Monday, May 11, 2020

The SBA and PROsopagnosia


PROsopagnosia
pros-uh-pag-NO-see-uh
Inability to recognize familiar faces.
From Greek prosopon (face, mask), from pros- (near) + opon (face), from ops (eye) + agnosia (ignorance).

Prosopagnosia is also known as face blindness.  People suffering from it cannot recognize familiar faces, even their own. A book on this and related topics is neurologist Oliver Sacks's "The Man Who Mistook His Wife for a Hat.”
Prosopagnosiacs' motto: We don't take people at face value.

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TIP OF THE WEEK

Selective prosopagnosia may proliferate among borrowers and their lenders over the profligate Paycheck Protection Program (PPP).

Initial profligacy is now prompting subsequent probity with many borrowers wondering what they got into.   The barrage of interim final rule notifications from SBA totaled 10 at last count along with 43 Frequently Asked Questions.

FAQ 43 indicates that SBA is extending the repayment date for a safe harbor to May 14, 2020 for a possible mis-certification on the Borrower Application Form.

The most recent interim final rule that came out on May 10th indicates that SBA will still provide the safe harbor until May 14th.

This most recent interim final rule also extends the lender 1502 reporting date for PPP loans to May 22, 2020.  PPP loans will have a specific 1502 report for lenders.

Lost in the fine print is the borrower certification that loan proceeds will be used ONLY to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; if the funds are knowingly used for unauthorized purposes, the federal government could hold him legally liable, such as for charges of fraud.

Does that mean if a borrower used a portion of the proceeds for a past due invoice on a payable or inventory purchase, that’s unauthorized and fraudulent in the eyes of the SBA?

The Office of the Inspector General in their Flash Report 20-14 released last Friday has determined that  “tens of thousands of borrowers” who participated in the first round of funding will not be eligible for loan forgiveness.

Other alternatives still include the SBA 7(a) loan for borrowers that were viable prior to the COVID-19 disaster declaration.   In addition, the state of California has a disaster relief loan guarantee program that provides lenders up to a 95% guaranty.

__________________________________________

Indices:
PRIME RATE= 3.25%
________________________________________
SBA 504 Loan Debenture Rate for May

For 20 year debentures, the debenture rate is only 1.37% but note rate is 1.39% and the effective yield is 2.68%.
For 25 year debentures, the debenture rate is only 1.50% but note rate is 1.52% and the effective yield is 2.761%.
_______________________________________________
AHEAD OF THE YIELD CURVE

The coronavirus pandemic destroyed 20.5 million U.S. jobs in April, and  GDP, the official scorecard for economic growth, shrank at a 4.8% annualized pace in the first quarter.

Watch out for the “annualization” of data, which ordinarily serves a useful purpose when analyzing numbers. Annualizing a monthly or quarterly number tells you what the real annual change would be if it changed at that monthly or quarterly pace all year long.

The formula for calculating an annual rate from quarterly numbers involves dividing the current quarter’s GDP by the previous quarter’s, taking the result to the fourth power and subtracting by one.   Got that?

You can approximate the result pretty well by multiplying the quarterly percentage change by four.

But that is not precisely right.  If you were to increase by 5 percent for four quarters in a row, the annualized number would be 21.6 percent, not 20 percent.

Suppose that the shutdown causes output to be 15 percent lower in the second quarter than in the first.  In annualized terms- that would mean that GDP fell at an astounding 47.8 percent rate.

But that does not mean that nearly half the economy has vanished.

So far on just a pure quarter to quarter change the decline was 0.89%.  Real GDP is 1.2% below the pre-recession peak.

Keep your eyes and ears open for Friday’s report on Industrial Production and Capacity Utilization from the Federal Reserve.

Here is what capacity utilization has been doing and this week’s interesting little table of data:

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
2020- 72.7

What does all this mean?

I don’t know.

Capacity utilization for the industrial sector decreased 4.3 percentage points to 72.7 percent in March as many factories were forced to suspend operations late in the month.  The drop that will be reported on Friday will reflect a full month of interruption to some factories.

