Monday, November 7, 2022

The SBA and PROlusion

prolusion

prōˈ lo͞o zhan

a preliminary action or event; a prelude.   To warm up.

an introductory and often tentative discourse

From Latin prolusion-, prolusio, from proludere to play beforehand, from pro- before + ludere to play

 

_____________________________________________

TIP OF THE WEEK

 

A new version of the SBA Standard Operating Procedures will be released soon and be effective around January 15, 2023.

 

SOP 50-10-6.1 will reflect changes in equity injection verification requirements, credit elsewhere, collateral requirements, and an overhaul of debt refinance requirements.

 

This SOP is a propaedeutic prolusion for upcoming changes reflected in recent Notices of Proposed Rulemaking on Affiliation and restrictions on loans for changes of ownership.

 

The notices are only proposed rule changes with the comment period ending on December 27, 2022.    Those changes won’t happen until well after the new SOP is released and effective.

 

_________________________________________

 

Indices:

PRIME RATE= 7.00%

________________________________________

SBA 504 Loan Debenture Rate for October

 

For 20 year debentures, the debenture rate is only 4.89% but note rate is 4.96% and the effective yield is 6.13%.

For 25 year debentures, the debenture rate is only 5.04% but note rate is 5.09% and the effective yield is 6.219%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

As prognosticated, the Federal Reserve’s Fed Open Market Committee raised the fed funds rate target by 75 basis points to 3.75-4.00 percent.

 

The FOMC statement for November 2 was the same as the one from September 21 with the exception that it added forward guidance on the cumulative impact of prior hikes to its anticipation of further rate hikes.

 

This is a fairly good signal that the FOMC may not pause on rate hikes.

 

Eurodollar futures can be prospicient.

 

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 several decades.

 

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

 

DEC22- 5.117

DEC23- 5.03

DEC24- 4.26

DEC25- 3.96

DEC26- 3.97

DEC27- 4.09

 

What does all this mean?

 

I don’t know.

 

The December 2022 implied rate is now at 5.12% up from 4.73% just last month and up from only 0.17% a year ago.

 

This week on Thursday there will be an auction of 30 year Treasury bonds.   At last month’s auction of 30 year Treasury bonds, the high yield was awarded at 3.930 percent, up from 3.511 percent at last month’s auction.      The 30 year Treasury yield is now at 4.253%.

 

For all the protervity of an inverted yield curve, the 3 month and 10 year yields have not maintained a sustained inversion.   The last time they inverted for any length of time was back in 2019.

 

 

The procacity over the yield curve is profluent proditomania.

 

__________________________________________

 

OFF BASE

 

Don’t forget to vote.

 

Ever wonder why elections are always a Tuesday in November?

 

The answer stems from the agrarian makeup of 19th-century America. In the 1800s, most citizens worked as farmers and lived far from their polling place. Since people often traveled at least a day to vote, lawmakers needed to allow a two-day window for Election Day. Weekends were impractical, since most people spent Sundays in church, and Wednesday was market day for farmers.

 

With this in mind, Tuesday was selected as the first and most convenient day of the week to hold elections. Farm culture also explains why Election Day always falls in November. Spring and early summer elections were thought to interfere with the planting season, and late summer and early fall elections overlapped with the harvest. That left the late fall month of November—after the harvest was complete, but before the arrival of harsh winter weather—as the best choice.

 

It is not propaganda when the Federal Reserve promulgates official holidays.    A three day weekend approaches!

 

The Federal Reserve has proscribed banks from being opened on the following days:

Veterans Day November 11

Thanksgiving Day November 24

Christmas Day December 25 

Monday, October 3, 2022

The SBA and PROpaedeutic

 propaedeutic

pro-pi-du-tik

 

preceding and preparing for something

a course that provides an introduction to an art or science (or to more advanced study generally)

 

You don't have to be a walking encyclopedia to use it, but "propaedeutic" does tend to occur mostly in scholarly discussions of learning and education.

 

"Propaedeutic" might be a "hard" word, but one easy thing to remember about it is that it is closely related to "encyclopedia."

"Encyclopedia" is from Greek paideia, meaning "education," plus enkyklios, meaning "general." "Propaedeutic" is from Greek paideuein, meaning "to teach," plus "pro-," which means "before."

 

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TIP OF THE WEEK

 

A propaedeutic promulgation.

 

Like the slope of the yield curve, SBA 7(a) loan approval volume has been prospicient about the direction of the economy.

 

Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over nine years using the Microsoft CORREL function.  It came out to a statistically significant 0.86.

 

SBA 7(a) loan approvals were profluent.

 

Through September 16th $24,101,763,300 in SBA 7(a) loans had been approved.   While below the levels of the prior year that had a 90% guarantee and no guarantee fee, SBA 7(a) loan volume did exceed fiscal years 2017 through 2020.

 

The new fiscal year starting October 1st has an authorization level of $30 billion which is more than sufficient lending authority.

 

The SBA program for this new fiscal year sets the 7(a) loan program at a ZERO subsidy rate.

 

That means the fees collected from borrowers and lenders are sufficient to cover the projected costs of the loan guarantee.   No tax payer subsidy is needed.

