eNews February 3, 2011

February 3, 2011



News Briefs

  1. January CMI Reports Jump in Extension of Credit: Manufacturing Sector Makes Big Gains with Lenders
  2. Senate Repeals Controversial 1099 Provision
  3. Rumors of the Euro's Demise Have Been Greatly Exaggerated
  4. Egypt Unrest Affects Economic Outlooks
  5. Fed Holds Rate, Gets on Same Page...For Now
  6. Senate Small Business Committee Asks SBA to See What Can Be Cut
  7. Tribune Closer to Bankruptcy Exit, Borders on the Way In

 

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January CMI Reports Jump in Extension of Credit: Manufacturing Sector Makes Big Gains with Lenders

"The assertion is that 2011 is the transition year 2010 was supposed to be," said Chris Kuehl, PhD, managing director for Armada Corporate Intelligence and economic advisor for the National Association of Credit Management (NACM). "The ‘green shoots' that started to appear about this time last year wilted and died by the end of spring, but 2011 is starting to show some signs of greater economic stability," he said. "This trend has been noted in several indexes and indicators and the Credit Managers' Index (CMI) is no exception." There was an overall improvement in the numbers—from 55.8 to 56.4—the highest point reached in the combined index since April 2010 when the index hit 56.5. What makes this latest number more encouraging is the expectation that the index will continue to see improvement over the next several months, noted Kuehl. Back in April that high point was followed by steady decline that took the index all the way back to 53 in August before a slow rebound got underway.

The most encouraging indicator this month is amount of credit extended. The jump from 61.7 to 64.8 is very significant as this is the signal that many have been waiting to see. While sales and new credit applications slowed a little in January, the numbers remain robust due to the overall increase in activity in these indicators over the past several months. Sales dropped from 65.9 to 63.5, which is still very respectable given that the holiday season had ended. New credit applications fell from 60.1 to 58.6, but that is also somewhat attributable to the arrival of a generally slow time of year as compared to the last quarter.

The fact that credit extended sharply increased despite the slowdown in sales and credit applications indicates more credit availability than in previous months—quite a bit more. This indicator has not seen such high readings since early 2008, and those were barely at 62, much less at 64.8. Banks are reporting a loosening of credit in the United States and since lenders are more active, more commercial credit is appearing as well. Companies are far more willing to offer credit and, as they start to consider expansion in the coming year, it will also create more opportunity to engage their clients.

This was not the only piece of good news in the CMI. There was improvement across the board in the negative factors. Rejection of credit applications was subdued and there was improvement in accounts placed for collection. Even disputes and bankruptcy data showed improvement. The positive development in these negative indicators over the last few months has been identified as an important trend in previous years.

"As companies start to see increased sales and begin to anticipate growth opportunities in coming months, it is important that they get positioned to take on more debt, if needed, for that expansion," said Kuehl. "If they are planning to access more credit, they generally have to catch up on their current debt first." In the midst of the downturn, companies tried to conserve cash flow at all costs, during which they are more prone to stretching out credit obligations. The result is reflected in the deterioration of unfavorable factors. As companies recover and catch up on their credit, they are in a position to request more and in a position to be granted that access. "This is what seems to be happening now," said Kuehl. "Companies are setting themselves up for more growth in the months to come. The data from the CMI is reflected in the latest economic numbers from the Purchasing Managers Index (PMI) as well as surveys from groups like the National Association of Business Economists and the Conference Board."

The index now stands at a level that normally signals more rapid expansion in the near future.

Click here to view the full report, complete with tables and graphs, along with CMI archives.

Source: NACM

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Senate Repeals Controversial 1099 Provision

After several failed attempts in the last Congress, the Senate finally voted to repeal the controversial 1099 requirement, originally passed as part of the health care reform bill.

In a bipartisan, 81-17 vote, the Senate agreed to erase the provision that would've required small businesses to file an Internal Revenue Service form 1099 for every vendor from whom they annually buy $600 worth of goods or services. The measure was originally enacted as a revenue generator, but quickly drew the ire of small business owners and advocacy associations nationwide, eventually becoming universally reviled.