On Wednesday, the government will sell $22 billion in 30-year bonds.  So far the Treasury Department has had little problem selling the deluge of debt. For an auction of $17 billion in 30-year bonds in early April, the Treasury saw twice as much in bids as it had debt to sell. At the other end of the yield curve, $60 billion in three-month bills sold last week attracted three times as much in bids.

The Fed is easing the burden somewhat, having bought roughly $1.3 trillion of Treasuries since mid-March.

Prognostication right now with procellous proditmania proliferating can be profligate.


__________________________________________
OFF BASE

Prosopagnosia probably is proliferating right now with the promulgation on Procrustean mask wearing.   Or in my case, the growing of a quarantine beard.

Any proroguing on masks is not prospicient and should prompt some inner probity.

It is also nothing new.   During the Influenza pandemic 100 years ago San Francisco required that people wear masks anytime out in public.   People complained and even an Anti-Mask League was formed.

The word quarantine comes from quarantena, meaning "forty days", designating the period that all ships were required to be isolated before passengers and crew could go ashore during the Black Death plague epidemic in 14th Century Italy.

History has a way of repeating itself.  You might want add to your reading list The Great Influenza by John M. Barry.

Monday, April 6, 2020

The SBA and PROcrastinate


PROcrastinate
pro·cras·ti·nate

to put off intentionally and habitually
to put off intentionally the doing of something that should be done 

from Latin procrastinat- ‘deferred till the morning’, from the verb procrastinare, from pro- ‘forward’ + crastinus ‘belonging to tomorrow’ (from cras ‘tomorrow’).

Procrastination is not simply the act of deferral or postponement. It implies an intentional avoidance of important tasks, putting off unpleasant responsibilities that one knows should be taken care of right away and setting them on the back burner for another day.

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TIP OF THE WEEK

Borrowers and lenders may want to procrastinate with the Promethean Paycheck Protection Program (PPP).

Borrower profligacy prompts lender probity.  Prospicient prodnosing proliferates after a not so prodigious promulgating prolegomenon.

The loan, based upon 2.5 times average monthly payroll prior to February 15, 2020, requires that the loan proceeds be used to support at least eight weeks of that payroll (75% of the loan amount).  If not the loan will NOT be forgiven.

If the loan is not forgiven, the borrower has a 1% interest rate for two years.  The loan accrues interest during an initial six month deferral period.  Payments can be deferred for one year.

Most small businesses will probably not seek or qualify for the loan forgiveness.  If they eventually default on the loan, even with no collateral or personal guarantee, they will be ineligible for future SBA financial assistance.

Lenders should be concerned about how they can participate in this critically important program when their cost of funds is higher than the proposed maximum interest rate.

The SBA Economic Disaster Injury Loan (EIDL) provides the opportunity for a $10,000 advance.  This is a direct loan from the SBA.

To apply for the Advance, you must submit a new application even if you previously submitted an EIDL application. Applying for the Advance will not impact the status or slow your existing application.
New Economic Injury Disaster Loan Applicants using the new streamlined online application may request the $10,000 Loan Advance in the application.


__________________________________________

Indices:
PRIME RATE= 3.25%
________________________________________
SBA 504 Loan Debenture Rate for March
For 20 year debentures, the debenture rate is only 1.49% but note rate is 1.518% and the effective yield is 2.808%.
For 25 year debentures, the debenture rate is only 1.62% but note rate is 1.643% and the effective yield is 2.881%.
_______________________________________________
AHEAD OF THE YIELD CURVE

The Federal Reserve did not procrastinate on monetary policy.

In an extraordinary move, the Federal Reserve dropped its benchmark interest rate to zero in response to the growing threat from the coronavirus outbreak.

That was on a Sunday March 15th just two weeks after having previously reduced rates by ½ percent after another unscheduled emergency meeting.

The last time the Fed cut interest rates on an emergency basis between its regular policy meetings was on October 8, 2008.

Keep your eyes and ears open for Wednesday’s release of the minutes from that Federal Reserve meeting.  It should make for some very interesting reading.

Employers also did not procrastinate.

The economy lost 710,000 jobs in March according to Friday’s report from the Department of Labor.  This however was based upon information completed in the second week of March, just before the COVID-19 pandemic began to devastate the economy.

