Monday, December 10, 2018

The SBA and PROmulgate

promulgate
PROM-uhl-gayt, pro-MUHL
1. To make a law, rule, etc. known by public declaration.
2. To make publicly known an idea, belief, etc.

From Latin promulgare (to make known), from pro- (forward) + mulgere (to milk, to cause to come out).

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TIP OF THE WEEK

SBA is about to promulgate significant changes to its loan guarantee program which will be reflected in the new SOP 50-10-6.

Before you go procumbent with the prodigious impact of all this, SBA has decided to not be Procrustean and has extended the deadline for submitting written comments to December 18th.

Probative prodnosing does work.  Earlier this year it appeared that business meals might NOT be tax deductible anymore with the new tax law.  Concerned about the frangible impact on the restaurant industry, the AICPA asked the IRS to confirm if business meals were still deductible. The IRS in October issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law known as the Tax Cuts and Jobs Act (TCJA),

Let me know if you would like a copy of the Proposed Rule changes on SBA loans or the recent IRS notice on the deductibility of business meals.

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Indices:

PRIME RATE= 5.25%

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SBA 504 Loan Debenture Rate for November

For 20 year debentures, the debenture rate is only 3.87% but note rate is 3.93% and the effective yield is 5.591%.

For 25 year debentures, the debenture rate is only 3.47% but note rate is 3.598% and the effective yield is 5.590%.
 ________________________________________________
AHEAD OF THE YIELD CURVE

It has been promulgated that an inverted yield curve creates splenetic presentiment of a recession.

There is some cunctation with the inversion of the yield curve and the actual allision of the economy.  Since 1978 there has been an average of 627.2 days between the first inversion and the start of the next recession.

An actual inversion was penelopized somewhat with Friday’s report on employment for November.  It was reported that total nonfarm payroll employment increased by 155,000 in November and the change in total nonfarm payroll employment for October was revised down from +250,000 to +237,000.

Here is a summary of net payroll employment and this week’s interesting little table of data:

November      155,000
October       237,000
September     119,000
August        286,000
July         165,000
June         213,000
May          244,000
April       175,000
March        155,000
February    324,000
January     176,000
2017      2,110,000
2016      2,160,000
2015     2,740,000
2014     3,116,000
2013     2,074,000
2012     2,193,000
2011     2,103,000
2010    1,022,000
2009    -5,052,000
2008    -3,617,000
2007    1,115,000
2006    2,071,000
2005    2,484,000
2004    2,019,000

What does all this mean?

I don’t know.

After the jobs report, the 30-year Treasury bond climbed 4.1 basis points to 3.177% recovering from the 10 basis point plunge earlier in the week which had been its largest daily fall in over 6 months.

On Friday, the Federal Reserve will report on industrial production and capacity utilization.  Last month capacity utilization fell to 78.4% from an upwardly revised 78.5% in September.  One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

The following Monday the Treasury will auction 30 year Treasury bonds.  Last month’s auction was fairly weak, with the ratio of bids accepted to bids received for the auction was at 2.06 times, the lowest in three years.   The yield ended up at 3.421%.

The next day, the Federal Reserve concludes its meeting on monetary policy.  Minutes from their last meeting indicated Federal Reserve officials were firm that they expected to increase interest rates in December, but they were much more uncertain about the path of monetary policy in 2019.  What’s also noteworthy is the difference between the minutes of the Fed’s September and November meetings. In September, most said it might be necessary to bring the federal funds rate above the neutral level; no one made that argument in the November meeting.

Some probity from the Federal Reserve will enervate a bigly recrudescence in interest rates.



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OFF BASE

Charles Dickens promulgated Christmas as we know it with A Christmas Carol.  Before that, Christmas was a pagan ritual on the winter solstice.

As the days grew shorter and shorter and colder and colder, it seemed as if we were plunging towards eternal darkness.  On the shortest day of the year, bonfires were lit with pleas for the sun to return.  It seemed to work as the next day was slightly longer than the previous day.  Light was triumphing over darkness.

Early church officials, eager to supplant these rites with their own, chose to make Christmas celebrations correspond to these pagan rituals.  Thus, Christmas had mostly replaced pagan holidays by the Middle Ages, but holiday observances were usually far from pious. Believers might go to church, but afterward citizens would gather for rowdy festivals similar to Mardi Gras.

But Oliver Cromwell proved to be the original Grinch. A staunch Puritan, Cromwell believed that Christmas was a decadent and unchristian holiday. When he took over in 1645, he vowed to rid England of such indulgences and cancelled Christmas. In 1660 Charles II was restored to the throne by popular demand and reinstated the holiday.

The Christmas debauchery and revelry continued.  In 1828, the New York City Council had to create its first police force in response to a Christmas riot.

Charles Dickens visited the United States in 1842 and the Christmas experience here was unlike anything he had seen before.  Returning to England, Dickens wrote A Christmas Carol in only six weeks during the autumn of 1843.  Since then A Christmas Carol has never gone out of print.

Christmas would not be declared a national holiday in the United States until June 26, 1870.

Merry Christmas.

Monday, November 5, 2018

The SBA and PROdnose

prodnose
PROD-nohz
verb intr.: To pry.
noun: A prying person.

After Prodnose, a pedantic and nosy character, who appeared in the newspaper columns of J B Morton in the Daily Express.   J B Morton wrote under the pen name Beachcomber.  Twenty years before the word appeared in his column, the poet Dylan Thomas once wrote in 1934:  “I want you to think of me today ... singing as loudly as Beachcomber in a world rid of Prodnose.”

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TIP OF THE WEEK

SBA 7(a) loan approvals for the fiscal year ending September 30th totaled $25,372,457,900.  That’s 0.3% less than the prior year.

Being a prodnose about this, I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function.  It came out to a statistically significant 0.86.

That would imply the economy won’t continue to grow as rapidly as it is now.

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Indices:

PRIME RATE= 5.25%

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SBA 504 Loan Debenture Rate for October

For 20 year debentures, the debenture rate is only 3.77% but note rate is 3.83% and the effective yield is 5.492%.

For 25 year debentures, the debenture rate is only 3.89% but note rate is 3.935% and the effective yield is 5.532%.

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AHEAD OF THE YIELD CURVE

On Friday, it was reported that employment surged by 250,000. Yearly pay increases topped 3% for the first time in nine years. And unemployment remained at a near 50-year low.

Prodnosing the numbers, you’d note that the big payroll total was partly fueled by workers in the Carolinas returning to jobs after staying home during Hurricane Florence in September.

The annual wage growth topping 3%?  There’s a caveat. Average pay in October 2017 was particularly weak, likely inflating the yearly increase.

The 30-year bond yield climbed 6.7 basis points to 3.454%, a new four-year high, contributing to a week long rise of 13.9 basis points.  Keep your eyes and ears open for the sale of $19 billion in 30 year Treasury bonds on November 7th.

At last month’s sale of the 30 year Treasury bond the yield ended up at 3.344%.  This week’s sale is part of a record amount of 3-year, 10-year and 30-year securities offered during one quarter.   The Treasury is on track to issue $1.34 trillion in new debt this year, more than double the amount in 2017.

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, seem silly now.