 

Effective October 1st, the guarantee fee for SBA 7(a) loans are:

-loans of $500,000 or less: 0.00%:

-loans of $500,001 to $700,000: 0.55% of the guaranteed portion.

-loans of $700,001 to $1,000,000: 1.05% of the guaranteed portion.

-loans $1,000,001 to $5,000,000: 3.5% of the guaranteed portion up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000.

 

_________________________________________

 

Indices:

PRIME RATE= 6.25%

________________________________________

SBA 504 Loan Debenture Rate for September

 

For 20 year debentures, the debenture rate is only 4.10% but note rate is 4.16% and the effective yield is 5.343%.

For 25 year debentures, the debenture rate is only 4.26% but note rate is 4.30% and the effective yield is 5.44%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

One profligate propaedeutic is that there is a trade-off between jobs and inflation.

 

The Phillips Curve, named after New Zealand economist A. W. Phillips, misconstrues a supposed correlation between unemployment and inflation as a causal relation.

 

When he won the Nobel Prize in economics in 1976, Milton Freidman in his acceptance speech titled Inflation and Unemployment made it clear there is no tradeoff between inflation and unemployment.

 

Freidman had promulgated that “inflation is always and everywhere a monetary phenomenon,” and said central bankers should prevent the supply of money from growing faster than economic output.

 

The growth rate of all the dollars in circulation (“M2 Money Supply”) soared a historic record 27% in 2020.

 

To put that in perspective, this increase in M2 Money Supply is the biggest jump in America’s history. That is bigger than the Financial Crisis of 2007-2008 (10%), bigger than World War II (18%), and bigger than FDR’s stimulus to fight the Great Depression (10%).

 

The recent increases by the Federal Reserve in the fed funds rate has moderated the changes in the M2 money supply.   M2 actually decreased by over $300 billion in May with nominal increases in June and July and no increase in August.      As a result month by month changes in the consumer price index over the last quarter has also plateaued.

 

As for jobs, initial claims for unemployment fell again last week, rapidly approaching the lowest levels seen early this year. Overall, claims remain historically low, and are headed lower again after trending higher from May through July. Claims suggest the labor market remains tight.  All signs point to continued tightness in the labor market, despite weaker growth.

 

Keep your eyes and ears open for this week’s report on employment for the month of September.

 

Here are the latest jobs numbers from the Bureau of Labor Statistics.

 

August  315,000

July        526,000

June      293,000

May       386,000

April      368,000

March     398,000

February  714,000

January  504,000

2021       6,400,000

2020    -9,370,000

2019     2,108,000

2018      2,679,000

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.

 

Next week on Thursday there will be an auction of 30 year Treasury bonds.   At last month’s auction of 30 year Treasury bonds, the high yield was awarded at 3.511 percent, up from 3.106 percent at last month’s auction.      The 30 year Treasury yield is now at 3.77%.

 

For all the talk of an inverted yield curve, the 3 month and 10 year yields have not inverted.   The last time they inverted was back in 2019.

 

On the same day, the consumer price index will also come out.   While year over year price increases will be reflected, it is important to actually note the month to month change.

 

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 plus years.

 

The December 2022 implied rate is now at 4.73% up from 4.454% just last month and up from only 0.17% in October.

 

 

__________________________________________

 

OFF BASE

 

It is not propaganda when the Federal Reserve promulgates official holidays.    A three day weekend approaches!

 

The Federal Reserve has proscribed banks from being opened on the following days:

Columbus Day October 10

Veterans Day November 11

Thanksgiving Day November 24

Christmas Day December 25

 

Monday, September 19, 2022

The SBA and PROvoke

 Provoke

prəˈvoʊk

to call forth (a feeling, an action, etc.) to stir up purposely to provide the needed stimulus for

from Latin provocare ‘challenge’, from pro- ‘forth’ + vocare ‘to call’.

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TIP OF THE WEEK

 

This might provoke SBA lenders and borrowers

 

Effective October 1st, the guarantee fee for SBA 7(a) loans are:

-loans of $500,000 or less: 0.00%:

-loans of $500,001 to $700,000: 0.55% of the guaranteed portion.

-loans of $700,001 to $1,000,000: 1.05% of the guaranteed portion.

-loans $1,000,001 to $5,000,000: 3.5% of the guaranteed portion up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000.

 

_________________________________________

 

Indices:

PRIME RATE= 5.50%

________________________________________

SBA 504 Loan Debenture Rate for September

 

For 20 year debentures, the debenture rate is only 4.10% but note rate is 4.16% and the effective yield is 5.343%.

For 25 year debentures, the debenture rate is only 4.26% but note rate is 4.30% and the effective yield is 5.44%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

Will the Federal Reserve provoke protervity?

 

The procacity over the Federal Open Market Committee meeting this week is profligate proditomania.

 

It is all but certain that the fed funds rate will be increased.   The only question is by how much.

 

That will depend on where they think we are at with inflation.

 

Last week it was widely reported that the consumer price index was up over 8% from a year ago.

 

Of course it is up because prices had dropped during the depths of the  procellous pandemic.

 

Keep in mind that the CPI is based on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living.

The index measures price change from a designed reference date. The reference base is 1982-84 and equals 100.

