NACM Credit Managers’ Index Trends Favorably to Start Year

It appears that NACM’s Credit Managers’ Index for January will join the ranks of the cautiously optimistic. While other indicators were trending in a positive direction or at least stable at the end of 2014, the CMI had been sounding the warning bells and trended the wrong way. But the combined index is expected to rise in January, according to data being released Friday morning by NACM.

January's CMI is not expected to be a spectacular turnaround given, but it is at least moving in the right direction. Overall, the index of favorable factors are expected to remain the same as in December, in part because the important "sales" category will not show drastic improvement in January. The real changes are likely in the CMI's unfavorable categories, especially in the “dollar amount beyond terms” and “dollar amount of customer deductions” categories.

Also, within the unfavorable categories, look for an uptick in “rejections of credit applications,” which would indicate fewer but more creditworthy applicants are in the pool at present, and a drop in "accounts placed for collection," which would further indicate that companies are in distress and unable to stay current with their debt.

- NACM Staff
Check back here Friday morning for links to the latest, detailed CMI data for January or visit www.nacm.org directly.

Fed Holds Line on Rates, Accommodative Policies

Unaffected by the European Central Bank's announcement of a new and larger-than-expected quantitative easing (QE) program designed to boost the struggling European Union, the U.S. Federal Reserve continued to stick to its guns on monetary policy plans Wednesday.  The Fed’s Federal Open Market Committee (FOMC) announced that the target for the federal funds rate would be kept unchanged in the short term and said little else to signal a departure from a largely expected rate increase by mid-year.

The FOMC left the target for the federal funds rate at a range between 0% and 0.25% despite noting that economic activity expanded at a solid pace in late 2014 and the first few weeks of the new year. Therein, household spending continued to rise, helped along by the steep decline in energy prices. The Fed hinted that the timetable for rate increases would likely only be accelerated if inflation rises quickly.

The FOMC also voted to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities and rolling over maturing Treasury Department securities at auction. It believes this, coupled with low rates, will continue accommodative financial conditions.

- Brian Shappell, CBA, CICP, NACM managing editor

Treasury Secretary Optimistic on Business Tax Reform

There is optimism that Congressional Republicans and the Obama administration can forge a bipartisan consensus to reform “a dysfunctional [business] tax system,” Treasury Secretary Jacob Lew said Wednesday at the Brookings Institution, a Washington think tank.

In his opening speech, Lew said that the entire federal tax code needs to be overhauled. “It has been almost 30 years since we last rewrote it, and since then, the tax system has become heavily burdened by loopholes and inefficiencies.” Lew acknowledged that there is good-will on both sides, at least regarding business tax reforms, and put the odds of an overhaul at “better than 50-50.”

“On paper, we have one of the highest corporate income tax rates in the world, but in practice, there is a wide disparity in effective corporate tax rates,” Lew said. “Some corporations pay little or no income tax at all, while others pay the highest rate in the developed world. Even worse, our tax system allows American companies to shift profits overseas to avoid paying U.S. taxes, and actually drives businesses to look for ways to move jobs and their tax home, at least on paper, out of the United States to countries with lower tax rates.” He said there was a greater benefit in efficiency and productivity when cross-border mergers are done for legitimate business reasons.

In September, the Obama Administration made it harder for companies to complete an inversion if they keep most of their business in the United States. Obama’s proposal for a new business tax system does the following:
  • Eliminates dozens of tax breaks and loopholes
  • Reduces the current top corporate tax rate from 35% to 28%
  • Lowers tax rates for domestic manufacturing to 25%
  • Makes manufacturing incentives, including the Research and Experimentation Tax Credit, permanent
  • Creates a new minimum tax on foreign earnings
  • Tightens rules so that companies to make it harder to shift profits to low-tax countries.
  • Eliminates tax deductions that reward companies when they shut down operations in the United States and relocate abroad
  • Provides tax breaks for companies that bring production back to the United States. 
  • Allows a small business to annually expense up to $1 million in investments.

Reform should be revenue-neutral in the short and long-run in part by eliminating loopholes, Lew said.

- Diana Mota, NACM associate editor

Cyber Threat Legislation Noted in State of the Union Address

President Barack Obama’s proposed cyber security legislation, which he promoted the week of January 12 and briefly addressed in his State of the Union address, includes one of four bills similar in essence to the Cyber Intelligence Sharing and Protection Act (CISPA). His proposal is actually similar to an effort he vetoed last year and said he would veto again, said Jim Wise, NACM’s Washington lobbyist and managing partner of Pace, LLP.

