Monday, September 9, 2019

The SBA and PROrogue 

Prorogue
pro-ROHG
verb tr.:
1. To discontinue a session of something, for example, a parliament.
2. To defer or to postpone.
from Latin prorogare (to prolong or defer), from pro- (before) + rogare (to ask).
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TIP OF THE WEEK

The official term for shutting down Parliament is "proroguing".

MPs do not vote to prorogue - it's a power that rests with the Queen, done on the advice of the prime minister.

Parliament will be suspended just days after MPs return to work in September, after the Queen agreed to a request from Prime Minister Boris Johnson.

It means MPs will have less time to pass laws that could stop the UK leaving the European Union without a deal on 31 October.

That current exit date is written into law, so if nothing changes the UK will leave automatically - whether or not a deal has been reached.

No prorogation with the US Congress.

With both the House and Senate out of town for the August recess, lawmakers will face a chaotic September. They’ll have three weeks to prevent a second shutdown in a year that is set to start October 1st without congressional action.

The House and Senate still must pass 12 FY 2020 spending bills by September 30, 2019 or agree to a Continuing Resolution (CR) to keep the government operating beyond the end of FY 2019.

SBA programs remain in limbo and could shut down.

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Indices:

PRIME RATE= 5.25%

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SBA 504 Loan Debenture Rate for August

For 20 year debentures, the debenture rate is only 2.15% but note rate is 2.188% and the effective yield is 3.531%.

For 25 year debentures, the debenture rate is only 2.31% but note rate is 2.241% and the effective yield is 3.62%.

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AHEAD OF THE YIELD CURVE


Can the recession be prorogued?

The splenetic presentiment with an inverted curve continued as the Labor Department reported that the U.S. created a lackluster 130,000 new jobs in August, adding to evidence that hiring has slowed sharply in 2019.

That payroll total was inflated by the federal government’s addition of 25,000 temporary workers for the 2020 census. Without those gains, the August number would have been even weaker.

One of the things dragging down the job numbers was with manufacturers.  Manufacturers added just 3,000 jobs in a sign the trade war and slowing global economy continue to take a toll.

The larger question is whether the contraction in manufacturing will lead to a steep downturn in the broader economy. That could happen if businesses stop hiring and begin to shed workers.

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

One of the Fed’s favorite leading indicators on the economy 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 Fed last month reported that capacity in use slipped 0.3 percentage point in July to 77.5 percent.

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- 78.5
2019- 77.5

What does this mean?

I don’t know.

The factory sector is in a technical recession, with output suffering small declines for the past two quarters. The July data do not point to any quick recovery. Renewed trade tension with China is not expected to help. For now, the consumer is the engine of U.S. economic growth.

Last week, the 10-year Treasury added 7.4 basis points, while the 2-year Treasury climbed 3.6 basis points, and the long-dated 30-year bond gained 8.7 basis points.  As a result, the inversion of the yield  curve between the 2 year Treasury and the 10 year Treasury unwound after inversion for the last week of August.  The 3 month yield and the 10 year yield, at about 1.961% and 1.561% respectively remain upside down.  The Federal Reserve Bank of Cleveland uses past values of the slope of the yield curve and GDP growth to provide predictions of future GDP growth and the probability that the economy will fall into a recession over the next year.  They recently pegged the probability of a recession at 44.1 percent, the highest probability since 2008.

The report on industrial production and capacity utilization comes out on September 17th and the Federal Reserve Open Market Committee meets on September 17th and 18th.

None of this can be prorogued.

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OFF BASE

You can not prorogue the calendar but summer has not ended.

The official end of summer is not until September 22nd.  The autumnal equinox is the next day.

After the autumnal equinox, nights begins to grow longer than the days. This ends with the December solstice, when days start to grow longer and nights shorter.

Don’t look too closely at the calendar however as this Friday is a Friday the 13th.

There is a word for the fear of Friday the 13th.  It is friggatriskaidekaphobia.  The Frigga is for Friday, the triskai is for 3, the deka means 10, so triskaideca means 13, and phobia is the fear.

If friggatriskaidekaphobia is too hard to pronounce you can always use Paraskevidekatriaphobia, which is an extension of Triskaidekaphobia. It originates from Paraskevi, (Greek for Friday).

If you wanted to say thank god its Friday in Greek it would be dóxa to Theó Eínai Paraskeví.

If you wanted to say thank god its Friday in Spanish it would be Gracias a Dios es Viernes while in German it would be Gott sei Dank ist es Freitag and Italian it’s grazie a Dio è venerdì.