The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year.  More generally, a flat curve indicates weak growth and conversely, a steep curve indicates strong growth.

Here is how the yield curve has changed over the last month and this week’s interesting little table of data:
Treasury MTD Chg
3M       --0.01
6M         0.00
1Y         0.02
2Y         0.03
5Y         0.05
10Y        0.06
30Y        0.05

What does all this mean?

I don’t know.

The Federal Reserve Bank of Cleveland in their monthly assessment of the yield curve and predicted GDP growth said that expectations of growth jumped up somewhat.  Using past values of the spread and GDP growth suggests that real GDP will grow at about a 2 percent rate over the next year.  So the yield curve is still optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.

The majority of top Federal Reserve officials believe that interest rates will have to continue to increase until the economy slows down from the rising cost of borrowing, according to minutes of the central bank’s September meeting.  The minutes also showed that just how long policy would have to be restrictive was an open question.  Officials only said “there is considerable uncertainty surrounding all estimates of the neutral federal funds rate.”  At the meeting, Fed officials removed the sentence indicating “the stance of monetary policy remains accommodative.”

The Fed’s next meeting on monetary policy concludes this week on November 8th.

There appears to be splenetic presentiment among the Federal Reserve Open Market Committee over an enervation of prodigiously recrudescent interest rates.

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OFF BASE

Election Day is Tuesday November 6th.

Did you ever prodnose about why it’s always the first Tuesday in November?

The answer stems from the agrarian makeup of 19th-century America. In the 1800s, most citizens worked as farmers and lived far from their polling place. Since people often traveled at least a day to vote, lawmakers needed to allow a two-day window for Election Day. Weekends were impractical, since most people spent Sundays in church, and Wednesday was market day for farmers. With this in mind, Tuesday was selected as the first and most convenient day of the week to hold elections. Farm culture also explains why Election Day always falls in November. Spring and early summer elections were thought to interfere with the planting season, and late summer and early fall elections overlapped with the harvest. That left the late fall month of November—after the harvest was complete, but before the arrival of harsh winter weather—as the best choice.

Monday, October 1, 2018

The SBA and PROdigious

prodigious

pruh-DIJ-uhs
1. Remarkable in size, quantity, strength, etc.
2. Marvelous.
3. Abnormal; monstrous.

From Latin prodigiosus (marvelous, portentous), from prodigium (portent).

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TIP OF THE WEEK

Prodigious use of loan brokers has always been a concern with SBA.  One of their lender flag metrics is what they call loan agent rate.  One of the ways they track this is with SBA form 159.

A new SBA form 159 was recently released.  SBA expects lenders and CDCs to begin transitioning to the new form immediately and will require its use for all forms completed on or after November 1, 2018.  One of the major changes is that the form has been redesigned to include all identifying information and information about fees paid in one location.   The new Form 159 requires that all information be completed on the form before the Applicant signs.

These requirements are not new and have been included in the CFR and SOP for some time.

One thing that will be changing is the requirement related to the evaluation of personal liquid assets of owners of 20% or more of a loan applicant as part of the Credit Elsewhere Determination.  The Federal Register just published for comment several substantial proposed changes.  One of those changes intends to add a new regulation to require certain owners of the small business Applicant to inject excess liquid assets into the business to reduce the amount of SBA-guaranteed funds that otherwise would be needed.  Prodigiously rich borrowers will be affected.

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Indices:

PRIME RATE= 5.25%

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SBA 504 Loan Debenture Rate for September

For 20 year debentures, the debenture rate is only 3.53% but note rate is 3.58% and the effective yield is 5.250%.

For 25 year debentures, the debenture rate is only 3.65% but note rate is 3.69% and the effective yield is 5.290%.

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AHEAD OF THE YIELD CURVE

Prodigious increases in interest rates are the probative question.

The Federal Reserve just increased interest rates for the third time this year with some presentiment that it would increase them again in December.

Rates are now at their highest level since the fall of 2008.  Fall could be construed to either mean autumn or collapse.

The Fed however is not being procrustean about the pace of future rate increases.

With some probity in their statement on monetary policy, the Fed removed language that said “the stance of monetary policy remains accommodative.”  Policy is accommodative, neutral or restrictive.

The Fed continued to project three rate increases next year and one more in 2020. This would bring rates into what is considered restrictive territory — more than enough to slow the economy.

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

DEC18- 2.67
DEC19- 3.14
DEC20- 3.18
DEC21- 3.06
DEC22- 3.13
DEC23- 3.17
DEC24- 3.23

What does all this mean?

I don’t know.

The price difference between the December 2019 Eurodollar futures contract  and the December 2018 Eurodollar contract, an indication of how many rate hikes money-market traders expect next year, jumped to 50 basis points, or two full hikes. Before last month, the spread between those two contracts bounced between 30 and 40 basis points, implying investors’ forecasts were split between one and two rate hikes in 2019.

There appears to be splenetic presentiment among Eurodollar market participants and the Federal Reserve Open Market Committee over an enervation of prodigiously recrudescent interest rates.

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OFF BASE

“Prodigious” doesn’t just mean big. It means really, really big. And its overuse to mean merely large is bordering on the “prodigious.”  The second definition of “prodigious” in Webster’s New World College Dictionary, is of great size, power, extent, etc.; enormous; huge.” The third definition in Merriam-Webster is “extraordinary in bulk, quantity, or degree.”

Things that are “prodigious” are also “wonderful” and “amazing,” definitions in both Webster’s New World and Merriam Webster.  Those definitions are actually older: The Oxford English Dictionary traces the “wonder” usage to about 1497, but the “enormous” usage to 1601.

But the original definition of “prodigious,” now obscure, was “portentous”: relating to an omen, probably a bad one. We are still using “portentous” in that way, though it’s occasionally incorrectly spelled and pronounced “portentious.

If you’re just trying to impress people, don’t use “prodigious” “portentously.”

If all of this is making your head spin or even if you don’t care, go ahead and take this Monday off.  According to the Federal Reserve, here are  the remaining holidays for 2018:

Columbus Day October 8
Veterans Day November 11
Thanksgiving Day November 22
Christmas Day December 25

Monday, September 10, 2018

The SBA and PROcumbent

procumbent
pro-KUM-buhnt
1. Lying face down; prone; prostrate.
2. Of a plant: Growing along the ground without putting new roots.

From Latin procumbent- (bending forward), present participle of procumbere (to lean forward), from pro- (forward) + cumbere (to lie down).

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TIP OF THE WEEK

SBA borrowers wishing to borrow smaller amounts might become procumbent when they realize that they now have to pay a guarantee fee.  With the start of a new fiscal year on October 1st, new guarantee fees for SBA 7(a) loans will go into effect.  The biggest change will be that the waiver on fees for loans of $125,000 and less is gone.

For loans of $150,000 or less the guarantee fee will be 2% of the guaranteed portion.  SBA guarantees 85% for loans of $150,000 or less.  For loans greater than that, the guaranteed portion is 75%.

For loans of $150,001 to $700,000, the guarantee fee will be 3% of the guaranteed portion.  For loans of $700,001 to $5,000,000 the guarantee fee is 3.5% of the guaranteed portion up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000.

