Financial thoughts

Cadbury turned up the heat in its defense against a takeover from Kraft as its Chairman Roger Carr said it was an “unappealing prospect” being absorbed into Kraft’s low growth conglomerate business model.

In the letter to Kraft’s Chairman and CEO Irene Rosenfeld on Saturday, Carr reaffirmed the British confectionery group’s rejection of Kraft’s bid, initially valued at 10.2 billion pounds ($17 billion), as it fundamentally undervalued Cadbury.

“Under your proposal, Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure play confectionery company,” Carr said in the letter seen by Reuters.

U.S. food giant Kraft launched its cash and shares bid for Cadbury Monday in an attempt to create the world’s largest confectionery group. It offered Cadbury shareholders 745 pence a share, but the value of the bid has fallen as Kraft shares have slipped and the dollar has weakened against the pound.

Carr said Kraft’s proposal for his shareholders was to exchange shares in a pure-play confectionery group for cash and shares in a company with a considerably less focused business mix and historically lower growth.

“We are committed to the delivery of optimum value to our shareholders and our board remains convinced that this is achieved through continuing to deliver our standalone pure play confectionery strategy,” Carr added in his letter.

“In addition, the proposal is of uncertain value for Cadbury shareholders as underlined by the movement in the Kraft share price since your announcement,” he said.

Kraft’s bid is worth 300p in cash and 0.2589 new Kraft shares for each Cadbury share. This valued Cadbury at 745p or 10.2 billion pounds ($17 billion) at the time, but this had fallen to around 707p late Friday due to the weakness in Kraft shares and the dollar compared to Cadbury’s close Friday at 775-1/2p.

The deal would bring together Cadbury, the world’s second largest confectionery group after privately-owned Mars-Wrigley, with its Dairy Milk chocolate and Trident gum, together with Kraft’s portfolio of Milka and Toblerone chocolates, Oreo biscuits and Philadelphia cheese.

Analysts say there is compelling logic to a potential deal adding Cadbury’s high growth emerging market business into Kraft’s wide ranging distribution system, with few overlaps which might prompt any anti-trust concerns.

Most independent analysts at brokers not involved in the bid expect Kraft to raise the bid price to between 850-900p, while some believe a bigger cash element is needed to attract Cadbury’s shareholders into acceptance.

(Reporting by David Jones; editing by Andy Bruce)

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Miner Rio Tinto scrapped a planned $19.5 billion tie-up with China’s Chinalco struck at the height of a global financial crisis, turning instead to an iron ore joint venture with rival BHP Billiton and a share sale to slash its debts.

The collapse of the Chinalco deal, put together in February in a bid to halve Rio’s $38 billion of debt, leaves the world’s biggest steel making nation vulnerable to just two suppliers — a Rio/BHP combination and Brazil’s Vale — controlling 70% of global iron ore trade.

Shares in Rio (RTP) jumped as much as 13% to a 7-month high, while BHP (BHP) rose 10%, as investors welcomed an alternative route to resolving Rio’s big debt burden.

"Rio has effectively been talking to BHP behind Chinalco’s back and Chinalco is entitled to feel like a two-timed lover this morning," said Paul Bartholomew at Steel Business Briefing in Shanghai. "This is a big slap in the face for China."

The new plan represents a victory for Rio shareholders who had argued the Chinalco deal favored the Chinese state firm and could give China greater influence over pricing of key resources.

"We were not supporters of the Chinalco transaction. We’re happy to see this alternative approach to solving Rio’s issues with its debt," said Ross Barker, managing director of Australian Foundation Investment Co, Rio Tinto’s sixth-largest shareholder in Australia and a BHP shareholder, according to Reuters data.

"A deal like this was really essential from Rio’s point of view. And it’s a good deal for BHP," he said.

Rio said it would pay Chinalco a $195 million break-up fee.

Rights offer

Rio and BHP, the world’s second- and third-largest iron ore miners, agreed to combine their operations into a 50-50 joint venture, generating savings of at least $10 billion.

A Rio/BHP combination would supply around 270 million tons of ore a year, while Vale supplies around 240 million tons.

BHP will pay Rio Tinto $5.8 billion to take its equity interest in the venture to 50%, but stressed the agreement was non-binding at this stage.

