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’.

_____________________________________________

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.

 

 

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.

 

_____________________________________________

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.

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.”

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

 

The SBA and PROlix

prolix

pro-LIKS, PRO-liks

Tediously wordy.

 

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

 

_____________________________________________

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.

 

The SBA and PROcacious

 Procacious

prō-kei-us

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

From Latin procax- “bold, impudent”

_____________________________________________

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

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

_____________________________________________

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.

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

The SBA and PROscribe

Proscribe

pro-SKRYB

 

1. To forbid something, especially by law.

2. To denounce, condemn, or exile someone.

 

From Latin proscribere (to publish in writing, to name someone as outlawed), from pro- (front) + scribere (write).

 

Proscribe has a meaning essentially the opposite of that of prescribe.

 

Prescribe is generally the more common of the two words, and anyone who uses the formal verb proscribe in their regular discourse is usually keen to the distinction. Keeping them separate, therefore, is often more difficult for the reader or listener (especially since they sound alike when spoken quickly). Context will usually tell you if an action is being ordered (prescribed) or prohibited (proscribed).

_____________________________________________

TIP OF THE WEEK

 

The phrase supply chain has been proscribed.

 

Lake Superior State University released its 2022 banished words list as a result of misuse, overuse, and uselessness.   Included on that list was supply chain.  Supply chain issues have become the scapegoat of everything.  The adverse result: overuse ad nauseam.

 

Trucks move roughly 72.5% of the nation's freight by weight.   The truck tonnage index is an index that measures the gross tonnage of freight which is transported by motor carriers in the United States for a given month.  The Federal Reserve Bank of St. Louis maintains a chart of the truck tonnage index on their website.  In March 2018, the truck tonnage index read at 112.5. A year later the index reached 116.7. It continued to rise until August 2019 before dipping in 2020. In April 2020 it had dropped to 106.9.  The US Truck Tonnage Index is at a current level of 113.40.  This is a change of 1.98% from one year ago.

 

The trucking industry is one of the most fragmented ones in the U.S.   There are almost 4 million class 8 trucks in operation.   According to the U.S. Department of Transportation, as of February 2021, the number of for-hire carriers on file with the Federal Motor Carrier Safety Administration totaled 996,894.  97.4% operate fewer than 20 trucks.

 

Truckers are well suited for SBA financial assistance.  Loan proceeds can be used for truck and trailer purchases, or for the refinance of existing debt.   A SBA loan can typically provide an amortization up to the useful life of the asset.   Working capital can also be provided as well as real estate financing for warehouse and storage facilities.

_________________________________________

 

Indices:

PRIME RATE= 3.25%

________________________________________

SBA 504 Loan Debenture Rate for January

For 20 year debentures, the debenture rate is only 1.84% but note rate is 1.87% and the effective yield is 3.07%.

For 25 year debentures, the debenture rate is only 2.04% but note rate is 2.068% and the effective yield is 3.216%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

The Federal Reserve continues to promulgate that "Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation".

 

At least they did not use the phrase supply chain.

 

This statement from their last meeting on monetary policy left out the "some sectors" mentioned last time. The Fed Open Market Committee is acknowledging that inflation is more broad-based.

 

They mentioned that “Job gains have been solid in recent months”.

 

For all of 2021, the economy added a record 6.4 million jobs.  So far, the U.S. has recouped 18.8 million, or 84%, of the 22.4 million jobs lost early in the pandemic, leaving it 3.6 million jobs shy of its pre-crisis level.

 

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

 

December 199,000

November 249,000

October     648,000

September 312,000

August    483,000

July     1,053,000

June       962,000

May        614,000

April      269,000

March      916,000

February  468,000

January    233,000

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.

 

Keep your eyes and ears open for this week’s auction of the 30 year Treasury bond.

 

At last month’s auction of 30 year treasury bonds the high yield was awarded at 1.895 percent,  down 4.5 basis points from last month's auction rate and the lowest awarded since January.

 

Since then the 30 year treasury bond yield has increased to 2.109%.

 

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.   The December 2022 implied rate is now at 1.18%, up from only 0.17% in October.

 

The Federal Reserve’s next meeting on monetary policy is January 25 and 26.

 

__________________________________________

 

OFF BASE

 

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

 

Birthday of Martin Luther King, Jr. January 17 

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

The SBA and PROpinquity

 propinquity

pro-PING-kwi-tee

Nearness in space, time, or relationship.

 From Latin propinquitas (nearness), from prope (near).

 _____________________________________________

TIP OF THE WEEK

 

Nothing propinks like propinquity as  U.S. hotel performance came in higher than any other Thanksgiving week on record.

 According to STR‘s latest data through November 27 occupancy came in at 53% which was 4.6% higher than 2019 while RevPAR (Revenue per available room) at $68 was up over 19%.

 Due to the steep, pandemic-driven performance declines of 2020, STR is measuring recovery against comparable time periods from 2019.

 This was the first week with an increase over the same week in 2019.

 Hotels and motels account for a significant piece of all SBA loan activity.

 _________________________________________

 Indices:

PRIME RATE= 3.25%

________________________________________

SBA 504 Loan Debenture Rate for December      

For 20 year debentures, the debenture rate is only 1.65% but note rate is 1.68% and the effective yield is 2.88%.