The word Friday comes from the Old English Frīġedæġ, meaning the "day of Frige", a result of an old convention associating the Germanic goddess Frigg with the Roman goddess Venus, with whom the day is associated in many different cultures.

The Greek word for Friday is Paraskevi and is derived from a word meaning "to prepare".  As Lord Baden Powell once told me, “be prepared.”

Monday, August 26, 2019

The SBA and PROspicient

Prospicient

pros-PISH-uhnt

Having foresight.

From Latin prospiciens, from prospicere (to look forward), from pro- (forward) + spicere, from specere (to look).
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TIP OF THE WEEK

From FY 2010 to FY 2018, based upon number of SBA 7(a) loans, freight and trucking grew the fastest, up 136%.

Freight and trucking is somewhat prospicient for the economy.

Trucking serves as a barometer of the U.S. economy, representing 70.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

According to the American Trucking Association for hire truck tonnage increased 6.6% in July.  Compared with July 2018, this is the largest year over year gain since April.

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Indices:
PRIME RATE= 5.25%

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SBA 504 Loan Debenture Rate for August

For 20 year debentures, the debenture rate is only 2.15% but note rate is 2.188% and the effective yield is 3.531%.

For 25 year debentures, the debenture rate is only 2.31% but note rate is 2.241% and the effective yield is 3.62%.

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AHEAD OF THE YIELD CURVE

If you can keep your head when all about you are losing theirs and blaming it on the yield curve, you just might be prospicient.

Shortly after 6 a.m. ET on August 14, the 10-year bond yield ticked below the 2-year bond yield by just one basis point. The inversion was brief and the curve ended the day officially un-inverted.

The 3-month Treasury bill sits 41 basis points above the 10-year note yield.  The short-term maturity has traded above 10-year yields since May 22 after briefly inverting back in late March.  An inversion really starts to become worrying if it extends to a multi-month stretch. In the run-up to the financial crisis of 2008, the yield curve had turned upside down for around 10 months.

Adding to the trichotillomania was the sudden disappearance of over ½ million jobs.

The economy had about 501,000 fewer jobs as of March 2019 than the Bureau of Labor Statistics initially calculated in its survey of business establishments. That’s the largest revision since the waning stages of the Great Recession in 2009.  This annual “benchmark” revision is much larger than is typically the case. The preliminary revision in 2018, for example, showed the economy produced 43,000 additional jobs than initially reported.  The government’s employment report each month is compiled from a survey of almost 700,000 work sites, but the BLS updates its numbers every year after rechecking its results against company tax records. In most years the revisions are quite small, reflecting about one-tenth of 1% of total nonfarm employment and attesting to the accuracy of the BLS survey.

Keep your eyes and ears open for next week’s report on jobs.

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

July             164,000
June            193,000
May                62,000
April            263,000
March        189,000
February     56,000
January    311,000
2018        2,674,000
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.

Last month’s report on jobs was somewhat disappointing.  The economy added 1.156 million jobs through July 2019, down from 1.589 million jobs during the same period of 2018.   So job growth has slowed.  After 30 months of Mr. Trump's presidency, the economy has added 5,736,000 jobs, about 514,000 behind the projection towards the Trump goal of adding 10 million jobs over his 4 year term.  Subtract another 500,000 with the benchmark revision, and the pace is falling short by almost 1 million jobs.

The minutes of the Fed’s meeting last month showed that senior officials preferred to follow a meeting by meeting approach when deciding on interest rate changes. The minutes said the U.S. central bank didn’t want to give the appearance of moving in a “preset course,” and that July’s rate cut was only “part of a recalibration” of policy.

Traders on the fed fund futures market all but expect a rate cut at the Fed’s September meeting,

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OFF BASE

Apologies obviously to Rudyard Kipling for usurping the opening lines from his poem “If”.

What a lot of people don’t know about that poem is that it was a tribute to Leander Starr Jameson, instigator of the Jameson Raid.  This was an attempt to start an insurrection against the Dutch influence in what would become South Africa.

The third and fourth lines of the second stanza of the poem: "If you can meet with Triumph and Disaster / and treat those two impostors just the same" are written on the wall of the players' entrance to the Centre Court at the All England Lawn Tennis and Croquet Club, where the Wimbledon Championships are held.  These same lines appear at the West Side Tennis Club in Forest Hills, New York, where the US Open was played.

Being prospicient about the calendar, note that a three day weekend approaches!

According to the Federal Reserve statistical release K.8, here are our remaining holidays for 2019:
Labor Day September 2
Columbus Day October 14
Veterans Day November 11
Thanksgiving Day November 28
Christmas Day December 25

Make sure you fill the unforgiving minute!

