August 29, 2013
Sears, JCPenney, Kmart, Radio Shack, Best Buy and countless smaller retailers have had all manners of difficulties recently. Their respective financial problems aren't just hype considering the battles they've had to fight on multiple fronts. It's why the industry in general has earned a dubious place among NACM's "Industries to Watch."
"There are so many factors to deal with in retail," said Bruce Nathan, Esq., partner with Lowenstein Sandler LLP. "If credit people are being kept up at night, retail may be their biggest industry of concern. The bottom line is you are going to see a shakeout in the retail area in the next few years."
The list of reasons cited by Nathan, among others who put retail of at the top of the list of industries creditors should be watching, includes many financially overleveraged retailers, those where the size or number of stores is unsustainable, inadequate responses to e-commerce and, often, notoriously poor management decisions. While not all retail businesses are contending with these problems, multiple issues are often in play for those that are struggling. It creates a potentially toxic mix that creditors should be monitoring closely.
"People are watching JCPenney, and should be," Nathan said. "People are concerned about Sears, Radio Shack. Best Buy seems to be stabilized for now, but there was a lot of concern about them for a long time." Nathan stressed that these are mostly bigger retailers, and that segment of the industry likely faces the most significant challenges. However, he noted smaller businesses also are quite challenged, especially by e-commerce competition.
Affecting retailers of all sizes was their inability to react quickly or seriously enough to institute change when online retail first started eating up market share. That resulted in something akin to the sports adage of "playing from behind." The infamous Borders implosion was one example of a failure many blamed on the rise of e-commerce.
The problem should a retailer of any size head toward insolvency or a Chapter 11 is the potential for a domino effect, the result of which would likely include retailer consolidation. With fewer players in the market, that will only lead to higher receivables concentration for suppliers, something creditors typically shy away from, or want to, as much as possible. A limiting of choices may leave some suppliers with little choice though.
- Brian Shappell, CBA, CICP, NACM staff writer
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The West sprang into action this week after it became clear that Syrian dictator Bashar al-Assad had used chemical weapons against civilians in attacks with casualty estimates ranging from the dozens to the thousands. The situation has been complicated by the continued support of Russia and China for Assad's regime, making any effort to involve the United Nations Security Council a gesture in futility.
The United States, then, sought to rely on the European Union, the British, the North Atlantic Treaty Organization (NATO) and the Arab League to support any actions it might take. As of August 26, a response, whether it was a surgical strike on Assad's forces or a blockade, seemed imminent. "This is the kind of act that can be seen as nothing short of provocative and the western states have no choice," said NACM Economist Chris Kuehl, PhD. "They have to respond with more than harsh words and a gesture."
Direct military intervention is highly likely to generate political and economic fallout, Kuehl noted. "The oil markets are already reacting to the threat, and there will certainly be hikes in the price of crude once the action takes place," he said, adding that other markets will be equally roiled by what the future holds regarding U.S. resources and Syria. "There will be reactions in the equity markets as well—particularly as people determine what the next steps might be," he said. "It is hard to imagine the U.S. or Europe engaging in another long ground war in a nation that would be even more hostile to the U.S. than Iraq and Afghanistan."
U.S. support for the rebel faction fighting against Assad's forces is also tempered by the fact that al-Qaeda also supports the rebels, raising risks that any military resources shared with Assad's opponents will make their way into the hands of terrorists. The involvement and varying allegiances of other actors in the region, including Hezbollah, Iran and Turkey, could turn any substantive U.S. reaction into a lengthy military, political and economic quagmire. Regardless, businesses should be prepared for the West's intervention to have some noteworthy effects on economic data. "The fact is that a good outcome is all but impossible these days," Kuehl said.
- Jacob Barron, CICP, NACM staff writer
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The new Experian/Moody's Analytics Small Business Credit Index tracking small business credit quality found that results in the second quarter reached the highest level since the study was launched in 2010.
The index rose to a level of 111.7, up from the first quarter's 108.9. It appears heightened consumer confidence is having a positive downstream impact on small business' bottom lines, and their collective credit quality. Experian/Moody's noted that credit quality strengthened in every business size category, and that balance volumes declined in significant fashion over a three-month stretch.
"During this period of modest growth, small businesses have improved their credit profile by decreasing delinquent debt and meeting financial obligations in a more timely fashion," said Joel Pruis, Experian senior business consultant.
That's not to say there aren't challenges ahead for small businesses. Moody's Chief Economist Mark Zandi listed the rebirth of the debt ceiling battle in Congress and its ability to distort predictions of conditions going forward among threats to the improving index. However, he is optimistic that small business is as ready as it has been in a long time to sidestep obstacles with minimal damage.