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

March     -710,000
February  275,000
January   214,000
2019     2,108,000
2018      2,679,000
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.

__________________________________________
OFF BASE
Why did Italy procrastinate?

A couple of weeks ago, Italy was much like us, with 107 deaths on March 4. But things were already rapidly getting worse and now Italy is currently the epicenter of coronavirus fatalities in the world.

Italy has been devastated by the virus because it procrastinated.

Procrastination is the Italian way.

Another word for procrastination is cunctation from the Latin cunctari (to hesitate, delay).

Drawing on an intimate knowledge of their own history, they see an upside to letting problems sort themselves out, piano piano—slowly. It’s even part of the national curriculum. By age 11, almost all Italian schoolchildren learn the story of Quintus Fabius Maximus Verrucosus, the Roman general who 2,200 years ago slowly ground down Hannibal by avoiding direct battle. He was nicknamed the Cunctator—“the delayer.”

That’s their excuse.

Behavioral economist George Akerlof wrote a paper “Procrastination and Obedience” lamenting his own procrastination arguing that procrastination might be more than just a bad habit. It revealed something important about the limits of rational thinking.

Monday, March 9, 2020

The SBA and PROgnosticate


prognosticate
prahg-NAHSS-tuh-kayt

-to foretell from signs and symptoms : predict

-to give an indication of in advance : foreshadow


from Greek pro- ‘before’ + gignōskein ‘know’.

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TIP OF THE WEEK

The prognostication from SBA is that the SOP 50-10-6 will include the new Interim Final Rule guidance effective March 11, 2020.

That means SBA loan applicants will be subject to a personal resources test as follows:


-If the total financing project is $350,000 or less, each 20 percent owner must inject any liquid assets that are in excess of 2 times the total financing package, or $500,000, whichever is greater

-If the total financing project is between $350,001 and $1,000,000, each 20 percent owner must inject any liquid assets that are in excess of 1.5 times the total financing package, or $1,000,000, whichever is greater

-If the total financing project exceeds $1,000,000, each 20 percent owner of the Applicant must inject any liquid assets that are in excess of 1 times the total financing package, or $2,500,000, whichever is greater



SBA has also expanded its definition of an affiliate to include a loan applicant which derived more than 85 percent of its receipts over the previous three fiscal years from a contractual relationship with another concern.  SBA has also provided guidance for exceptions on affiliation.  If you would like a copy of their guidance of the exception, let me know.



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Indices:
PRIME RATE= 4.25%
________________________________________
SBA 504 Loan Debenture Rate for March

For 20 year debentures, the debenture rate is only 1.49% but note rate is 1.518% and the effective yield is 2.808%.

For 25 year debentures, the debenture rate is only 1.62% but note rate is 1.643% and the effective yield is 2.881%.
_______________________________________________
AHEAD OF THE YIELD CURVE

The fed funds futures market had prognosticated last week’s Federal Reserve cutting of the target range for the fed funds rate by 50 basis points to 1.00% to 1.25%.

The Federal Reserve did not suggest further rate cuts were forthcoming, but investors are adding to bets that the central bank will ease policy again at its March meeting on the 18th and 19th.

Even better-than-expected gains in U.S. job growth in February in Friday’s Labor Department data failed to blunt the bond-market rally that caused longer term interest rates to go procumbent.

The 30-year bond yield tumbled 35.4 basis points to 1.216%, and 44.2 basis points for the week, its biggest such drop since September 2011.

With the 30 year bond now at an all time historical low, keep your eyes and ears open for Thursday’s auction of the 30 year Treasury bond.

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
2018- 3.13
2019- 2.594
2020- 1.216

What does all this mean?

I don’t know.

Prognostication right now with procellous proditmania proliferating can be profligate.

__________________________________________
OFF BASE

Yogi Berra once proclaimed, "It's tough to make predictions, especially about the future."

One of the most famous prognostications of all time was from the soothsayer in Shakespeare’s Julius Caesar in Act I, scene 2, line 103 when he said “Beware the ides of March.”

So what the heck is an ide?

