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.

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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.

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Indices:

PRIME RATE= 5.00%

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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%.

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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.

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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.

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