Category Archives: CRE


It’s Time for the Fed to Raise Interest Rates

By Charles H. Green

The Federal Reserve Board’s Open Market Committee meets Wednesday and Thursday this week, and the world’s eyes will be focused on the results: will they finally raise interest rates after two years of openly toying with the idea? I believe it’s high time to act decisively.

The FOMC faces a narrowing window of opportunities to  fulfill  their pledge to raise the U.S. Dollar sign graphfed funds rate this year. As defined in their monetary policy announcement in July, it all comes down to two criteria: 1) some further improvement in the labor market, and 2) reasonable confidence that inflation would move back to its two percent objective over the medium term. There were no other criteria mentioned, including international events, Chinese exchange rates, the Dow Jones Industrial Average (DJIA) or who wins the first Republican presidential debate.

Fed chair Janet L. Yellen has said that the Fed wants to raise its benchmark rate slowly over the next several years, gradually reducing its long-running stimulus campaign to bring the economy back to good health. The Fed has held short-term rates near zero since December, 2008.

The Fed has repeatedly delayed the beginning of that process, as economic growth has fallen short of its expectations. But as recently as June, most members of the Fed’s leadership — 15 of the 17 senior officials — indicated they planned to start raising rates this year.

The Fed Doesn’t Blink

The mid-August drama in China, which has seen its primary stock index drop significantly this year despite several overt strategies designed to buffet the fall, left investors shivering around the globe. The DJIA closed Friday at 16,433, climbing back about 800 points from its August plunge. Coupled with the devaluation of the Chinese Renminbi, many analysts have predicted that rate hikes will be pushed further down the road, possibly into 2016.

And in fact, William C. Dudley, the influential president of the Federal Reserve Bank of New York, said at a late August news conference that the case for raising interest rates had become “less compelling” in recent weeks. But as reported by the NY Times, even as Mr. Dudley suggested that a September rate increase was less likely, he cautioned against assuming the Fed would significantly alter its plans. He dismissed the possibility of a new round of stimulus.

“It’s important not to overreact to short-term market developments because it’s unclear whether this will just be a temporary adjustment or something more persistent that will have implications for the U.S. growth and inflation outlook,” Mr. Dudley said.

The following week Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, in a calming speech delivered in Berkeley, CA said “I expect the normalization of monetary policy — that is, interest rates — to begin sometime this year.” Mr. Lockhart noted some of the factors that are roiling markets, including the rise of the dollar, China’s currency devaluation and falling oil prices. But he said the Atlanta Fed expected the economy to continue its expansion, including adding jobs.

Some Voices Defend Holding Rates Down

The volatility of financial markets over the last few weeks contrasts with the stability of domestic economic growth over the last several years. The Fed is focused on that broader picture, and while the pace of growth remains sluggish by past standards, central bank officials have suggested repeatedly that they regard it as good enough.

But there are still plenty of voices arguing against a rate hike. In an opinion published in the Financial Times, former treasury secretary Lawrence Summers pushed back hard.

Said Summers, “Why, then, do so many believe that a rate increase is necessary? Pressure comes from a sense that the economy has substantially normalized during six years of recovery, and so the extraordinary stimulus of zero interest rates should be withdrawn.”

“Whatever merit this view had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers. It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. Fiscal drag is over. Banks are well capitalized. Corporations are flush with cash. Household balance sheets are substantially repaired,” he continued.

Much more plausible is the view that, for reasons rooted in technological and demographic change and reinforced by greater regulation of the financial sector, the global economy has difficulty generating demand for all that can be produced. This is the “secular stagnation” diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a “savings glut,” he continued.

His conclusion: “Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialized world over the next decade.”

Some Argue for Higher Rates

For what it’s worth, the International Monetary Fund has also expressed concern that the Fed, by raising rates, could increase pressure on developing economies. But on the proverbial other hand, others argue that demonstrated growth justifies a return to normalized rates.

For all the zigs and zags of economic data over the last couple of years, the underlying growth rate has not deviated much from about 2.5 to 3 percent annually, according to Nariman Behravesh, chief economist at IHS, a private research and forecasting firm, as quoted in the NY Times. “Historically, this is a modest growth rate,” he said, explaining that the American economy now faces what he termed “speed limits,” including the retirement of the baby boomers, slower population growth and weak productivity gains recently.