The repeal came in the form of an amendment attached to the Federal Aviation Administration (FAA) Reauthorization bill.

"Today we provided a common-sense solution for business owners so they can focus on creating jobs, not filling out paperwork for the IRS," said Sen. Debbie Stabenow (D-MI), who proposed the successful 1099 repeal amendment. "Since last year, I have worked with my colleagues on both sides of the aisle to address this problem. If left unchecked, 40 million small businesses would see their IRS 1099 paperwork increase 2000%."

Stabenow's amendment was similar, indeed almost identical, to a provision originally proposed by Sen. Mike Johanns (R-NE), who was ecstatic about the repeal effort as well. "I'm thrilled that after multiple attempts to repeal this burdensome mandate, the Senate has finally done the right thing in voting to repeal it," he said. "The small business owners and organizations who stepped forward in opposition to this 1099 overreach were instrumental in sustaining the momentum that has resulted in wide bipartisan support."

While the repeal amendment garnered GOP support, the party's broader intent was full repeal of the health care law that originally instituted the 1099 requirement. The House recently voted in support of full repeal, but a similar effort failed in the Senate, although Johnanns quickly noted that the fight was far from over. "I look forward to continuing the effort to repeal the health care law and finding true solutions to our health care challenges," he added.

Jacob Barron, NACM staff writer

Thought for the Day

"Leaders should certainly make sure they are walking in a commendable fashion so that people will want to follow them. If they are just out there spouting proclamations, speaking words and dictating to people, you'll find that the ability to lead is not as great as it could be."

—Tom Flick, Speaking of Success: World Class Experts Share Their Secrets

Flick is this year's General Session keynote speaker at Credit Congress. To find out more about Flick, Speaking of Success and Credit Congress in Nashville, click here.

Rumors of the Euro's Demise Have Been Greatly Exaggerated

Talk of the euro's strength, or lack thereof, may have been bumped from the holes squirreled away on television broadcasts and in newspapers for international coverage in favor of the unrest in Africa, but that doesn't mean the issues have gone away. Actually, despite ongoing debt struggles in Europe, economists seem to be lining up to characterize talk of the currency's potential collapse as wildly overstated.

After months of struggles fueled by the ongoing debt crises in the "PIIGS" countries (Portugal, Ireland, Italy, Greece, Spain), there was good news to begin February as bonds from struggling euro zone countries experienced hot rallies. This reduced borrowing costs, positively though temporarily, for the high-debt countries. But the euro's high soon crumbled when Germany balked at a proposal calling for the buy-back of bonds from some of those hurting countries. It appears the value of the euro and bonds tied to it will continue to experience volatility as high-debt countries face a long, painful economic recovery, even with bailouts.

In the weeks prior to the recent bond rally, talk of the euro failing as a currency or key EU members pulling out of it, namely the debtor's proverbial sugar daddy Germany, escalated considerably. Since then, highly regarded economists, including Dan North of Euler Hermes ACI, and Freddy Van den Spiegel of BNP Paribas Fortis, appeared more united than ever that the euro isn't going anywhere, by Germany's hand or otherwise.

"I am quite sure that Germany will not drop the euro or drop out as a euro member state," said Van den Spiegel. "Besides the chaos that this would create, it would immediately hurt their own economy." He added that German banks are quite exposed to the debt of other EU governments, most of the PIIGS are key importers of German goods and a return to the strong Deutsche Mark would undermine some of its trade competitiveness.

North, rated by Bloomberg as one of the top five economic forecasters in the business and keynote speaker at next week's FCIB New York International Round Table, told NACM the probability of the euro dissolving is "very, very low." North intimated that Germany's tough talk is more of a bluff to encourage continued commitments to austerity than anything else.