Monday, July 29, 2019

The SBA and PROmethean

Promethean
pruh-MEE-thee-uhn

adjective: Boldly creative; defiant; audacious.
noun: A person who is boldly creative or defiantly original.

After Prometheus, a demigod in Greek mythology. He made man from clay, stole fire from Zeus by trickery, and gave it to humans. For his crime he was chained to a rock and an eagle devoured his liver to have it grow again to be eaten again the next day.

The name means forethinker, from Greek pro- (before) + manthanein (to learn). Earliest documented use: 1594.

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TIP OF THE WEEK

Nothing Promethean about hospitality lending with SBA loans.

Over the past nine years, 7,976 loans were made to motels and hotels.  Based on gross dollar amount, hotels and motels obtained more SBA guarantees than any other NACIS classification.  From FY 2010 to FY 2018, loans to hotels and motels increased 123% based upon number of loans.  Freight and trucking grew the fastest, up 136%.

The U.S. hotel industry reported negative year-over-year results in the three key performance metrics during the week of 7-13 July 2019, according to data from STR.

U.S. hotel occupancy dropped 2.4% to 74.2% during the week of 7-13 July, ADR dipped 0.6% to $132.24 and RevPAR decreased 2.9% to $98.08.

Don’t read too much into that.  Occupancy has been solid in 2019, close to-date compared to the previous 4 years.

SBA Loans to hotels and motels also have one of the lowest charge off rates, 2.3%.



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Indices:

PRIME RATE= 5.50%

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SBA 504 Loan Debenture Rate for July

For 20 year debentures, the debenture rate is only 2.53% but note rate is 2.574% and the effective yield is 3.914%.

For 25 year debentures, the debenture rate is only 2.69% but note rate is 2.72% and the effective yield is 4.01%.

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AHEAD OF THE YIELD CURVE

The Federal Reserve may be chained to the Promethean rock.

After increasing interest rates four times last year, they appear to be ready to drop them.

“The FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the Fed said in a statement at last month’s meeting on monetary policy, dropping its recent buzzword about being “patient.”

Some of the incoming information that the Fed has received was the June employment report.  By most measures, the June employment report was a good report -- good from the standpoint that it revealed broad-based job gains and no significant wage-based inflation pressure.  Total nonfarm payroll employment increased by 224,000 in June.  The good June report doesn’t hide the truth that hiring has softened. The US added an average of 172,000 new jobs a month in the first half of 2019, compared to a 223,000 pace in 2018.

Another piece of the Fed puzzle is 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.  The Fed recently reported that capacity in use slipped to 77.9% in June from 78.1 in the prior month.

The yield curve is getting a little flatter.  It had been inverted since late March.  It is widely accepted that that an inverted yield curve creates splenetic presentiment of a recession.  The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—is 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.  The usually positive spread between the 3-month bill yield and 10-year yield was at a negative 11 basis points a month ago.  Now it is only down 3 basis points as of last Friday.

The longer end of the curve with the 30 year Treasury bond is also holding up.  The last auction of $16 billion in 30 year Treasury bonds saw the yield climb 7.2 basis points to 2.642%.  That was the highest yield since May 30.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
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
2018- 3.13
2019- 2.594

The short end of the curve is driven by the Federal Reserve Open Market Committee.  The long end of the curve is driven by the tyranny of the bond market.

Keep your eyes and ears open for this week’s meeting by the Federal Reserve on monetary policy.

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:
DEC19- 2.10
DEC20-1.70
DEC21- 1.71
DEC22- 1.79
DEC23- 1.92
DEC24- 2.05

What does all this mean?

I don’t know.

The market foresees zero probability that the Fed will raise rates anytime this year and in fact, their bets indicate a high almost certain likelihood that the Fed will cut rates before year’s end.

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OFF BASE

So Prometheus was chained to a rock and each day an eagle was sent to feed on his liver, which would then grow back overnight to be eaten again the next day.

Sisyphus on the other hand was forced to roll an immense boulder up a hill only for it to roll down when it nears the top, repeating this action for eternity.  Tasks that are laborious, futile and repetitive are often described as Sisyphean

Both are like the Red Queen’s race in Through the Looking Glass.  The Red Queen said to Alice in her explanation of the nature of Looking-Glass Land:
“Now, here, you see, it takes all the running you can do, to keep in the same place”

The Red Queen’s Race is also used to illustrate the Red Queen hypothesis which proposes that organisms must constantly adapt, evolve, and proliferate in order to survive while pitted against ever-evolving opposing organisms in a constantly changing environment, as well as to gain reproductive advantage.  It is in a new book out called Perfect Predator which is a true story about an epidemiologist trying to save her husband from an antibiotic-resistant infection with a forgotten cure.  You should put it on your summer reading list.