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Indices:
PRIME RATE= 5.00%

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SBA 504 Loan Debenture Rate for August

For 20 year debentures, the debenture rate is only 3.58% but note rate is 3.638% and the effective yield is 5.301%.

For 25 year debentures, the debenture rate is only 3.71% but note rate is  3.754% and the effective yield is 5.351%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

Minutes from the Federal Reserve’s meeting on monetary policy revealed a heresy on yield curve thinking that soon spread like procumbent pearlwort.

The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have predicted each of the last seven recessions

Bloviating over the possible implications of a flattening yield curve, several participants cited statistical evidence that inversions of the yield curve have often preceded recessions.  But other board members emphasized that inferring economic causality from statistical correlations was not appropriate.  Other things might be keeping longer term rates low such as central bank asset purchase programs and strong worldwide demand for safe assets.  The exact wording in the minutes was “In such an environment, an inversion of the yield curve might not have the significance that the historical record would suggest; the signal to be taken from the yield curve needed to be considered in the context of other economic and financial indicators.”

The splenetic presentiment from the Federal Reserve Bank of San Francisco was almost immediate.  They published a FRBSF Economic Letter titled “Information in Yield Curve about Future Recessions”.  The conclusion was to not get caught up in cause and effect but instead accept that the yield curve has been a reliable predictor of recessions.

The Federal Reserve Bank of Cleveland in their monthly assessment of the yield curve and predicted GDP growth said that despite a flatter yield curve expectations of growth are about the same.  Using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.6 percent rate over the next year.  So the yield curve is still optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.

Treasury yields rose on Friday after August jobs data offered nascent signs that a tight labor market is accelerating wage growth—a phenomenon many see as the missing ingredient for higher inflation.  The August jobs report showed the U.S. economy added 201,000 jobs, leaving the unemployment rate at 3.9%. Yet investors mostly keyed into the sharp climb in the average hourly earnings number, a key measure of worker’s wages, which rose 0.4%, pushing the yearly growth rate to 2.9%, the fastest since 2009.  The economy has produced an average of 207,000 new jobs a month so far this year — faster than the pace of hiring in both 2017 and 2016.

The 30 year Treasury bond ended the week at 3.10%.

Keep your eyes and ears open for Thursday’s auction of 30 year Treasury bonds.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
2006- 4.91
2007- 4.84
2008- 4.18
2009- 3.89
2010- 4.61
2011- 2.89
2012- 2.77
2013- 3.25
2014- 3.97
2015- 2.91
2016- 2.32
2017- 3.16

What does all this mean?

I don’t know.

At last month’s auction the sale of $18 billion in 30 year Treasury bonds ended the day at 3.09% not far off from where the long bond is currently.

The frangible long end of the yield curve as reflected by probative measures of the 30 year Treasury bond appear to be enervating a bigly recrudescence in interest rates

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OFF BASE

If you go procumbent on the green to figure out how to mess up your putt, you might notice a softer mossy patch.  It looks like grass but it isn’t.  It’s procumbent pearlwort.  The bane of putting greens and lawns around the world, procumbent pearlwort is a difficult weed to spot until it reveals itself with tiny white flowers.  It also grows in the cracks of sidewalks.  It is difficult to eradicate as it is resistant to most herbicides.  Don’t despair however if you see it in your lawn.  Trying to mow your lawn closely does not help as it leads to a weak sward in the grass and allows the pearlwort to establish itself.  It also flourishes in very wet soil.  So evidently to kill it you have to stop mowing and watering your lawn.  Resistance is futile.

This is a legendary plant in the British Isles as it was commonly believed if a young village maiden had a piece of procumbent pearlwort in her mouth when she kissed someone, he was bound to her for ever.  Resistance is futile.

Monday, August 13, 2018

The SBA and Procrustes

Procrustes
pro-KRUS-teez
A person imposing conformity without concern for individuality.

After Procrustes, a giant in Greek mythology, who stretched or cut his victims to make them fit his bed. He was killed by Theseus. From Greek Procroustes (stretcher). The word is more often used in its adjective form procrustean.

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TIP OF THE WEEK

The SBA has revised and updated SBA form 413, the personal financial statement.  The new form itself clarifies the guidance on who must sign it, including spouses.

SBA is very procrustean about having the spouse sign the personal financial statement.  Spouses, even if they have nothing to do with the business must sign the personal financial statement.  Keep in mind that the SBA’s lending programs qualify as “Special-Purpose Credit Programs” under the Equal Credit Opportunity Act (ECOA). This regulation stipulates that information pertaining to the Applicant’s marital status, sources of personal income, alimony, child support, and spouse’s financial resources can be obtained and considered in determining program eligibility.

Lenders should be using the new form now.  Let me know if you need a copy of it.

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Indices:

PRIME RATE= 5.00%

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SBA 504 Loan Debenture Rate for July
For 20 year debentures, the debenture rate is only 3.54% but note rate is 3.597% and the effective yield is 5.259%.

For 25 year debentures, the debenture rate is only 3.68% but note rate is  3.724% and the effective yield is 5.320%.
 ________________________________________________
AHEAD OF THE YIELD CURVE

The Federal Reserve is not being a Procrustes about raising interest rates at every meeting on monetary policy.

Two weeks ago the Federal Open Market Committee voted unanimously to hold rates at a range between 1.75% and 2%, after raising rates in June.  In their statement, the Fed said the inflation was near their symmetric 2% objective over the medium term.  Whatever that means.

So what is inflation doing?  The Bureau of Labor Statistics reported on Friday that headline inflation was up 2.9% over the past 12 months. Core prices, excluding volatile food and energy prices, were up 2.4%, the fastest pace since Sept. 2008. Housing, specifically rent, had a lot to do with that acceleration. If rents were excluded, headline CPI would have been up a cooler 1.7% over the past 12 months.  Prices of some essentials have declined over the past year.  In the 12 months ending in July, the cost of coffee fell 2.4%, and the cost of nonprescription drugs were down 1.6%.  The decline with the biggest impact of the year-over-year rate of inflation are the cost of golf clubs, tennis rackets and other sporting equipment, down 2.7%%. This trimmed about .05% from the inflation rate.  The problem with my game is not my clubs so that won’t help.

One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Keep your eyes and ears open for Wednesday’s report on Industrial Production and Capacity Utilization.

Here is what capacity utilization rates have done:
2007- 81.5
2008- 79.9
2009- 66.9
2010- 74.8
2011- 76.7
2012- 79.0
2013- 77.8
2014- 78.8
2015- 76.5
2016- 75.4
2017- 76.2
2018- 78.0

What does all this mean?

I don’t know.

Last month capacity utilization edged up to 78% from 77.7%.  While that’s about 1.8 percentage points below the historic average, the rate of utilization is still at a multi-year high.  Interestingly enough, capacity utilization is actually up 1.8 percentage points over the last year.

Some probity from the Federal Reserve will need some probative to enervate any splenetic presentiment of a bigly recrudescence in interest rates.

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OFF BASE

If you want to be a Procrustes about this, don’t let anyone say we are in the dog days of summer.   They just ended.

It does not have anything to do with it being so hot that dogs just lay around.  Instead, the dog days refer to the Dog Star, Sirius, and its position in the heavens.

To the Greeks and Romans, the “dog days” occurred around the day when Sirius appeared to rise just before the sun, in late July.