"Germany has taken a very strong line; they're obviously very unhappy to be carrying people," said North. "But it seems they and France are committed [in the form of a larger rescue fund] to doing what they have to do keep the euro zone together. There's just too much invested in there already, and it has proved beneficial. Practically speaking, there's virtually no way it could come apart."

For more information on FCIB's New York International Round Table or to register, click here.

Brian Shappell, NACM staff writer

Leverage Goes a Long Way

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Egypt Unrest Affects Economic Outlooks

The ongoing unrest in Egypt has dealt a severe lashing to the country's economic prospects, most notably in the form of a downgrade from Standard & Poor's (S&P).

The ratings giant put Egypt, formally one of Africa's crown economic jewels, on CreditWatch with negative implications, and also downgraded its long-term foreign currency sovereign ratings and long- and short-term local currency ratings. "The rating actions reflect our expectation that the violent demonstrations of the past week will persist, despite the appointment of a vice president and the dismissal of the government by President Hosni Mubarak on January 29, 2011," said Standard & Poor's credit analyst Kai Stukenbrock.

Since then, Mubarak has announced that he will cede power after upcoming elections this fall. Despite the fact that this was easily Mubarak's largest concession to the protesters, riots continued, eventually drawing out Mubarak supporters and turning increasingly violent. "After days of peaceful protests in Cairo and other cities in Egypt, today we see violent attacks on peaceful demonstrators and journalists. The United States denounces these attacks and calls on all engaged in demonstrations currently taking place in Egypt to do so peacefully," said Philip Crowley, assistant secretary of the Bureau of Public Affairs at the State Department. "These attacks are not only dangerous to Egypt; they are a direct threat to the aspirations of the Egyptian people. The use of violence to intimidate the Egyptian people must stop. We strongly call for restraint."

In the long term, the uprising in Egypt could pose a threat that reaches beyond its borders, exacerbating regional, and even global, economic activity. Locally, Egypt's vibrant tourism industry will suffer as a result of the uprising, at least until a new leader is elected and order is restored, which could take some time. The country has experienced solid growth for the last several years, but a hit to one of its most successful sources of jobs and revenue would certainly be felt, especially by average consumers in the still poverty-stricken country.

The threats posed by continued Egyptian unrest to the regional and global economies, however, are much more interesting, if somewhat speculative. Firstly, Egypt's control of the Suez Canal, a major shipping route for oil exporters, makes it integral to trade and commerce in Europe and other points west. Should political turmoil affect the operation of the canal, prices will go up, as they have already, and potentially increase the chances for inflation in already overheated developing economies like China and India.

More dangerous to the global economy, however, is the fact that Egypt, until recently, represented a relatively stable, although admittedly autocratic, foundation in the Arab world. If the wave of revolt in Tunisia and Egypt continues to sweep through the region, it could pose a significant threat to oil prices and the global recovery at large. Indeed, no one could argue against the passionate fight for democracy in these nations, but the economic ramifications of such revolts could end up being far less than ideal.

Jacob Barron, NACM staff writer

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For more information on NACM's MLBS, click here.

Fed Holds Rate, Gets on Same Page...For Now

The Federal Reserve broke from its two-day monetary policy meeting, the first of 2011 and first without frequent contrarian Thomas Hoenig, to continue the positions taken throughout much of 2010. And it did so with a consensus that's not expected to last far into the year.

Partly because of continued perceptions of low inflationary levels, the Fed's Federal Open Market Committee (FOMC) opted not to change the near 0% target for the federal funds rate nor to water down its stated effort to buy Treasury securities. Both are still seen as necessary to stimulate short-term economic growth, which the Fed statement again acknowledged as ongoing but decidedly weaker than needed. The FOMC noted that areas of improvement continue to be found in business spending on equipment and software as well as household spending, though the latter is being constrained by tight credit and high unemployment, among other factors. "To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today [January 26] to continue expanding its holdings of securities as announced in November. In particular, the committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011."

The statement added that the federal funds rate was to be held stable because the FOMC "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period."