 

Here is what the index has done over the last year:

2021-08-01          273.092

2021-09-01          274.214

2021-10-01          276.590

2021-11-01          278.524

2021-12-01          280.126

2022-01-01          281.933

2022-02-01          284.182

2022-03-01          287.708

2022-04-01          288.663

2022-05-01          291.474

2022-06-01          295.328

2022-07-01          295.271

2022-08-01          295.620

 

It appears that price increases have gone procumbent over the last three months.

 

One of the Federal Reserve’s preferred measures of inflation is the capacity utilization rate.

 

Here is what capacity utilization has been doing and this week interesting little table of data:

 

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- 79.7

2020- 74.5

2021- 76.4

2022- 80.0

 

What does all this mean?

 

I don’t know.

 

Normally the Fed is concerned about inflationary pressures when the capacity utilization rate is about 82%.

 

Capacity utilization declined 0.2 percentage point in August to 80.0 percent.

 

The overall reading was pulled down by a decline in utilities output.

 

Utilities capacity usage fell to 72.8 percent in August from 74.7 percent in July.    Capacity use for manufacturing was unchanged.

 

Cooler weather in August relative to July eased demand for utilities and electricity for air conditioning. Electricity output fell 2.9 percent

 

At last week’s auction of 30 year Treasury bonds, the high yield was awarded at 3.511 percent, up from 3.106 percent at last month’s auction.

 

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 plus years.

 

The December 2022 implied rate is now at 4.454% up from 3.96% just last month and up from only 0.17% in October.

 

 

__________________________________________

 

OFF BASE

 

The fall equinox arrives on Thursday, September 22, 2022.

 

The word “equinox” comes from Latin aequus, meaning “equal,” and nox, ”night.” On the equinox, day and night are roughly equal in length.

 

After the autumnal equinox, days become shorter than nights as the Sun continues to rise later and nightfall arrives earlier. This ends with the winter solstice, after which days start to grow longer once again.

 

 

Monday, August 8, 2022

The SBA and PROfuse

profuse

pruh-fyoos, proh‐fyoos

-spending or giving freely and in large amount, often to excess; -made or done freely and abundantly:

-abundant; in great amount.

 

from Latin profūsus, past participle of profundere “to pour out or forth”;

 

Profuse is a word for a lot of something or even way too much — a profuse rainfall is a serious amount of rain.

 

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TIP OF THE WEEK

 

Profuse and perhaps procellous is the DEREG regulation effective August 1st from the Small Business Administration.

 

The prosaic promulgation most prominent is the provision for variable interest rates.

 

Effective August 1st, the maximum variable interest rates for all 7(a) loans is now:

 

$350,001 and greater:    PRIME + 3%

$250,001 - $350,000:     PRIME + 4.5%

$50,001 - $250,000:      PRIME + 6%

$50,000 or less:         PRIME + 6.5%

 

Most SBA 7(a) loans adjust on a calendar quarterly basis.

 

Prolix profligate promulgations proliferate over variable interest rates.

 

Because 7(a) loans are fully amortizing over long terms, increases in interest rates do not dramatically increase the monthly payment.

 

For example, a $100,000 SBA loan with a variable rate of PRIME plus 3.00 resulting in an interest rate of 8.50% amortized over 10 years would have a monthly payment of  $1,240.

 

If interest rates rise another 1% resulting in a rate of 9.50% the monthly payment is now $1,293, an increase of only $53.

 

_________________________________________

 

Indices:

PRIME RATE= 5.50%

________________________________________

SBA 504 Loan Debenture Rate for July

For 20 year debentures, the debenture rate is only 3.81% but note rate is 3.87% and the effective yield is 5.05%.

For 25 year debentures, the debenture rate is only 3.93% but note rate is 3.97% and the effective yield is 5.11%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

The procacity over the yield curve inverting is profligate proditomania.

 

The widely followed spread between 2- and 10-year Treasury yields is negative and prognostications proliferated that this inversion of the yield curve meant a recession was now on the way.

 

However, there is nothing “magical” about the “10/2” spread.

 

The spread between the 3 month Treasury bill and the 10 year Treasury bond is considered an even better indicator.

 

The last time the 3 month Treasury bill and the 10 year Treasury bond spread had inverted was in late May of 2019.   That inversion lasted until October of 2019.    As if on cue, the economy began to slump in the spring of 2020.

 

At last week’s auction of the 3 month Treasury bill,  the bill rate edged down from 2.520 percent last week to 2.49 percent but remains elevated from 1.850 four weeks ago.

 

The recent July employment numbers reflecting that all the jobs lost during the pandemic have now come back  has now caused longer term yields to tick up and the 3 month 10 year spread has increased positively even more.

 

Keep your eyes and ears open for this week’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:

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

2020- 1.216

2021- 1.88

2022- 2.375

 

So what does all this mean?

 

I don’t know.

 

At last month’s auction of 30 year Treasury bonds, the high yield was awarded at 3.115 percent, down 7 basis points from the prior auction rate. Lower long-term rates reflect diminished long-term inflation expectations as the growth outlook has cooled.

 

On Friday’s close, the 30 year Treasury bond yield was at 3.072 percent.