Monday, June 17, 2019

The SBA and PROlepsis

prolepsis
pro-LEP-sis
1. The use of a descriptive word in anticipation of the result. Example: The word hot in hot water heater.
2. The anticipation and answering of an objection or argument before it's raised. Also known as prebuttal.
3. The representation of an event before it actually happened. Example: He lost the game even before the match began.
4.  A literary technique in which the author drops hints of things to come. Also known as foreshadowing.

From Greek prolepsis, from prolambanein (to anticipate), from pro- (before) + lambanein (to take). Earliest documented use: 1450.


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TIP OF THE WEEK

There could be an economic prolepsis with government guaranteed lending.

Concerned about possible escalations in defaults the California Infrastructure & Economic Development Bank (IBank) has reduced its maximum guarantee from $2,500,000 to $1,000,000 effective July 1st.  Even with this reduction, the State Guaranteed Lending Program remains a viable complement to SBA guaranteed financing.

For the period ending June 7th, SBA 7(a) loan approvals have declined over 8% compared to the same period a year ago.  This is the first sustained decline in loan approvals in almost 10 years.

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.

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Indices:

PRIME RATE= 5.50%

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SBA 504 Loan Debenture Rate for June

For 20 year debentures, the debenture rate is only 2.60% but note rate is 2.645% and the effective yield is 3.983%.

For 25 year debentures, the debenture rate is only 2.77% but note rate is 2.806% and the effective yield is 4.09%.

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AHEAD OF THE YIELD CURVE

It is widely accepted that that an inverted yield curve creates splenetic presentiment of a recession.  The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—is 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.

A key measure of the yield curve deepened its inversion, with the usually positive spread between the 3-month bill yield and 10-year yield at a negative 11 basis points as of Friday.  An inversion along that measure has historically preceded a recession, though the timing can vary.

One of the recessions predicted by the yield curve was the most recent one: The yield curve inverted in August 2006, a bit more than a year before the most recent recession started in December 2007. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998.

Although an inversion in some measures of the yield curve, such as the 3-month/10-year spread, might point to an economic downturn, other segments of that curve suggest a more optimistic view of the U.S.’s growth prospects.  The 2-year/10-year gap has yet to turn negative.  The spread between the 2-year/10-year stands at a positive 25 basis points, from a recent low of 14 basis points on May 28.

The longer end of the curve with the 30 year Treasury bond is also holding up.  Last week’s auction of $16 billion in 30 year Treasury bonds was met with strong demand as the yield ended up at 2.607%.

The Federal Reserve also reported last week that industrial production rose 0.4% in May, the strongest monthly rise in six months.  Capacity utilization edged up two-tenths of a point to 78.1%.  The biggest gain came from the most volatile category, utilities, which surged 2.1% in response to consumers cranking up air conditioners.  Industrial production is up just 2% from 12 months ago.

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- 78.5
2019- 78.1

What does all this mean?

I don’t know.

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.  At a capacity utilization rate of 78.1%, inflation is the least of the Federal Reserve’s concerns.

The Fed’s next meeting on monetary policy concludes on June 19th.

Investors foresee zero probability that the Fed will raise rates anytime this year. And in fact, their bets indicate a roughly 64% likelihood that the Fed will cut rates before year’s end.

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OFF BASE

There is often prolepsis over summer with Memorial Day.  Summer does not start until this Friday, June 21st.

The day of the summer solstice is the longest day of the year. The length of time elapsed between sunrise and sunset on this day is a maximum for the year.   There are about 14½ hours of daylight on this day for most of us.

Monday, May 20, 2019

The SBA and PROliferate

proliferate
pruh-LIF-uh-rayt
1 : to grow or cause to grow by rapid production of new parts, cells, buds, or offspring
2 : to increase or cause to increase in number: multiply

Proliferate is a back-formation of proliferation. That means that proliferation came first (we borrowed it from French in the 18th century) and was later shortened to form the verb proliferate. Ultimately these terms come from Latin. The French adjective prolifère ("reproducing freely") comes from the Latin noun proles and the Latin combining form -fer. Proles means "offspring" or "descendants," and -fer means "bearing."

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TIP OF THE WEEK

Have you noticed the proliferation of shared work spaces?  You’ve got WeWork and now CBRE has now begun to offer a shared flexible work space option called Hana.  The primary attraction is the short lease commitment.

Many of the tenants have been larger publicly traded companies whose motivation was driven by the new accounting standard for leases ASC 842.  Under the old rule ASC 840, FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to 12 months in length.