“Would we like to see faster growth? Of course,” said Mr. Behravesh. “But we’re growing twice as fast as Europe and three to four times as fast as Japan. For a mature economy, this is about as fast as we can grow, and it’s something we can feel good about.”

The most forceful voice pressing for a rate hike comes through a NY Times opinion by business writer William D. Cohan. In his words, “Yes, it would be a little painful to start having to pay a little more for short-term borrowing and, yes, the net worth of Wall Street billionaires might increase at a slightly lower rate, but it looks as if the moment is at hand to end the morphine drip.”

The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying,” he continues.

His conclusion: “The only way to return the assessment of risk to something resembling normalcy is to stop the manipulation. That requires nothing less than serious intestinal fortitude from the Fed and a willingness to raise interest rates in the face of determined opposition from Wall Street.”

Commercial Lenders Hang in the Middle

If you aren’t on Wall Street, but sitting in a Main Street bank trying to maintain a healthy loan portfolio, the interest rate discussion carries much different implications. First of all, it’s about income. The zero-rate policies have kept the Prime Rate–the predominate interest index used by community banks–stuck at 3.25% since 2008. That has restricted a lot of revenue that could have helped recover from the crash easier, and generated better profits and compensation.

While the surviving banks have mostly recovered, today they’re sitting on loan portfolios that are priced well below plenty of the underlying risk that they represent. As rates rise, a new element of risk will enter many of these assets and could tip some borderline deals over into default. Another immediate impact will be the tightening of loan qualifications, as the price of debt rises, so will the capacity required to repay it in anyone’s financial analysis.

But all that said, I personally think that higher rates will be beneficial to the greater economy. Upward pressure on inflation would stimulate more growth than putting easy money into the hands of many borrowers with marginal capacity to borrow. This condition can prove disastrous as eventual rising rates exposes their weaknesses.

Pushing inflation higher will spur people to act sooner to buy major purchases like cars and houses, and provide a more reasonable return on risk for main street banks. It may even push some wages higher and create more competition for talent, which will benefit plenty of business developers.

What about Wall Street? They’ve had multiple “taper tantrums” and have made plenty–PLENTY–of money over the long ride of next-to-free cash. Maybe taking the DJIA back down to where the price of equity more soberly reflects the actual value of the underlying companies would be a good thing.

What do you think?

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at .

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Small Businesses Borrow Slightly Less in July

By Ravinder Kapur

In the month of July, small businesses lowered their borrowings marginally, as reflected in the Thomson Reuters/PayNet Small Business Lending Index, which fell to a level of 145.2 from 146.4 in June. Despite this minor fall, the index, which measures the volume of small business loans issued over the past 30 days, is at its second highest point since it was launched in 2005, with the highest level being achieved in the previous month.

Reuters reports that this index is acknowledged as a good indicator of the expected GDP Thomson Reuters-PayNet Small Business Lending Index July 2015trend in the country as small businesses have quicker response times to the changing market environment. Over the years, growth in the Small Business Lending Index has preceded growth in GDP by two to five months. A healthy index is also an indicator of capital spending and job growth.

PayNet founder Bill Phelan says, “This is showing some strength–while foreign markets are falling, while corporations are pulling back on their investments, we’ve got this small business economy anchoring the U.S. economy.”  Small businesses have “a lot of capital to borrow, a lot of capital to invest more when the opportunity presents itself,” Phelan said. “That means there’s a lot of runway for GDP expansion.”

The index is based on data collected from 325 U.S. lenders and includes financing to key sectors like transportation and construction. It had fallen to a level of 65 in 2009, after which it began a gradual climb to reach its highest ever point in June, 2015. Even though there is a small decline in July, the Small Business Lending index is still 13% above the level it was in the same month of the last year.

The record levels achieved by the Small Business Lending Index indicate that private enterprises are positive about their prospects and lenders are equally confident regarding the performance of the economy. The slight dip in the index in July does not take away from the overall trend and the expansion in the country’s GDP can be expected to continue on the basis of the impetus it is receiving from the growth in small businesses.

Have you responded to our 2016 SBA Lending Outlook Survey yet?

