November 4, 2010
The Republican party can claim a fairly resounding victory in Tuesday's midterm election by taking a majority in the House of Representatives and cutting into the Democrat's super-majority in the Senate. However, though small business appeared to pine for such results, the 2010 race may have left more questions than answers. Chief among them may be: Will there actually be massive improvements for small businesses in the areas of manufacturing and credit? The jury on that could remain out well into the 112th Congress.
Republicans gained at least 60 seats in the House and about a half-dozen more in the Senate with some close races still being tallied. On the surface, the GOP victory appeared to be just what the doctor ordered for small businesses, especially in manufacturing. In fact, a pair of studies released in the week before the election from Discover and FTI Consulting, indicated just that.
Discover's Small Business Watch saw its monthly measure of small business confidence in the economy surge by 10.4 points to a level of 84.2. The study's directors attributed the strong gain directly to the perception that Republicans would almost certainly retake the majority at least in the House. Meanwhile, FTI Consulting's study found 64% believe economic conditions would improve and 60% thought employment levels would rise if Republicans won a majority in either house of Congress. A similar ratio of respondents indicated they believed GOP policymakers were more likely to be cooperative with the business community going forward.
Should those responses prove accurate, the most likely short-term legislative changes would come in a significant revision of unpopular health care-related provisions requiring a 1099 filing for any business transaction over $600 as well as passage of a small business aid package that was pushed by the Obama White House in October. The latter appeared to die in Congress more from pre-election partisan gamesmanship than any actual objection on either side. The change in Washington, DC might also inspire lawmakers to push for quicker resolution on long-pending free trade agreements with Panama, South Korea and Colombia.
Byron Shoulton, senior vice president and international economist at FCIA Management Company, believes those Democrats who have opposed breaks for businesses and/or increased exporting, something the administration has shown increased interest in, may have to compromise more so than any time in the last two, perhaps four, years.
"I do believe the current mood favors tax cuts on small businesses among other likely incentives to help boost the economy and regain consumer confidence," said Shoulton. "The new majority has every reason to move boldly to help small businesses as much as possible. I expect they will." However, Shoulton admitted that some "new arrivals" to Congress may come to Capitol Hill trying to prove something to the voters who elected them on an anti-incumbent, anti-Washington platform. Others simply may not want to ease the pressure on President Barack Obama.
Economists Xiaobing Shuai, of Chmura Economics & Analytics, and Ken Goldstein, of the Conference Board, appeared even more pessimistic regarding the idea of compromise among federal lawmakers.
"Because both parties are moving away from the center, it is difficult to see anything big coming out of Congress," said Shuai. "Both parties will be posturing for the presidential election in 2012."
Moreover, Goldstein said matters are complicated further by the reality that it's not just Democrats and Republicans battling—both traditional parties being joined in the mix by the emerging tea party membership, which didn't exactly toe the GOP line or get much support from party stalwarts during the 2010 campaign season. The latter group is unlikely to play ball, so to speak.
"This three-way free-for-all is made for gridlock," said Goldstein. "Some of the victors specifically campaigned on NOT compromising. Small business must therefore look to the Federal Reserve and the local banks, not to Congress or the White House. It also suggests looking for legislation to be passed in both houses and NOT vetoed could be waiting for Godot."
Brian Shappell, NACM staff writer
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The Credit Managers' Index (CMI) improved dramatically in October and for the best reasons. This month saw solid activity in favorable factors for both the manufacturing and service sectors. Sales returned to levels not seen since May and is now above 60 again. Sales had been dropping steadily all summer and had been as low as 57.2, a reading not seen since December 2009. The boost in this factor occurred in both sectors. At the same time, there was a small jump in the number of credit applications, reaching a level not seen since June. Additionally, the increase in credit applications was coupled with fewer rejected ones, which is a solid sign for the future. "The overall feeling is that credit is starting to loosen up again after the decline in the summer. Banks are getting a little more aggressive, but more importantly there is more credit being extended by companies seeking to capture more share from their consumers," said Chris Kuehl, PhD, economic advisor for the National Association of Credit Management (NACM). The amount of credit extended is back to levels previously set in May and dollar collections, which had already started to improve in September to 60, is now up to 61.9. "It is good news when either of the sectors starts to move in a positive direction, but activity in the favorable category generally signals a bigger set of gains in the overall economy," said Kuehl.
Improvement in unfavorable factors continued as well. These are the indicators that signal companies are struggling with debt. When they improve, there is a return to confidence in the business community as a whole. As disputes, bankruptcies and dollar exposure decline, there is evidence that companies are trying to catch up on debt, which is both a signal that business prospects have improved and that there is activity planned. An established pattern for these factors indicates that companies are seeking to get current with existing credit lines so they are in a position to ask for more in order to expand. This seems to be happening again, albeit at a subdued rate.
