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Market mayhem, recession talk darken local mood

1/28/08 — Crain's Chicago Business

By Mike Colias, Ann Saphir and Steven R. Strahler

The credit crunch and recession fears roiling markets from Tokyo to London to New York are starting to hit home for people like Zachary Mottl.

Mr. Mottl's aluminum casting business in southwest suburban Lyons, Atlas Tool & Die Works Inc., was "going like gangbusters," he says. Then, in November, his customers caught a whiff of economic trouble and began asking him to hold off shipping their orders for a month or two. Conditions have only worsened since.

Economic concerns are "trickling down to me and the guy I buy my screws and my metal from," says Mr. Mottl, 29, who has 80 employees. Revenue has dropped 15% from a year ago, he says. "It's a big snowball effect."

Financial market turmoil that reached a crescendo last week has swept up a broad array of Chicago interests, from small, family-owned companies like Mr. Mottl's to giant corporations like CME Group Inc. and Motorola Inc. Local real estate agents are mired in the worst housing slump in more than a decade, companies are cutting jobs, and Chicago investment banking and private-equity firms say deal-making is slowing down.

Some money managers say it appears the first U.S. recession since 2001 has arrived. "The market is starting to trade like that's coming, or we're in the midst of one," says Linn Arbogast of Chicago-based Segall Bryant & Hamill.

This year's slump has erased almost $100 billion in market value for 135 local companies on the Crain's Chicago Index, compiled by Bloomberg L.P. The index ended Friday at 107.51, down 10% this year. Based on Friday's figure, the companies had a combined market capitalization of $900 billion.

A recession, defined as two consecutive quarters of negative gross domestic product growth, may have begun nationwide late last year, says Sophia Koropeckyj, managing director of Economy.com, a unit of New York-based Moody's Investors Service Inc. If the U.S. economy isn't already in a recession, "it's very close to one," she says.

Concerned about the economy, Congress last week forged a $150-billion stimulus package that provided rebates to taxpayers. But a Crain's survey shows that may produce little of the boost lawmakers seek. According to a Web poll Friday that garnered more than 1,500 responses, three-quarters plan to stash their rebates in savings accounts or use them to pay down debt.

Some are considering belt-tightening moves already. Colleen Thacker, 52, used to rely on part-time real estate sales to pay for her family's annual trip to the Caribbean. But those sales have dried up.

"If we decide to go this time, it will be a bad financial decision," she said Friday while running an errand on Michigan Avenue.

For some local companies, the markets' slide has magnified their troubles. Motorola's shares slid 20% last week after its fourth-quarter earnings fell short of expectations. The shares ended Friday at $10.73, down 33% this year, among the worst performers in the Bloomberg index.

Healthier companies have been dragged down, as well. Shares of CME Group, the world's biggest futures exchange, ended Friday at $629.00, down 8.3% this year even with its trading volume near record levels.

"There is a real panic in the fixed-income debt markets," says Charlie Bobrinskoy, vice-chairman and research director at Ariel Capital Management LLC in Chicago. With financing getting tougher, the survival of some businesses is "in question," he says.

BRACING FOR TOUGH TIMES

Further deterioration in the economy probably signals more job losses to go with those announced last week by Methode Electronics Inc. The Harwood Heights-based maker of automotive components said it would cut 700 jobs at three Illinois plants as it shifts more production overseas. Similarly, Westell Technologies Inc. of Aurora said it would lay off 58 employees, while Motorola CEO Gregory Brown warned of further job cuts.

Raj Gupta, president of Chicago-based Environmental Systems Design Inc., says it's unlikely his engineering consulting company will come close to its 2007 performance, when profit rose 25% to $40 million. Three or four client projects are on hold, and a like number have slowed. "Just a year ago, it was go-go-go," he says.

Market turbulence hasn't been bad news for everybody. Some CME traders and stock-pickers looking for bargains are thriving.

Chicago-based futures trading firm Traditum Group LLC is on pace to surpass a record profit last year, thanks partly to bets that short-term interest rates would fall faster than long-term rates, says Michael Creadon, a partner with the firm. "It was a real panic, flight-to-quality, safe-haven trade, and we were on the right side of that," he says.

At Atlas in Lyons, Mr. Mottl is bracing for tougher times and holding off on new hiring as customers press him for better terms.

They "want to lower their prices in a slow market, so they want me to cut my prices by 15% or they'll find another vendor in China or Mexico," he says.