"This deal has been 10 years in the making and well worth the wait," BHP Chief Executive Marius Kloppers told reporters.

To cut debt, Rio said it was raising $15.2 billion through a 21-for-40 rights offer, the fifth-largest rights issue on record, according to Thomson Reuters data.

Rio and BHP agreed to keep their iron ore marketing separate, a key factor designed to win approval from competition regulators, especially the European Commission, which last year raised concerns about BHP’s proposed takeover of Rio due to the impact on iron ore markets personal business cards.

Chinalco said it regretted Rio’s decision after it had worked hard to try to revise the deal to reflect changed market conditions as well as shareholders’ and regulators’ concerns.

"As a result, we are very disappointed with this outcome," Chinalco President Xiong Weiping said in a statement.

Australia and China, which are trying to start free trade talks, played down the impact of the collapse of the deal, which would have been China’s largest foreign investment, on diplomatic ties or the future of Chinese offshore investment.

"It is a commercial matter, and I think it’s very important that our friends in China focus on that fact," Australian Prime Minister Kevin Rudd said.

In China, an official at the State-owned Assets Supervision and Administration Commission characterized the deal’s failure as "normal market behavior", and state banks said they stood ready to back any future foreign investments by Chinalco.

Massive savings

"My initial reaction is that it will be overwhelmingly positive for both companies because of the cost savings (and) the synergies," said Michael Bentley, resources portfolio manager at Northward Capital.

The cost of insuring Rio Tinto’s debt fell by more than a third, with the spread on its credit default swaps (CDS) narrowing to around 190 basis points from 290 bp.

"We consider these initiatives are a superior outcome for Rio’s credit quality as opposed to the Chinalco deal," Monaural International said, adding it was better for Rio to sell equity instead of convertible bonds, maintain greater ownership of its assets and gain joint venture savings.

The prospects for Chinalco were less clear.

Chinalco Vice President Lou Outing said the firm had not decided whether to participate in the rights offer.

"This is a big thing and is not determined by a single person," Lou told Reuters, adding the decision not to revise the deal with Rio Tinto was made by both sides.

Under the deal agreed in February, Chinalco would have paid $12.3 billion for stakes in Rio’s key iron ore, copper and aluminum assets and $7.2 billion for convertible notes that would have doubled its equity stake in Rio to 18%.

BHP launched a 3.4-for-1 share swap to take over Rio in February 2008, which Rio rejected saying it vastly undervalued the firm and its prospects. BHP dropped the deal last November after commodity markets collapsed.  

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No layoffs — ever!

The global financial crisis has led many companies to slice payrolls, but these employers are staying loyal. Meet 9 of this year’s Best Companies that, as of mid-January, have never had a layoff.

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NEW YORK (CNNMoney.com) — American Express said Monday it will cut 4,000 jobs, or 6% of its global workforce, as part of an $800 million restructuring plan.

Under the plan, the financial services company will also cut investment spending and operating costs.

The 4,000 cuts are on top of the 7,000 positions the company said in October it would eliminate, according to American Express spokeswoman Joanna Lambert.

American Express’ (AXP, Fortune 500) first-quarter earnings call in April had indicated further job cuts were imminent, Lambert said. The reductions will occur across business units, markets and staff groups.

"Cuts were largely expected, but it’s a sizable amount," said Jason Arnold, analyst at RBC Capital Markets.

While the company "has remained solidly profitable," it continues "to be very cautious about the economic outlook and are therefore moving forward with additional reengineering efforts to help further reduce our operating costs," chief executive Kenneth Chenault said in a prepared statement.

Severance and other costs related to the job cuts will result in a $180 million to $250 million pre-tax restructuring charge.

Cuts in marketing and business development are expected to save $500 million, while operating cost reductions should save $125 million, the company said.

The cuts are in addition to the $1.8 billion cost benefit announced in October, and the tone of Monday’s release was "a little more guarded" than that of previous announcements, Arnold noted.

Credit crunch

"Our concern is that the credit issues in this country are substantial," Arnold said. "AmEx especially gets a lot of its revenue from spending, which is obviously under severe pressure."

Especially troubling, Arnold said, is the company’s percentage of charge-offs - when a creditor writes off an account balance as a "bad debt" instead of an asset, usually after six months of non-payment.

AmEx’s charge-offs are in the upper range compared with its competitor group, at 9.9% Arnold said.