 

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 plus years.

 

The December 2022 implied rate is now at 3.96% up from 3.87% just last month and up from only 0.17% in October.

 

The December 2023 implied rate is at 3.29% down from 3.69% a month ago.

 

__________________________________________

 

OFF BASE

 

August 10th is the anniversary of the greatest moment in baseball history.    At least when it comes to three true outcomes.

 

A profusion of home runs, a strike out or a walk is known as a three true outcome.

 

It’s called that because the at bat comes down to the pitcher or the hitter.

 

The greatest three true outcome batter is Adam Dunn.   If you add up all his home runs, walks and strike outs it comes to 4,158, which includes 462 home runs, 1,317 walks and 2,379 strikeouts.   He only had 8,328 plate appearances.

 

No other than Jose Lima is the epitome of a three true outcome pitcher.    He would throw a lot a strike outs, not walk very many, but holds the all-time record for most home runs given up in the National League in one season.

 

On August 10th 2004, Adam Dunn faced Jose Lima at the Great American Ball Park .

 

After he successfully fought off seven pitches, Dunn connected on one of Lima's fastballs and sent it out of the park and into the Ohio River.

 

Not only was it one of the longest home runs ever hit but it landed onto a piece of driftwood that was floating on the Kentucky side of the Ohio River.

 

It is the only home run in baseball history that landed in another state.

 

After Jose Lima had died of a sudden heart attack while he slept, Vin Scully had this to say:

“Young and Old, we all will get our time and it was Lima’s time”

 

Vin’s wit and wisdom still echoes.

Monday, July 18, 2022

The SBA and PROvision

Provision

pruh-vizh-uhn

 

- the activity of supplying or providing something

- a store or supply of something (especially of food or clothing or arms) -a stipulated condition; a clause in a legal instrument, a law, etc., providing for a particular matter -the cognitive process of thinking about what you will do in the event of something happening

 

from Latin pro, meaning “forward, outward,” and vidēre “to see, observe, take care.”

 

Thus, its meaning is “to see or act forward.”

 

Provision can also describe the planning you do for "when something happens."

 

_____________________________________________

TIP OF THE WEEK

 

SBA borrowers should provision for interest rates being higher than they thought.

 

Effective August 1st, the maximum variable interest rates for all 7(a) loans is now:

 

$350,001 and greater:    PRIME + 3%

$250,001 - $350,000:     PRIME + 4.5%

$50,001 - $250,000:      PRIME + 6%

$50,000 or less:         PRIME + 6.5%

 

Most SBA 7(a) loans adjust on a calendar quarterly basis.

 

Prolix profligate promulgations proliferate over variable interest rates.

 

Because 7(a) loans are fully amortizing over long terms, increases in interest rates do not dramatically increase the monthly payment.

 

For example, a $100,000 SBA loan with a variable rate of PRIME plus 3.00 resulting in an interest rate of 7.75% amortized over 10 years would have a monthly payment of  $1,200.

 

If interest rates rise another 1% resulting in a rate of 8.75% the monthly payment is $1,253, an increase of only $53.

 

_________________________________________

 

Indices:

PRIME RATE= 4.75%

________________________________________

SBA 504 Loan Debenture Rate for July

For 20 year debentures, the debenture rate is only 3.81% but note rate is 3.87% and the effective yield is 5.05%.

For 25 year debentures, the debenture rate is only 3.93% but note rate is 3.97% and the effective yield is 5.11%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

I don’t see anyone provisioning for WIN buttons in the fight against inflation.

 

Whip Inflation Now (WIN) was a 1974 attempt to spur a grassroots movement to combat inflation in the US, urged by U.S. President Gerald Ford.

 

Ford had taken office in August 1974 amidst one of the worst economic crises in US history.

 

Despite rate hikes increasing the federal funds rate by 6 percentage points, from 4.8 percent to 10.8 percent, inflation continued to rise until December 1974, when it reached a peak of 12.3 percent.    The economy had also slid into a recession.

 

President Ford rolled out the WIN button campaign and by mid-November, orders for WIN buttons passed the 15 million mark. It was the best-selling button since 1971, when more than 50 million smiley face buttons were sold.

 

By the first half of 1976, the inflation rate was down to 4.6 percent.

 

The Federal Reserve meets next week on monetary policy.

 

At its last meeting, they stated “that ongoing increases in the target range will be appropriate.”

 

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 several decades.

 

A Eurodollar by the way is simply a U.S. dollar on deposit in commercial banks outside of the United States.

 

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

 

DEC22- 3.87

DEC23- 3.19

DEC24- 2.83

DEC25- 2.81

DEC26- 2.87

 

What does all this mean?

 

I don’t know.

 

The December 2022 implied rate is now at 3.87% up from 3.67% just last month and up from only 0.17% in October.

 

The fed funds target rate is currently 1.50% to 1.75%.    Fed funds futures for December 2022 imply a fed funds rate of 3.51% consistent with the prognostication from the Eurodollar futures market.

 

At last week’s auction of 30 year Treasury bonds, the high yield was awarded at 3.115 percent, down 7 basis points from last month's auction rate. Lower long-term rates reflect diminished long-term inflation expectations as the growth outlook has cooled.