Prompted by the Center for Plain English Accounting (yes, there is such a thing)  the American Institute of CPAs wrote to the Financial Accounting Standards Board last week seeking a delay in the implementation of the new lease accounting standard. The standard—which is already in effect for public firms—is set to take effect for private companies on Jan. 1, 2020.  Going forward, under the new standards, all classifications of leases, operating and finance, will be capitalized on the balance sheet unless it was a short term lease less than 12 months.  This would cause an increase in assets and liabilities on the balance sheet potentially violating debt covenants.  Many private companies will have to review loan covenant calculations to ensure the new standard does not cause technical defaults and likely will have to work with lenders and users to modify debt and other financial covenants as needed in response to the effects of the new standard.

Keep in mind that co-working spaces and executive suites continue to be INELIGIBLE for SBA financial assistance.

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Indices:

PRIME RATE= 5.50%

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SBA 504 Loan Debenture Rate for May

For 20 year debentures, the debenture rate is only 2.88% but note rate is 2.929% and the effective yield is 4.265%.

For 25 year debentures, the debenture rate is only 3.07% but note rate is 3.109% and the effective yield is 4.391%.

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AHEAD OF THE YIELD CURVE

Jobs continue to proliferate as employers added a booming 263,000 jobs in April.  The unemployment rate fell to a nearly 50-year low of 3.6%.   There are 7.5 million open jobs available while there are about 6.2 million people still unemployed.

Think of that — there are more job openings today than there are unemployed workers.

There are currently 0.8 unemployed workers for every available job.   Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

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

April       263,000
March        189,000
February     56,000
January    311,000
2018        2,674,000
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.

Despite the stellar employment gains, average hourly earnings rose by a muted 0.2%.

The economy might not be quite as robust as the latest economic figures suggest. The first quarter’s healthy 3.2% annual growth rate was pumped up by some temporary factors – from a surge in restocking of companies’ inventories to a narrowing of the U.S. trade deficit – that are expected to reverse themselves. If so, this would diminish the pace of growth and likely hold down inflation.

Industrial production fell 0.5 percent in April.  This caused capacity utilization to decline 0.6 percentage point in April to 77.9 percent.  The key takeaway from the report is that it marked the fourth straight month in which there was no growth in manufacturing output.

The yield curve briefly inverted again with the 90 day treasury bill trading above the 10 year note.  The yield curve last inverted on March 22.

Investors foresee zero probability that the Fed will raise rates anytime this year.

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OFF BASE

A three day weekend is coming!

According to the Federal Reserve statistical release K.8, here are our remaining holidays for 2019:
Memorial Day May 27
Independence Day July 4
Labor Day September 2
Columbus Day October 14
Veterans Day November 11
Thanksgiving Day November 28
Christmas Day December 25

Monday, April 1, 2019

The SBA and PRO se

pro se
(pro say)
On one’s own behalf (i.e., representing oneself in a court, without a lawyer).
From Latin pro (for) + se (himself, herself, itself, themselves).

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TIP OF THE WEEK

You may NOT want to go pro se as a 7(a) lender on assisting living facility loan requests.  Nursing homes and assisted living facilities are no longer eligible.  This is not an April Fool’s joke. This is a recent change to the rules.  It used to be that businesses that were licensed as nursing homes or assisted living facilities were eligible.  They have now added the additional qualifier that they must also provide healthcare and/or medical services.  This is now reflected in SOP 50-10-5(K) which is effective April 1, 2019.  SBA has indicated that facilities must provide medical services beyond mere assistance with Activities of Daily Living (ADLs).

The recently revised SBA form 159 seems to think that there are pro se loan applicants as it continues to assert that the SBA Lender must inform the Applicant in writing that the Applicant is not required to employ an Agent or representative (including the SBA Lender) to assist the Applicant with the SBA loan application.  Note that anyone receiving a referral fee even if PAID by the lender must now sign the form 159.

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Indices:
PRIME RATE= 5.50%

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SBA 504 Loan Debenture Rate for March

For 20 year debentures, the debenture rate is only 3.20% but note rate is 3.25325% and the effective yield is 4.586%.

For 25 year debentures, the debenture rate is only 3.42% but note rate is 3.46% and the effective yield is 4.741%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

Pro se bond geeks are terrified that the yield curve has inverted and the economy is on the brink of recession.

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:
3M         -0.04
6M         -0.06
1Y          -0.13
2Y          -0.24
5Y          -0.27
10Y       -0.30
30Y       -0.25

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 the flatter yield curve was reflected in reduced expectations of growth. Using past values of the spread and GDP growth suggests that real GDP will grow at about a 2.1 percent rate during the next year, just below the 2.2 percent rate for February and even with the 2.1 percent rate for January.