JPMorgan Chase (JPM, Fortune 500) and Discover (DFM) have charge-offs of around 8%. Still, Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500)’s rates exceed 10%, Arnold said.

"None of these charge-off rates are good numbers," Arnold said. "Unfortunately, with unemployment and the economic climate being what they are, it’s a tough time for spending." 

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Bank of America’s Ken Lewis may be down, but he’s far from out.

On Wednesday, the veteran banking chief suffered one of the bigger setbacks of his career after the board ousted him as chairman of the bank, stripping Lewis of a position he has held since 2001.

The move came after shareholders narrowly approved a proposal at the bank’s annual shareholder meeting Wednesday requiring the company to separate the roles of CEO and chairman. Lewis was re-elected to the company’s board of directors, however.

Many shareholders have been fuming over a variety of failings that have surfaced on Lewis’ watch, including a floundering stock price and most notably, the company’s ill-timed acquisition of Merrill Lynch last year.

But even as Lewis retreats into his primary role of overseeing the company’s operations as CEO, few believe that he is poised to leave the company where he has served for 40 years anytime soon.

"The change that has occurred is pretty much form over substance," said David Dietze, chief investment strategist of New Jersey-based Point View Financial Services, which owns Bank of America stock.

What Lewis currently enjoys, note experts, is the full backing of the other 17 board members - a group that has the ultimate say over who runs the company. One of those board members, Dr. Walter Massey, was named the new chairman Wednesday.

Massey and several other Bank of America (BAC, Fortune 500) board members who were re-elected by investors at Wednesday’s annual shareholder meeting have served closely with Lewis over the years and may be unwilling to push him out completely.

But with Lewis no longer chairman, those long-time allegiances could very well start to disintegrate, said Espen Eckbo, a professor of finance at Dartmouth’s Tuck School of Business, who also serves as director of the school’s Lindenauer Center for Corporate Governance.

In addition, Lewis received the second-lowest level of support among the 18 incumbent directors, with 67% of shareholders voting in favor of his re-election at Wednesday’s meeting. Many other directors, including Massey, had more than 90% of shareholders voting in favor of their return to the board.

The annals of corporate history are littered with instances in which executives who held the position of both chairman and CEO wound up leaving the company after being stripped of the chairman’s role.

Walt Disney’s (DIS, Fortune 500) Michael Eisner, who was removed as company chairman in March 2004 but had the full backing of the board to continue as CEO, announced a year later he would retire as CEO in September 2005, a year before his contract was set to expire.

More recently, two of Lewis’ colleagues from the banking industry were forced to step down shortly after they lost the chairman’s job online cash advance lenders.

Wachovia’s Ken Thompson was stripped of his title as chairman in June of last year and was ousted from the company altogether just a month later.

Washington Mutual’s Kerry Killinger, who served at the helm of the company since 1990, was also removed as chairman last June. Three months later, he parted ways with the Seattle-based lender — just before WaMu became the biggest bank to fail in U.S. history and was sold to JPMorgan Chase (JPM, Fortune 500).

Yet, there is a case for drawing big distinctions between Lewis and his two fallen peers. Both Killinger and Thompson fueled incredible growth at their respective firms by doubling down on the U.S. housing market - a move that would ultimately prove fateful for both companies.

Lewis, on the other hand, employed a much more cautious approach, relying instead on key acquisitions during those years to help transform his company into the nation’s largest bank based on deposits.

Lewis has maintained that the company’s most recent acquisitions - last year’s controversial purchases of mortgage lender Countrywide Financial and Merrill -will only further that growth trend, leaving Bank of America well poised to benefit when the economy turns around.

Still, one of the shareholder groups that spearheaded the campaign to remove Lewis as chairman said Thursday that the board must go even further.

"By removing Ken Lewis as Chairman and signaling strong opposition to his remaining on the board of directors, shareholders took the critical first steps." said William Patterson, executive director of CtW Investment Group, an investment advisor to pension funds, in a statement.

"The onus is now on the board to act on the underlying management and board concerns that drove [the] shareholder vote. At minimum, this includes accelerating the board’s CEO succession plan," Patterson added.

Experts said the performance of Merrill and Countrywide, as well as BofA’s stock price, may ultimately decide Lewis’ fate. The stock has nearly tripled from its March lows. But at about $9 a share, it is still more than 70% below where it traded before the Merrill deal was announced.

