January 2, 2014
Market-watchers looking for holiday cheer would be hard pressed to find any in the December Credit Managers‚Äô Index (CMI), published by the National Association of Credit Management (NACM). The Combined Index fell dramatically from 57.1 to 55.6, erasing most of the gains made in the last few months and taking the CMI back to levels not seen since the middle of summer. Though the manufacturing index fell by a full point from 56.7 to 55.7, it was the service sector‚Äôs two-point fall from 57.5 to 55.5, reflecting a slow response to Christmas and a slowdown in the housing sector, that delivered the hardest blow.
The CMI‚Äôs four favorable factors registered the biggest declines, as the gains made in the second half of the year seemed to evaporate. Overall, the favorable factor index fell from 61.3 to 59.3, driven by a sharp reduction in sales, which stumbled from 63.4 in November to 58.7 in December, marking the fifth lowest sales reading in the last 12 months. New credit applications dropped by two points from 59.2 to 57.2, a reading not seen since April, and dollar collections slipped a full point from 59.7 to 58.7. The smallest drop occurred in amount of credit extended, from 63.2 to 62.6, which could be the only silver lining in the favorable factor index. ‚ÄúThis suggests there might be an opportunity to recover in the coming months,‚ÄĚ said NACM Economist Chris Kuehl, PhD. ‚ÄúIt gives some faint hope that many companies are still interested in making credit available to the customers they trust.‚ÄĚ
December also saw a slowdown in the unfavorable factors, which contributed further to the overall decline in the combined index. The unfavorable factor index fell from 54.3 to 53.1, staying in the same range of numbers recorded in the last six months. Dollar amount beyond terms took a big dive in December to 49.7 into contraction territory. The only factor that improved was rejections of credit applications, from 53.3 to 54.5, which supports the notion that credit is still available for companies in good standing, but decreases in accounts placed for collection and disputes both suggest that more and more companies are experiencing financial distress.
‚ÄúThe sense is that most of the financial issues are of relatively recent origin and that would suggest that things could turn in either direction,‚ÄĚ Kuehl said. ‚ÄúThe situation could get more serious and some of the longer-term issues could emerge or this might be more of a curve in the road and just a delay in the response of the overall credit world and the economy.‚ÄĚ
What‚Äôs most alarming about the December CMI, however, has more to do with the CMI in general than it has to do with any one particular factor. ‚ÄúThe most concerning part of this month‚Äôs data is that the CMI is very often a predictor of what is to come in the near future given its ability to track the availability of credit,‚ÄĚ Kuehl said. ‚ÄúThis month‚Äôs reading could signal that the economy is due to slow down substantially in the first quarter of the year.‚ÄĚ
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Half of the 20 largest markets measured by Standard & Poor‚Äôs/Case-Shiller Home Price Indices suffered a loss between September and October. Still, the improvement between October 2012 and October 2013 continues to impress even as some uncertainty lies ahead.
All 20 cities posted annual growth since October 2012, with particularly strong gains in markets damaged the most during the crash last decade (Las Vegas, San Francisco and Los Angeles). Each saw a one-year improvement that exceeded 22%. Others with double-digit gains were Atlanta, Chicago, Detroit, Miami, Minneapolis, Portland, Phoenix, San Diego, Seattle and Tampa. Even the smallest gainers, New York and Cleveland, posted annual gains of nearly 5%. That said, nine markets actually showed negative movement on housing prices on a monthly basis between September and October, while another posted a flat performance. The best September-October gain was posted in Miami (1.1%), with the worst in Chicago (-0.5%). Detroit and Boston were the best and worst in price change, respectively, between August and September.
With 10 markets failing to grow, additional economic uncertainty can be tied to the Federal Reserve‚Äôs tapering of quantitative easing and its impact on mortgage rates, and increasing predictions of single-digit price growth in 2014. In short, housing‚Äôs future looks far from clear in the near term. ‚ÄúHousing data paints a mixed picture suggesting that we may be close to the peak gains in prices,‚ÄĚ said David Blitzer of S&P Dow Jones. ‚ÄúHowever other economic data point to somewhat faster growth in the new year.‚ÄĚ
- Brian Shappell, CBA, CICP, NACM staff writer
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The workload of the US Bankruptcy Courts fell in 2013, according to Chief Justice of the United States John Roberts in his year-end report on the judiciary, as bankruptcies themselves took a nose dive due to low interest rates and high-cost filing requirements.
Total filings of bankruptcy petitions fell by 12% to 1,107,699 in 2013, and fewer petitions were filed in all but four of the nation‚Äôs 90 bankruptcy courts. Business filings declined by 17%, a slightly steeper drop than in the consumer world, where filings in 2013 decreased by 12%. By chapter, bankruptcy petitions dropped 14% under Chapter 7, 10% under Chapter 11 and eight percent under Chapter 13. In his report, Roberts noted that after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, a significant reduction in filings occurred, but that filings then rose from 2007 to 2010, only to fall once again. The total filing figure for 2013 is 31% below that of 2010.
The bankruptcy courts‚Äô decline in caseload was mirrored in the appellate courts and the judiciary‚Äôs pretrial services system, while workload in the US district courts remained relatively stable. All this being the case, Congress has considered making further cuts to the judiciary‚Äôs budget for 2014, a course of action that Chief Justice Roberts urged lawmakers to abandon.