 Sirius is the brightest star visible from any part of Earth.  It is part of the constellation Canis Major, the Greater Dog. This is why Sirius is sometimes called the Dog Star.

In the summer, Sirius rises and sets with the Sun. On July 23rd, specifically, it is in conjunction with the Sun, and because the star is so bright, the ancient Romans believed it actually gave off heat and added to the Sun’s warmth, accounting for the long stretch of sultry weather. They referred to this time as diēs caniculārēs, or “dog days.”

Thus, the term Dog Days of Summer came to mean the 20 days before and 20 days after this alignment of Sirius with the Sun—July 3 to Aug. 11.

Monday, July 16, 2018

The SBA and PRObity

probity
(PRO-bi-tee)
Integrity and honesty.
From Latin probus (upright, good).

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TIP OF THE WEEK

The FDIC, OCC and Federal Reserve introduced a new exposure category called high volatility acquisition, development, or construction exposure (HVADC).

This new category addresses the contributed capital concerns by eliminating it all together as an exemption. A multipurpose loan would be deemed an HVADC if the loan primarily (more than 50 percent) finances the acquisition, development, or construction project.

The rule proposes an exemption for the 7(a) and 504 loan programs.  SBA has also requested the exemption to be applied to the 504 interim loan and third party lender loan

That might mean it will be easier to get a SBA loan for real estate purposes than one without a SBA guarantee.

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Indices:

PRIME RATE= 5.00%

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SBA 504 Loan Debenture Rate for July

Last week the first 25 year 504 loan pool funded.  The funding of the first $27,536,000 in 25-year debentures under the 504 Program reflected a slight premium over the 20 year debenture.

For 20 year debentures, the debenture rate is only 3.54% but note rate is 3.597% and the effective yield is 5.259%.

For 25 year debentures, the debenture rate is only 3.68% but note rate is  3.724% and the effective yield is 5.320%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

I don’t think anyone can question the probity of the Federal Reserve Open Market Committee.

At their last meeting on interest rates the Fed raised the fed-funds rate by a quarter percentage point to a range of 1.75% to 2.00%, marking its second increase in 2018 and its seventh since the commencement of a path of normalization for the central bank since 2015.

Most notably, gone is language that said the Fed expected the federal funds rate was “likely to remain, for some time, below levels that are expected to prevail in the longer run.” That’s a clear sign the Fed no longer thinks money is very cheap or that the economy needs as much help as it once did.

Last week’s sale of $14 billion in 30 year Treasury bonds drew a high yield of 2.958%, about 15 basis points away from its starting levels this year, even after two Federal Reserve interest-rate hikes have been passed. Fed moves are usually more acutely mimicked along the shorter end of the yield curve but, and especially if they accompany rising inflation expectations, higher rates can be reflected along the yield curve.

The lack of a substantial selloff suggested investors mostly ignored the bearish implications of rising price pressures. Inflation can chip away a bond’s fixed value and provide some impetus for Fed policy makers to quicken their pace of rate increases. Both are factors that might drive debt prices lower and yields higher.

That’s because market participants see the recent burst of inflation as a temporary phenomenon. Lackluster wage growth is one of the reasons preventing prices from taking off.

The Bureau of Labor Statistics reported that over the last year, average hourly earnings have increased by 72 cents, or 2.7 percent.  Wage growth had been trending up, although growth has been moving more sideways recently.

They also reported that 213,000 jobs were added in June and the previous two months were revised up by a combined 37 thousand.

Here is a summary of net payroll employment and this week’s interesting little table of data:
June         213,000
May          244,000
April       175,000
March        155,000
February    324,000
January     176,000
2017      2,110,000
2016      2,160,000
2015     2,740,000
2014     3,116,000
2013     2,074,000
2012     2,193,000
2011     2,103,000
2010    1,022,000
2009    -5,052,000
2008    -3,617,000
2007    1,115,000
2006    2,071,000
2005    2,484,000
2004    2,019,000

What does all this mean?

I don’t know.

Keep your eyes and ears open for Tuesday’s report on Industrial Production and Capacity Utilization.  One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.  Last month it was reported that capacity utilization slipped to 77.9% from 78.1%.  That was the first drop in four months.  For the Fed, last month’s capacity utilization report does not turn up pressure for a more hawkish policy on interest rates.  We will see with this month’s report.

The frangible long end of the yield curve as reflected by probative measures of the 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent.
__________________________________________
OFF BASE
Probity means integrity.

So what is integrity?

Integrity stems from the Latin word ‘integer’ which means whole and complete. So integrity requires an inner sense of ‘wholeness’ and consistency of character. When you are in integrity, people should be able to visibly see it through your actions, words, decisions, methods, and outcomes. When you are ‘whole’ and consistent, there is only one you.

You bring that same you wherever you are, regardless of the circumstance. You don’t leave parts of yourself behind. You don’t have a ‘work you,’ a ‘family you,’ and a ‘social you.’

That little tidbit I just gleaned from one of my summer reading books written by Ray Dalio, PRINCIPLES.  He is the richest hedge fund guy in the world.

I recommend it highly along with another one called 12 Rules for Life: An Antidote to Chaos by Dr. Jordan Peterson.

Monday, June 11, 2018

The SBA and PRObative

probative
PRO-buh-tiv, PROB-uh
Serving to test something or providing a proof.
From Latin probare (to test or prove), from probus (upright, good).
_____________________________________________
TIP OF THE WEEK

Some people think SBA loans go to borrowers that don’t need them, but we haven’t found anything probative yet.

The Government Accountability Office recently released a report entitled Additional Actions Needed to Improve Compliance with the Credit Elsewhere Requirement.

As reflected on page 97 of SOP 50-10-5(J), a lender must certify that a borrower does not have the ability to obtain a loan on reasonable terms without SBA assistance.  Acceptable factors that demonstrate an identifiable weakness in the credit can include needing a longer maturity or a lack of collateral.

The GAO report expressed concerned about SBA’s monitoring efforts of lender’s compliance with this credit elsewhere requirement.

If you would like a copy of this report, let me know.

If you need a loan with a longer maturity or don’t have enough collateral, let me know.
__________________________________________
Indices:
PRIME RATE= 4.75%

________________________________________

SBA 504 Loan Debenture Rate for May
The debenture rate is only 3.50% but note rate is 3.557% and the effective yield is 5.222%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

By any probative measure, the yield curve is not really inverting.

The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year.  More generally, a flat curve indicates weak growth and conversely, a steep curve indicates strong growth.

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping many on edge. An inverted yield curve has often preceded a recession.

Here is how the yield curve has changed over the last year and this week’s interesting little table of data:

Treasury YTD Chg
3M         54.32
6M         57.96
1Y         55.37
2Y         61.08
5Y         56.56
10Y        52.42
30Y        33.81

What does all this mean?

I don’t know.

Short term rates have jumped just over a ½ percent along with the 10 year Treasury yield.  Over the last month, both short and long rates moved up, and in nearly parallel fashion. The 3-month Treasury bill rate rose to 1.92 percent, up from April’s 1.81 percent and well above March’s 1.76 percent.  The 10-year rate finally crossed a barrier by increasing to 3.01 percent, above April’s 2.88 percent and March’s 2.86 percent. These changes narrowly increased the slope to 109 basis points, up 2 basis points from April’s 107 basis points.