Dietze said that given the economic straits the nation’s banking industry now finds itself in, it may not be easy for Bank of America to provide the type of strong results that investors will continue to demand.

"What happens going forward in some ways is all up to the market," he said. "It’s kind of out of his hands." 

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Americans already shouldering the cost of millions of people without health insurance should brace for a double-whammy: a surge in the number of the "underinsured," or consumers who have some but not enough coverage.

The problem, according to health care industry experts, is that the government and those with employer-based plans will have to pick up the tab as more Americans are unable to pay their entire medical bill.

As the recession puts a bigger strain on consumers’ wallets, many underinsured Americans either can’t or won’t pay the high deductibles and co-pays for treatment they receive in hospitals and emergency rooms.

By one estimate, 25 million Americans can’t afford to cover the gap between what their insurance covers and their medical bills demand.

The issue shows the steep challenge faced by President Obama and other Washington leaders vowing to put the health care system on a course for long-term fiscal viability. On Thursday, the president is convening 150 experts, advocates and lawmakers for a "summit" to debate options.

Many people without adequate insurance are also delaying or forgoing medical care until it becomes an absolute emergency, said Dr. David Chin, managing partner of consulting firm PricewaterhouseCooper’s Global Healthcare Research Institute.

By law, hospitals have to treat all emergency admissions regardless of insurance.

"If the underinsured can’t pay the bills, the hospital either writes it off as bad debt or shifts the cost to its charity care program," said John Pickering, principal and consulting actuary with consulting firm Milliman Inc.

Increasingly, hospitals are shifting costs to "those who can pay," said Wynn Bailey, partner and health care expert with consulting firm AT Kearney. "That’s the government, private insurers and the self-insured."

Bailey said hospitals are negotiating higher treatment rates with insurance companies to offset the bad debt.

In turn, commercial insurance providers are charging higher premiums to their clients, both businesses and individuals, to cover their cost increases. As businesses struggle with their employee health care costs, they are shifting a higher percentage of overall premiums to their workers, charging higher deductibles, or encouraging greater use of generic drugs.

"It’s a vicious cycle," said Pickering.

Bailey said he wouldn’t be surprised if people with employer-based health insurance have to pay 5% to 10% more for their coverage over the next year or two.

Not tracked by government

One reason the exponential growth in underinsured Americans hasn’t made headlines is because this group isn’t yet tracked by the government, explained Sara Collins, economist and assistant vice president with health policy research group The Commonwealth Fund free credit report and score.

"It’s harder to define the underinsured," Collins said.

The Commonwealth Fund defines underinsured as those who incur high out-of-pocket costs - excluding premiums - relative to their income, despite having coverage all year.

Using that measure in consumer surveys, Collins’ firm estimates that 25 million adults under age 65 were underinsured in 2007.

More importantly, Collins pointed out that the number of underinsured increased 60% from 2003 to 2007. That compares with a 5.1% increase in the number of uninsured Americans - to about 46 million - over the same period, according to the U.S. Census Bureau.

"The 25 million [number] can still be an underestimate," Collins said.

What’s also troubling, she said, is that the ranks of the underinsured are spreading across income levels and have seen the most rapid increases lately in middle-income households earning between $40,000 to $60,000.

Obama’s plans

Meanwhile, Obama has made health care reform a top priority, detailing a dramatic overhaul of the system in his budget outline last week.

Some of Obama’s initiatives will provide short-term relief to both the uninsured and underinsured.

Specifically, the government will provide a 65% subsidy to businesses who continue Cobra premiums for laid off employees for a period of 9 months.

"But what happens after that period?" said Bailey. "Many people are wary about finding another job in a year in this economy."

Longer term, Obama last month extended the Children’s Health Insurance Program Reauthorization Act which renews and expands health coverage by an additional 3 million children, to 11 million children.

Investments in health care technology will eliminate unnecessary costs and prevent duplicative care, Bailey said.

Also, in his budget, Obama proposed a 10-year health care reserve fund of $630 billion to "bring down costs and expand coverage."

Bailey has reservations.

That $630 billion "sounds like a lot of money. But total health care consumption this year is expected to be about $2 trillion," he said. "So is spending $63 billion a year enough to transform this gigantic beast?"