Obama’s proposal, however, addresses additional privacy concerns, Wise said. “Companies would have to redact personally identifiable information, for instance, and comply with certain privacy restrictions.”
The bill that could affect NACM members is the National Data Breach Reporting measure, called the Personal Data Notification and Protection Act, which the administration has updated since its initial proposal in 2011.

“Security breach reporting laws require businesses that have suffered a cyber attack to notify customers if personal information has been compromised,” Wise said. “While this generally would not impact our members, it does have the potential to do so in those instances where our members need to secure a personal guarantee in the extension of business credit.” The administration claims their proposal will help businesses, as there are currently 46 state laws on this type of reporting, with different requirements and reporting timelines, Wise said.

U.S. Senate Majority Leader Mitch McConnell (R-KY) has said cyber security is one area of possible agreement with the Obama White House: “Unlike many of the president's major policy initiatives rolled out in the last few years, this package of proposed legislation may actually go somewhere in Congress.”

- Diana Mota, NACM associate editor
For the extended version of this story and more analysis, check out this week's edition of eNews, available late Thursday afternoon at www.nacm.org and via email to members who have opted in. 

High Court Considers Limits on Bankruptcy Court … Once More

For a third time, the Supreme Court of the United States will address the limits on the Bankruptcy Court’s jurisdiction under Article III of the U.S. Constitution. Justices heard arguments on January 14 in Wellness International Network v. Richard Sharif, asking it to clarify what property became part of the debtor’s bankruptcy estate under bankruptcy code.

This issue was first brought to the court’s attention in 2011 in Stern v. Marshall, where it determined that a final decision on a state law counterclaim was not within the power of the Bankruptcy Court. And in the spring, Executive Benefits Insurance Agency v. Arkison accepted the process by which the district courts supervise the adjudicative proceedings of the Bankruptcy Courts.

In Wellness v. Sharif, the Supreme Court will also decide whether or not litigants may consent to Bankruptcy Court jurisdiction; and if so, whether or not implied consent is sufficient instead of actual written consent.

The history of Wellness v. Sharif goes back for more than a decade. In a district court action, Wellness was granted more than $500,000 in fees and sued Sharif to collect those fees. During the course of that action, Sharif was held in contempt and jailed. After being released, Sharif filed a Chapter 7 petition in bankruptcy. Wellness objected to Sharif obtaining a discharge on the grounds that Sharif lied about ownership of certain property and attempted to hide it from being pulled in to the property of the bankruptcy estate. Sharif argued that the property belonged to a trust, was not property of the estate and any attempt by Wellness to pull it into the bankruptcy estate was actually an attempt to have the Bankruptcy Court wipe out the rights of third parties (not in bankruptcy) to property not belonging to the estate. Sharif argued that this was a state law issue and not appropriate for a Bankruptcy Court to determine. The case will attempt to address the following points:

  • If the issue is whether or not this property is property of the estate, then this is a “core” issue and the Bankruptcy Court has jurisdiction
  • If the issue is actually whether or not the Bankruptcy Court can determine a state law issue over the ownership of this property, then this is not a “core” issue and under Stern, the Bankruptcy Court would not have jurisdiction.
The Supreme Court will also make a determination regarding litigants’ consent to jurisdiction. In Wellness, Sharif participated in every aspect of the case, even filing a motion for summary judgment against Wellness. Sharif did not raise an objection to jurisdiction until the appeal was taken and being briefed.

Personally, I believe the Bankruptcy Court’s jurisdiction should be expanded to hear these types of claims. However, the Supreme Court in the Stern case said Article III does not give the Bankruptcy Court this power. Bankruptcy practitioners will disagree as to whether or not the powers of the Bankruptcy Court should be expanded. Disagreement also exists as to whether or not consent to jurisdiction should enable the Bankruptcy Court to proceed.

A decision from the Supreme Court on Wellness v. Sharif, which may not come for months, will be welcome to hopefully clarify, once and for all, what is or is not within the jurisdictional purview of the Bankruptcy Court.

- Wanda Borges, Esq., principal member, Borges & Associates, LLC
Diana Mota, NACM associate editor, contributed to this article.

Industries to Watch: Will Slowing Chinese Growth Affect Steel Producers?