It is worth noting that the FOMC voted unanimously on the policy tracks, the first time that has occurred in months. It's partly due to the departure of the seemingly disgruntled committee member Hoenig, who appeared more concerned about inflationary pressure than colleagues including Chairman Ben Bernanke. However, things may soon change significantly as two new voting members for 2011 have been characterized as hawkish inflation fighters who are deeply concerned with the FOMC's ongoing efforts to stimulate the economy.

Brian Shappell, NACM staff writer

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Senate Small Business Committee Asks SBA to See What Can Be Cut

The bloated federal budget continues to loom over all government business, leading many powerful senators and their committees to look for what they can cut.

Last week, Sens. Mary Landrieu (D-LA) and Olympia Snowe (R-ME), chair and ranking member of the Senate Committee on Small Business and Entrepreneurship, sent letters to the Small Business Administration (SBA), seeking recommendations for cuts in existing programs. In the missives sent to SBA Administrator Karen Mills and Inspector General Peg Gustafson, the two senators sought the elimination, or substantial reduction, of any redundant or ineffective programs that could be lost without robbing the SBA of its ability to serve its small business constituency.

"As the new Congress convenes, the Committee on Small Business and Entrepreneurship will begin the session by examining and assessing the need, efficiency and effectiveness of programs within the Small Business Administration," said Landrieu and Snowe. "Like the American people, Congress must continue to evaluate and determine what spending is necessary to meet current needs and demands while identifying and eliminating needless spending. Accordingly, we take this responsibility seriously and will dedicate time and effort in this Congress to determine the best path forward."

No specific programs were named by the senators in their letters, but, in a release, they noted that they would seek the elimination of programs that were "duplicative, ineffective or redundant." A hearing will also eventually be held to move the belt-tightening process forward, probably after February 10, which was the deadline by which Mills and Gustafson must make their recommendations to the senators.

Jacob Barron, NACM staff writer

Tribune Closer to Bankruptcy Exit, Borders on the Way In

Moving in opposite directions, two industry titans got significant news as January rolled over to February. Tribune Co. finally appears to have a realistic shot at emerging from bankruptcy as early as mid-March, while Borders seems almost assured of starting their process around the same time, if not before.

Efforts by Tribune Co.—publisher of the Los Angeles Times, Baltimore Sun and Chicago Tribune, among other media holdings—watched as its original plans to exit bankruptcy crumbled last year amid the organized efforts from lower-level creditors to scuttle deals it negotiated primarily with higher-ranked lenders. Many creditors cried foul over what appeared to be a deal that would have left the smaller stakeholders with little to nothing. As such, no less than four bankruptcy reorganization plans were officially floated in the Tribune case.

However, a new settlement between the debt-saddled publisher and a group of bridge loan providers, spearheaded by JPMorgan, cleared the way for one of the competing, creditor-based reorganization proposals to be dropped. It's the second of four to go by the wayside in recent weeks, greatly easing the process. Now, a U.S. Bankruptcy Court judge in the Third Circuit (Delaware) is expected to review the remaining duo of proposals on March 7, with some type of ruling to follow soon after.

Meanwhile, whispers and rumors of Borders' potential descent into bankruptcy have evolved into a Chapter 11 filing becoming a near-foregone conclusion. The big-league book retailer intimated for the second time in as many months that it would have to delay payments to creditors and or vendors in an attempt to bolster its capital position. Borders has also been trying diligently to work out some kind of renegotiated terms with financiers at Bank of America and General Electric, among others. These developments all helped tank a stock that was already trading below $0.50. It's now widely expected the retailer will file before month's end.

A late 2010 poll conducted by The Street found that more than two-thirds of respondents believed a Borders Chapter 11 filing was likely. In the resulting fallout and that of the first announcement of delayed vendor payments, at least one major publishing company reportedly stopped all shipment of books to Borders, fearing what now appears to be inevitable.

Brian Shappell, NACM staff writer

To view past eNews issues or to visit the NACM Archives, click here.

 

 

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