Monday, July 29, 2019

The SBA and PROmethean


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.


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%.





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%.


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
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.


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.