The Federal Reserve meets this week and the market is already pricing in a 92.5% probability of a 25 basis point increase, CME Group data shows.

Don’t get distracted by the Fed meeting.  At the same time there will be an auction of 30 year Treasury bonds.  Last month’s $17 billion auction of 30 year Treasury bonds was the largest sale on record.  Despite the size, investors eagerly sought the bond which drew a high yield of 3.130%   This week’s auction will be for $14 billion.

The frangible long end of the yield curve as reflected by probative measures of the 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent.

__________________________________________
OFF BASE

The word probative is thrown around all the time by lawyers.  Probative value is considered to be evidence which is sufficiently useful to prove something important in a trial.

A probative question is one which reveals the absolute answer.  Answers are only a meaningless laundry list of symbols unless they reveal the truth.

This principle is well illustrated by a Danish proverb:
“Better to ask twice than lose your way once.”

Monday, May 7, 2018

The SBA and frangible

frangible
FRAN-juh-buhl
Readily broken; breakable.
from Latin frangere (to break) which also gave us fraction, refract, chamfer, defray, infringe, and fracture.

_____________________________________________
TIP OF THE WEEK

SBA 7(a) loan demand continues to be infrangible.   For the six month period ending 3/30/2018, SBA 7(a) loans are up 6% over the same period last year.

The pick-up in SBA 7(a) loan approvals is good news for the economy.  Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function.  It came out to a statistically significant 0.86.

Interestingly there has been a significant increase in SBA 7(a) loans to new businesses.  59% of all loan requests were to new businesses so far this year.  For the last two years it had averaged closer to 36% of all approvals.  It could be that SBA considers a business acquisition to be a new business.  SBA 7(a) loans for business acquisitions have increased as a result of the new guidance allowing down payments as low as 10%.

SBA 504 loan demand on the other hand appears to be frangible.  504 loans so far this year are down 30% by dollar amount and 23% down by loan number.


__________________________________________

Indices:

PRIME RATE= 4.75%

________________________________________

SBA 504 Loan Debenture Rate for April
The debenture rate is only 3.31% but note rate is 3.36454% and the effective yield is 5.029%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

The slope of the yield curve is not as frangible as you’d think.  The Federal Reserve recrudescence on monetary policy is causing some splenetic presentiment as to whether it is enervating inflation.

At their last meeting on monetary policy, Federal Reserve officials left interest rates unchanged, but changed their policy statement by adding a reference to the “symmetric” nature of their inflation target TWICE.

The first time they said “Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term”.  The other time they said “The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.”

What does symmetric even mean?  It comes from the Latin symmetria which came from the Greek symmetria meaning commensurateness.  Symmetry implies either a quantitative equality of parts ( the perfect symmetry of pairs of matched columns).  In geometry, two points(1, 1) and(−1, −1) are symmetrical with respect to(0, 0).  A set is symmetric when pairs of points have this relation with respect to the same center.

I think what they are trying to say is that some of the inflation rhetoric that has indicated a deviation of inflation to the upside will not necessarily elicit a policy response, especially in light of the prolonged period of below-target inflation.

The Federal Reserve’s statement sparked a move in the U.S. yield curve that’s been virtually absent of late.  The spread between 5- and 30-year yields widened after the announcement to 33.6 basis points, the highest since April 27. Curve steepening is a rare enough occurrence -- it’s near the flattest levels in more than a decade amid bets on continued gradual Fed rate hikes. But it’s the manner of the steepening that’s striking.  The world’s biggest bond market experiences so-called bull steepening when shorter-term Treasuries rally to a greater extent than their longer-dated counterparts. Indeed, five-year yields fell as much as 1.7 basis points and two-year yields dropped 1.2 basis points. In contrast, 10-year yields were flat and those on the long bond rose.

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping many on edge. An inverted yield curve has often preceded a recession.

In April, short rates continued to rise, but long rates could not quite keep pace, so the yield curve moved higher and continued to get flatter. The three-month (constant maturity) Treasury bill rate rose to 1.81 percent while the 10-year rate (also constant maturity) rose by 2 basis points to 2.88 percent.  These changes dropped the slope to 107 basis points, down from March’s 110 basis points and a full 20 basis points below February’s 127 basis points.   According to the Federal Reserve Bank of Cleveland, the incoming data had only a minimal impact on expectations of growth. Using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.5 percent rate over the next year.

The curve is collapsing partly because the Treasury is ramping up issuance of shorter maturities to fund expanding budget deficits.

Keep your eyes and ears open for this week’s auction of 30 year Treasury bonds.  At last month’s auction of the 30 Treasury bond, the high yield, at 3.044 percent, was 6.5 basis points below March’s awarded rate.  As of Friday, the 30 year Treasury was up to 3.122%.

The Treasury Department should sell more longer-dated debt to keep its borrowing costs down.

The department will notch higher sales of two- and three-year note auctions by $1 billion per month over the quarter, compared with monthly rises over the past quarter of $2 billion. It will also boost five-, seven-, 10-, and 30-year note sales by $1 billion starting in May and lift floating rate notes by $1 billion in May.

Heavy supply coming onto the market suggests higher yields.

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

DEC18- 2.66
DEC19- 2.99
DEC20- 3.05
DEC21- 3.06
DEC22- 3.09
DEC23- 3.12
DEC24- 3.16

What does all this mean?

I don’t know.

The frangible long end of the yield curve as reflected in 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent and Eurodollar futures imply a quiescent Federal Reserve will not estivate.

__________________________________________
OFF BASE

A material is said to be frangible if it tends to break up into fragments.  Common biscuits or crackers are examples of frangible materials, which is why I am not allowed to eat them on the couch.

A frangible light pole base is designed to break away when a vehicle strikes it. This lessens the risk of injury to occupants of the vehicle

A frangible bullet is one that is designed to disintegrate into tiny particles upon impact to minimize their penetration for reasons of range safety, to limit environmental impact, or to limit the danger behind the intended target.  Too bad all bullets aren’t frangible.

Monday, April 9, 2018

The SBA and rhubarb

rhubarb
(ROO-bahrb)
A heated dispute; brawl.

The origin of the plant name rhubarb is from Greek rha (perhaps from Rha, an ancient name of the river Volga on whose bank rhubarb was grown) + barbaros (foreign)

In Shakespeare’s day when a play called for a crowd scene,a group of actors was asked to repeat the word rhubarb which reverberated through the theatre like the sounds of an angry horde.

From this "rhubarb" eventually came to be theatrical slang for "commotion." Actors who did it were called "rhubarbers." This standard stage practice then became a verb "rhubarbing", eventually "rhubarb" came to mean, "fight."

_____________________________________________
TIP OF THE WEEK

A rhubarb over the new SOP has gone quiescent with a recent policy change from SBA.

SBA Notice 5000-17057 dated 4/3/2017 revises and clarifies several policies in SOP 50 10 5(J).

Under the revised guidance, lenders will now be required to consider the liquidity of owners of 20% or more of the applicant business. The Notice increased the ownership percentage for which liquidity must be considered from 10% to 20%.