In the overall economy, there is evidence some progress is being made, but the pace has been excruciatingly slow. The latest data on jobs show that layoffs have slowed, but there is still not much evidence that hiring is underway. Durable goods orders were up, but only because there was another surge in orders for aircraft. The latest results from the Purchasing Managers Index show only modest gains; this pattern is the same in almost every current survey or study. "The good news is that there is progress, but the bad news is that it is far too slow to make a big impact on the issue that is of greatest concern in the public's mind: jobless totals. It will take a growth rate above 5% to erode the unemployment numbers, but the Commerce Department's recent numbers show that the economy grew at only 2% in the third quarter. The CMI numbers reinforce the notion that there has been growth, but it remains slower than preferred," said Kuehl.
The overall indicator that sets the tone for the entire October survey is the top number, and this month the index reached 54.9 after falling to as low as 53 in July. The numbers are not yet signaling that happy days are here again, but the trend is headed in the right direction and there is some renewed hope for a reasonably strong finish to the year.
Click here to view the full report, complete with tables and graphs, as well as the CMI archives and a schedule of survey participation open and close dates.
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NACM and its Government Business Group (GBG) have continued the fight for relief from a pending 3% withholding tax on most federal, state and local government contracts. Enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the now five-year old fight for repeal most recently took the form of a letter delivered to both houses of Congress, signed by NACM and the dozens of other like-minded associations that comprise the Government Withholding Relief Coalition (GWRC).
"The GWRC and its 110 member associations strongly urge you to include a two-year delay of the 3% tax withholding law in a legislative vehicle moving through Congress this September if repeal is unattainable this year," said the letter. "The Coalition will continue to vigorously advocate for repeal of this misguided law; however, a delay is urgently needed now to prevent any additional wasteful expenditure of funds and manpower by governments and companies in order to prepare for the looming implementation deadline of January 2012."
Upon enactment in TIPRA's Section 511, the tax was set to go into effect on all payments made after December 31, 2010. A one-year delay was included in the American Recovery and Reinvestment Act (ARRA), which passed into law in February 2009. Repeal of the tax has widespread support, but ideas for offsetting the revenue it would generate remain scarce, thereby necessitating the delays.
Originally the tax was included in order to address the nation's tax gap, which represents the $345 billion annual difference between taxes legally owed and taxes collected. The GWRC noted, however, that several other measures passed since TIPRA have been designed to address the tax gap, rendering the 3% withholding tax unnecessary. "There have been numerous legislative and regulatory measures put in place since the enactment of the 3% withholding law back in 2006 that have focused on increasing tax compliance and enhancing transparency for companies that have received government payments. All these initiatives taken together obviate any rationale or need for retaining the withholding mandate and will be far more cost-effective for the government," said the letter.
While the tax is not set to go into effect until January 1, 2012, the GWRC noted in its letter that implementation costs have already started to weigh on the nation's most economically vulnerable entities. "Businesses—the vast majority of which are small businesses without any tax delinquencies—and governmental entities are starting to expend resources now in preparation for implementation due to major system and process changes needed for withholding, reporting and reconciling the millions of affected payments annually," it said. "These changes have to be made well in advance of 2012."
A full repeal may still not be in the cards for Congress, but a two-year delay would go a long way toward abating the pressure this pending requirement currently places on American businesses.
Jacob Barron, NACM staff writer
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The "Big Three" credit ratings agencies—Moody's Investment Services, Standard & Poor's and Fitch Ratings—have certainly been active stamping their upgrades and, more likely of late, downgrades on everything from global companies to individual nations. Now, a global panel of regulators and economic officials, many incensed by downgrades of struggling European nations and ratings inaccuracies in the run-up to the global downturn, has struck at the very foundation of the ratings agencies in an organized effort to undermine much of their influence on financial markets.
As predicted in a two-part story in NACM's Business Credit earlier this year (the July/August and September/October issues), the ratings agencies have fallen into the crosshairs of governments around the world and face almost certain changes, potentially sizable ones, to their business models. The strongest, most united hit against the credit ratings agencies (CRAs) came in an Oct. 27 manifesto from the Financial Stability Board (FSB), an offshoot of the G-20. FSB's "Principles for Reducing Reliance on CRA Ratings" calls for the rapid implementation of a series of standards designed to "reduce stability-threatening herding and cliff effects that currently arise from CRA rating thresholds:"
"The principles aim to catalyse a significant change in the existing practices, to end mechanistic reliance by market participants and establish strong internal credit risk assessment practices instead. The ‘hard wiring' of CRA ratings in standards and regulations contributes significantly to market reliance on ratings. This, in turn, is a cause of the ‘cliff effects' of the sort experienced during the recent crisis, through which CRA rating downgrades can amplify procyclicality and cause systemic disruptions. It can be also one cause of herding in market behavior, if regulations effectively require or incentivize large numbers of market participants to act in similar fashion. But, more widely, official sector uses of ratings that encourage reliance on CRA ratings have reduced banks', institutional investors' and other market participants' own capacity for credit risk assessment in an undesirable way."