‚ÄúThe impact of the sequester was more significant on the courts than elsewhere in the government, because virtually all of their core functions are constitutionally and statutorily required. Unlike most Executive Branch agencies, the courts do not have discretionary programs they can eliminate or postpone in response to budget cuts,‚ÄĚ Roberts said. ‚ÄúThe courts must resolve all criminal, civil and bankruptcy cases that fall within their jurisdiction, often under tight time constraints. And because many of the judiciary‚Äôs expenditures, such as rent and judicial salaries, must be paid regardless of sequestration, the 5% cut that was intended to apply ‚Äėacross-the-board‚Äô translated into even larger cuts in discretionary components of the judiciary‚Äôs budget.‚ÄĚ
Currently the US Judicial Conference‚Äôs requested budget for fiscal year 2014 tops out at $7.04 billion, $120 million less than the amount approved by the Senate Appropriations Committee and $13 million more than the amount approved by the House Appropriations Committee, where cut-hungry conservatives hold greater sway. Regardless of which approach prevails, Roberts warned Congress that the consequences of locking in sequester-level spending would be dire.
‚ÄúThe deep cuts to judiciary programs would remain in place. In addition, faced with inflation-driven increases in the ‚Äėmust-pay‚Äô components of this account, the Judicial Conference would need to cut allocations to the courts nationwide by an additional 3% below fiscal year 2013 levels. Those cuts would lead to the loss of an estimated additional 1,000 court staff,‚ÄĚ Roberts said. ‚ÄúIn the civil and bankruptcy venues, further consequences would include commercial uncertainty, lost opportunities and unvindicated rights.‚ÄĚ
- Jacob Barron, CICP, NACM staff writer
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Several Eastern European countries hit the news for developments affecting business and trade at the end of 2013 and continuing into the new year. Notable is small but fast-growing Latvia, which became the 18th nation to join as a full member of the European Union and began using the euro on January 1. Granted, people in the Baltic nation have concerns, as do some of the more stable EU members that already paid to bail out problematic, fellow EU nations in recent years.
Though recovering well from the massive global recession that started to hit Europe particularly hard by 2008, some Latvians have expressed concern about joining an economic bloc that has seen several nations, especially in the southwestern portion of the continent, fall on financial hard times under the euro. The concern is so prevalent that polls indicate more than half the population did not want to switch currencies. That said, the potential for reduced reliance on the Russian government because of new alliances and a stable, well-accepted currency was high enough for leaders to push the move.
Ukraine, however, is headed in the opposite direction on EU matters. Protests reignited this week in Ukraine as part of the fallout from the nation‚Äôs shocking move in late November to abruptly end trade pact negotiations with the EU after five years. The EU and Ukraine had been working toward an association that would have represented a significant step forward economically. Instead, Ukrainian leadership opted to hitch its economic wagon to Moscow. The Putin government had reportedly been pressuring Ukraine, independent from the Soviet Union for just over two decades, through blocking the flow of manufactured goods, high oil and gas prices and other tactics in an effort to dull its interest in forging the EU deal. The level of unrest has fluctuated since, but protests outside the capital this week show the populace is not ready to quietly accept a situation that gives Russia a perceived heightened control over Ukraine‚Äôs decision-makers.
Meanwhile, Russia dealt with its own bad news as the Olympic Games in Sochi approach. As predicted by many, including NACM Economist Chris Kuehl, PhD, acts of terrorism have broken out in the run-up to the event. Two fatal attacks about 500 miles away in Volgograd have thrust security into the spotlight because the southern region of Russia is home to several anti-Moscow extremist groups. Some groups have made it known that they plan bloodshed at the event while the eyes of the world are on Russia. Such acts only add extra risk to doing business in Russia, which already carries a reputation for very late payment or nonpayment for businesses and hamper other current dealings and future opportunities for exporters around the world.
- Brian Shappell, CBA, CICP, NACM staff writer
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In December, the fourth of five events in FCIB‚Äôs European Roundtable series on the topic of Compliance and Ethics was held in Amsterdam. The topic was approached from a credit risk perspective and focused on the ‚ÄúKYC‚ÄĚ (Know Your Customer) element of the compliance policy. Attendees from companies with an American ‚Äúparent‚ÄĚ appeared more aware of the KYC culture and its impact on deterring issues like money laundering and terrorist financing, while others were divided on who was responsible within their companies.
Some member corporations based within the European Union were not quite as familiar with current legislation and, in particular, the European Union‚Äôs Fourth Directive. Broadly speaking, the EU Commission has adopted two proposals therein to update and improve the EU‚Äôs existing legal framework designed to protect the financial system against money laundering and terrorist financing. That said, the Fourth Directive has not been widely disseminated as yet and, in many cases, it seems that will be handled by in-house legal teams or a chief compliance officer, rather than credit managers there.
During the interactive programs, key principles of the KYC element of compliance and ethics discussed included:
‚ÄĘ Screen the customer‚Äôs company ownership, such as directors‚Äô addresses.
‚ÄĘ Know the final destination of the goods.
‚ÄĘ Keep everyone on the credit team familiar with items like embargo and sanction lists.
‚ÄĘ Know where payments are coming from.
‚ÄĘ Develop a policy for dealing with third-party payments.
The five-event series that began in September 2013 in London will culminate with the final event in Zurich on February 13.
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