The Ides Of March refers to how the Romans kept track of the days in a month, which is quite different from how we do it. While we count the days sequentially from the first day all the way to the last day, the Romans used a different system. They counted backward from three fixed points of the month. For instance, the Nones usually fell on the 7th, the Ides on the 15th and the Kalends was the beginning of the month.

It is now known as the day Caesar was assassinated.  After being warned, Caesar took the prophecy very lightly. In fact, as he passed the seer on his way to the Theater of Pompey where he ends being stabbed to death by Brutus and 60 other Senators,  Caesar commented that “The Ides of March have come.” To that, the seer is reported to have replied, “Aye, Caesar; but they have not gone.”

Monday, February 10, 2020

The SBA and PROleptic 


proleptic
pro-LEP-tic

Of a calendar, extrapolated to dates prior to its first adoption Describes an event as having been assigned too early a date Anticipating and answering objections before they have been raised

From Greek prolepsis + ic  (see SBA and PROlepsis June 17, 2019) from prolambanein (to anticipate), from pro- (before) + lambanein (to take).
_____________________________________________
TIP OF THE WEEK

The promulgation of SOP 50-10-6 has been proleptic.

On Monday, February 10, the SBA is publishing an Interim Final Rule that will become effective in 30 days.

The rules address when the owners of a small business Applicant are required to inject excess liquid assets into the project;

amend certain regulations setting forth the affiliation principles applicable to SBA financial assistance programs;

and limit certain fees payable by loan Applicants to amounts deemed reasonable by SBA;

The big change on affiliation will be if a small business Applicant derived more than 85 percent of its revenue from another business over the previous three fiscal years, SBA would find that the small business Applicant is economically dependent on the other business and, therefore, that the two businesses are affiliated.

Compliance with two of the regulatory changes on fees will not be required until October 1, 2020.


__________________________________________

Indices:
PRIME RATE= 4.75%
________________________________________
SBA 504 Loan Debenture Rate for January

For 20 year debentures, the debenture rate is only 2.32% but note rate is 2.361% and the effective yield is 3.644%.

For 25 year debentures, the debenture rate is only 2.45% but note rate is 2.48% and the effective yield is 3.714%.
_______________________________________________
AHEAD OF THE YIELD CURVE

The Federal Reserve proleptically downgraded its assessment of the economy at the last meeting on monetary policy and interest rates.   The wording on inflation was changed, as policy is now consistent with "returning" inflation to the 2 percent target from running "near" the 2 percent target in the prior statement.

The Federal Reserve’s procellous proditomania might be prospicient despite the Labor Department reporting that the US created a robust 225,000 new jobs in January to get off to a good start in 2020.

Employment in manufacturing, however, fell for the third time in the past four months as another 12,000 jobs were lost.

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

Last month capacity utilization fell to 77% in December, the second lowest reading in 27 months.

Here is what capacity utilization has been doing and this week interesting little table of data:

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%

What does all this mean?

I don’t know.

Last month’s report was not all doom and gloom.  Output at utilities, perhaps reflecting unseasonable weather, fell a sharp 5.6 percent, which offset a small rise for manufacturing.  The modest net gain for manufacturing is a definite positive for the economic outlook. The sector, and its vulnerability to foreign demand, is a chief concern of the Federal Reserve and a major reason behind last year's three consecutive rate cuts.  Fourth quarter GDP was dragged down by a 1.09 point negative contribution from inventories where growth slowed very sharply. Whether businesses begin accelerating their inventory build, amid what is moderate demand, is another question for the ongoing quarter.

The Federal Reserve’s prolegomenon after their last meeting on monetary policy indicated a probative approach as their interest rate projections indicate that rates will stay at current levels this year.

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OFF BASE
The proleptic Gregorian calendar is produced by extending the Gregorian calendar backward to dates preceding its official introduction in 1582.  The Gregorian calendar, named after Pope Gregory XIII, shortened the average year by 0.0075 days to stop the drift of the calendar with respect to the equinoxes.  That way spring would remain around March 21.  The calendar further adjusts by adding a leap year, meaning we have 29 days for February this year.

Great Britain and its possessions did not adopt the Gregorian calendar until 1752.  George Washington was originally born on February 11, 1731.    After the switch, that day became February 22, 1732, which is the date commonly given as Washington's birthday.