FSB suggested authorities and "standard setters" remove/replace references to CRA ratings in existing laws and regulations, when possible, in favor of alternative provisions as soon as prudently possible.
The effort is bold, definitive and grandiose, though not altogether unexpected. Economic officials in many nations have lashed out at the independent ratings agencies any time they have issued downgrades to nations' credit ratings in recent months. It has generated a seemingly ongoing war of words in Europe, as the ratings agencies have been particularly hard on the high-debt countries of Portugal, Italy, Ireland, Greece and Spain in 2010. It is worth noting that five of the spots at the proverbial G-20 table are held by European nations within the European Union itself, all of which have publicly criticized the CRAs, and that does not include a pair of nations essentially considered part of the "Eurasian" block (Russia and Turkey).
Brian Shappell, NACM staff writer
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As the economy continues to limp toward a full-on recovery, issues such as sniffing out fraud, both on the part of customers and a business' own employees, as well as proper use of credit applications have become increasingly important. A pair of NACM teleconferences presented respectively by Debie Wangsgard, CCE and Wanda Borges, Esq. will tackle each in detail next week.
Wangsgard, of Stock Building Supply, noted that identity theft has become the biggest and fastest-growing crime in the United States. Scarily, it's also, "the easiest to perpetrate," she argued. About half of Wangsgard's November 9 teleconference, "Identifying Business Credit Fraud," will focus on customer issues, such as identity theft. However, because such topics are already "pretty familiar" to those in the business credit industry, Wangsgard said she plans to spend the other half of the teleconference on another unsettling and perhaps less discussed trend: employee theft.
"I don't know that I would say it's new, but it's certainly escalating," she noted. "There are more people that are financially strapped that wouldn't normally do these things, but they get desperate, and things happen."
Wangsgard said incidents have become more common, even at her own company, and that risk can strike firms that are large and small alike. While small companies may be a risk because they don't have the most up-to-date controls, some larger companies have been victimized by not updating the ones they've implemented or monitoring them properly. Wangsgard promises to offer three basic things every company can do to cut back on employee theft, among other highlights of the teleconference.
One day prior, on November 8, Borges will present "Credit Applications." The presentation gives credit professionals an opportunity to learn how to better prepare credit applications. Borges said the topic often is overlooked by credit professionals who don't understand how important or useful applications can be, not only for evaluating a prospect's creditworthiness but for future collections efforts, if needed.
"The credit application is your first connection to your customer," said Borges. "It is the means by which you get to know all the details about your customer that will hold you steadfast later on in the relationship when you need to pursue your customer legally. There are so many ways to use a credit application so that it becomes a binding contract. The details within that credit application are extremely beneficial."
Brian Shappell, NACM staff writer
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President Barack Obama proposed temporary 100% expensing for businesses in early September. Now, the U.S. Treasury Department has issued a report, making the convincing case for the president's plan to allow companies to deduct the full cost of capital investments made from September 8 until the end of next year.
In the report, aptly titled "The Case for 100 Percent Expensing: Encouraging Business to Expand Now by Lowering the Cost of Investment," the Treasury uses a whole world of figures to explain to partisan and non-partisan observers why the proposal should be implemented quickly. "Consider a business that makes $1 million of additional investments in new equipment that typically have a 7-year recovery period," said the report. "Under current law, the business would only be able to deduct a fraction of its investment each year—about $143,000 in the first year, for example. At a tax rate of 35%, that would reduce the business' taxes in the first year by $50,000. By contrast, under immediate 100% expensing, the business could deduct all $1 million in the first year—reducing the business' taxes by $350,000."
Essentially, the Treasury argued that the proposal would not only provide companies with more cash on hand this year, but also encourage spending by making the investment itself more attractive. The agency's analysis on a nationwide basis noted that 100% expensing would accelerate $150 billion in tax cuts to 2 million businesses, lower the average cost of capital for business investment by more than 75% and produce about $50 billion in new investment.