"Obama’s proposals certainly are a start, but much more is needed," said Bailey. 

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NEW YORK — Supertankers that once raced around the world to satisfy an unquenchable thirst for oil are now parked offshore, fully loaded, anchors down, their crews killing time. In the U.S., vast storage farms for oil are almost out of room.

As demand for crude has plummeted, the world suddenly finds itself awash in oil that has nowhere to go.

It’s been less than a year since oil prices hit record highs. But now producers and traders are struggling with the new reality: The world wants less oil, not more. And turning off the spigot is about as easy as turning around one of those tankers.

So oil companies and investors are stashing crude, waiting for demand to rise and the bear market to end so they can turn a profit later.

Meanwhile, oil-producing countries such as Iran have pumped millions of barrels of their own crude into idle tankers, in effect taking crude off the market to halt declining prices that are devastating their economies.

Traders have always played a game of store and sell, bringing oil to market when it can fetch the best price. They say this time is different because of how fast the bottom fell out of the oil market.

"Nobody expected this," said Antoine Halff, an analyst with Newedge. "The majority of people out there thought the market would keep rising to $200, even $250, a barrel. They were tripping over each other to pick a higher forecast."

Now the strategy is storage. Anyone who can buy cheap oil and store it might be able to sell it at a premium later, when the global economy ramps up again.

The oil tanks that surrounded Cushing, Okla., in a sprawling network that holds 10 percent of the nation’s oil, have been swelling for months. Exactly how close they are to full is a closely guarded secret, but analysts who cover the industry say Cushing is approaching capacity.

It’s the same scene at the four other massive storage sites in the U.S., complexes on the East Coast, Gulf Coast, West Coast and near the Rocky Mountains.

Some oil is ending up in giant ships and staying there. On these supertankers, rented by oil companies such as Royal Dutch Shell, there is little for crews to do but paint and repaint the decks to pass time car loan.

More than 30 tankers, each with the ability to move 2 million barrels of oil from port to port, now serve as little more than floating storage tanks. They are moored across the globe, from the Texas coast to the calm waters off Europe and Nigeria.

"It gets expensive to do this," said Phil Flynn, an analyst at Alaron Trading Corp. "If you’re sitting on a bunch of oil and you’re stuck paying storage and insurance and you can’t find a buyer, you may have to sell it at a discount just to get rid of it."

On the other hand, as storage units on land have filled up, the companies that own the tankers have profited. Tanker companies charge an average of $75,000 a day, three times as much as last summer, to hold crude, said Douglas Mavrinac, an analyst with Jefferies & Co.

Demand for oil began to increase steadily in the early 1980s, and it went into overdrive in recent years as the Chinese economy surged. That changed when recession gripped the globe and frozen credit markets made things worse. Inventories swelled.

Refineries in the U.S. have cut way back on production of gas as the economy weakens and millions of Americans, many of them laid off, keep their cars in the garage.

Experts aren’t sure what will happen when all that oil finally comes ashore. One fear is that with oil prices so low, companies will slash drilling and production, setting the world up for an energy crunch that would send prices soaring. The number of oil and gas rigs operating in the United States has fallen a staggering 39 percent since August.

Others say prices would plummet if companies forced millions of barrels onto the market at once.

"If everyone’s running for the exits at the same time, they’ll engineer a price collapse," Flynn said.

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This was the summer of $4 a gallon gas - and its impact on Americans is reflected in our lexicon.

The New Oxford American Dictionary crowned "hypermiling" as its word of the year for 2008.

To hypermile is to maximizing gas mileage by making fuel-conserving adjustments to one’s car and driving techniques.

Hypermilers keep their tires properly inflated, remove the roof rack from their vehicles, and turn engines off rather than letting them idle at stoplights, according to a statement from the dictionary.

The term was coined in 2004 by Wayne Gerdes, and the dictionary reports that it has attracting a following who "push their gas tanks to the limit" in an effort to exceed EPA ratings for miles per gallon.

President-elect Barack Obama alluded to the practices of hypermiling on the campaign trail by recommending keeping tires properly inflated, and California Gov. Arnold Schwarzenegger has called for EcoDriving, the dictionary reported short-term cash loans.