This year we celebrate Washington’s Birthday on February 17th to comply with the Uniform Monday Holiday Act enacted in 1968.

The point is that a three day weekend is coming!

Monday, January 13, 2020

The SBA and PROcellous 


Procellous
pro-SEL-uhs
Stormy, as the sea.
From Latin procellosus (stormy), from procella (storm)

_____________________________________________
TIP OF THE WEEK

A procellous prolepsis proliferates over the promulgation of SOP 50-10-6 despite prodigious prodnosing for an official prolegomenon from the SBA.

__________________________________________

Indices:
PRIME RATE= 4.75%
________________________________________
SBA 504 Loan Debenture Rate for December For 20 year debentures, the debenture rate is only 2.26% but note rate is 2.30% and the effective yield is 3.582%.
For 25 year debentures, the debenture rate is only 2.38% but note rate is 2.41% and the effective yield is 3.643%.
_______________________________________________
AHEAD OF THE YIELD CURVE

Procellous and profligate pronouncements ended at the Federal Reserve’s last meeting on interest rates.

After dropping interest rates three times last year, the Fed kept rates the same and removed the phrase "uncertainties about this outlook" which was part of the statements in the prior three meetings all of which produced incremental 25-basis-point rate cuts.

On Friday, the Labor Department reported that the economy added 145,000 jobs in December, down from the 256,000 added in November.

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

December   145,000
November  256,000
October   152,000
September 180,000
August    219,000
July      166,000
June      193,000
May        62,000
April     263,000
March     189,000
February   56,000
January   311,000
2018      2,679,000
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.

In 2019 the economy added 2.108 million jobs, down from 2.679 million jobs during 2018.  So job growth has slowed to an average 176,000 jobs a month in 2019 from the 223,000 average the previous year.

On Friday the Federal Reserve will report on industrial production and capacity utilization.  It is anticipated that this report will reflect further erosion in manufacturing.  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 is at a still moderate 77.3 percent.

Federal Reserve interest rate projections indicate that rates will stay at current levels this year.

Things remain procellous.

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OFF BASE
If after finally working for a full week makes you feel a little proditomanic, a three day weekend approaches!
The Federal Reserve has promulgated that these are our holidays for 2020:
Birthday of Martin Luther King, Jr. January 20 Washington's Birthday February 17 Memorial Day May 25 Independence Day July 4 Labor Day September 7 Columbus Day October 12 Veterans Day November 11 Thanksgiving Day November 26 Christmas Day December 25

Note that Valentine’s Day is the Friday of a three day weekend.  4th of July is a Saturday, and Halloween is a Saturday.

Monday, November 4, 2019

The SBA and PROditomania

proditomania

pro-dit-uh-MAY-nee-uh

The feeling or the belief that everyone around is out to get you.

From Latin prodere (to betray).

_____________________________________________
TIP OF THE WEEK


Proditomania proliferated after profligate prospicience from SBA promulgation about the SBA 7(a) loan subsidy rate.

Since 2010 the SBA 7(a) loan program has operated at least at a zero or better subsidy rate.  This means that the fees collected from borrowers and lenders plus recoveries more than offsets the actual cost of SBA 7(a) loan guarantees.  The program has actually generated about $3 billion in additional revenue to the government.  Somewhat lacking probity, the SBA is now estimating that the subsidy will suddenly go in the wrong direction and actually require an appropriation (hence a subsidy) from the government for fiscal year 2020.  Now a $99 million appropriation is needed to cover a $30 billion 7(a) loan program.  That appropriation was covered in a continuing resolution that expires November 21.

A new resolution will be needed to fund the 7(a) program or it will shut down.

So why the sudden and dramatic change in the subsidy rate projection?  Why do SBA and OMB think that the program is facing potential greater defaults?  One plausible prolegomenon is if you prodnose through it all you can see the prodigious increase in highly leveraged business acquisition loans.  On January 1, 2018 with SOP 50-10-(J) SBA required an equity injection of only 10% on business acquisitions.  Since then change of ownership loans now account for about 24% of all SBA 7(a) loans.  They also have a somewhat higher average loan size.  Business acquisition loans tend to not be fully secured with collateral and do have higher default rates than the overall SBA 7(a) loan portfolio.