 

We may not need to pull out the WIN buttons after all.

 

__________________________________________

 

OFF BASE

 

Ford’s top economic adviser, Alan Greenspan, later described the WIN idea as “unbelievable stupidity.”

 

In November, reporters spotted what looked like a distress signal from White House press secretary Ron Nessen, who wore his button upside down. It spelled NIM.

 

Nessen said it stood for “No Immediate Miracles.”

Monday, June 13, 2022

The SBA and Propagate

 propagate

prop·a·gate

-spread and promote (an idea, theory, etc.) widely -to cause to continue or increase by reproduction

 

from Latin propagatus, past participle of propagare "set forward, extend, spread, increase; multiply plants by layers, breed,"

from pro "forth" + -pag, from PIE root *pag- "to fasten," source of pangere "to fasten"

 

_____________________________________________

TIP OF THE WEEK

 

Has leisure and hospitality propagated past its procumbent pandemic levels?

 

Going into the Memorial Day weekend occupancy rates finally exceeded 2019 levels.   Occupancy at 66.5% was 3.2% higher compared to the same week of May 22-28 in 2019.

 

This was partly due to the timing of Memorial Day this year.

 

Reflecting an expected post-Memorial Day holiday slowdown, occupancy for the week of May 29 through June 4 dropped 12.1% to 63.2% compared to the  comparable week in 2019.

 

Average daily rates are up 11.3%.

 

Hotels and motels continued to be a dominant segment of SBA borrowers based upon NACIS codes.

 

_________________________________________

 

Indices:

PRIME RATE= 4.00%

________________________________________

SBA 504 Loan Debenture Rate for June

For 20 year debentures, the debenture rate is only 3.89% but note rate is 3.95% and the effective yield is 5.132%.

For 25 year debentures, the debenture rate is only 4.01% but note rate is 4.056% and the effective yield is 5.191%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

What is the Federal Reserve supposed to do?

 

Modifying the original act that established the Federal Reserve in 1913, the Federal Reserve Act of 1977 clarified the roles of the Board of Governors and Federal Open Market Committee (FOMC).

 

Congress explicitly stated the Fed's goals should be "maximum employment, stable prices, and moderate long-term interest rates."

 

It is these goals that came to be known as the Fed's "dual mandate".

 

Wait a minute.   Employment, stable prices, and moderate long-term interest rates are three things.   How could this be a “dual” mandate?

 

Ensuring stable prices and moderate long-term interest rates are interpreted as a single mandate. That's because long-term nominal interest rates are set with inflation expectations in mind. For any given nominal interest rate, rapidly rising prices diminish the real interest rate that lenders receive and debtors must pay. Thus, in an unstable monetary environment with rapidly rising prices, lenders will want to charge much higher interest rates to mitigate the inflation-rate risk.

 

The Fed seems to be doing ok with employment.   Total nonfarm employment rose by 390,000 in May.

 

Here are the latest jobs numbers from the Bureau of Labor Statistics.

 

May       390,000

April      436,000

March     398,000

February  714,000

January  504,000

2021       6,400,000

2020    -9,370,000

2019     2,108,000

2018      2,679,000

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.

 

Excluding leisure and hospitality, the economy has more than added back all the jobs lost at the beginning of the pandemic.  Leisure and hospitality gained 84 thousand jobs in May.  At the beginning of the pandemic, in March and April of 2020, leisure and hospitality lost 8.20 million jobs, and are now down 1.35 million jobs since February 2020.

 

Ok.  What about moderate long term interest rates?

 

At last week’s auction of $19 billion in 30 year Treasury bonds, the high yield was awarded at 3.185 percent, up 18.8 basis points from last month's auction rate and the highest awarded for the bond since November 2018.

 

At 3.185%, this is still well below the long term average of 4.79% for the 30 year Treasury bond.

 

Keep your eyes and ears open for this week’s meeting of the Federal Reserve’s Federal Open Market Committee.

 

At its last meeting, they stated “that ongoing increases in the target range will be appropriate.”

 

The fed funds target rate is currently .75% to 1%.

 

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 plus years.

 

The December 2022 implied rate is now at 3.67% up from 3.22% just last month and up from only 0.17% in October.   The December 2023 implied rate is at 3.69%

 

 

__________________________________________

 

OFF BASE

 

The similarity between propagate and propaganda is not coincidental; that word also comes to us from propagare.

 

Propaganda is today most often used in reference to political statements, but the word comes to our language through its use in a religious context. The Congregatio de propaganda fide (“Congregation for propagating the faith”) was an organization established in 1622 by Pope Gregory XV as a means of furthering Catholic missionary activity.

 

The first use of the word propaganda (without the rest of the Latin title) in English was in reference to this Catholic organization. It was not until the beginning of the 19th century that it began to be used as a term denoting ideas or information that are of questionable accuracy as a means of advancing a cause.

 

It is not propaganda when the Federal Reserve promulgates official holidays.    A three day weekend approaches!

 

The Federal Reserve has proscribed banks from being opened on the following days:

Juneteenth      June 19 (observed Monday June 20)

Independence Day July 4

Labor Day September 5

Columbus Day October 10

Veterans Day November 11

Thanksgiving Day November 24

Christmas Day December 25

 

Monday, May 9, 2022

The SBA and PROlix

prolix

pro-LIKS, PRO-liks

Tediously wordy.

