointment—of doing business in China has been a common theme since at least the 19th century, when weavers in Manchester were said to dream of adding a few inches to every shirttail in China.

It is incredibly difficult to do business in developing markets (see So You Want to Do Business in a Developing Country), and China is no exception. The interesting thing to me about entry into developed markets is how managers systematically overestimate the benefits and underestimate the costs. And sadly, I am not aware of any evidence that suggests that we are becoming better at making these entry decisions over time.

———————————————–

Shazam, Maker of Phone App, Draws Investment (New York Times)

Cellphone applications can turn your phone into a mobile dictionary, help you find your way when you are lost on a hiking trail and identify mystery songs on the radio. But can they make significant money?

That question has been hounding the entrepreneurs and venture capitalists behind the start-up companies that create the software programs.

An interesting ditty about how making apps may actually be a commercially viable business. Be sure to look for their IPOs in an equity market near you…

———————————————–

Schumpeter Centenary (The Economist)

The centenary of Joseph Schumpeter’s birth has not brought forth an avalanche of academic tributes and retrospectives. There is no Schumpeter industry to compare with the one on Keynes. No pop biographies. No “Schumpeter and the Post-Schumpeterians”. Yet his academic reputation at the height of his powers was of the same order, and the impact of his analysis continues to be strongly felt.

An interesting look at the history of an influential economist. He certainly left his mark on the fields of innovation and entrepreneurship.

———————————————–

Wall Street Smarts (New York Times, ht Neysa)

“IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.”

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend.

“O.K.,” I said. “Let’s hear it.”

“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.”

Hysterical anecdote (with more than a grain of truth) about the near-collapse of the financial system (see Krugman’s post on same)

Happy weekend everyone!!

The folks at the Effective Executive magazine asked to interview me last month for an upcoming issue of the magazine. I was asked to share my thoughts about the global economy, the financial crisis, and the growth of developing countries.

Below are excerpts from that interview.

[Y]our current research centers on the management and economics of international expansion. However, with the US financial crisis hitting the world economy hard, even the developed countries seem to be contemplating on going very slow on globalization. And in fact, there is a wide rhetoric about developed world (including most of the G-15 countries) embracing protectionist attitudes. Do you think such a move would indeed undo all the progress that has been made in the last decade?

The benefits of globalization are many. Not only does globalization allow countries to specialize in the productive activities in which they have an advantage, but it also provides an important conduit for the exchange of ideas across countries. As my research points out, the exchange of ideas across countries is critical to innovation and growth.

Therefore, I think it would not only be a mistake for countries to enact protectionist policies, but in the extreme, such policies could threaten the currently fragile economic recovery. Economies have become so intertwined that restricting the cross-border flow of goods and services (and capital) could lead to severe disruptions for developed and developing countries alike. For students of history, a refresher on the impact of the Smoot-Hawley Tariff Act (and protectionist policies adopted by other world economies) during the Great Depression might serve as a guide for the potential deleterious consequences of protectionism.

That said however, I think we are a far stretch from undoing all the progress brought about by globalization over the past decade. I would like to believe that most interested parties (politicians, lawyers, managers, etc.) recognize how important globalization is to economic growth and prosperity. But certainly, the emerging level of protectionist rhetoric bears some monitoring.

What are the best practices that you have, over your distinguished research and teaching career, noticed regarding market entry strategies and international expansion strategies? Any interesting observations that you have noticed either from American companies, European Companies or Asian companies?

One of the things that I have noticed both in my research, and in my interactions with managers, is that managers often exaggerate the benefits and underestimate the difficulty of foreign expansion. Managers are quite good at identifying the demand-side benefits (the ability to tap into additional demand in the foreign market) and supply-side benefits (decreasing input and labor costs) associated with expansion, but systematically underestimate the additional costs imposed by operating businesses across differing institutional environments. Cultural, political, and economic environments vary greatly across countries. These differences manifest as real costs to firms, as research demonstrates that foreign entrants take a longer to set up operations in foreign countries, are forced to pay higher wages than local domestic competitors, run afoul of the law more frequently, and are generally less likely to succeed than similar domestic businesses.