Frugalista: Person who leads a frugal lifestyle but stays fashionable and healthy by swapping clothes, buying second-hand, growing own produce, etc.

Moofer: A mobile out-of-office worker, as in someone who works away from a fixed workplace, via BlackBerry, a laptop, or Wi-Fi. Also can be used as a verbal noun, as in moofing.

Topless meeting: A meeting in which the participants are barred from using their laptops, BlackBerries or cellphones.

Toxic debt: Mainly sub-prime debts that are now proving so disastrous to banks. They were parceled up and sent around the global financial system like toxic waste, hence the allusion. 

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The Treasury Department is reviewing the trading of two- and five-year notes after a scarcity in U.S. government securities triggered by the credit crunch led to a record level of failed transactions.

The probe comes two days after Karthik Ramanathan, the acting assistant secretary for financial markets, told bond dealers to fix chronic settlement problems or submit to tougher regulation. The Treasury has conducted at least nine such reviews, known as “large position reports,'' to monitor trading and guard against market manipulation since 1997.

The overnight repurchase, or repo, agreement rates for two- and five-year notes have traded at about 0.05 percent since the start of October, among the lowest of all Treasuries. When demand for a security rises, traders lend cash at a wider spread below the federal funds rate to obtain the needed securities, charging even zero interest at times. Failures to deliver or receive all Treasuries in the repo market climbed to a record $5.31 trillion in the week ended Oct. 22.

“The Treasury is very concerned and wants the market to be fluid and liquid,'' said E. Craig Coats Jr., co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York. “They are looking at these position reports from the standpoint that if you have one person that is just hoarding a security and disrupting the market, then the Treasury is going to have a conversation with them to find out why and encourage them not to.''

`Elevated Level'

The Treasury asked for information on the 2 percent note maturing Sept. 30, 2010, and the 3.125 percent note maturing Sept. 30, 2013. Bond dealers or investors with “reportable positions in either of these notes equal to or exceeding the $2 billion threshold must submit a separate report for the security to the Federal Reserve Bank of New York'' before noon on Nov 1000 cash advance. 14, the Treasury said in a statement released in Washington.

“The request for information this morning pertains to the elevated level of fails to deliver in these particular securities for a prolonged period of time,'' Treasury spokeswoman Brookly McLaughlin said. “This request is another way, beyond speaking with market participants, to ensure that Treasury understands current market conditions.''

The large position reporting program was established in 1996 in the aftermath of the Salomon Brothers bond market scandal. The confidential reports requested today are for positions held on Nov. 6 at the close of business. McLaughlin declined to comment on the results of previous position reports.

Trading Fails

Failed trades, or “fails,'' have been a problem since 2003, when supply shortages first collided with the technical effects of low interest-rate levels.

“The Treasury is definitely interested in putting an end to these trading failures,'' said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., a unit of France's largest bank. “There isn't a whole lot that they can do besides reopening issues and they expressed this week a big aversion to'' doing that.

Securities that can be borrowed at interest rates close to the Fed's target rate are called general collateral, while those in the highest demand are called “special'' by traders because rates on loans secured by these securities are lower.

The overnight general collateral repo rate was 0.25 percent today, which match where the overnight fed funds rate traded. The central bank's official target rate for overnight loans is 1 percent.

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Europe's manufacturing and service industries contracted at a record pace in October as the financial crisis damped exports and consumer spending.

Royal Bank of Scotland Group Plc's composite index dropped to 44.6, the lowest since the survey began in 1998, from 46.9 in September, Reuters reported. Economists forecast a decline to 45.4, according to the median of 17 estimates in a Bloomberg survey. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.

Europe's economy may be tipped into a recession as the global credit crunch forces governments to bail out banks and stock markets plunge. Daimler AG, the world's second-biggest maker of luxury cars, yesterday slashed its 2008 earnings forecast by 1 billion euros ($1.3 billion) and Fiat SpA, Italy's biggest carmaker, said it will cut production in the fourth quarter.

“We're going to see a contraction of the European economy in the fourth quarter,'' said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. The European Central Bank “is going to cut interest rates as early as the next governing council meeting'' on Nov. 6, he said.

The euro dropped more than a cent after the PMI figures were published to $1.2530, a two-year low. European stocks fell, extending the Dow Jones Stoxx 600's decline to 46 percent this year.