SBA is also concerned about business acquisition transactions utilizing an equity injection from a retirement account.  They no longer will allow lenders to process these loans on a delegated basis and instead must submit them to the loan guaranty processing center.  An official pronouncement is expected soon.

__________________________________________

Indices:

PRIME RATE= 4.75%

________________________________________

SBA 504 Loan Debenture Rate for October

For 20 year debentures, the debenture rate is only 2.08% but note rate is 2.117% and the effective yield is 3.462%.

For 25 year debentures, the debenture rate is only 2.22% but note rate is 2.25% and the effective yield is 3.54%.

_______________________________________________
AHEAD OF THE YIELD CURVE

Proditomania prompted the Federal Reserve to lower interest rates another quarter percent.

Their official statement indicated that “that the labor market remains strong and that economic activity has been rising at a moderate rate.”  Despite that they still needed to lower rates.

What their statement did not mention at all was the struggle to maintain the federal funds rate at their target level.  Two weeks ago the fed announced that the amount offered in overnight repo operations will increase to at least $120 billion.  At least $120 billion every day!  This demand for liquidity is forcing a Federal Reserve intervention that far surpasses what they had to do in 2008 during the last hiccup in the economy.

The Federal Reserve Open Market Committee does not meet again until December 10 and 11.

So what’s the prognosis on interest rates?

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- 1.90
DEC20-1.495
DEC21- 1.445
DEC22- 1.485
DEC23- 1.54
DEC24- 1.685

What does all this mean?

I don’t know.

A little proditomania is prompting the Federal Reserve to be protean.

__________________________________________
OFF BASE

If you are feeling a little proditomanic, a three day weekend approaches!

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

By the way, it is Veterans Day - a simple plural without a possessive apostrophe (Veteran's or Veterans').  The United States government has declared that the attributive (no apostrophe) rather than the possessive case is the official spelling.

Monday, October 7, 2019

The SBA and PROtean

protean

pro-TEE-uhn

1. Assuming many forms: variable.
2. Able to handle many different things, as roles in a play. Versatile.

After Proteus, a sea god in Greek mythology, who could assume different forms. He got his name from Greek protos (first) as he was one of the earliest sea gods.

_____________________________________________
TIP OF THE WEEK

SBA 7(a) loans are protean as they can be used for many different purposes such as real estate purchase, business acquisition, debt refinance, and working capital.  Roughly 17% of all SBA 7(a) loans were used for start-ups while 24% was for change of ownership.

The SBA fiscal year ended on September 30th and it looks like SBA 7(a) loan approvals declined 9% compared to 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.

SBA 504 loan approvals are up about 5% compared to a year ago.  The increase can be attributed primarily to the introduction of the 25 year debenture.  This increase in 504 loan approvals however does not explain the decline in SBA 7(a) loan volume.

__________________________________________

Indices:

PRIME RATE= 5.00%

________________________________________

SBA 504 Loan Debenture Rate for September

For 20 year debentures, the debenture rate is only 1.98% but note rate is 2.0159% and the effective yield is 3.359%.

For 25 year debentures, the debenture rate is only 2.14% but note rate is 2.169% and the effective yield is 3.458%.

_______________________________________________
AHEAD OF THE YIELD CURVE

The Federal Reserve has been very protean.

After increasing interest rates four times last year, the Federal Reserve is now considering a third straight interest rate cut.

Keep your eyes and ears open for the release of the minutes from the Federal Reserve Open Market Committee.

The minutes are released three weeks after the meeting on monetary policy.  At the last meeting seven members voted to reduce rates ¼ percent while one of them wanted a ½ percent reduction in the fed funds rate.  During the week of the meeting, the Fed struggled to maintain the fed funds rate within its targeted range as a liquidity squeeze strained banks and hedge funds financing their trading operations.  The Federal Reserve Bank of New York recently indicated that they will continue to offer overnight repurchases of at least $75 billion everyday through November 4th.