As a reminder, the liquidity of the owner includes the liquid assets of the owner’s spouse and any minor children.  For those that want to start rhubarb over why a non-owner spouse must be included keep in mind that the SBA’s lending programs qualify as “Special-Purpose Credit Programs” under the Equal Credit Opportunity Act (ECOA). This regulation stipulates that information pertaining to the Applicant’s marital status, sources of personal income, alimony, child support, and spouse’s financial resources can be obtained and considered in determining program eligibility.

__________________________________________

Indices:
PRIME RATE= 4.75%
SBA LIBOR Base Rate April =N/A
SBA Fixed Base Rate April = TBA

________________________________________

SBA 504 Loan Debenture Rate for April

The debenture rate is only 3.31% but note rate is 3.36454% and the effective yield is 5.029%.

Keep in mind a rhubarb over the new 25 year debenture won’t estivate.

 ________________________________________________
AHEAD OF THE YIELD CURVE

A rhubarb about Federal Reserve recrudescence on monetary policy is causing some splenetic presentiment and if it is enervating inflation.

Huh?

At their last meeting on monetary policy the Fed decided to increase the federal funds rate target range by 0.25 percent to 1.5 to 1.75 percent.

They also slightly changed the wording in their statement.  The Fed said inflation on an annual basis is “expected to move up in coming months,” after saying “move up this year” in the January statement.

You would think that means inflation is starting to heat up, but they left their inflation forecasts unchanged at 1.9% in 2018 and 2% in 2019.

Will they penelopize and cunctate any further?

Fed funds futures showed a decline in the odds for tightening, with the probability of rates being higher after the June meeting dipping to around 72 percent from 76 percent after the report on jobs came out on Friday.

Employers added a disappointing 103,000 jobs in March as colder weather appeared to crimp hiring after solid employment gains the first two months of the year.  In February, unseasonably warm weather pulled forward hiring in industries such as construction and retail, leading to blockbuster job gains that topped 300,000.   As a result, the weak showing is being viewed as a blip rather than a sign of a weakening labor market.

After the jobs report, the 30-year Treasury bond dropped 4.1 basis points to 3.032 percent.

Keep your eyes and ears open for Thursday’s auction of 30 year Treasury bonds.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
2001- 5.49
2002- 5.43
2003- ND
2004- ND
2005- ND
2006- 4.91
2007- 4.84
2008- 4.18
2009- 3.89
2010- 4.61
2011- 2.89
2012- 2.77
2013- 3.25
2014- 3.97
2015- 2.91
2016- 2.32
2017- 3.16

Wait a minute, why no numbers for 2003, 2004, and 2005?

One month after the 9/11 attacks, the Treasury 30 year bond is discontinued. When the Treasury mothballed the 30-year bond in 2001, experts speculated it was trying to drive down long-term interest rates, which had remained stubbornly high while the Federal Reserve was slashing short-term interest rates to revive the economy. When the Treasury discontinued the 30-year bond in 2001, its yield fell 35 basis points in one day. Why? A shrinking supply of the 30-year Treasury bond caused increased demand to drive rates down.

What does all this mean?

I don’t know.

At last month’s auction of $13 billion of 30 year bonds bidding was tight and pulled down the high yield to 3.109 percent.  That’s 6.1 basis points below the high yield awarded in March 2017.

So long term rates have declined while short term rates continue to climb.  The $14.7 trillion Treasuries market is sending clear signals that a flatter yield curve could be back in vogue.

__________________________________________
OFF BASE

My first exposure to rhubarb came from listening to Vin Scully on the radio describe a brawl between the Dodgers and Giants.

Vinny got it from his predecessor Red Barber.  The Oxford English Dictionary has the first citation from 1943:  "Mr 'Red' Barber,.. who has been announcing the games of the Brooklyn Dodgers, has used the term 'rhubarb' to describe an argument, or a mix-up, on the field of play." (NY Herald Tribune) Red’s autobiography was titled “Rhubarb in the Catbird Seat."

My second exposure to rhubarb was at Mrs. Knott’s Chicken House.  Dinner featured cherry rhubarb, salad with French dressing, handmade biscuits, cabbage and sweet pickles, three pieces of fried chicken and mashed potatoes smothered with gravy. For dessert: a slice of boysenberry pie with vanilla ice cream.

Rhubarb, a springtime stalk most commonly used in the creation of America’s second best pie, the strawberry-rhubarb, is a very strange plant indeed. Most often used in sweet applications, it’s a sour vegetable that looks like crimson celery. And its leaves are spectacularly poisonous. Rhubarb leaves are very high in oxalic acid, which quickly causes kidney failure in humans. About 25 grams of pure oxalic acid is the average amount needed to kill a human. That said, rhubarb leaves aren’t pure oxalic acid, and it would take around 11 pounds of the leaves to secure that much. But still! I’d stay away.

America’s best pie of course is that boysenberry pie.  Boysenberry is a cross between a red raspberry, a loganberry and a blackberry. The fruit was a failed experiment of Anaheim Parks Superintendent Rudolph Boysen, who was unable to keep the vines from withering. Walter Knott tried his hand at it and after successfully turning a harvest, named it the boysenberry, whose jams and jellies became a staple at the stand, and later at the restaurant.

Monday, March 12, 2018

The SBA and casuistry

casuistry

KAZ-oo-i-stree

-Deceptive or excessively subtle reasoning, especially on moral issues.
-The use of clever but unsound reasoning, especially in relation to moral questions

From Latin casus (case, fall, chance), past participle of cadere (to fall).

The Oxford English Dictionary states that the word "often (and perhaps originally) applied to a quibbling or evasive way of dealing with difficult cases of duty."

It is often characterized as a critique of principle- or rule-based reasoning.
_____________________________________________
TIP OF THE WEEK
Why did the chicken cross the road?  Apparently to get a SBA loan.

With little casuistry, the SBA Office of the Inspector General reviewed SBA 7(a) loans to poultry farmers.  It found that all the loans were ineligible for SBA financial assistance because the contracts between large chicken companies and the growers created an affiliation issue.

If you would like to see a copy of this report, please let me know.

The new SOP 50-10-5(J) has clarified the guidance regarding affiliation.

Keep in mind that last month’s stop gap funding bill expires March 23rd.

__________________________________________

Indices:
PRIME RATE= 4.50%
SBA LIBOR Base Rate March =4.69%
SBA Fixed Base Rate March = 7.44%
________________________________________

SBA 504 Loan Debenture Rate for February The debenture rate is only 3.22% but note rate is 3.2735% and the effective yield is 4.940%.
 ________________________________________________
AHEAD OF THE YIELD CURVE

The Federal Reserve meets next week and some casuistry goes into their decision making.

After their last meeting on monetary policy, they changed their policy statement by adding the word “further” twice:

“The Committee expects that, with FURTHER gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.”

“The Committee expects that economic conditions will evolve in a manner that will warrant FURTHER gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

The Fed is expected to raise rates at the next meeting.  A bigger question is whether central bank officials strengthen their resolve for three quarter-point hikes this year, or leave the door open for four.

On Friday, it was reported that U.S. employers added a blockbuster 313,000 jobs in February.