Using the yield curve to predict whether the economy will be in recession in the future, the Cleveland Fed estimates the expected chance of the economy being in a recession next March at 32.7 percent, up from February’s estimate of 29.7 percent and from January’s 26.5 percent. So while the yield curve predicts a moderate amount of growth for the year, it also suggests the probability of recession in the near future is nearly one-third.

Two weeks ago, the 10-year Treasury yield staged its biggest one-day decline following a Fed meeting since March 2017, amid rising expectations for the central bank to trim its benchmark fed-funds rate.

Last month, the 30-year bond yield is down 26.6 basis points. Both the 10 year and 30 year bonds are also set to notch their biggest monthly rally since Dec. 2018.

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.

__________________________________________
OFF BASE

Pro se brings to mind the quote about a lawyer presenting himself has a fool for a client.

Abraham Lincoln often gets credit for the line, but in 1814 clergyman Henry Kett’s collection of proverbs in The Flowers of Wit included, “I hesitate not to pronounce that every man who is his own lawyer has a fool for client.”

Whether or not he came up with that one on his own, Mr. Lincoln has some pretty good ones.  Especially appropriate for these days is ““Some legal rights are moral wrongs”.

Other Lincoln classics include:
“Whatever you are, be a good one.”
“Do I not destroy my enemies when I make them my friends?”
“When you reach the end of your rope, tie a knot and hang on.”

Noted Lincoln biographer Doris Kearns Goodwin has a new book out, “Leadership in Turbulent Times”.  I just finished it and recommend you put it on your summer reading list.

Monday, March 18, 2019

The SBA and PROfligate

Profligate
PROF-li-git, -gayt
1. Recklessly extravagant; wasteful.
2. Given over to dissipation; dissolute.
From Latin profligatus, past participle of profligare (to strike down, to ruin), from pro- (forth, down) + fligere (to strike).

_____________________________________________
TIP OF THE WEEK

The profligate government shutdown had a frangible impact as political cunctation caused an allision of SBA 7A) loan approvals.

They declined over 8% compared to SBA 7(a) loan approvals for the same period a year ago.

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.

__________________________________________


Indices:
PRIME RATE= 5.50%

________________________________________

SBA 504 Loan Debenture Rate for March

For 20 year debentures, the debenture rate is only 3.20% but note rate is 3.25325% and the effective yield is 4.586%.

For 25 year debentures, the debenture rate is only 3.42% but note rate is 3.46% and the effective yield is 4.741%.

 ________________________________________________
AHEAD OF THE YIELD CURVE


Profligacy has  spread like procumbent pearlwort.*

The economy added just 20,000 new jobs last month, the smallest gain since September 2017.  The biggest drop-off in hiring in February took place in construction, where employment fell 31,000 after a 53,000 increase in January. The sharp swing in construction employment is likely evidence that government statisticians had trouble with seasonal adjustments.  That’s what happens when you have to take time off because of a government shutdown.

The jump in construction jobs in January was fueled by construction on new homes, known as housing starts, which leapt nearly 19% in January, rebounding from a big drop at the end of 2018. Housing starts rose to an annual pace of 1.23 million, according to a Commerce Department report delayed by the partial government shutdown earlier this year.

The increase in housing starts is being driven by an increase in the cost of housing.  Consumer inflation was a touch slower than expected in February. Looking through core components, Owner's Equivalent Rent (the largest metric used to gauge the cost of shelter) was up 0.35% on the month, now 3.63% annualized over the last three months vs. 3.22% over the last six months.

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.  Capacity utilization fell slightly to 78.2% in February from 78.3% in the prior month.   The month before capacity utilization had plunged over ½ percent to the lowest level since last July.

Keep your eyes and ears open for this week’s meeting by the Federal Reserve on monetary policy.

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:
DEC19- 2.59
DEC20-2.39
DEC21- 2.35
DEC22- 2.43
DEC23- 2.56
DEC24- 2.72

What does all this mean?

I don’t know.

At the first meeting of the year on monetary policy, the Fed did not change interest rates.  They did however remove language in their statement on the expectation for “further gradual increases” to the fed funds rate.  No more further gradual increases.

At their second meeting of the year, it still looks like there will be no further gradual increases and an enervation of any splenetic presentiment of a bigly recrudescence in interest rates.

__________________________________________
OFF BASE

*If you don’t remember what procumbent pearlwort is see my prolegomenon from September 10th.

