Monday, July 16, 2018

The SBA and PRObity

Integrity and honesty.
From Latin probus (upright, good).


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.





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%.


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.
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.

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