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%.



__________________________________________

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%.

_______________________________________________
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%.

_______________________________________________
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%.

 ________________________________________________
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.

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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%.

 ________________________________________________
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.

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.


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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)

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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.



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Indices:
PRIME RATE= 5.50%

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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%.

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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.

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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!