Rate Cuts Expected

The International Monetary Fund on Oct. 7 predicted growth in the 15 countries sharing the euro would slow to 0.2 percent next year, the weakest since the single currency began trading in 1999, from 1.3 percent this year.

The ECB joined a globally coordinated rate cut this month in an effort to boost confidence, reducing its benchmark by half a point to 3 free credit report and score.75 percent. Investors expect the Frankfurt-based bank to lower the rate by a further half-point to 3.25 percent next month, Eonia forward contracts show.

“The euro zone is experiencing a double-whammy,'' said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “The escalation of the financial crisis in the past few weeks has damped demand in the euro zone as well as from its trading partners.''

Markit's manufacturing index dropped to 41.3 this month from 45 in September, while the services index fell to 46.9 from 48.4. At the same time, inflation pressures continued to ease from a July peak, today's report showed.

Risks Materialize

“There has been a materialization of the downside risks to growth and we have to take that into consideration in all respects, and particularly as regards the influence that it has on the upside risks for price stability,'' ECB President Jean-Claude Trichet said in New York on Oct. 14. In an interview on French radio on Oct. 19, he described the 15-nation euro area as being in a “very, very important growth slowdown.''

The euro's decline and lower oil prices may help to steady the economy by making exports more competitive and reducing household energy bills.

“Commodity and oil prices and the euro's rate against the dollar will help confidence to recover,'' said Kenneth Broux, and economist at Lloyds TSB in London. Oil prices have halved in the past three months, helping euro-area inflation slow to 3.6 percent in September.

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Pssst. The secret’s out at KFC. Well, sort of. Colonel Harland Sanders’ handwritten recipe of 11 herbs and spices was to be removed Tuesday from safekeeping at KFC’s corporate offices for the first time in decades. The temporary relocation is allowing KFC to revamp security around a yellowing sheet of paper that contains one of the country’s most famous corporate secrets.

The brand’s top executive admitted his nerves were aflutter despite the tight security he lined up for the operation.

"I don’t want to be the president who loses the recipe," KFC President Roger Eaton said. "Imagine how terrifying that would be."

So important is the 68-year-old concoction that coats the chain’s Original Recipe chicken that only two company executives at any time have access to it. The company refuses to release their name or title, and it uses multiple suppliers who produce and blend the ingredients but know only a part of the entire contents.

Louisville-based KFC, part of the fast-food company Yum Brands Inc. (YUM, Fortune 500), hired off-duty police officers and private security guards to whisk the document away to an undisclosed location in an armored car. The recipe will be slid into a briefcase and handcuffed to security expert Bo Dietl for the ride.

"There’s no way anybody could get this recipe," said Dietl, a former New York City police detective. His security firm is also handling the security improvements for the recipe at headquarters, but he wouldn’t say what changes they’re making.

For more than 20 years, the recipe has been tucked away in a filing cabinet equipped with two combination locks in company headquarters. To reach the cabinet, the keepers of the recipe would first open up a vault and unlock three locks on a door that stood in front of the cabinet.

Vials of the herbs and spices are also stored in the secret filing cabinet.

"The smell is overwhelming when you open it," said one of two keepers of the recipe in an interview at company headquarters.

The biggest prize, though, is a single sheet of notebook paper, yellowed by age, that lays out the entire formula - including exact amounts for each ingredient - written in pencil and signed by Sanders.

Others have tried to replicate the recipe, and occasionally someone claims to have found a copy of Sanders’ creation cash advance. The executive said none have come close, adding the actual recipe would include some surprises.

Sanders developed the formula in 1940 at his tiny restaurant in southeastern Kentucky and used it to launch the KFC chain in the early 1950s.

Sanders died in 1980, but his likeness is still central to KFC’s marketing.

"The recipe to him, in later years, was everything he stood for," said Shirley Topmiller, his personal secretary for about 12 years.

Larry Miller, a restaurant analyst with RBC Capital Markets, said the recipe’s value is "almost an immeasurable thing. It’s part of that important brand image that helps differentiate the KFC product."

KFC had a total of 14,892 locations worldwide at the end of 2007. The chain has had strong sales overseas, especially in its fast-growing China market, but has struggled in the U.S. amid a more health-conscious public. KFC posted U.S. sales of $5.3 billion at company-owned and franchised stores in 2007. 

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