December 1, 2011
The Credit Managers' Index (CMI) remained largely unchanged for the third consecutive month, dropping slightly to 53.5 from 53.7. While not ordinarily great news, given September's strong data, it is not altogether a bad thing that October and November stayed much the same.
"There is a story for just about everyone these days," said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). "If one is of a more pessimistic bent, there is the continued high rate of unemployment, the struggles in the housing sector and the sense that nobody in the political realm has a clue what to do about any of this. There is the mess in Europe, the gyrations in stocks and consumer polls that suggest that vast numbers of people are in bed with the covers pulled over their heads. If you tend toward optimistic, there is something for you as well, especially recently."
Retail numbers are coming in far more robust than anybody anticipated. Black Friday totals were almost 7% above last year and records were set in terms of dollar expenditures. Subsequent Cyber Monday sales were also just as dramatic. There is also evidence that manufacturers are setting up to do far more capital spending than in past years. Even the savings rate for consumers has started to creep back up after falling back to 3.3%. "It would be nice to see some gains in select areas," said Kuehl, "but there are no emergency warning signs popping up at this point either."
Much the same message can be gleaned from this month's CMI data; there is something to depress the pessimistic and something to provide encouragement to the optimistic as well. The most negative news came in sales, which tumbled from the 61.4 high reached in September to 58.2 in November—the lowest reading in the last year. The decline was seen across the board in both the manufacturing and service sectors. Some of this is to be expected as the end of the year draws closer, and there is reason to expect gains in the months to come if the data on capital expenditure planning is reliable.
Other favorable factors carried better news. Dollar collections improved marginally from 56.8 to 56.9, which marks the second best performance since July behind the jump to 57.8 in September. Even better news came in the amount of credit extended, which moved from 61.9 to 62.4, higher than any month since April. Overall, the index of favorable factors faded slightly from 59.5 to 58.8. This is not a dramatic decline, but it takes the index to levels seen in the depths of the summer, which is a bit of a concern.
There was better news in terms of unfavorable factors, suggesting that fewer companies are in financial distress. This is partly the result of an economic rebound and partly due to the fact that those companies in trouble months ago have either self-corrected or have gone out of business. The index did not shift dramatically, but it moved in the right direction from 49.9 to 50.1.
Most indicators were pretty stable. Rejections of credit applications trended down slightly from 50.2 to 49.5, suggesting that credit remains pretty tight. There was a slight improvement in dollars beyond terms from 47.6 to 48, but it remains under the all-important 50 mark. The biggest change was in the filings for bankruptcy number. There was a substantial improvement from 53.8 to 56.7 and that is the best performance since May. The indication is that those companies weakened by the recession have already fallen by the wayside and, for the most part, every industry is now working with the survivors. "This is not to say that they don't have their own financial issues," explained Kuehl, "but, going forward, many companies will see opportunities to gain market share from those competitors that have left the scene and that strengthens their ability to gain momentum in the coming year."
Do You Know Someone Worthy of Recognition?
It's time to nominate your distinguished CBA, CBF and CCE colleagues, your favorite instructor or mentor, among others, whose professional life displays unquestioned integrity, outstanding and meritorious service in the field, and ongoing dedication to the highest standards of the credit management profession.
Find out more on NACM's Honors and Awards Program web page. Deadline for nominations is January 20, 2012.
Read the profile of a 2011 award recipient in the November/December issue of Business Credit, which features the first O.D. Glaus Credit Executive of Distinction. If your copy has not yet arrived, as an NACM member, you can login here to view the online version of this article and the entire November/December issue now!
The world's largest central banks joined forces yesterday, taking coordinated action to inject liquidity into the ailing global financial system. In addition to the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all took action to enhance their capacity to support markets sagging under the weight of the euro crisis.
"The purpose of these actions is to ease strains on the supply of credit to households and businesses and so help foster economic activity," said the Fed in a statement. "These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011."