 

From Latin prolixus (extended, poured), from liquere (to flow),

 

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TIP OF THE WEEK

 

Prolix profligate promulgations proliferate over variable interest rates.

 

A SBA 7(a) loan with a variable rate tied to prime should adjust on a calendar quarterly basis.   That benefits both the borrower and the lender.

 

Because 7(a) loans are fully amortizing over long terms, increases in interest rates do not dramatically increase the monthly payment.

 

For example, a $100,000 SBA loan with a variable rate of PRIME plus 2.75 resulting in an interest rate of 6.75 amortized over 10 years would have a monthly payment of  $1,148.

 

If interest rates rise another 1% resulting in a rate of 7.75% the monthly payment is $1,200, an increase of $52.

 

Another 1% rise in rates would cause the monthly payment to now be $1,253, an increase of roughly $53.

 

A 2% increase in interest rates is a 30% jump but payments only went up 9%.

 

The impact is more pronounced with 7(a) loans with 25 year terms since more of the monthly payment goes towards interest and not principal.

 

In the above examples, if the loan had a 25 year amortization, payments would have increased by almost 20%.

 

 

_________________________________________

 

Indices:

PRIME RATE= 4.00%

________________________________________

SBA 504 Loan Debenture Rate for May

For 20 year debentures, the debenture rate is only 3.82% but note rate is 3.88% and the effective yield is 5.061%.

For 25 year debentures, the debenture rate is only 3.94% but note rate is 3.98% and the effective yield is 5.119%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

With no prolixity, the Federal Reserve Open Market Committee announced that it raised its key short-term interest rate by a half percentage point Wednesday, its largest hike since 2000.

 

Its official statement came in at 366 words.   The January statement after its prior meeting was at a prolix 420 words.

 

Most prospicient was its prognostication that “ that ongoing increases in the target range will be appropriate.”

 

Nobel Prize winning economist Milton Freidman had promulgated that “inflation is always and everywhere a monetary phenomenon,” and said central bankers should prevent the supply of money from growing faster than economic output.

 

The growth rate of all the dollars in circulation (“M2 Money Supply”) soared a historic record 27% in 2020.

 

To put that in perspective, this increase in M2 Money Supply is the biggest jump in America’s history. That is bigger than the Financial Crisis of 2007-2008 (10%), bigger than World War II (18%), and bigger than FDR’s stimulus to fight the Great Depression (10%).

 

Most of the damage occurred in the spring and summer of 2020.

 

Here is a new chart reflecting the M2 Money Supply percent change quarterly:

 

2019-04-01          4.3

2019-07-01          5.2

2019-10-01          6.7

2020-01-01          7.9

2020-04-01          20.6

2020-07-01          23.4

2020-10-01          24.4

2021-01-01          25.7

2021-04-01          15.3

2021-07-01          13.3

2021-10-01          12.7

 

To put that into perspective, here is another chart reflecting monthly change in M2 in billions of dollars:

 

2019-12-01          69.0

2020-01-01          82.4

2020-02-01          57.3

2020-03-01          530.4

2020-04-01          1014.7

2020-05-01          833.8

2020-06-01          296.5

2020-07-01          149.5

2020-08-01          82.2

 

In March, April and May of 2020, the supply of money increased roughly $2.4 trillion.

 

It is not all the Federal Reserve’s fault.

 

Most of the increase came from fiscal stimulus, not Federal Reserve policy moves.

 

The Treasury Department pitched in by borrowing trillions to send stimulus checks to most Americans.   Stimulus spending sent both the FY 2020 deficit and the national debt to all-time highs.  Spending represented a jump of more than $2 trillion from the previous year, a 47% increase.  The increased government spending combined with declining revenue resulted in more than $3.1 trillion added to the national debt.

 

So what does this all mean?

 

How much higher will interest rates go?

 

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 plus years.

 

The December 2022 implied rate is now at 3.22% up from 3.00% just last month and up from only 0.17% in October.   The December 2023 implied rate is at 3.45%

 

Keep your eyes and ears open for this week’s auction of 30 year Treasury bonds.   Last month’s auction was considered average, with demand for the debt at 2.3 times the bonds on sale even with the average of the past 12 months but well short of the 2.46 in the March auction.  The yield on the 30-year Treasury bond was down 2.7 basis points to 2.800%.   As of last Friday, the 30 year yield was 3.23%.

 

The yield curve is not close to inverting.   According to the Federal Reserve Bank of Cleveland, using past values of the slope of the yield curve and GDP growth to predict future growth and the probability of recession, the odds of a recession  have actually decreased.   The probability of a recession in 1 year is at only 2.7%.

__________________________________________

 

OFF BASE

 

There's no way to talk about prolix without being redundant, verbose, and wordy. That's because the word is a synonym of all of those long-winded terms. Of those words, prolix is the one most likely to suggest unreasonable and tedious dwelling on details. It derives from prolixus, a Latin term meaning "extended" or "copious." Prolixus originated from a combination of the prefix pro- (which means "forward") and the past participle of liquēre, a verb meaning "to be fluid." True to that history, something that is prolix flows on and on.