Please click on the link below to complete a brief 10-question survey to help us understand your expectations for growing new SBA loan transactions in FY 2016 from the perspective of the important role you play.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Keeping Track of Small Business Finances

By Ravinder Kapur

Many small businesses find it difficult to manage their finances in a manner that helps them analyze their cash flows and adequately plan their business requirements. A large number of firms also find the maintenance of statutory accounting records to be a great challenge and leave this task to their accountants to tackle as best as they can. And as small business lenders know, some business owners simply ignore this task until they begin to search for third-party financing.

Taxation is an equally, if not more, challenging area with 85% of firms saying that they SBFI-financial-reportingcannot file their federal tax return on their own and pay a tax practitioner or accountant to do it for them. The National Small Business Association’s latest annual taxation survey finds that for 59% of organizations the most significant challenge presented by federal taxes is the administrative burden it puts on them. Consequently, over a third of these enterprises spend 80 hours per year and pay upwards of $5,000 as accountant’s fees.

A recent Forbes article argues that of the 30 million small businesses in the U.S. only 10% have up-to-date and reliable accounting information, with the remaining being unable to produce dependable financial statements. The lack of dependable data available with these enterprises has forced financial institutions like banks and insurance companies to adopt procedures which work around this problem.

As a result, a small firm requiring a loan would need to provide a great deal of information and submit a number of documents to the bank before funds are made available. In fact, the entire process would take 60 days on an average and would include requests for additional information time and again. The bank has no option but to follow a time-consuming process, as the information it requires to make a decision whether to extend a loan is usually not available in a usable manner from the firm.

Several companies have identified this problem and developed solutions to enable firms to manage their finances and provide real-time access to their financial accounts. BodeTree enables businesses to sync their banking transactions in a manner that transforms transaction data into complete cash-basis financial statements instantly.

Firms that use platforms like Xero, QuickBooks Online and QuickBooks Desktop can connect directly to BodeTree to obtain detailed reports giving them their spending pattern, cash availability and categorized transactions in a readily usable format. The software also provides income statements, forecasting tools and other reports that help businesses manage their performance.

inDinero is another solution-provider for small businesses, which uses their bank and credit-card information to provide an aggregated “dashboard” to monitor balances and expenses, as well as see financial trends over time. The software also allows users to manage their accounting, taxes and payroll on a single platform

There is a need for services like BodeTree and inDinero because these companies make available real-time information to enterprises, which they can then use to organize their finances and run their businesses. Jessica Mah, co-founder and CEO of inDinero says, “Our team of virtual CFOs, backed by our own automation software makes accounting a weapon and not a pain in the neck.”

If small enterprises are able to derive the full benefit these companies offer, they will be able to manage their finances better and also save time which they can devote to their business.

And commercial lenders can offer more competitive financing offers with the information they need readily available. Do you have any clients that might benefit from these services?

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Training More Important Than Ever in Competitive Environment

By Charles H. Green

Over the past several months, my articles have chronicled the steadily recovering economy, widening risk appetite of chief credit officers, and growing business loan volumes in every category. In the next few weeks I’ll be describing the extent of an all-time record approval volume for SBA-guaranteed lending this year, as another sign of a rapidly improving credit marketplace.

But how many lending organizations are struggling to get their share of these surging loan Trainingvolumes? How many chief credit officers are overwhelmed by the amount of work that they must personally contribute into each deal, due to being surrounded by less experienced staff? How many prospective business developers still demand top dollar for their services, only to deliver a high volume of average deals?

The lending industry is feeling the effects of years of neglecting ongoing training for their personnel, particular commercial lenders and underwriters, some of whose performance does not match their years in service. There are many reasons for the deficit of professional development, but new resources are available to provide a reasonable solution.

SBFI now offers an online training platform to deliver commercial lender training through streaming video-on-demand. The content is tailored to span the entire career of lending professionals, from new hires starting their first job, to the Board of Directors, who make the largest institutional credit decisions.

And this curriculum will continue to grow in an effort to offer courses to enhance every career in your lending operation and help the entire staff continue to build on their experience through peer mentoring. All training has been developed by seasoned lenders with ‘hands-on’ experience through banks and non-bank lenders alike.

SBFI’s innovative commercial lender training platform offers instructive presentations with many features including:

  • Accessibility–Professionally-produced streaming videos through the internet.
  • Comprehensive Content–Downloadable handout materials and course transcripts support viewer learning.
  • Convenience–Available 24/7 when you want to learn–say goodbye to disruptive webinars in the middle of the day.
  • Expertise–Led by seasoned, commercial lending experts, respected due diligence professionals, and other experienced business veterans.
  • Flexibility–Available for individual and group viewing.
  • Within budget–Training that never requires time out of the office or travel expenses.

