Monday, June 13, 2011

The SBA and epiphenomenon


(ep-i-fuh-NOM-uh-non, nuhn)

A secondary phenomenon, one resulting from another. 2. An additional symptom appearing during the course of an illness, but not necessarily related to it.

From Greek epi- (upon, after, over) + phainomenon (that which appears), from phainesthai (to appear).


Tantalizingly low interest rates are one epiphenomenon of this economy. And it looks like rates will remain low for quite a while.

For every $1,000,000 dollars borrowed to purchase or refinance real estate, the monthly payment is around $6,000.

SBA LIBOR Base Rate June 2011 = 3.19%
SBA Fixed Base Rate June 2011 = 5.73%
504 Debenture Rate for May

The debenture rate is 3.79% but note rate is 3.85% and effective yield is only 5.639%.

So are we headed for a double dip recession?

The economy has visibly slowed as only 54,000 jobs were created last month compared to 232,000 in April.

The yield curve is telling us no. We are not headed for a double dip 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, and yield curve inversions have foreshadowed each of the last seven recessions. 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 current recession started in December 2007.

Over the past month, the yield curve became flatter, as longer term rates have dropped.

Last week’s $13 billion auction of 30 year Treasury bonds drew a yield of 4.238 percent. It was up to 4.79 percent at the February auction.

So while the yield curve has become flatter, it has not inverted.
Here is what the 30 year bond has been doing:

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

What 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.

Fed policy makers are due to meet in Washington on June 21-22. Futures contracts showed the likelihood of an increase in the Fed funds target by the March 2012 meeting fell to 21 percent. The Fed’s target rate for overnight lending between banks has stayed at zero to 0.25 percent since December 2008.

One of the reasons the Fed is keeping rates low is because of “low rates of resource utilization.”

Keep your eyes and ears open for Wednesday’s release on capacity utilization. This is one of the Federal Reserve’s favorite measures of inflationary expectations.

Last month capacity utilization, which measures the amount of a factories and plants in use, fell to 76.9 percent last month from 77 percent in March. The capacity utilization rate had been steadily climbing since reaching a historic low in August of 2009 of only 68.2%. The Federal Reserve watches capacity utilization rates to see if production constraints are threatening to cause inflationary pressures. Bottlenecks or shortages often lead to inflationary pressures that would drive prices even higher. Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

The Ceridian-UCLA Pulse of Commerce Index tends to lead industrial production which in turn dictates capacity utilization rates. This index is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued last week by the UCLA Anderson School of Management and Ceridian Corporation fell 0.9 percent on a seasonally and workday adjusted basis in May, after falling 0.5 percent in April.

It looks like interest rates should remain low for, as the Federal Reserve likes to say, an “extended period.”



Today marks the last day Babe Ruth ever wore a Yankees uniform. In 1948 an ailing Babe Ruth made his final appearance at Yankee Stadium. With the crowd of 49,641 singing Auld Lang Syne, and members of the 1923 Yankees team (the first to play in the stadium) looking on, the New York Yankees retired Ruth's uniform number 3 during ceremonies that also commemorate the 25th anniversary of the Stadium. Fewer than two months later, the 53-year-old Ruth would die from throat cancer.

Tonight Reno Aces pitcher Armando Galarraga faces the Tucson Padres. The last time Armando pitched for the Aces he gave up 10 runs in only four innings. 5 of those runs came on two homers. It certainly has been an interesting year for the former Detroit Tigers pitcher. It was almost exactly a year ago that he pitched the near perfect game while on the Tigers. A wrong call made by the umpire in the top of the ninth with two outs gave him the imperfect game instead.

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