If you don’t remember what a prolegomenon is, go back to January 14th.

I don’t really use these words in real life because I can’t pronounce them.

Monday, February 11, 2019

The SBA and pro rata

pro rata
pro RAY-tuh, RAH-
adverb: Proportionally.
adjective: Proportional.

From Latin pro rata according to the calculated share or literally ‘according to the rate’.

_____________________________________________
TIP OF THE WEEK


SBA loans are all about being pro rata.

SBA and the Lender share pro rata (in accordance with their respective interests in a loan).  The 7(a) program provides a 50 percent to 85 percent and in some cases a 90 percent federal guarantee on small business loans. If a loan defaults, the bank, after the liquidation of collateral, receives from the SBA the remaining unpaid principal and interest of the guaranteed loan portion on a pro rata basis.

Lenders can sell the guarantee portion of the loan.  After the loan is sold, payments from the borrower are split on a pro rata basis, generally equal to the percent of the SBA guarantee.  The SBA Form 1086 Secondary Market Participation Guaranty agreement states, “Lender agrees to deposit the pro rata share of borrower’s payment due to the FTA in a trust account with the name ‘Colson Services Corp., FTA, in trust for the individual security beneficiaries’.”

Loans that are sold are assembled into a SBA secondary market pool that includes a number of loans with various maturities and interest rates.  The Pool Certificates issued for such a pool, however, have one maturity date and an initial interest (coupon) rate.  These differences in maturities and interest/coupon rates, together with timing differences between the payment of principal on a pool loan and the payment of principal on Pool Certificates, result in what is referred to as “amortization excess.”  When a pool loan prepays in full, the amount of amortization excess attributable to the loan is equal to the difference between the loans’ pro rata share of the remaining pool principal balance and the amount of the loan’s principal prepayment.

This pro rata sharing of guarantees between borrowers, lenders and institutional investors provides financing to small business that is not otherwise available.

Taxpayers win as SBA loan programs operate on what is called a zero subsidy which means the SBA guarantee fee covers the cost of any loan defaults or losses.

Congress did not have to approve appropriations for 7(a) and 504/CDC loan guaranty program credit subsidies for FY2016, FY2017, FY2018, and FY2019 because the President’s budget request indicated that those programs did not require appropriations for credit subsidies in those fiscal years.

This too good to be true story is detailed in the latest Congressional Research Service report prepared for Congress on the SBA 7(a) Loan Guaranty Program.  Let me know if you would like a copy of it.

The only time any one loses is when the government shuts down.


__________________________________________

Indices:
PRIME RATE= 5.50%
________________________________________

SBA 504 Loan Debenture Rate for January
For 20 year debentures, the debenture rate is only 3.37% but note rate is 3.425% and the effective yield is 4.758%.

For 25 year debentures, the debenture rate is only 3.56% but note rate is 3.60% and the effective yield is 4.88%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

Nothing pro rata about the yield curve.

Last year the Federal Reserve increased interest rates 4 times pushing up the fed funds rate by 1 percent.

One month Treasury bills increased in rate over the last year from 1.32% to about 2.39% currently.  The 30 year Treasury bond yield is close to the same yield as it was a year ago.

Last week’s auction of $19 billion in 30 year Treasury bonds met with decent demand with the yield ending at 3.022% compared to the high yield of 3.035% from the auction in January.  The average yield over the last 12 auctions is 3.134%.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
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
2018- 3.13

What does all this mean?

I don’t know.

The short end of the curve is driven by the Federal Reserve Open Market Committee.  The long end of the curve is driven by the tyranny of the bond market.  Investors moved into the relative safety of longer term US Treasuries over concerns with the European economy.  On the same day as the 30 year Treasury bond auction, Germany reported another sharp year-over-year decline in industrial production in December while Spain's industrial production also contracted notably.

Industrial production in the United States appears to be robustious as last month the Federal Reserve reported that capacity utilization rose to 78.7% in December, the highest rate in almost four 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.

Keep your eyes and ears open for the Friday’s report on Industrial Production and Capacity Utilization.  At a capacity utilization rate of 78.7%, inflation is the least of the Federal Reserve’s concerns.

At last month’s meeting on monetary policy, the Fed did not change interest rates.  They did however remove language in their statement on the expectation for “further gradual increases” to the fed funds rate.  No more further gradual increases.

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.

__________________________________________
OFF BASE

A three day weekend approaches and it is NOT a pro rata celebration of Lincoln and Washington’s birthdays.  It is Washington’s Birthday.  It is not President’s Day.