Get to know SBFI and what we offer for commercial lenders here.

Learning is lifetime adventure–the very best people in any industry continue to improve their skills over the life of their career. Take the next step up to a new level of success with ongoing professional development.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at .

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Shareholders Finally to Get Disclosure of CEO Pay

By Charles H. Green

The Securities and Exchange Commission (SEC) adopted a final rule that requires public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule, mandated by the Dodd-Frank Act, provides companies with flexibility in calculating this pay ratio, and helps inform shareholders when voting on “say on pay.”

The new rule provides shareholders with information to evaluate a CEO’s compensation, Loan Committteeand requires disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. These disclosure rules go into effect for the first fiscal year beginning on or after Jan. 1, 2017.

Why does CEO compensation matter?

Companies get some flexibility in meeting the rule’s requirements, for example, by being permitted to select the methodology for identifying its median employee and that employee’s compensation. The rule also permits companies to make the median employee determination only once every three years and to choose a determination date within the last three months of a company’s fiscal year. The rule does not apply to smaller reporting companies, emerging growth companies, or registered investment companies.

After years of resistence, the adoption of this rule–passed 3-2 along partisan lines by the commission–is  a victory for shareholder rights advocates, who’ve been fighting for the ability of shareholders to check executive compensation. Why is that a concern for shareholders? Namely because they own the company, with some owning a larger share than the Board of Directors as a group, and most owning more interests than the CEO.

A study by the Economic Policy Institute found that from 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period. For all of the bellowing about “shareholder value,” the study reveals that the C-suites have provided themselves with outsized pay, grossly excessive compared to the gains delivered to company owners.

More shocking is when you consider that these statistics represent pay to the same executives who directly, or through proxies like the U.S. Chamber of Commerce, howl in opposition to any suggestion of raising minimum wages for the lowest rung employees.

Consider that the average CEO-to-worker compensation ratio was 20-to-1 in 1965, and rose to 29.9-to-1 in 1978. From there, it grew to 122.6-to-1 in 1995, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s Shareholders did fare nearly so well in most instances.

What are they worth?

It goes without saying that for the high price tags, much is expected of these high-flying CEOs–and they get it. A compilation of CEO pay was provided by the NYTimes last year shows that pay packages and perks challenge the imagination as to what one would do with all the loot. There’s an accompanying story trying to reconcile that value to the companies, found here.

The ugly truth is that the tenure for the average Fortune 1,000 CEO is short, and their ability to deliver true long term value to shareholders is questionable. Compensation is generally determined by a board of directors, who themselves are CEOs or clubby members who often serve on a web of multiple boards with interlocking relationships. Sometimes expectations are not met and the price to start over can be steep–such as in the case of former Home Depot CEO Robert Nardelli, who was paid over $200 million to quit after disappointing shareholders while rival Lowe’s stock price doubled.

The new rule won’t instantly change any of these factors, but it will provide more open disclosure to company owners, employees and the world about what the corporate culture really is in the C-suite. This information which will empower them to more forcefully make changes where their values are not reflected in the companies they own or work for.

And more importantly, eventually stop over-paying those disclosed to be grossly overpaid for substandard performance.

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at .


Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Oil: Part of the Ongoing Adaptive Economy

By Charles H. Green

According to economist Robert Dye, America is in a “transitional economy” with considerable crosscurrents and volatility, which is leading us through an ongoing, rapid evolution, highlighted with the requirement of several complex adaptations by its participants. While he related his outlook to the global economy with many of these disruptive elements, such as technology, labor, housing and financial, I’ll focus on only one of the most dominant elements discussed: oil.

Dye is Senior Vice President and Chief Economist at ComericA Bank, and he spoke before U.S. Oil Production & Consumption, Monthly Dataan audience gathered for the third quarter economic forecast presented by the Robinson College of Business at Georgia State University recently.

Click here for a full-size copy of the nearly image, courtesy of ComericA Bank.