The Fed statement did not discuss the possibility of a standing repo facility which would supply liquidity to cap stresses in money markets and keep the fed funds rate within its target range.  It will be interesting to see if the minutes reflect any discussion on the overnight repurchasing operations.

The day after the minutes from the Fed’s last meeting come out, there will be an auction of $16 billion in 30 year Treasury bonds.  Last month’s auction drew weak demand causing the yield to jump over 5 basis points to 2.264%.  That is over 35 basis points from its all time low of 1.90% set on August 14th.  Since then the 30 year yield has drifted down to around 2.019%.

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

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
2001- 5.49
2002- 5.43
2003- ND
2004- ND
2005- ND
2006- 4.91
2007- 4.84
2008- 4.18
2009- 3.89
2010- 4.61
2011- 2.89
2012- 2.77
2013- 3.25
2014- 3.97
2015- 2.91
2016- 2.32
2017- 3.16
2018- 3.13
2019- 2.594


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

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

What does all this mean?

I don’t know.

After the report on jobs for September came out, the 2 year note yield, sensitive to expectations for interest rate policy, climbed 3.2 basis points to 1.418%.  The 10 year yield was unchanged and the 30 year yield fell 1.3 basis points.  This caused the yield curve to tighten somewhat but the spread between the 2 year and 10 year is still five basis points wider that it was a week ago.

The inversion of the yield curve between the 2 year Treasury and the 10 year Treasury has unwound.  The 3 month yield and the 10 year yield, at about 1.71% and 1.53% respectively remain upside down.

The Federal Reserve considers the slope of the yield curve to be prospicient.  Their next meeting on monetary policy is October 29 and 30.

__________________________________________
OFF BASE

A three day weekend approaches!

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

As you celebrate Columbus Day, keep in mind that much of what we know about Christopher Columbus is the result of a biography from his son Hernando Colón.

A then 13 year old Hernando accompanied his father on his fourth and final voyage to the New World.  The trip was a disaster resulting in a shipwreck and being stranded in Jamaica.  Facing a rebellious crew of starving men, Columbus uses an almanac with astronomical charts he has on board to predict a lunar eclipse, convincing the local Taino that his god will destroy them and the moon unless they provide him with food. And the moon darkens.  Columbus is well fed until he is able to leave.

The young Hernando learns from this that books offer power in the most immediate sense.   Hernando decided to build a universal library, which would have every book in the world in it — with every book, in every language, on every subject.  In order to manage his vast library, Hernando imported multilingual scholars from the Low Countries to serve as its librarians and developed an elaborate cataloging system to index the books’ contents.  He assembled lists of authors and works, book indexes, a hieroglyphic code used in an early version of the card catalog, keywords and content summaries that would allow readers to find the volume they needed.  He had even grander designs for the future of the library, involving teams of dedicated book buyers and a complex cage system to keep readers from stealing.

One of his more radical innovations was to store books vertically instead of horizontally.  Since stacking books horizontally can place undue pressure on book spines, most books should be stored in the upright position, ideally shelved neatly supported against similarly sized books with bookends at either side.  In Hernando’s time however books were sometimes large folio books.  Since folio books tend to be larger and the text blocks can be quite heavy, the weight of the text block can cause it to separate from the spine if they are stored in the upright position. If need be, you can stack the books horizontally on top of each other in a rough pyramid shape, but be sure to not stack them too high, as all of that weight could jeopardize the boards and spines of the books on the bottom of the stack.

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).
_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.25%

________________________________________

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%.

_______________________________________________
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.

__________________________________________
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).
_____________________________________________
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.

__________________________________________

Indices:
PRIME RATE= 5.25%

________________________________________

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%.

_______________________________________________
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,

__________________________________________
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.

_____________________________________________
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%.



__________________________________________

Indices:

PRIME RATE= 5.50%

________________________________________

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%.

_______________________________________________
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.

__________________________________________
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.


_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.50%

________________________________________

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%.

_______________________________________________
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.

__________________________________________
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."

_____________________________________________
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.

__________________________________________

Indices:

PRIME RATE= 5.50%

________________________________________

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%.

 ________________________________________________
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%.

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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.

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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).

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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.

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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%.

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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.

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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.