In 1968, Congress passed the Monday Holidays Act, which moved the official observance of Washington's Birthday from February 22 to the third Monday in February. Some reformers wanted to change the name of the holiday as well, to Presidents' Day, in honor of both Lincoln and Washington, but splenetic cerebration over Lincoln’s war of northern aggression caused that proposal to be rejected by Congress, and the holiday remained officially Washington's Birthday.

The Federal Reserve not only dictates interest rates, they promulgate our Federal holidays.

According to the Federal Reserve statistical release K.8, here are our remaining holidays for 2019:

Washington's Birthday February 18
Memorial Day May 27
Independence Day July 4
Labor Day September 2
Columbus Day October 14
Veterans Day November 11
Thanksgiving Day November 28
Christmas Day December 25

Monday, January 14, 2019

The SBA and PROlegomenon

prolegomenon
pro-li-GOM-uh-non, -nuhn
A critical, introductory discussion, especially an introduction to a text.

From Greek prolegómenon, from prolegein (to say beforehand), from pro- (before) + legein (to say)

_____________________________________________
TIP OF THE WEEK

This prolegomenon came from SBA:

Funding for portions of the federal government, including funding for most SBA operations, is set to expire at midnight Friday, December 21, 2018.

During a lapse in appropriations, new loan making under the 7(a) and 504 loan programs will be suspended until government funding is made available. This means no new loans will be processed.


The IRS had this to say:

While the IRS remains closed during the partial government shutdown, on January 7, 2019, it will begin processing requests for transcript information made through Income Verification Express Service (IVES) program.


Loan guarantees are available from the State of California Infrastructure and Development Bank.



__________________________________________

Indices:
PRIME RATE= 5.50%

________________________________________

SBA 504 Loan Debenture Rate for December

For 20 year debentures, the debenture rate is only 3.54% but note rate is 3.587% and the effective yield is 4.926%.

For 25 year debentures, the debenture rate is only 3.67% but note rate is 3.714% and the effective yield is 4.990%.

 ________________________________________________
AHEAD OF THE YIELD CURVE

There was a recent prolegomenon from the Federal Reserve that an inverted yield curve was not just an indicator of a recession, but an actual cause of a recession.

It is widely accepted that that an inverted yield curve creates splenetic presentiment of a recession.  The slope of the yield curve—the difference between the yields on short- and long-term maturity bonds—is 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.

The Federal Reserve Bank of Saint Louis thinks an inverted yield curve can potentially harm U.S. economic growth and even cause a recession by pinching bank-lending margins and causing a contraction in loan activity.  That’s because banks tend to make money from short-term borrowing at lower rates which they lend at higher rates for longer periods of time. An inverted yield curve can make that business much less attractive.

The yield curve has not inverted yet.  On an annual basis, the 30-year bond yield advanced nearly 28 basis points, marking its biggest yearly rise since 2013. The 2-year note yield, sensitive to the Federal Reserve’s rate increases, more than doubled the rise of its longer-dated counterparts, climbing around 61 basis points.

Last week’s auction of $16 billion of 30 year Treasury bonds was lackluster.  The increase in auction sizes since last February have contributed to messier debt sales, which some say could push yields higher as investors struggle to make room for incoming supply.  On Friday, the 30-year bond yield rose 2.6 basis points to 3.051%, logging its fifth straight session of yield gains.

Minutes from the Federal Reserve’s last meeting on monetary policy said that they could be patient about increasing interest rates because of “muted inflation pressures.”  On Friday, it was reported that the Consumer Price Index declined 0.1%.   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 Friday'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- 78.5

What does all this mean?

I don’t know.

Last month capacity utilization rose 0.4 percentage points to 78.5 percent.  Inflationary pressure would appear to be as the Fed would say “muted.”

The Fed’s next meeting on monetary policy concludes on January 30th.

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

__________________________________________
OFF BASE

The Federal Reserve has promulgated that these are our holidays for 2019:
Birthday of Martin Luther King, Jr. January 21
Washington's Birthday February 18
Memorial Day May 27
Independence Day July 4
Labor Day September 2
Columbus Day October 14
Veterans Day November 11
Thanksgiving Day November 28
Christmas Day December 25

A three day weekend is coming!

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).

_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.25%

________________________________________

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.



__________________________________________
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.”

_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.25%

________________________________________

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%.

 ________________________________________________
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.

__________________________________________
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).

_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.25%

________________________________________

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%.

 ________________________________________________
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.

__________________________________________
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).

_____________________________________________
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.

__________________________________________

Indices:
PRIME RATE= 5.00%

________________________________________

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

__________________________________________
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.

_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.00%

________________________________________

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.

__________________________________________
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).

_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.00%

________________________________________

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.