Why would a bank economist know anything about oil? Maybe it’s because this Dallas TX-based economist works for a bank that makes its footprint primarily in five states: Texas, California, Florida, Michigan and Arizona, which represents 31% of the U.S. GDP. And these five states include two of the top four oil producing states (TX #1, CA #4), the top three oil consuming states (TX, CA & FL), and the top auto manufacturing state (MI). Needless to say, they better understand oil.

Dye described the fast changing oil horizon predicated off of recent technological advances (extracting oil from shale), to the geopolitical theater (our old friend, Saudi Arabia). He described the rush of oil production in the U.S. as this new technology emerged as the ‘shale-gale,’ which had most economists predicting the return of a booming manufacturing sector in the U.S., such as we described one such viewpoint last September. That month, the average price of West Texas Intermediate crude oil sold for $92.58/barrel. This week that same oil is selling for less than one-half the price.

Who would have imagined just ten years ago that the ‘shale gale is contributing to the global oil glut? And if the U.S. and other five leading nations enter into an agreement with Iran regarding their nuclear power development, count on another 1 million barrels of oil headed to the market each day.

It’s notable that Saudi Arabia has responded to both the rise in U.S. oil production and falling prices with their spigot wide open. They’re charging hard to maintain global market share at any costs and replace the lost American exports with buyers in new markets. If history provides any guidance, they can manage that just fine, based on the decades they sold oil well south of $50/barrel.

Dye predicts that the days of $90-$100 oil may be over, which may greatly affect how much capital is deployed to exploring new wells in the U.S. While pricing bouncing between $50 to $60/barrel is workable, $40/barrel is different. Banking regulators have already set their sights on lending to this industry, cautioning lenders about the industry’s substandard condition that’s in the near term.

Long term depressed pricing will render U.S. oil producers as essentially the ‘swing market producers,’ meaning that they’ll kick in when shortages arise, but will fade away as production expands elsewhere. Our industry here likely will be required to adapt to switching online/ offline quickly in response to changes in the global supply, with a new goal changing from stabilizing prices to stabilizing revenues.

Oh yea, and all the talk about re-shoring our manufacturing base due to lower energy costs? Those rosy predictions are starting to abate as falling U.S. oil production will dent that potential, and the remainder of opportunity may be sapped up with the rising dollar on global currency markets.

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at .

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Global Growth is Moving Sideways

By Charles H. Green

According to economist Gregory Daco, the global growth outlook over the next five years seems to be moving sideways, “stuck in second gear,” as he put it. With contrasting results predicted for China, the Eurozone, and the other emerging markets, along with the effects of major structural changes occurring in China and Japan, there should be growth ahead, but he predicts it will be at a muted pace.

Daco is Head of U.S. Macroeconomics at the Oxford Economics, and spoke before an China Investment in Fixed Assetsaudience gathered for the third quarter economic forecast presented by the Robinson College of Business at Georgia State University recently. He summarized the cloudy growth forecast in terms of the combination of mixed results from several of the world’s major economies:

China–GDP results in China have been lower than expected, and as such, most economists have lowered forecasts, reckoning to a ‘new normal.’ Much of globe came to expect a continuation of the meteoric growth levels in the 10 to 12 percent range experienced in recent years, but that level has tapered off quickly without explanation. And given China’s tendency to obfuscate their intentions, there is global recognition that the economy is slowing down faster than the official numbers are described by the government.

Complicating matters is the fact that there are political transitions in play, with President Hu Jintao in the midst of purging the vast government of hundreds of senior and mid-level bureaucrats in an effort to root out corruption, all the while struggling with a slowing economy, which is not known as his strongest suit. There are emerging changes in upper mobility of Chinese consumers, who were encouraged to borrow for investments, only to watch the Shanghai composite index drop off precipitously in recent months.

After five years worth of building inventory and in the middle of a huge infrastructure building program, suddenly China’s commodity purchases has dramatically dropped off, leading to falling prices and activity. The question of not whether growth will slow, but how fast and how far?

So how are the other BRIC nations faring, in light of China’s stumble? There again, results are mixed, with two of the three suffering the hangover effects from Chinese gyrations.

Brazil-This emerging economy, darling of the late 2000s, hit the end of their super- growth rather abruptly. When China started buying up commodities in the 2000s, Brazil aimed an outsized portion of their output in response, and today is feeling the pain of those purchases going away. The commodity spikes are over, so production has slowed in response, unemployment has climbed back to high levels and there’s less capital available to support growth for anything else. Brazil is stuck with high debt levels, but their monetary policy is tough to effect any relief with a softening currency. A recession is forecast in 2016.