 

Liquere is also the source of words such as liquid, liquor, licorice.   Now you see the connection -- why consuming liquor makes people prolix.

 

All this brings to mind the proverb that even fools are thought wise if they keep silent.

 

Maybe I should shut up.

 

Monday, April 11, 2022

The SBA and PROcacious 

 Procacious

prō-kei-us

Insolent or arrogant in attitude or tone; forward, cheeky; provocative.

From Latin procax- “bold, impudent”

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TIP OF THE WEEK

No need to be procacious about the SBA 7(a) loan program.

The SBA program for next fiscal year sets the 7(a) loan program at a ZERO subsidy rate.

That means the fees collected from borrowers and lenders are sufficient to cover the projected costs of the loan guarantee.   No tax payer subsidy is needed.

The guarantee fee for loans of $350,000 or less is ZERO.

 

_________________________________________

 

Indices:

PRIME RATE= 3.50%

________________________________________

SBA 504 Loan Debenture Rate for April

For 20 year debentures, the debenture rate is only 3.38% but note rate is 3.43% and the effective yield is 4.620%.

For 25 year debentures, the debenture rate is only 3.50% but note rate is 3.54% and the effective yield is 4.680%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

The procacity over the yield curve inverting is profluent proditomania.

 

Driven by a weak auction of 2 year treasury notes almost three weeks ago, the 2 year treasury yield jumped to over 2.365%, up a whopping 81.2 basis points from the prior month's auction rate and the highest awarded since February 2019.

 

That caused the widely followed spread between 2- and 10-year Treasury yields to become negative and prognostications proliferated that this inversion of the yield curve meant a recession was now on the way.

 

However, there is nothing “magical” about the “10/2” spread.

 

The spread between the 3 month Treasury bill and the 10 year Treasury bond is considered an even better indicator.

 

Right now, the current Treasury yield curve is historically very steep from 3-months to 2-years a bit flatter than normal from 2- to 3-years, and slightly inverts from 3- to 10-years.  Spreads between the 3 year Treasury and the Fed funds rate is at its widest since 1994.

 

This procellous slope of the yield curve is driven by concerns on what the Federal Reserve is going to do about inflation.

 

One of the Fed’s leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.

 

Keeps your eyes and ears open for this week’s report on industrial production and capacity utilization.

 

Here is what capacity utilization has been doing and this week interesting little table of data:

 

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- 79.7

2020- 74.5

2021- 76.4

 

What does all this mean?

 

I don’t know.

 

Normally the Fed does not feel there are inflationary pressures until the capacity utilization rate is about 82%.

 

Last month capacity utilization was up 0.3 percent to 77.6 percent.   This still almost 2 percentage points below the long run average dating back to 1972.

 

The Federal Reserve Open Market Committee next meets May 3rd and 4th.

 

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 plus years.

 

The December 2022 implied rate is now at 3.00% up from 2.06% just last month and up from only 0.17% in October.

 

__________________________________________

 

OFF BASE

 

If you happen to watch a major league baseball game on Friday, April 15th you might notice that all the players are wearing number 42.  It is the only day you will see any player with that number on their jersey.   In 1997, MLB retired number 42 across all major league teams.

 

That is in honor of Jackie Robinson.  42 was his jersey number.  April 15 was Opening Day in 1947, Robinson's first game in the major leagues with the Brooklyn Dodgers.

 

For some strange reason it is not a national holiday.   We are now in the longest stretch of the year without a holiday.

 

The Federal Reserve has proscribed banks from being opened on the following days:

Memorial Day May 30

Juneteenth      June 19

Independence Day July 4

Labor Day September 5

Columbus Day October 10

Veterans Day November 11

Thanksgiving Day November 24

Christmas Day December 25

Monday, March 14, 2022

The SBA and PROtervity

Protervity

prō-ter′vi-ti

The state or quality of being irritable; quick excitability; petulance; fretfulness; as, irritability of temper.

From Latin pro, forth, terĕre, to bruise

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TIP OF THE WEEK

Sensing protervity over the verification of tax returns for SBA loans, SBA Lenders may instead obtain tax return information by fully completing and submitting IRS Form 8821.

SBA Lenders may use either IRS Form 4506-C or IRS Form 8821.   Use of Form 4506-T has been discontinued.

Putting aside its protervity, Congress has passed both the short term Continuing Resolution (CR) that keeps the government operating to March 15, and also the full year FY22 funding package.

Both the SBA 7(a) and 504 loan programs have more than adequate resources to support small business through the end of the fiscal year which is in about 197 days.

_________________________________________

 

Indices:

PRIME RATE= 3.25%

________________________________________

SBA 504 Loan Debenture Rate for March

For 20 year debentures, the debenture rate is only 2.53% but note rate is 2.57% and the effective yield is 3.766%.

For 25 year debentures, the debenture rate is only 2.75% but note rate is 2.78% and the effective yield is 3.929%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

The protervity of the bond market continued at the government’s last auction of 30 year treasury bonds.

The high yield was awarded at 2.375 percent, up 3.5 basis points from last month's auction rate and the highest awarded for the bond since May of last year.