In layman's terms, this lower pricing scheme makes more money available to banks and at a cheaper rate, offering both a fiscal benefit as well as a psychological one by easing these institutions' concerns about the availability of funds.
The Fed went on to note its continuing relevance to the health of the domestic and international financial sectors, assuring observers that it has plenty of remaining tricks up its sleeve should things continue to get worse. "U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets," they said. "However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses."
Investors celebrated the move by driving the Dow Jones Industrial Average up by 400 points, but most expect the party to be short-lived. "Markets love it...till tomorrow. This week's solution solves this week's crisis," said Conference Board Economist Ken Goldstein. "The real issue is with the euro. Does everybody stay? Will there be a split, essentially euro A and euro B? Will they go to euro bonds? Will they tighten and unify fiscal policy? Can they get everyone over there to buy in?"
"Until there are answers to these questions this Perils of Pauline will continue to deliver riveting episodes," he added, referring to the serialized nature of these globe-spanning financial remedies.
Jacob Barron, CICP, NACM staff writer
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Fitch Ratings upheld the nation's "AAA" credit rating on Monday. However, the "big three" agency did note that continued ineffectiveness on the part of the U.S. Congress to breakthrough partisanship to get things done, most importantly addressing a growing debt problem, could cause Fitch to move the needle by 2013. In fact, the firm placed its odds of a formal downgrade at just better than 50% within a year or two.
While Fitch affirmed the U.S. sovereign credit rating, it did drop the long-term outlook to negative from stable. Fitch noted the U.S. continues to retain strong economic and credit fundamentals as well as a currency that is "the global benchmark." It also asserted that the U.S. economic recovery is likely to kick into a higher gear by early 2013 if not late next year. However, uncertainty regarding the recovery of employment levels, government spending and even effectiveness or competency of federal lawmakers are front of mind for ratings analysts at the firm:
"Fitch's revised fiscal projections envisage federal debt held by the public exceeding 90% of national income (GDP) and debt interest consuming more than 20% of tax revenues by the end of the decade and, including the debt of state and local governments, gross general government debt will reach 110% of GDP over the same period. In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status...The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure of the Congressional Joint Select Committee on Deficit Reduction (JSCDR) to agree to at least $1.2 trillion of measures to cut the federal budget deficit over the next 10 years as mandated under the Budget Control Act passed in August...The failure of the JSCDR underlines the challenge of securing broad-based consensus on how to reduce the outsized federal budget deficit. Agreement and implementation in 2013 of a credible medium-term deficit reduction plan that would stabilise government indebtedness in the latter half of the decade would relieve downward pressure on the U.S. sovereign ratings, though by postponing the difficult decisions on tax and spending until after forthcoming Congressional and Presidential elections, the scale and pace of required deficit reduction will consequently be greater."
Fitch also noted that automatic cuts, to be implemented if an agreement isn't made by lawmakers charged with finding ways to reduce the debt, essentially are discretionary spending and, thus, would not be considered a "credible" move toward real debt reduction.
Brian Shappell, NACM staff writer
'Tis the season for giving and thanks...
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"Being awarded the NACM Scholarship afforded me the chance to benefit from an enormous amount of educational resources...I have been able to broaden my perspective on my everyday credit responsibilities and have become more involved in company wide processes." Wendy Edsall, credit manager, Mayer Electric Supply/Jones & Lee Supply
For more information on giving to or receiving from the Scholarship Foundation, click here or call 800-955-8815.
The Senate attached long-term reauthorizations for two small business development programs this week to a massive piece of defense legislation. Amendment 1115 to the National Defense Authorization Act for Fiscal Year 2012 would reauthorize the Small Business Innovation and Research (SBIR) and Small Business Technology Transfer (STTR) programs for another eight years, through 2019.
The measure was unanimously approved in the Senate by voice vote. Although the approval of defense authorization bills is typically pro forma on Capitol Hill, the legislation, and the amendment reauthorizing SBIR and STTR, still must pass through the House before entering into law.