Average hourly earnings rose only 2.6% compared to January’s 2.9%. The drop suggests that January’s big increase was an anomaly. It was caused by a sharp decline in average weekly hours as a result of harsh weather and a nasty flu season.  That’s just over the tepid 2.5% pace of the past couple of years.

One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Here is what capacity utilization rates have done:
2007- 81.5
2008- 79.9
2009- 66.9
2010- 74.8
2011- 76.7
2012- 79.0
2013- 77.8
2014- 78.8
2015- 76.5
2016- 75.4
2017- 76.1

What does all this mean?

I don’t know.

Last month it was reported that capacity utilization fell 0.2 percentage point in January to 77.5 percent, a rate that is still 2.3 percentage points below its long-run (1972–2017) average.  This report is not consistent with building inflation pressures.  For the Fed, last month’s capacity utilization report does not turn up pressure for a more hawkish policy on interest rates.

Keep your eyes and ears open for Friday’s report on industrial production and capacity utilization.

On Tuesday, the Treasury will auction 30 year Treasury bonds.  At last month’s auction, the yield ended up at 3.121 percent.  The 3.121 percent high yield was a sharp 25.4 basis points above January’s auction rate and the highest awarded yield at a bond auction since March 2017.

After Friday’s jobs report, the 30 year Treasury bond advanced 3.4 basis points to 3.166%.

According to CME Group data, market participants are expecting the next rate increase by the Fed to occur next week.

The long end of the yield curve as reflected in the 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates.

__________________________________________
OFF BASE

If you look at the list of holidays observed by the Federal Reserve, you will note that our next holiday is not until Memorial Day:

Memorial Day May 28
Independence Day July 4
Labor Day September 3
Columbus Day October 8
Veterans Day November 11
Thanksgiving Day November 22
Christmas Day December 25

Good grief!  That is almost 2 ½ months.

With some casuistry you might be able to justify taking some of these days off:
St Patrick’s Day Eve- March 16
Opening Day Major League Baseball March 29
Good Friday March 30
Easter Monday April 2

Monday, January 8, 2018

The SBA and penelopize

To delay or gain time to put off an undesired event.

From Penelope, the wife of Odysseus and mother of Telemachus in Greek mythology. She waited 20 years for her husband’s return from the Trojan War (ten years of war, and ten years on his way home). She kept her many suitors at bay by telling them she would marry them when she had finished weaving her web, a shroud for her father-in-law. She wove the web during the day only to unravel it during the night.

_____________________________________________
TIP OF THE WEEK

The SBA did not penelopize with the release of its new Standard Operating Procedure.

Cunctation may have worked to their advantage as there are now different versions of the new SOP 50-10-5(J).

There were several technical corrections and an updated SOP was issued with the technical corrections.

Make sure you are using the new version of the SOP that incorporates these changes.  The easy way to determine if you have the correct SOP 5010 5 (J) is the first version consists of 410 pdf pages, while the updated version is 413 pdf pages.
__________________________________________

Indices:
PRIME RATE= 4.50%
SBA LIBOR Base Rate January =4.56%
SBA Fixed Base Rate January = 6.92%

________________________________________

SBA 504 Loan Debenture Rate for December
The debenture rate is only 2.78% but note rate is 2.82766% and the effective yield is 4.499%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

The Federal Reserve continues to penelopize over interest rates.

Minutes from their last meeting on interest rates highlighted some division over the central bank’s forecast for three rate increases in 2018.

The current slope of the yield curve was brought up and some expressed concern that a possible future inversion of the yield curve, with short-term yields rising above those on longer-term Treasury securities, could portend an economic slowdown, noting that inversions have preceded recessions over the past several decades.

But then on Friday, the Department of Labor reported that jobs increased 148,000 for the month of December and the yield curve grew slightly steeper with the yield on the 30-year Treasury bond up 2.9 basis points at 2.815%.

Here is a summary of net payroll employment and this week’s interesting little table of data:
December     148,000
November     252,000
October      211,000
September     18,000
August       208,000
July         138,000
June         222,000
May          152,000
April       207,000
March        50,000
February    235,000
January     216,000
2016      2,160,000
2015     2,740,000
2014     3,116,000
2013     2,074,000
2012     2,193,000
2011     2,103,000
2010    1,022,000
2009    -5,052,000
2008    -3,617,000
2007    1,115,000
2006    2,071,000
2005    2,484,000
2004    2,019,000

What does all this mean?

I don’t know.

This is the 87th straight month of U.S. job growth, the longest such streak on record.

Keep your eyes and ears open for Thursday’s auction of 30 year Treasury bonds.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
2007- 4.84
2008- 4.18
2009- 3.89
2010- 4.61
2011- 2.89
2012- 2.77
2013- 3.25
2014- 3.97
2015- 2.91
2016- 2.32

What does all this mean?

I don’t know.

At the December auction of 30 year Treasury bonds, the flattening of the Treasury yield curve is illustrated by the 2.804 percent high yield, which in a period when short term rates rose steadily, was just 0.3 basis points above the November auction rate and 36.6 basis points below the long term high yield peak set in March, the highest since September 2014.

If you look at the Federal Reserve website, they indicate that one of their principal economic indicators is industrial production and capacity utilization.  One of the Fed’s leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Here is what capacity utilization rates have done:
2007- 81.5
2008- 79.9
2009- 66.9
2010- 74.8
2011- 76.7
2012- 79.0
2013- 77.8
2014- 78.8
2015- 76.5
2016- 75.4
2017- 76.1

What does all this mean?

I don’t know.

Last month it was reported that capacity utilization rose to a 2½ year high of 77.1%.   This is still 2.8% below the average from 1972 to 2015 and below the pre-recession level of 80.8% in December 2007.

The Federal Reserve will report on capacity utilization on January 17th.

The Federal Reserve next meets on interest rates on January 30-31.

According to CME Group data, market participants are expecting the next rate increase, after the Fed’s recent quarter-percentage point increase to a range between 1.25% and 1.5%, to occur in March.

The long end of the yield curve as reflected in 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent.

Keep in mind that Congress penelopized and passed a stopgap spending bill just before Christmas, averting a partial government shutdown but pushing into January showdowns on spending, immigration, health care and national security.  The stopgap extends federal funding through Jan. 19

__________________________________________
OFF BASE

Many of us might penelopize about a full work week but a three day weekend approaches.

According to the Federal Reserve, here are our holidays for 2018:

Birthday of Martin Luther King, Jr. January 15
Washington's Birthday February 19
Memorial Day May 28
Independence Day July 4
Labor Day September 3
Columbus Day October 8
Veterans Day November 11
Thanksgiving Day November 22
Christmas Day December 25

Monday, December 11, 2017

The SBA and robustious

robustious
ro-BUHS-chuhs
1. Strong and sturdy.
2. Boisterous.
3. Coarse or crude.
From Latin robur (oak, strength).

_____________________________________________
TIP OF THE WEEK 

Our robustious* President signed a spending bill to avoid a government shutdown and keep the federal government running through Dec. 22.

The president signed the two-week spending bill at the White House after the House and Senate acted to prevent a government shutdown last weekend.

The White House and congressional leaders are negotiating a longer-term agreement.