Russia –Despite a strong economy in recent years driven by the strong global demand for its oil and gas, Russia is not faring so well as oil prices have plummeted and the international economic sanctions over its invasion into Ukraine have begun to take a toll. Russia’s dependence on oil revenues has left it high and dry, as its currency has fallen off badly over the last year.

India-Of the BRIC countries, India is the bright spot at this time. Their emphasis on  education development and investments are admirable for the long term potential for growth. Their more pro-business government is making key investments in transportation and food production, which have both brought prices down and given consumers more income. Prospects for this economy are looking positive.

Japan-Elsewhere, the world’s third largest economy is not projected to fare much better than recent years, but if there is a glimmer of positive news, they’re not projected to be heading into a recession, based on second quarter growth. Japan has an aging population, and although consumer confidence remains “ok,” wage growth has been flat or falling over the last several years, as workers have little bargaining power.

Industrial production growing is growing, but household spending is volatile. A 2014 planned tax hike cooled spending considerably last year, and after it went into effect, buying plunged. Inflation is hovering on deflation.

Europe-The big question for Europe is whether growth there, driven by considerable reductions in oil prices, is sustainable? Leading indicators suggests there is better growth ahead, and momentum is leaning toward solid gains in consumer growth and employment growth. Even consumer confidence is looking upward.

Will this be followed by corporate investments and profits? The Euro’s weakness tends to add inflationary pressure, meaning some consumers may postpone spending, and certainly lower spending on imports. Greece remains a risk, but is currently a much lower risk since the crisis has been deferred to work out down the road.

And where does the U.S. fit into this equation. Although we had a slow start to 2015, there was a stronger than expected 2nd quarter, particular in western states. Growth expectations remain strong for the balance of the year along with employment gains. The only question is when–not whether–the Federal Reserve will begin to normalize interest rates.

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at .

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Consumer Demand + Investment Trumps Market Turbulence

By Charles H. Green

With China’s economy stalled as Europe growth is limping, U.S. GDP growth in coming months ahead will be predicated on the return of healthy domestic consumer demand and more capital investment, despite recent stock market turmoil, says Rajeev Dhawan of the Economic Forecasting Center (EFC) at Georgia State University’s J. Mack Robinson College of Business.

Dhawan’s assertions were delivered in his quarterly “Forecast of the Nation,” released Rajeev DhawanThursday, against the backdrop of China’s currency devaluation in mid-August. Even though initial reactions were negative, he characterizes the devaluation as “positive news for the economy overall,” which will boost domestic profit margins on imported goods.

Between low gas prices and wealth gains from reflated home prices and stock portfolios, post-recession consumers are in the mood to spend, albeit judiciously, on utility items. For the first seven months of the year, vehicle sales averaged 17.0 million units – up 4.5% over the previous year’s strong sales numbers, led by light trucks that drove the increase, rising by 10.7% over the previous year. By contrast, consumers hit the brakes when it came to passenger car purchases, which declined 1.9%.

As for oil, Dhawan anticipates prices will stay below $60/barrel until late 2016 due to a drop in global demand and an increase in drilling efficiency by U.S. producers. “People can safely expect low gas prices to continue for the next year.”

But when will the Federal Reserve determine that the economy is strong enough to hike interest rates and by how much? “The expected rebound in investment spending (forecast to rise 6.2% in the second half of 2015), will be strong enough for the Fed to start normalizing interest rates,” Dhawan said. “The issue is whether it will do so at the September or December meeting.” At present, remarks by key officials strongly telegraph a September move provided the ongoing market correction doesn’t deepen further.

Highlights from EFC’s National Report:

  • After stumbling in the first quarter of 2015, real GDP grew strongly at 2.3% in the second quarter. Growth of 2.2% is expected for the second half of the year, which will lead to an overall annual rate of 2.2%.
  • Business investment growth will hit 3.0% in 2015, rebound to 5.4% in 2016 and 5.2% in 2017. Jobs will follow by a monthly rate of 219,000 in 2015, 226,000 in 2016 and 214,000 in 2017.
  • Housing starts will average 1.105 million units in 2015, rise to 1.202 in 2016 and 1.275 in 2017. Expect auto sales of 17.0 million units in 2015, 16.5 in 2016 and 16.4 in 2017.
  • The 10-year bond rate will rise to 2.7% in 2015 and should rise to 3.3% before the end of 2017.