Domestic steel producers and many industries downstream have performed well in recent years, and there is no indication that major players therein face imminent solvency struggles. However, the world’s top steel consumer, China, continues to report declining growth levels. That could pose eventual challenges for those connected to the steel industry, especially in countries outside of the United States whose economies are not so diverse. Still, it bears watching whether several positive points domestically (the auto industry, an eventual real estate recovery, infrastructure) will counter what looks to be an ongoing weakness in China.  

A credit crunch for steel could become a problem if the Chinese economy continues to grow at a slower pace than the world’s exporters are accustomed to, if not dependant upon, said a steel industry expert in an NACM interview this week. The reduced importing activity on China’s end and the potential for dumping of steel (selling at a lower price than domestic production costs—defrayed in part by alleged illegal government subsidies) isn’t the only area of concern from a sales and pricing standpoint. Product dumping could reduce prices both domestically and in foreign markets to which both U.S. and Chinese producers sell. A recent example of this is the solar panel production industry. The steel expert, who wished to remain anonymous, said there is no sign of slowing production on the part of Chinese producers, meaning they will likely look for increased sales in other markets. “If there’s a slowdown in China, that’s going to slow things down for everyone else. The Chinese could begin to subsidize those sales, meaning you’re not on an even playing field here.”

Bruce Nathan, Esq., a partner with Lowenstein Sandler LLP, notes there appears to be no known solvency problems among key industry players domestically. However, he believes a glut, should one occur, could pose problems, as could the ongoing drop in energy prices.

“With the energy issue and the price per barrel continuing to dip, we have to remember that all those producers use steel in their production rigs, and a lot of it,” Nathan said.

Still, both sources noted that a number of positive factors could help maintain strength among domestic producers. Perhaps the biggest is the long-anticipated rebound of the housing industry. With employment and the overall domestic economy improving, along with the presence of an existing housing stock that doesn’t match the changing tastes of key homebuyer demographics, the rebound could be the closest since last decade’s real estate crash.

In addition, the automotive industry continues to be a bright spot within the U.S. economy, said Deborah Thorne, Esq., a partner with Barnes & Thornburg LLP. “It’s been a good couple of years here for auto, and it is doing really well here again,” said Thorne, who is based in the Chicago area. “So, steel fabricators are doing pretty well.”

Also, NACM Secured Transaction Services’ Chris Ring believes another positive wild card in the mix for steel producers is the crumbling U.S. infrastructure: bridges and rail lines are in disrepair throughout the country, and lawmakers will only be able to kick the can down the road for so long, without addressing that.

- Brian Shappell, CBA, CICP, NACM managing editor

Proposed Laws Target Consumer Data, Privacy

President Barack Obama announced three proposed laws aimed at protecting consumers against data and privacy breaches. “In the 21st century—in this dizzying age of technology and innovation—so much of the prosperity that we seek, so many of the jobs that we create, so much of the opportunity that’s available for the next generation depends on our digital economy,” said Obama January 12 as he addressed the Federal Trade Commission. “It depends on our ability to search and connect and shop and do business and create and discover and learn online, in cyberspace.”

One such law, Personal Data Notification, would establish a national standard for how companies respond to data breaches so citizens know when their information has been stolen or misused. This would replace a patchwork of state laws, he said. Under the new standard, companies would have to notify consumers of a breach within 30 days. “In addition, we’re proposing to close loopholes in the law so we can go after more criminals who steal and sell the identities of Americans—even when they do it overseas,” Obama said.

Additional legislation—a Consumer Privacy Bill of Rights—would give consumers the right to decide what personal data companies collect from them and how companies use that data; to know that personal information collected for one purpose can’t be used by a company for a different purpose; and to have their information stored securely by companies that are accountable for its use. The legislation, which he plans to introduce by month’s end, would provide basic baseline protections across industries.

“Working with many of you—from the private sector and advocacy groups—we’ve identified some basic principles to both protect personal privacy and ensure that industry can keep innovating,” Obama said.

He also proposed the Student Digital Privacy Act, which states data collected on students in the classroom should only be used for educational purposes—not to market to children. “Many states have proposed similar legislation,” Obama said. “We won’t wait for legislation, though. The Department of Education is going to offer new tools to help schools and teachers work with tech companies to protect the privacy of students.”

“The more we do to protect consumer information and privacy, the harder it is for hackers to damage our businesses and hurt our economy. Meanwhile, the more companies strengthen their cyber security, the harder it is for hackers to steal consumer information and hurt American families.”