The measure funds government agencies including the SBA.  SBA loan volume should continue to be robustious**

*as in boisterous, coarse and crude
**as in strong and sturdy

__________________________________________

Indices:
PRIME RATE= 4.25%
SBA LIBOR Base Rate December =4.38%
SBA Fixed Base Rate December 2017 = 6.65%
________________________________________
SBA 504 Loan Debenture Rate for November    
The debenture rate is only 2.79% but note rate is 2.83785% and the effective yield is 4.510%.
 ________________________________________________
AHEAD OF THE YIELD CURVE 

The economy continues to be robustious.

Some 228,000 new jobs were created in November, another healthy gain that highlights the strongest U.S. labor market since the turn of the century.

After ten months of Mr. Trump's presidency, the economy has added 1,700,000 jobs.   That puts him about 383,000 behind the pace needed to hit his goal of adding 10 million jobs over the next 4 years. 

His predecessors by comparison did the following (private sector employment only):
20,966,000 - President Clinton
14,717,000 - President Reagan
11,756,000- President Obama
9,041,000- President Carter
1,510,000- President G.H.W. Bush
  396,000- President G.W Bush

Treasury yields rose across the board last week ahead of the Federal Open Market Committee’s rate-setting meeting Dec. 12-13, where an increase in the fed-funds rate is seen as a virtual certainty.

After the jobs report, the 30-year Treasury bond yield was unchanged at 2.773%, and rose only 1.1 basis point over the past five days.   The day the Fed begins their meeting on monetary policy there will be an auction of the 30 year bond.  At last month’s auction the 2.801 percent high yield was 6.9 basis points below October’s rate.  Since the start of 2017, 30-year yields have actually declined. And the culprit behind that appears to be stubbornly muted inflation.

One of the Fed’s favorite leading gauges of inflationary pressure is the capacity utilization rate.  Keep your eyes and ears open for this Friday’s report on industrial production and capacity utilization.  Last month it was reported that capacity utilization for October had nudged up to 77 percent.   Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred. 

So what will the Fed do?  They should not be too concerned about inflation.

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

DEC17- 1.60
DEC18- 2.01
DEC19- 2.26
DEC20-2.35
DEC21- 2.46
DEC22- 2.56
DEC23- 2.64

What does all this mean?

I don’t know.

The long end of the yield curve as reflected in 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent and Eurodollar futures imply a quiescent Federal Reserve will not estivate.

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OFF BASE
So the government might come to a crashing stop on December 22nd.  

Actually that day the world won’t look as grim as the days will start getting longer again and you can start looking forward to Spring.  So hang in there and be robustious. 


The day before, December 21st, is the winter solistice.  The winter solstice marks the shortest day of the year and the official beginning of winter.

Monday, November 6, 2017

The SBA and cunctation

cunctation
(kungk-TAY-shunn) 
Delay; procrastination; tardiness.
From Latin cunctari (to hesitate, delay)
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TIP OF THE WEEK 

Without any more cunctation, the SBA has released its latest version of its Standard Operating Procedure, which will be effective January 1st , 2018.

Changes include a reduction in the minimum required equity capital injection for a business acquisition.  At least 10% must be put into the project.  A seller note can be considered part of that injection but it must then go on full standby for the life of the loan.  The buyer must contribute AT LEAST 5%.

Franchise eligibility has also changed with SBA now publishing a franchise directory.  

Some third party management agreements are now eligible as are consumer and marketing cooperatives.

A borrower is prohibited from leasing space to any business engaged in any activity that is illegal under federal, state or local law.

New SBA submission forms have also been released.

Let me know if you would like a copy of the 409 page SOP 50 10 5(J). 

If you are being cunctative about reading it, feel free to ask me a question and I will make up an answer.

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Indices:
PRIME RATE= 4.25%
SBA LIBOR Base Rate November =4.24%
SBA Fixed Base Rate November 2017 = 6.46%
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SBA 504 Loan Debenture Rate for October    
The debenture rate is only 2.85% but note rate is 2.89859% and the effective yield is 4.635%.
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AHEAD OF THE YIELD CURVE 

Is the Federal Reserve being cunctative about raising interest rates?

Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession.  One of the harsh lessons learned by the Federal Reserve was in the 1930’s when they misapplied monetary policy enervating to the point of splenetic impecunious presentiment.

Last week at their meeting on monetary policy, the Federal Reserve Open Market Committee policy statement changed from describing the economy from "rising moderately" to "rising at a solid rate".  Futures markets are setting expectations firmly centered on a rate hike at the next meeting in December.

On Friday, the Bureau of Labor Statistics reported that jobs increased by 261,000 in October.  Previously it was reported that in September the economy had lost 33,000 jobs  but that has now been revised to show an increase of 18,000 jobs and August was revised up from 169,000 new jobs to 208,000.  With these revisions, employment was 90,000 higher than previously reported.

Here is a summary of net payroll employment and this week’s interesting little table of data:
October                                  261,000
September                                 18,000
August                                   208,000
July                                      138,000
June                                     222,000
May                                      152,000
April                                     207,000
March                                    50,000
February                             235,000
January                               216,000
2016        2,160,000
2015     2,740,000
2014     3,116,000
2013     2,074,000
2012     2,193,000
2011      2,103,000
2010     1,022,000
2009     -5,052,000
2008     -3,617,000
2007    1,115,000
2006     2,071,000
2005     2,484,000
2004     2,019,000

What does all this mean?

I don’t know.

Also included in the jobs report was a look at wages.  Average hourly earnings for all employees on private nonfarm payrolls, at $26.53, were little changed in October (-1 cent), after rising by 12 cents in September. Over the past 12 months, average hourly earnings have increased by 63 cents, or 2.4 percent.

This lack of wage growth is enervating the cerebration on the Phillips Curve to the point it might be considered pabulum.   The Phillips curve, an economic concept named for the late economist A.W. Phillips, states that as unemployment falls inflation will ultimately rise as workers see wage increases.  Fed officials have justified its recent tightening stance on the Phillips curve. 

Cunctation may prevail with the Fed.  Their statement also said that “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Keep your eyes and ears open for this Thursday’s $15 billion sale of 30 year Treasury bonds. 

At last month’s sale, the 2.870 percent high yield was 8 basis points higher than September’s rate but well below the March auction's 3.170 percent, a two and half year peak.  The Treasury just cut its borrowing estimate by almost half this quarter.  The Treasury will issue $275 billion in net marketable debt from October through December, assuming a cash balance of $205 billion at the end of the period, according to a statement released Monday in Washington. The new estimate is $226 billion lower than the previous projection made in July. 

The debt ceiling suspension is due to expire on December 8th.  Further cunctation is expected.

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OFF BASE
Cunctation is the Italian way.

Drawing on an intimate knowledge of their own history, they see an upside to letting problems sort themselves out, piano piano—slowly. It’s even part of the national curriculum. By age 11, almost all Italian schoolchildren learn the story of Quintus Fabius Maximus Verrucosus, the Roman general who 2,200 years ago slowly ground down Hannibal by avoiding direct battle. He was nicknamed the Cunctator—“the delayer.”  They may be on to something.  The Bloomberg Global Health Index of 163 countries ranks Italy as the healthiest on Earth, based on variables such as life expectancy and incidence of high blood pressure.


I may have to cunctate after all.