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at .

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Stock Market Plummets, SME Lenders Indirectly Impacted

By Amaresh Gautam

The U.S. stock market started falling last week dragging the global markets with them and presently (at post deadline), many leading global stock markets have experienced something of a meltdown. The source of this meltdown? Most analysts are blaming investors being concerned about recent news of the Chinese economy and disappointments in other emerging markets.

Data shows that Chinese factory activity has reached a low level last seen in 2009. Beijing Correctionreleased manufacturing figures showing fresh evidence of problems at the heart of their economy. The preliminary Caixin China Manufacturing Purchasing Managers’ Index for August fell to a 77-month low. After Monday’s closing, the Shanghai Composite Index had lost all of their gains since the beginning of the year.

Low U.S. oil prices also add to the worries and have fallen to less than $40 per barrel, a level not seen since before the financial crisis. The dollar fell to a two-month low against the euro and added to speculation that the Federal Reserve may now postpone a broadly expected increase in interest rates next month.

Through last Friday, the Dow Jones index had lost about 10% from its record closing high on May 19, appearing to be entering a correction (a fall of at least 10% from a recent peak), and a rocky start Monday morning saw the DJIA fall over 1,000 points until investors started buying up bargains. Still the day finished down four percent.

Stock market swings are not the bellwether of all things in the economy, since the immediate impact only directly hurts those holding securities. If you’re personally invested in a broad basket of balanced securities, chances are the effects of this moment are only taking away inflated gains, not eating anything near your principal. If you’re buying on margin, you may have more reason to be concerned.

Amid this mayhem, small business lenders would do well to remember that markets often have its reasons that only the market can understand, and to be sure, some economic fundamentals are still strong (e.g. rising small business lending volume this year). But as written through several articles in these pages, it pays to pay attention to the world beyond your book of business.

The price of oil and devalued Chinese currency may not hit your pocketbook this week, but there are causes and effects that eventually are felt by most everyone. If one of those is that the Fed postpones rate hikes due to the uncertainty, that will hurt lenders more than borrowers, and that’s getting closer to home.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Risky Mortgage Bonds Make a Comeback

When the U.S. capital markets were collapsing in the aftermath of the subprime financial crisis, many folks assumed that we had seen the last chapter of the financial product innovation known as ‘securitized mortgage bonds.’ After all, the market and the people making that market must have learned from their recent experience and never again make choices that led to propagation of such toxic financial securities, right?

However history-even financial history-has a pattern of repeating itself, and the only thing Cash Moneywe learn from financial history is that we do not learn from much from it. Already within just a few short years, risk-laden mortgage bonds are making a comeback.

In the years since the crisis, Wall Street’s mortgage-bond issuance has been largely restricted to bundling old, secured debt or big loans made to the wealthiest Americans. The only securities backed by new loans to delinquency-prone borrowers have been insured by taxpayers. However Lonestar, owned by billionaire John Grayken, recently made a deal in which about 220 home loans were packed into one $72 million bond offering.

Moreover the market analysts say that there is fair amount of excitement about such loans which will ultimately be securitized. The market players are saying that they will revive the market for such loans without repeating the mistakes that led to the subprime crisis. This time they’ll retain the risk instead of passing them to someone else.

Right. Recall that the first version of this financing bonds were sold touting a credit risk grade rated “AAA” for a reason, albeit a bad, probably illegal reason. The experience of previous financial derivatives offer plenty of reasons to be skeptical, although it’s fine for anyone to buy them so long as they, and they alone, bear the risk of loss. The American taxpayers should not be relied on to bailout the capital markets again.

In Lone Star’s offering, an affiliated vehicle that sponsored the deal will hold onto at least 15 percent that’s first in line to bear losses, according to preliminary offering documents obtained by Bloomberg. The mortgages were originated over the past nine months by Caliber Home Loans Inc., which is owned by Dallas-based Lone Star.

To someone familiar with market lore, this reintroduction of an old failed financing vehicle was to be expected. As the scars of the subprime crisis heal further, many other innovations that led to the disaster are also bound to make a comeback, albeit in a slightly different form, and quite possibly leading to another disaster that will also be slightly different.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon