August 30, 2012
The Credit Managers Index (CMI) has consistently predicted the performance of the greater economy by roughly a month. In 2008, when the majority of the economic indicators pointed toward more growth, the CMI was starting to track downward and essentially predicted the impending recession. If this trend holds true, the news from this month is going to make many people happy about the coming trends in the economy.
At the top of the list of numbers to get excited about is the CMI reading itself. It is now sitting at 55.8 and that ends four straight months of decline. The 55.8 reading takes the index back to levels seen back in March when the CMI was at 56.2. The second number to get enthused over is the index of unfavorable factors. Last month that set of categories slipped beneath the 50 line that separates expansion from contraction. Now at 53.1, it is as high as it has been in well over a year. The prior high was 52, which was also back in March. Finally there is the index of favorable factors, which recovered nicely as well. The current reading is back to 60 and is consistent with the numbers seen through most of the spring.
If one looks at the details, there is more to fuel a cautiously upbeat attitude. The reading for sales returned to the 60sâ€”sitting right at 60â€”after falling below this mark to 58.5 last month. Sales had been one of the more consistently positive numbers for the past year, staying above 60 all year with the exception of a dip to 58.3 in November 2011. There was a slight weakening in new credit applications, but stability in dollar collections and amount of credit extended. The factor that moved the needle on the index of favorable factors was salesâ€”the almost four-point jump was impressive.
The most significant change took place in the unfavorable factors. Last month, only two of the six factors were above the expansion mark, and this month all of them are. The biggest improvements were in accounts placed for collection (48.9 to 52.4), disputes (47.6 to 51.9) and filings for bankruptcies (54.9 to 59.6). Filing for bankruptcies is as positive as this category has tracked in well over a year. Business closures have radically tapered off over the last several months and that is generally a good sign.
"It is far too early to declare that there has been a dramatic turnaround in the economy," said NACM Economist Chris Kuehl, PhD, "but these better numbers are reinforcing some of the other data points emerging." He affirmed that the housing market is showing consistent signs of life, boosting the prospects for construction employment, and noted the solid numbers in durable goods orders cautioning that a significant part of that gain seemed to come from the aerospace industry. Finally, the rate of new claims for unemployment has slowed, but did not have much effect on the rate of unemployment itself.
"The best that can be said about the current CMI number is that a declining pattern was thoroughly broken, and there is some reason to believe that this could be start of a much more positive trend than has been seen through most of the summer," Kuehl said.
The complete CMI report for August 2012 contains the full commentary, complete with tables and graphs.
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A recurring theme at this year's Credit Congress seemed to be a decline in the use, or usefulness, of personal guarantees (PGs) in B2B transactions.
While NACM's August survey might seem to bear this out, the reality is that PGs are still widely used, but very rarely required, or sometimes even received. When asked "Do you require a personal guarantee from your customers?" 65% of respondents said "no" while 33% said "yes." The remaining 2% weren't sure.
In the survey comments, participants noted that even if they did "require" PGs as part of their credit application or regular credit procedures, most of the time they didn't receive them. "There is a PG section in the credit application which is completed about one-third of the time," said one respondent. "Generally it is the higher risk customers that complete this section on their own, but once or twice a year we may have to insist that the PG be completed, should they have failed to do so earlier."
Others thought that even asking for a PG was too intrusive and rarely worth the trouble that comes from challenging the customer to provide one. "Clients are not willing to provide personal guarantees for what they believe is a simple business transaction," said one participant. "Our sales team is unwilling to ask for a personal guarantee to complete a sale."
Questions about enforceability also left many respondents skeptical of the actual value of a PG. "In the rare instances where we have asked for a personal guarantee, we find that it is very hard to enforce, and requires thorough investigation to determine if there are enough unencumbered assets to cover the exposure," said one participant. "In community property states, the spouse has to sign as well, or only half of the assets are available when they are liquidated."
Some noted that PGs only led to future expenses in the form of litigation. "Personal Guarantees do not make bad credit good. [They're] only an invitation to go to court and I have no time for that," said one respondent.
Still, some participants remained steadfast in their belief in the value of PGs, both as a collection tool and a legal instrument. "We do use PGs to gain a psychological edge. If a client knows a PG is supporting their account, we believe we will be paid before suppliers without guarantees in the event of financial problems," said one respondent. "Regardless of prevailing sentiment in the credit community today, I've gotten paid on accounts when they're close to going out of business, but only because of my PGs," said another.
- Jacob Barron, CICP, NACM staff writer
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It is clear that exporting levels, perhaps more than anything else in the economy, need to increase during the coming quarters to stem the tide of slowing growth rates. While that sounds strikingly similar to the message President Barack Obama has been espousing over the last couple of years, the statement actually came from Chinese Premier Wen Jiabao this week.
Chinese officials uncharacteristically appear to be showing concern over slowing growth rates. While it seems laughable on the surface to call 7% or 8% growth a problem, China actually needs to add millions upon millions of jobs every year to keep up with population needs. While inflation and fast-rising food prices are a concernâ€”the Chinese Ministry of Commerce noted significant price increases in recent weeks for staple products like eggs, cabbage and vegetablesâ€”Jiabao and others are eyeing export levels as a way to keep the economic machine in check and growing. To wit, Jiabao called the third-quarter a "crucial period" of 2012 for Chinese growth.
Jiabao is laying out a full-court press, so to speak, to exporters with announced visits to exporting districts intended to boost confidence and measures being put in place such as expedited tax rebates and reduced fees for companies sending products elsewhere.
Typically a stone-faced nation that has enjoyed a lengthy string of economic prominence, China's mood has shifted a few times throughout 2012. Still the leader of the emerging economies, NACM Economist Chris Kuehl, PhD noted Chinese officials "pumped the brakes" on growth early in the year to try to reduce inflation and rampant overheating in the economy. They have appeared shocked and dismayed when they couldn't just "turn the spigot back on" and get growth back to hot, global-economy-driving levels. With other emerging economies like Brazil and India trailing off slightly, the United States being stuck in neutral in its economic rebound and more than half of the European Union facing significant long-term debt crises, it cannot be underestimated just how important China's efforts to stabilize its previously high-growth levels are to the rest of the world.
- Brian Shappell, CBA, NACM staff writer
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Twice in recent days, representatives for the federal government have chimed in to object to pieces of proposed bankruptcy plans for energy-related companies. They appear to be foreshadowing a growing trend in the Obama Administration, which is still bearing the brunt of the controversial insolvency of a California solar products producer it backed with loans and has since made a point to watch industry-related Chapter 11 proceedings very closely.
As the parties for Solyndra try to quickly end Chapter 11 proceedings in U.S. Bankruptcy Court for the District of Delaware, attorneys for both the Internal Revenue Service and the Department of Energy have filed objections to its bankruptcy disclosure statement. The sticking point between the agencies and Solyndra, which received more than $500 billion in loan guarantees from the Obama Administration before its collapse, appears to be the potential for investment firms to use Solyndra's past operating losses to skip out on significant liabilities and circumvent the tax system.
Solyndra, with its deep ties to the Obama fundraisers now being investigated for fraud amid its September 2011 collapse, became a regular punching bag for Republican Presidential Candidate Mitt Romney's campaign after the FBI raided its palatial headquarters. As expected, the first proposed reorganization plan submitted this summer would see unsecured creditors getting pennies on the dollar, at best.
This is significant because no less than a dozen energy-related companies, largely solar and alternative energy, have filed for bankruptcy protection over the last year or so. Those that emerge are facing a tough go even after reorganization because of the saturated market in the industry and alleged drastic undercutting on pricing and costs by Asian competitors.
Even outside of solar, federal representatives have gotten involved in bankruptcy cases. A U.S. trustee in the Department of Justice objected this week to Dynegy's reorganization plan a little more than a week before the scheduled plan confirmation hearing. The trustee, Hope Davis, has alleged that part of Dynegy's plan involving third-party liability claim limitations appears to stray outside the bounds of federal bankruptcy law.
Dynegy filed for Chapter 11 protection last year because of a dispute involving control of a coal power plant. Creditors have already noted their approval of the bankruptcy reorganization plan currently being heard in U.S. Bankruptcy Court in Poughkeepsie, NY.
- Brian Shappell, CBA, NACM staff writer
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The U.S. Treasury continues to wind down its investments in the Troubled Asset Relief Program (TARP), most recently announcing more additions to the profit taxpayers have received from the program so far.
Last week the Treasury priced secondary public offerings of preferred stock it holds in BNC Bancorp, First Community Corporation, First National Corporation and Mackinac Financial Corporation, four small financial institutions based in North Carolina, South Carolina, Virginia and Michigan, respectively, that received TARP funds during the financial crisis. The auctioning off of the stock held by the Treasury in these four banks is expected to yield an additional $62.4 million in proceeds for the U.S. taxpayer.
TARP's bank programs have already earned taxpayers a significant profit. Including the aforementioned $64.2 million in profits from its most recent sales, the Treasury has recovered $266 billion from TARP bank programs through repayments, dividends, interest and other income, compared to the $245 billion originally invested.
Auctions such as these are part of the strategy that the Treasury outlined in May for giving up its remaining TARP bank investments in a way that "protects taxpayer interests, promotes financial stability and preserves the strength of our nation's community banks," said the Treasury in a statement. Eventually, the Treasury will get out of the TARP game completely.
"By any objective standards, the Troubled Asset Relief Program has worked," said the Treasury in its most recent Monthly 105(a) Report on TARP funds to Congress, required under the Emergency Economic Stabilization Act of 2008 that created the program. "It helped stop widespread financial panic, it helped prevent what could have been a devastating collapse of our financial system, and it did so at a cost that is far less than what most people expected at the time the law was passed."
- Jacob Barron, CICP, NACM staff writer
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