The shorter end of the yield curve has the pressure as reflected in the earlier 3 year auction where the high yield was awarded at 1.775 percent, up 18.3 basis points from last month's auction rate and the highest yield awarded for the note since July 2019.

The yield curve going procumbent is no need for proditomania.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:

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

2020- 1.216

2021- 1.88

2022- 2.375

 

So what does all this mean?

I don’t know.

The Federal Reserve meets March 15th and 16th on monetary policy.

At the Semiannual Monetary Policy Report to the Congress, the chairman of the Federal Reserve said that they would probably raise the target range for the federal funds rate.

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 plus years.

The December 2022 implied rate is now at 2.06% up from 1.18% at the beginning of the year and up from only 0.17% in October.

Protervity comes with a procellous prognostication.

 

__________________________________________

 

OFF BASE


The protervity caused by daylight saving time began with Germany during World War I.    The rationale was to minimize the use of artificial lighting to save fuel for the war effort.

In the US, “Fast Time,” as it was called then, was first introduced in 1918.   Only seven months later, daylight saving time was repealed.

In 1942, at the height of World War II, President Franklin D. Roosevelt reintroduced the measure, instituting year-round Daylight Saving Time in the US and referred to it as “War Time,”

The protervity of the Irish peoples is celebrated this Thursday, March 17th which is the day Saint Patrick died.

The first day of Spring is Sunday March 20th.

The next proscribed Federal holiday is not until Memorial Day May 30th.   This is the longest stretch of the year between three day weekends.  Protervity.

Monday, February 14, 2022

The SBA and PROceleusmatic

 Proceleusmatic

pros-uh-loos-MAT-ik

Inciting, exhorting, or inspiring.

 

From Late Latin proceleusmaticus, from Greek prokeleusmatikos (calling for incitement), from keleuein (to rouse to action).

 

One of the derivatives of keleúein, the agent noun keleustḗs, means “coxswain, one who beats time for the rowers,” referring specifically to the very quick rhythm to incite rowers charging into battle to ram enemy ships.

 

_____________________________________________

TIP OF THE WEEK

 

A proceleusmatic prospicient House of Representatives passed a Continuing Resolution (CR) to fund the federal government, including SBA, through March 11, 2022 by a vote of 272-162.

This new CR maintains current funding levels and policies for SBA which are set to expire under the current CR on February 18.

 

Currently, the exact timing of Senate consideration is unclear but all indications are that the Senate will pass this latest CR and avoid a shutdown. President Biden is also expected to sign this CR.

 

_________________________________________

 

Indices:

PRIME RATE= 3.25%

________________________________________

SBA 504 Loan Debenture Rate for February For 20 year debentures, the debenture rate is only 2.22% but note rate is 2.259% and the effective yield is 3.454%.

For 25 year debentures, the debenture rate is only 2.42% but note rate is 2.4526% and the effective yield is 3.598%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

Rates are going up, rates are going up is the  proceleusmatic prognostication proliferating.

 

The US government’s deficit however is going down.

 

The federal government ran a budget surplus of $119 billion in January compared with a deficit of $163 billion in the same month last year, the Treasury Department reported last week.

 

Spending in January was $346 billion while receipts totaled $465 billion.   For the fiscal year to date, the deficit was $259 billion compared to $736 billion last year.

 

The deficit looks relatively tame during the first four months of the fiscal year mainly because last year the government had kept open the spending floodgates in 2021 to battle the effects of the coronavirus pandemic on the economy.

 

So what will the Federal Reserve do at their next meeting 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 plus years.

 

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

 

DEC22- 1.92

DEC23- 2.275

DEC24- 2.13

DEC25- 2.14

DEC26- 2.145

 

What does all this mean?

 

I don’t know.

 

Keep your eyes and ears open for the Minutes from the Federal Reserve’s last meeting on monetary policy that will be released February 16th.

 

The December 2022 implied rate is now at 1.92% up from 1.18% a month ago and up from only 0.17% in October.

 

At last week’s auction of 30 year treasury bonds the high yield was 2.34%, up 26.5 basis points from last month's auction rate and the highest awarded for the bond since May of last year.

 

The Federal Reserve’s next meeting on monetary policy is March 15 and 16.

 

__________________________________________

 

OFF BASE

 

Where a number of individuals have been accustomed for centuries to perform exactly the same work at the same time, it is evident that they labored together to the rhythm of some familiar melody, the time of which was adapted to suit the particular requirements of the task in which they were engaged.

 

The ancient Phoenician builders of the Temple at Jerusalem, and the skilled stone-masons who were employed by the Kings of Egypt to construct the great pyramids sang songs so as to secure concerted effort. Otherwise they might never have been able to place their huge monoliths in position at all.

 

Proceleusmatic promulgations can become a profligate tyranny of rhythm.

 

It is important to sometimes take a break from that and a three day weekend approaches!

 

The Federal Reserve has proscribed banks from being opened on the following days:

Washington's Birthday February 21

Memorial Day May 30

Juneteenth      June 19

Independence Day July 4

Labor Day September 5

Columbus Day October 10

Veterans Day November 11

Thanksgiving Day November 24

Christmas Day December 25