"My Senate colleagues and I have been working all year to get this done and, with this vote, the Senate has set politics aside and given our support to small business and innovation," said Sen. Mary Landrieu (D-LA), chairman of the Committee on Small Business and Entrepreneurship, and one of the driving forces behind the amendment. "This amendment not only keeps these programs alive, it also gives them stability and I thank Senators [Carl] Levin (D-MI) and [John] McCain (R-AZ) for their help in getting tonight's vote. I am hopeful our counterparts in the House will work with us to bring this to the President's desk immediately so that we can continue to keep our nation on the forefront of defense technology and scientific innovation."
Enacted by Congress in 1982, the SBIR program is the largest federal research and development program for small businesses and one of the largest examples of U.S. public-private partnerships. The program allows small businesses to compete for a portion of federal research dollars in order to help agencies meet their many missions. The STTR program, enacted ten years after SBIR, in 1992, differs only slightly from the SBIR, and serves as a bridge between research institutions and the market by allowing ideas originating in academia to get private sector support.
"Small businesses are our nation's job generators, employing more than half of all private sector employees and creating 64% of the net new jobs over the past 15 years. They also represent 99.7% of all employer firms," said Sen. Olympia Snowe (R-ME), Landrieu's ranking member on the Small Business Committee. "Small businesses are also our nation's most effective innovators, producing roughly 13 times more patents per employee than large firms—patents which are at least two times as likely to be among the top one-percent of high-impact patents. [SBIR/STTR] Program participants have produced more than 85,000 patents and have generated millions of well-paying jobs across all 50 states."
Jacob Barron, CICP, NACM staff writer
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With the Thanksgiving holiday celebrations in the United States last week, a few stories may have slipped past usually eagle-eyed credit professionals. Here are some happenings of note:
The "Big Three" credit ratings agencies (Standard and Poor's, Fitch Ratings, Moody's Investment Services) suffered a significant legal setback in the U.S. Supreme Court. It was ruled that the ratings agencies were not protected from lawsuits based on invoking rights under the First Amendment. The three had tried to use such a defense to protect themselves from suits brought by investors who were burned after using the companies' ratings information. Still, two of the three agencies (Moody's, Fitch) were cleared in said suit because of a lack of evidence.
In the Harrisburg Chapter 9 case, U.S. Bankruptcy Judge Mary France found the state law (Act 46) to be constitutional, ending the council's hopes of continuing the bankruptcy proceedings and avoiding state conservatorship. Act 46 forbids "third-class" (by population totals) Pennsylvania cities from declaring municipal bankruptcy prior to July 2012. (See NACM's blog for full story.)
In Jefferson County, AL, where the largest municipal U.S. bankruptcy filing in the nation's history is proceeding, Judge Thomas Bennett said he will not remove an appointed receiver charged with working on the county's massive debt tied to a sewer renovation project. However, the judge intimated he could limit the receiver's powers somewhat to give the county a little more influence over the Chapter 9 proceedings, though a pair of challenges to the receiver's authority were already struck down.
In the area of free trade agreements, South Korean lawmakers ignored a significant portion of the voter base fighting its pact with the United States over the fear of job losses or economic hits, and its ruling party called a hasty, surprise Wednesday vote. As a result, the FTA, which originated during the Bush Administration and was signed by President Barack Obama about one month ago, passed overwhelmingly but not before some unrest. One opposing politician allegedly released some form of tear gas or pepper spray in parliament chambers. The deal's value is estimated at nearly $90 billion. (See NACM's blog for full story).
Struggling newspaper publisher Tribune Co., which has become a symbol of challenges in the newspaper/old media industry as well as a lampoon based on what looked like reckless and "old-boys' club" internal policies, saw yet another reorganization plan filed in its bankruptcy. There's no telling at this point if its prospects are any better than several other failed efforts of the past in the languishing proceedings.
Brian Shappell, NACM staff writer
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