Some have noted that, if temporary 100% expensing is expected to offer so many sudden benefits, then the proposal should be made permanent, but the Treasury was quick to rebut this suggestion in its report. "If a future expensing policy is anticipated prior to its effective date, then there is an incentive to delay investment until the more favorable tax regime becomes effective," said the report. "If a temporary expensing policy is ending, then an incentive exists to shift investment from the future into the tax benefit window." The theory is that, since the goal is to get businesses off the sidelines now, and not in 2012, timing the incentive and designating an end point would lead companies to move planned spending forward, creating a more pronounced and immediate benefit to the economy.
A full copy of the Treasury's report can be found at the agency's website (www.ustreas.gov).
Jacob Barron, NACM staff writer
The bankruptcy news was good and bad for companies, and for at least one city, in October, with some filers and potential filers on the verge of successful exits and others on the verge of major breakdowns.
General Growth Properties Inc.
A reorganization plan for General Growth Properties Inc. (GGP) was approved on October 21 and the company is expected to emerge from bankruptcy at the beginning of next week. Due to the expenses associated with its Chapter 11 filing, the company posted a $231.2 million loss in the third quarter, about $80 million of which was reorganization costs and another $83 million of which was interest expense. On the positive side, however, tenant sales for the period were up by 10% over the previous year.
After it emerges from bankruptcy, the company is expected to turn its attention to a $2 billion share sale to raise capital, spearheaded by its new CEO, Sandeep Mathrani. Recent reports note that Mathrani will receive a generous salary package from GGP, including a base salary of $1.2 million coupled with a $1 million signing bonus. The new CEO will also be eligible for an annual bonus of up to $1.5 million and receive 1.5 million restricted shares in the company, which could wind up being worth more than $20 million.
The formerly ubiquitous video rental company has continued its attempts to reinvent itself through its Chapter 11 filing, most recently announcing new "On Demand" options that will allow customers to watch video content on dozens of electronic and mobile devices. It has also partnered with six new consumer electronic dealers in order to make a run at its top competition, Netflix. The court handling Blockbuster's case also recently authorized the company to retain the services of Rothschild Inc., which will serve as a financial advisor and investment banker. Under the terms of a pre-packaged plan, Blockbuster would eventually emerge from bankruptcy with $100 million in debt, down from close to $1 billion, and convert much of its remaining senior secured debt into company equity. Many of Blockbuster's largest creditors are major movie studios, like 20th Century Fox, Warner Bros., Sony Pictures and Walt Disney Studios.
Although no official filing has taken place, the Harrisburg City Council interviewed bankruptcy attorneys in late October and may make a hiring decision in the coming weeks. Meanwhile though, reports have noted that the city currently lacks the capital to make two debt payments for more than $300,000 due on November 15. This comes in addition to the $10 million in debt payments the city has already missed in relation to the $288 million incinerator project that went awry and plunged Pennsylvania's capital city into financial distress. Mayor Linda Thompson has staunchly rejected the possibility of bankruptcy, despite support for it from several city council members.
Washington Times LLC
Following the dismissal of an involuntary bankruptcy petition filed against the paper, the Washington Times was recently bought for $1 by the Moon Group, operating on behalf of the paper's founder, Rev. Sun Myung Moon. The group also agreed to assume the company's liabilities, paying them from an escrow account, and rehire three executives previously dismissed by Moon's son, Preston Moon, who took control of the paper four years ago.
The involuntary bankruptcy petition was filed by Richard Steinbronn, a former affiliate officer who claimed that the company owed two other affiliated companies $2 million, meaning that they should be under the court's protection. Lawyers for the Times alerted Bankruptcy Judge S. Martin Teel Jr. to the potential sale and the fact that it would generate $3.1 million in cash that the company could use to pay its creditors. In light of this, Teel dismissed the involuntary petition and the sale proceeded, allowing the company to avoid shutdown amid persistently declining circulation figures.
Jacob Barron , NACM staff writer
The Federal Reserve's Federal Open Market Committee emerged from a two-day fiscal policy meeting Wednesday to announce it would not change the long-steady target for the federal funds interest rate. But, perhaps more significantly, it launched a new, large wave of Treasury securities. The latter, perhaps intimating the Fed's lack of confidence in a sharply divided and changing Congress to quickly push beneficial legislative changes, is designed to bolster what it admits has been "disappointingly slow" economic growth by lowering longer-term rates.
The Fed confirmed the pace of the recovery, especially in areas including output and employment continues to be slow. Trying to lower rates through securities purchases is a somewhat risky, because it could invite higher inflation, attempt to get businesses spending more on things like capital projects: "The committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month...and will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."
Brian Shappell, NACM staff writer
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