A deeper look inside the statistics revealed that small businesses in the Western United States have performed significantly better than their eastern counterparts where quickness of payment and account growth were concerned. Topping the list of states where business delinquency rates were well below the national average were Idaho, Wyoming, Arizona and Utah. All four also showed strong account growth, unlike nearby California. In general, the Western States appear to be profiting from energy and technological product exports to other parts of North America as well as Asia, even though the latter is experiencing a growth rate slowdown. A rebound in Asia would only bolster the performance, analysts suggested.
New England also showed strong account growth, though business there tracked as average to late-paying. The southern half of the U.S. East Coast fared poorly in both categories, with Florida, Georgia, South Carolina and Virginia posting particularly disappointing numbers. And though not among the worst regarding late-payments, Michigan, Ohio, Texas and Oklahoma notably fell into the worst category for account growth.
Overall, Experian/Moody's analysts predicted further improvements in small business credit quality in the third quarter and beyond. But they warn that improvements will come at a modest, rather than hot, pace.
- Brian Shappell, CBA, CICP, NACM staff writer
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Congress will return from the customary August recess next week faced again with what's becoming an annual fall tradition of dueling fiscal crises.
The threat of a government shutdown may have increased earlier in August as lawmakers from the Republican party's more conservative wing, emboldened by the complaints of their angry constituents, suggested that the GOP force just such an eventuality unless President Barack Obama's signature legislative achievement, the Affordable Care Act (ACA), was defunded. Establishment members of the party eventually threw cold water on the plan, and a letter circulated by Sen. Mike Lee (R-UT) and Sen. Ted Cruz (R-TX), signed by several other Republicans, that would pledge signatories to shut down the government unless the ACA wasn't implemented has lost much of its novelty.
Instead, Speaker of the House John Boehner (R-OH) has proposed a series of continuing resolutions that would extend the current budget into the next year. While this would head off a government shutdown in the fall, it also would lock in current sequester spending levels, which, although not nearly as cataclysmic as initially projected, haven't been good for a U.S. economy that continues to search for firm footing.
Complicating the process is the attitude in some Republican circles that, instead of using the threat of a government shutdown to extract concessions from the Obama Administration, the party should leverage the threat of a debt default in a similar fashion. Surpassing the nation's $16.7 trillion debt limit, which will occur sometime in October unless the limit is raised by Congress, would almost without question cause a much greater amount of damage to the American economy than a comparatively minor government shutdown, but Boehner remains caught between the two wings of his party: one that wants to cut a deal and the other that doesn't want to compromise.
This budgetary drama will be playing out against a backdrop of uncertainty regarding what changes the Federal Reserve might make to its monetary policy. Many have predicted that the Fed would reduce its $85-billion-a-month bond-buying stimulus program this fall, but such a retreat might be delayed to account for Congress' actions. In the most recent minutes released by the Fed's Federal Open Market Committee (FOMC), directors cited downside risks in the form of "ongoing fiscal constraints," meaning Congress' autumnal penchant for economic brinkmanship, and mixed reactions regarding the manufacturing sector among their reasons for maintaining the current rock-bottom prime rate.
- Jacob Barron, CICP, NACM staff writer
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Mexico's gross domestic product (GDP) contracted for the first time in four years in the second quarter, baffling some analysts who had expected much more out of the second-largest Latin American economy.
On a seasonally adjusted basis, Mexican GDP declined by 0.7% in the second quarter, driven primarily by a 1.1% drop in industrial activity overall. More specifically, the construction sector followed up its 3.1% first-quarter decline with a 4.0% drop in the second quarter, in year-over-year calculations. The mining sector also continued on a similar track, declining by 1.4% in the first quarter and 2.1% in the second.
Wells Fargo noted that it was caught off guard by the number of analysts who, earlier in 2013, expected nothing but growth from the Mexican economy. "We were...surprised by outsized expectations earlier in the year due to the fast pace of reforms tackled by the administration of Peña Nieto after taking office in December and bringing in the Institutional Revolutionary Party, which governed Mexico for more than 70 years, back to power after a 12-year hiatus," said Wells Fargo Senior Economist Eugenio Aleman. "However, those expectations did not last long."
Despite the decline in output, Wells Fargo actually increased its 2013 GDP forecast for Mexico from 1.9% to 2.0%, which is still 0.7% points lower than the consensus GDP forecast, a target that's looking increasingly more difficult for Mexico to hit and could be marked down. For its part, Nieto's government blamed the decline on weak international demand, but Aleman noted that "a close analysis from the supply side of the economy today conveys a weak domestic economy, rather than an economy affected by a weak external environment."
- Jacob Barron, CICP, NACM staff writer
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