- Diana Mota, NACM associate editor

Can the U.S.Go It Alone, Carry the Sputtering Global Economy?



The United States is the only large economy showing any signs of health right now. In the simplest of terms, strong U.S. growth is needed currently to provide opportunities for struggling European nations and Japan as well as emerging markets that aren’t as hot as in previous years. The problem is that the domestic recovery, and thus consumption, is not robust enough to carry that burden, and there are doubts that the pace of growth in the US can increase or even be sustained.

The world economic situation is really not good, and few solutions exist that make much difference in the short run. The U.S. is not as reliant on export activity as some nations, but it still accounts for 15% of the GDP. That places exports in third place as far as GDP is concerned—behind health care spending and manufacturing. The prospects for expanded export activity are also somewhat grim as the dollar continues to gain against all the major world currencies. The U.S. business community will face increasing pressure from competitors in other nations, as it is easier to sell at cut-rate prices when their currencies are low compared to the dollar. The much-anticipated rebound of manufacturing in the U.S. could well be halted and even reversed as the dollar gains. Remember: U.S. consumers are primarily price-driven, which can tilt them towards cheaper imported goods, coming at the expense of domestic producers. That will likely affect domestic job growth in a negative way.

As the world hopes and assumes that the US economy will recover fast enough to pull the rest of the globe along with it in 2015, analysts remain unsold that the U.S. has the strength to pull even itself together in the medium term. The basic critique therein is that there focuses on the substantial weakness remaining in the economic fundamentals. The biggest concern emanates from stagnation in critical areas such as wages—slow or no growth in wages means limits on consumer spending. And the huge price drop of gasoline isn’t going to have more than a short-lasting effect on people’s disposable income, as a time will come when those prices start to climb again.

- Chris Kuehl, PhD, NACM economist and Armada Corporate Intelligence co-founder

PMI Roundup: More Slowing Seen among Major Economies

Economic output continues to track above the dreaded expansion-contraction line (50) in JPMorgan and Markit Economics research, but the global manufacturing and services Purchasing Managers' Index (PMI) fell to its lowest level in 14 months to close out 2014.

Much like data included in the latest NACM's Credit Managers’ Index, the December performance in the Global All-Industry Output Index is disconcerting. The index fell to 52.3 from its November level of 53.1.

"The latest PMI data point to further easing in the rate of global economic growth," said David Hensley, director of global economics coordination at JP Morgan. "The underlying dynamics of the survey are weaker across the board." To wit, output, new orders, input prices and employment all continue to rise, but at a much slower rate than previously, according to index producers JP Morgan and Markit. In addition, the backlog category not only fell, but it now sits in contraction territory (49.9).

There were only a few sources – United Kingdom, Ireland, Mexico, South Korea, Vietnam – of good news in the latest roundup of monthly data on the part of the two firms.

- Brian Shappell, CBA, CICP, NACM managing editor

For more information on the latest global PMI data, see the extended version of this story in this week’s edition of eNews or visit www.markiteconomics.com  for a full list of country-specific press releases.

Bankruptcy Filings, Especially Commercial, Down for 2014

Bankruptcy filings continued to fall as 2014 came to a close. The total number for the year reached 910,090 nationwide, or 12% fewer than the prior year’s total, according to Epiq Systems, Inc. Of that total, commercial filings equaled 34,455, a 21% decline year-on-year; and noncommercial, 875,635, down 11% compared with 2013.

“Annual total filings fell for the fifth consecutive year and dipped under one million for the first time since 2007,” said ABI Executive Director Samuel J. Gerdano. “Sustained low interest rates and high costs to file continue to turn consumers and businesses away from the bankruptcy code for a financial fresh start.”
December 2014 showed a 5% decrease in filings to 63,090 compared with December 2013. Of that number, 2,465, a 15% drop, represented commercial entities, and 60,625, a 5% decrease, noncommercial. Commercial Chapter 11 filings registered a 12% drop to 349 last month, and average total filings per day in December were 2,035, a 5% decrease from December 2013.

The average nationwide per capita bankruptcy filing rate for calendar year 2014 decreased to 2.93 (total filings per 1,000 per population) from the 3.33 rate during calendar year 2013. States with the highest per capita filing rate (total filings per 1,000 population) through 2014 were: Tennessee (6.10), Alabama (5.28), Georgia (5.24), Utah (4.85) and Illinois (4.66).

- Diana Mota, NACM associate editor