All of this makes it critical for companies to have a sound understanding of how the cultural, political, and economic differences that they face across countries are likely to affect their business. Firms should first see if their business (and business model) is appropriate to the environment, understanding that it might be better, in some cases, not to enter a country. However, once they’ve decided which countries are appropriate targets for entry, they should choose an entry mode appropriate to the environment.

In my experience, I have found that those firms that perform best in this respect pay special attention to the cultural, political, and economic risk factors present in the host country.

Did you find any interesting insights from Chinese companies’ market entry strategies and their international expansion strategies as opposed to let’s say either South Korean or Japanese companies? Do you think Chinese companies are taking the same route as South Korean or Japanese companies followed several years ago or are they chalking out their unique strategies?

This is an interesting question. When I think about China, Japan, and South Korea, certainly some similarities can be drawn. All three followed an export-led growth path to prosperity. However, once a certain level of prosperity had been achieved through trade, the three countries diverged with respect to international investment. South Korean firms have generally followed a more organic growth strategy – eschewing acquisitions of foreign targets in favor of building businesses from scratch. Japanese firms followed a similar strategy up to a point. While many of Japan’s industrial firms preferred organic growth, Japanese firms acquired a vast portfolio of real estate holdings in the late 1980’s and early 1990’s. Insofar as China is concerned, although we are in the early stages of China’s international expansion, it seems so far that Chinese firms are following a more growth-through-acquisition type of strategy, acquiring foreign firms in both basic materials and high-tech industries.

My sense is that this has a lot to do with the capabilities of the firms from these countries. That is, by the time Japanese and South Korean firms began to expand, they did so from a position of technological strength. For this reason, they were able to organically extend existing advantages to other countries. China, by contrast, is expanding from a relatively weak technological position not only vis-à-vis Japan and South Korea, but also vis-à-vis the rest of the developed world. In this sense then, Chinese firms are embarking on a strategy of acquisition in order to acquire the technological capabilities their firms currently lack.

There was more to the interview. The soft copy is currently in newsstands (mostly in India). I am assuming they will post the interview on-line in a few months time. I will update when a link to the on-line version becomes available.

In January I predicted (see Notable Bankruptcies of 2009: Q1) that “major” bankruptcies in 2009 would challenge the 383 mark set in 2001 (the high-water mark after the dotcom bubble). I even suggested that it was possible that we could exceed 400 “major” bankruptcies in 2009.

According to Bankruptcydata.com, there have been 208 “major” filings thus far in 2009. Assuming that bankruptcies are equally distributed throughout the year, this puts us on pace for 277 bankruptcies. That is tracking well shy of my prediction. In fact, bankruptcies were down significantly from Q2 to Q3, and have been trending downward throughout the year.

That stylized fact begs the question: Is that a “green shoot” dip in bankruptcy filings, or might the Fed/Treasury liquidity programs be keeping weaker firms on artificial life support?

Although I cannot be sure why bankruptcies have tracked lower than forecast — whether due to a better-than-expected economy or government intervention (or some combination of the two) — I am certain that my prediction was way off. At this point then, if the bankruptcy pace quickens in the 4th quarter (as is typical), the final number will likely come in around 300. With 300 major bankruptcies, we would exceed last year’s number by 30% (see Notable Bankruptcies of 2008: Final Tally).

But looking forward, the question now becomes: What should we expect for 2010? I will wait for the final 2009 numbers to make a definitive prediction, but right now, my informed guess would be 350, …and that’s even if the economy rebounds in 2010, barring a double-dip recession scenario.