For 25 year debentures, the debenture rate is only 1.85% but note rate is 1.876% and the effective yield is 3.026%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

The propinquity of prodigious inflation proliferates.   Or does it?

 The Consumer Price Index increased 6.8 percent over the last 12 months.   This is the largest gain since June of 1982.

 Of course it did because prices had dropped during the depths of the  procellous pandemic proditomania.

 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.

 Now the index level is at 277.948.   That essentially implies that the grocery cart full of stuff that would have cost you $100 in 1984 would now cost you $278. 

 In November of 2019 that index was at 257.208.   We are now at 277.948.  That’s just over a 8% increase in total prices over the last TWO years.

 While that is an average of 4% annually, keep in mind the 0.8% increase in November was a slowdown from the 0.9% increase in October.

 The long term treasury bond market does not seem overly concerned about inflationary threats.   Inflation running hot, in theory, should push up yields for longer dated bonds because rising pricing pressures can erode government debts fixed value.

 At last week’s auction of 30 year treasury bonds the high yield was awarded at 1.895 percent,  down 4.5 basis points from last month's auction rate and the lowest awarded since January.

 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's 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- 77

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%.

 At their last meeting on monetary policy, the Federal Reserve changed their description of inflation from “Inflation is elevated, largely reflecting transitory factors” to “Inflation is elevated, largely reflecting factors that are expected to be transitory”.

 So inflation is no longer just transitory, but EXPECTED to be transitory?   The word expect comes from the Latin word expectare which means "await, or look out for”

 In other words, we will just have to wait and see.   We will also have to wait and see what happens at this week’s meeting on monetary policy with the Federal Reserve.

 Prognostications proliferate over the protean slope of the yield curve.

 _________________________________________

 

OFF BASE

 

Nothing propinks like propinquity was Chapter 21 in the James Bond novel Diamonds Are Forever by Ian Fleming.

 

Nothing propinks like propinquity was also called the Ball Rule of Power as American diplomat George Ball often said it.  It means that the more direct access one has to someone powerful, the greater one's power regardless of title.

 

The propinquity effect is the tendency for people to form friendships or romantic relationships with those whom they encounter often, forming a bond between subject and friend.

 

Nothing propinks like propinquity.

The SBA and PROfluent

profluent

PROF-loo-ent

Flowing smoothly; flowing in full stream.

from Latin pro- (forth) + fluere (to flow)

_____________________________________________

TIP OF THE WEEK

Procellous not profluent was October for SBA 7(a) loan approvals.

 

SBA loans had propined small business in protean ways with the guarantee fee waiver and SBA payments of P&I through the fiscal year ending September 30th.

 

The prosaic promulgation reducing guarantee percentages and imposing the guarantee fee prompted SBA 7(a) loan approval volume to drop 35%.

 

October 2021 7(a) loan approvals were at $804,764,600 while October 2020 loan approvals for that month were $1,232,723,000.

 

October 2019 7(a) loan approvals for that one month period were $1,602,677,500, consistent with the prior three years.

 

_________________________________________

 

Indices:

PRIME RATE= 3.25%

________________________________________

SBA 504 Loan Debenture Rate for October

For 20 year debentures, the debenture rate is only 1.54% but note rate is 1.568% and the effective yield is 3.021%.

For 25 year debentures, the debenture rate is only 1.74% but note rate is 1.765% and the effective yield is 3.157%.

_______________________________________________

AHEAD OF THE YIELD CURVE

 

The pronunciamento from the Federal Reserve that later this month they will start to reduce purchases by $15 billion per month -- $10 billion in Treasuries and $5 billion Agency MBS overshadowed the Treasury’s announcement on its anticipated borrowing needs.

 

It turns out the government borrowed $570 billion LESS than they thought they had to last quarter.  A part of that was a greater than anticipated increase in receipts.

 

As a result, the Treasury anticipates decreases in its bond auction sizes.   Overall, these planned changes will reduce by $84 billion the auction sizes during the current quarter from the level in the August-October quarter.

 

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:

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

2020- 1.216

2021- 1.88

 

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 job’s announcement of a nice increase of 531,000 in October, the 30 year Treasury bond DROPPED 7.8 basis points to 1.885%.

 

This drop was somewhat confounding, given that the robust payrolls number, lack of improvement in the participation rate, and strong hourly wage growth underlined inflation concerns.

 

Or it could be the carefully choreographed pivot in monetary policy is part of a bigger dance with the Treasury refunding announcement decreasing auction sizes.

 

Prognostications proliferate over the protean slope of the yield curve but it could be profluent.

 

__________________________________________

 

OFF BASE

 

According to the Federal Reserve, here are our remaining holidays:

 

Veterans Day November 11

Thanksgiving Day November 25

Christmas Day December 25

 

So why is Veterans Day on the 11th instead of a Monday?  Major hostilities of World War I were formally ended at the 11th hour of the 11th day of the 11th month of 1918, when the Armistice with Germany went into effect. It coincides with other holidays such as Armistice Day and Remembrance Day, which are celebrated in other parts of the world.

 

By the way, it is Veterans Day - a simple plural without a possessive apostrophe (Veteran's or Veterans').  The United States government has declared that the attributive (no apostrophe) rather than the possessive case is the official spelling.