Today, Wall Street’s fears were eased by the Non-Manufacturing NAPM survey came in higher than economists expectations and actually signaled some expansion. I would be cautious extrapolating this single data point after the pummeling in October. While the headline number showed increasing business activity, the other indexes from NAPM offer little to be enthusiastic over. Only imports registered an increase, and although most of the other indexes did show improvement they still pointed to further contraction. Within the press release, NAPM included comments from members relating to each index. Here are a few of the published comments for some of the indexes:

• New Orders: "Fewer new sales, Partly, recovery from terrorist disruption in September"
• Backlog of Orders: "Less work, less backlog"
• Inventory Change: "Still trying to lower inventory due to lack of sales, Overstocked on some items purchased while prices are low"
• Employment: "Some early retirement – freezes on new hires – layoffs coming"

Remember that the question asked is what was the change in business for the current month compared to the previous month. I think everyone will agree that there has been a pick up in business activity since October, but there are major problems with the current economy that cannot go over-looked. Bankruptcies are headed for a record high, mortgage payments are slipping, layoffs mount, and holiday sales will be down from last years level just to name a few.

Travel has bounced from September, but is not close to last year’s levels. American Airlines reported this week that traffic is down 25% year over year while Continental has experienced a 16.7% drop. Hotels in the Bay Area were only 58% full in October compared to 86% last year. During the tech boom, 70% of Silicon Valley’s travelers were there on business. Business travel was declining prior to 9-11 and the terrorist attacks "basically did things in," said Gary Carr, consultant with PKF Consulting.

According to Jeffery Dallas, a hotel industry consultant with Ernst & Young, most hotels are break-even at the 50%-55% occupancy level, so there are a lot of hotels on the edge. Smith Travel Research reported that nationwide hotels were 60% booked in October. California is reeling from the effects more than the rest of the nation. Nationwide, 30% of hotel and restaurant workers have been laid off, but California has experienced 34% job loss.

Historically, hotels are often reluctant to lower room rates. In the short-term hotels are able to manage costs on a per room basis and it is more profitable, (or less costly), to maintain room rates at the expense of a lower occupancy. Hotels can reduce staff and by not renting a room it saves on the utilities for the night. But times are so tough around San Francisco that hotels are lowering prices and tying to entice local customers and business to help shore up occupancy. The average room rate in San Jose during October dropped $145.44, 21% below last year’s rate.

The travel slowdown is already having an affect on hotels’ ability to remain viable. Yesterday, the Westin Beechwood was foreclosed on. The $43 million foreclosure was the biggest in Dallas in the last five years. Starting next year there could be a wave of foreclosures. Lenders typically wait 90 days before foreclosing on a property. The terrorist attacks have exacerbated the slowdown in business travel. Since travel has yet to pick up to pre-attack levels Bjorn Hanson, head of the global hotel practice at PricewaterhouseCoopers, thinks 5% to 10% of hotels could face loan trouble early next year, with 2% to 4% being foreclosed on. Everything depends on getting the economy turned around. A Reuters story today reporting the Westin foreclosure, also included comments by Nancy Evans, director of hotel lending at Wells Fargo, "The weaker assets are going to fall off a cliff. The determining factor is going to be if the spring [recovery] comes. You may see a few fall off because they were weak before Sept. 11. But if the spring comes, if the business comes back, a lot of people are going to squeak back." Obviously, if the recovery is pushed back, the situation will get a lot worse.

Companies are also facing higher insurance rates. Insurance costs are escalating for both health insurance and property and casualty insurance. Rising medical cost are forcing insurance companies to increase premiums and/or decrease benefits. Just yesterday Ford announced that it would pass along rising cost to its employees and retiree in the form of higher premiums and higher co-payments.

Property and casualty insurers have to pass along increased costs derived from rising reinsurance cost. These cost increases will force several businesses to make the decision whether or not to stay in business. Trucking companies are one industry that is already suffering from low margins and are now seeing insurance premiums increase. Don Sullivan, CEO of Truck Writers Inc, an insurance broker specializing in the trucking industry, believes higher insurance rates could force 15% of the trucking industry to go out of business.

The zero-percent financing is starting to affect the bottom line. While the zero-percent financing continued to lure in buyers it is having a diminished affect. Vehicle sales fell to an 18 million-unit rate, from October’s 21 million-unit rate, but this was still almost 10% above last years pace. There was also wide disparity between automakers. General Motors maintained the most aggressive incentives and increased sales by 13.3% from last year. Ford and GM said during conference calls that sales started to fade toward the end of the month and December would be lower, with Ford forecasting a 15 to 16 million unit rate. Most analyst are forecasting auto sales to come in below the break-even point for most carmakers, however Dow Jones carried a story quoting Kevin Tynan, analyst with Argus Research. Tynan agrees with GM’s forecast of 15 million to 15.5 million units.

Tynan says because the industry is "sized" for 15 million to 16 million vehicles, the industry will have to "grease them with incentives." While this sounds good, automakers would not be about to financially survive. Ford is already having serious problems based on the zero-percent financing it has offered during the last two months.

Just today Ford announced its loss would be larger than expected. It blamed the short fall on the marketing incentives and the needing to reserve more for bad loans in the deteriorating economy. Ford is trying to negotiate with the UAW in its attempts to further reduce costs. Ford has already slashed its dividend, cut executive bonuses, and eliminated 401(k) matching. Wall Street also expects Ford to announce 20,000 more layoffs early next year as cost cutting efforts are increased.

Speaking of bad loans, UBS Warburg, concluded in a report that seven big banks need to increase loan reserves 40% to mitigate the deterioration in their loan portfolios. This would reduce pretax profits by a combined $6.4 billion.

Retail sales continue to dominate headlines. While reports are mixed, most are pointing to one of the worse holiday seasons on record. The Bank of Tokyo-Mitsubishi retail chain-store sales index fell 1.7% for the week ending December 1. This was the largest drop since week following the terrorist attacks. Additionally, the Bank of Tokyo-Mitsubishi sales index, which measures the total dollar volume of sales, fell to the lowest level in five weeks.

Prudential Securities published a report detailing its findings after visiting several specialty apparel stores. I’ve included a few quotes that highlight just how promotional retailers, especially apparel retailers, are this season:

• Abercrombie & Fitch
  "approximately 60% of the store was on sale at an average markdown rateof 25%."
• Ann Taylor Stores
  "approximately 60% of the store was on sale at an average markdown rateof 40% (merchandise was marked down the Monday after Thanksgiving weekend). Thisis quite different from Thanksgiving weekend where only 15% of the store wasmarked down."
• Gap Inc
  "The stores were even more promotional than last week, with new markdownson coats and sweaters and a total of 70% of the store marked down at an averagemarkdown of 45%."
• Old Navy
  "This week, the amount of merchandise on sale increased to 75% versus 60%last week, and the average markdown rate increased to 45% from 40%."
• Express
  "Approximately 50% of the store was marked down, with an average markdownrate of 35%."

The market has certainly started to believe the economy has hit bottom and a recovery is just around the corner. The next month will be very interesting as companies come forward with their guidance for next year. It is highly likely that the recent euphoria will be a distant memory.