Anyhow, below you can find an updated list of what I see as the “noteworthy” bankruptcies of 2009, as reported by Bankrupctydata.com. New additions since January appear in RED (please note that this is not an exhaustive list):

• 1st Centennial Bancorp (Banking)
  
• AbitibiBowater Inc. (Paper)
• Adamar Inc. dba Tropicana Casino & Resort (Gambling)
• American Community Newspapers Inc. & LLC (Newspapers)
• ARG Enterprises, Inc. (Restaurants)
• Aurora Oil & Gas Corporation (Energy)
  
• Aventine Renewable Energy Holdings, Inc. (Energy)
  
• BankUnited Financial Corporation (Banking)
• Barzel Industries, Inc. (Manufacturing)
• Baseline Oil & Gas Corp. (Energy)
  
• Bearingpoint, Inc. (Consulting)
• BI-LO, LLC (Supermarkets)
• Bruno’s Supermarkets, LLC (Supermarkets)
• Butler International, Inc. (IT Services)
• Cape Fear Bank Corporation (Banking)
• Capital Corp of the West (Banking)
• CCS Medical, Inc. (Medical)
  
• Charter Communications, Inc. (Telecom)
• Chemtura Corporation (Chemicals)
• Chrysler LLC (Automobiles)
• CIB Marine Bancshares, Inc. (Banking)
  
• Colonial BancGroup, Inc. (Banking)
• Cooperative Bankshares, Inc. (Banking)
  
• Cooper-Standard Holdings (Automobile)
  
• Crescent Resources, LLC (Real Estate)
• Cynergy Data, LLC (Banking)
  
• Eddie Bauer Holdings, Inc. (Retail)
• Ennis Homes, Inc. (Real Estate)
• Extended Stay Inc. (Hotels)
• Filene’s Basement, Inc. (Retail)
• Finlay Enterprises, Inc. (Jewerly)
  
• Fleetwood Enterprises, Inc. (Recreational Vehicles)
• Fortunoff Holdings, LLC (Retail)
• Fountainbleu Las Vegas, LLC, (Hotels)
• Freedom Communications Holdings, Inc. (Media)
  
• Fulton Homes Corporation (Real Estate)
• General Growth Properties, Inc. (Real Estate)
• General Motors Corporation (Automobiles)
• G.I. Joe’s, Inc. (Retail)
• Goody’s LLC (Retail)
• Gottschalks Inc. (Retail)
• Guaranty Financial Group Inc. (Banking)
  
• Herbst Gaming, Inc. (Gambling)
• Holley Performance Products, Inc. (Automotive)
  
• ION Media Networks, Inc. (Television)
  
• Idearc (Publishing)
• Irwin Financial Corporation (Banking)
• JL French Automotive Castings, Inc. (Automotive)
  
• Journal Register Companies (Newspapers)
• Lear Corporation (Automobile)
  
• Lyondell Chemical Company (Chemicals)
• MagnaChip Semiconductor LLC (Semiconductors)
  
• Magna Entertainment (Gambling)
• Masonite Corporation (Real Estate Manufacturing)
• Metromedia International Group, Inc. (Media)
• Midway Games, Inc. (Entertainment Software)
• Monaco Coach Corporation (Recreational Vehicles)
• Muzak Holdings LLC (Entertainment)
• Nortel Networks, Inc. (Telecom)
• Oscient Pharmaceuticals Corporation (Pharma)
  
• Pacific Energy (Oil & Gas)
• Philadelphia Newspapers, LLC (Newspapers)
• Proliance International, Inc. (Manufacturing)
• RathGibson, Inc. (Manufacturing)
  
• Reader’s Digest, Inc. (Media)
  
• Recycled Paper Greetings, Inc. (Greeting Cards)
• R.H. Donnelley Corporation (Marketing)
  
• Ritz Camera Centers, Inc. (Retail)
• Samsonite Company Stores, LLC (Retail)
  
• Security Bank Corporation (Banking)
  
• Shane Company (Jewelry)
• Silicon Graphics, Inc. (IT/Computing)
• Silver State Bancorp (Banking)
• Six Flags, Inc. (Entertainment)
  
• Smurfit-Stone Container Corporation (Paper Manufacturing)
• Source Interlink Companies, Inc. (Marketing)
• Southern Community Bancshares, Inc. (Banking)
  
• Spectrum Brands (Consumer Products)
• Star Tribune Companies (Newspapers)
• Station Casinos, Inc. (Gambling)
  
• Sun-Times Media Group, Inc. (Newspapers)
• Tarragon Corporation (Real Estate)
• Team Financial, Inc. (Banking)
  
• Thornburg Mortgage, Inc. (Banking)
  
• Trump Entertainment (Gambling)
• U.S. Shipping Partners L.P. (Marine Transportation)
• Velocity Express Corporation (Delivery)
  
• Vineyard National Bancorp (Banking)
  
• Visteon Corporation (Auto Supplies)
• Wall Homes, Inc. (Real Estate)
• WL Homes, LLC (Real Estate)
• Young Broadcasting, Inc. (Television)

I have long had an interest in what the financial crisis means for the future of the fields of economics and finance (see Future of Financial Economics and Future of Financial Economics Part Deux). So I was incredibly pleased to come across Krugman’s abbreviated history and thoughtful criticisms of the field of economics in the New York Times Magazine (see How Did Economists Get It So Wrong).

A bit of a teaser:

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

What happened to the economics profession? And where does it go from here?

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth…the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

Krugman follows that introduction with a fascinating, and well-informed, account of the history and development of the field of economics, with a focus on macroeconomics/finance and the longstanding debate between so-called freshwater (Free-Market) economists and saltwater (Keynseyian) economists. Although Krugman and I are in different academic fields (Krugman is an international macro scholar and I am an international business strategy scholar), our conclusions with respect to the future of financial economics are more or less aligned. Krugman suggests:

If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.

There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance [economics].

Krugman’s article is a fairly long (hence its placement in the magazine), but well worth your time to read. So carve out a bit of time, visit the NY Times Magazine website, pour yourself a drink, and enjoy the read.

Several months ago I wondered aloud whether the current rally had legs based on Q1 corporate earnings (see Are Better-than-Expected Earnings Illusory? or Corporate Earnings Redux). I concluded in June:

The key then to the future of corporate profitability lies in whether you believe corporate earnings have bottomed out and will now begin to increase from a lower base, or whether you believe that there is still substantial downside risk that increasing unemployment and decreased consumer spending will continue to put a crimp in profitability. Given the nearly 40% rally in equity markets over the past several months, market participants clearly believe the former. I fear that the latter might be more representative.

Markets have continued to rally since June, and were up more than 50% from the March lows. But Q2 earnings looked no different than Q1. The story, again, was better-than-expected earnings based off greatly reduced earnings expectations, and greater-than-expected cost cutting. There was not much revenue growth; instead, revenues broadly declined.

Given the lackluster nature of corporate profitability, many have now begun to question the underlying rationality of the rally, including the following thought-provoking piece from this week’s edition of The Economist (see Has the Tide Turned for Corporate Profits?). According to The Economist:

The recent rally in shares has been driven…by hopes of economic recovery. But if those recovery hopes do not translate into a rebound in profits, it is hard to see how the rally can last.

The American second-quarter results season was undoubtedly better than expected. But it is worth remembering that such positive surprises are quite common, with companies massaging down expectations in the run-up to their figures. David Rosenberg of Gluskin Sheff, a Canadian asset-management firm, says profits were actually down 27.8% year-on-year…

MY ADDENDUM: Again, it’s not simply that companies/analysts ratcheted down expectations leading to better-than-expected earnings, but that companies beat expectations due, in large part, to greater-than-expected cost cuts.

With profits still falling, the rally has thus been driven by a re-rating of the market. Assuming operating earnings hit $50 a share in the third quarter, the S&P 500 index is trading on a price-earnings ratio of 20, the kind of multiple normally associated with boom conditions. Clearly, investors are expecting a robust profits recovery in the years ahead.

But companies are digging themselves out of a deep pit…

It is this deep pit that should be most disconcerting. And again, it all comes down to the assumptions that you are willing to make about how quickly firms are likely to emerge from that pit. Some expect demand to increase rapidly leading corporate profitability to snap back (at least that’s how the market seems to be pricing it). But given the precarious state of consumer balance sheets, top-line growth drivers are less than obvious to me, …even if we are experiencing something of an economic recovery. Moreover, cost cutting is not a sustainable path to profitability. For these reasons I remain less sanguine than most about the speedy return of corporate profitability.