Sales Woes Have Negative Impact on Credit Managers' Index for December


Though a number of favorable factors that help comprise the National Association of Credit Management’s Credit Mangers’ Index (CMI), problems with sales ultimately outweighed the positive toward the end of 2012.


The CMI, available Friday afternoon (see link at bottow of story), will show a slight decline for the month largely on disappointing sales figures. NACM economists Chris Kuehl believes this reinforces the notion that business is stalled out in anticipation of what might happen with spending and taxation next year. There was some cautious optimism just one month ago in the CMI, but that optimism has seemingly evaporated, as it seems all but certain that there will be no settlement of lasting value on the “fiscal cliff” issue paralyzing Congress and the Obama Administration.


Other favorable factors statistics were not expected to register the same level of distress, even though a few small declines were expected. Additionally, the unfavorable factor index for December will show only a slight decline. The overall sense is that this month’s decline is due to the tensions existing among (and caused by) federal lawmakers. The inability of Congress and the president to make a deal has already cost significant economic growth, and it is now anticipated that real decline in GDP growth will be the next outcome.


“The reaction captured in this month’s CMI shows a stark lack of confidence as opposed to anything substantial,” said Kuehl. “The overall news for the economy has been pretty good, and so it is with much of the CMI. The factors most connected to mood and confidence are the ones slipping. The whole business community seems to be in state of suspense.”


The complete CMI report for December 2012 contains more commentary, complete with tables and graphs. CMI archives may also be viewed on NACM’s website.



-NACM staff

2013: Surprise Year of the Trade Agreement?


At first blush, a boost in trade agreements would seem unlikely given all the wrangles about fiscal cliffs and austerity plans (see previous blog and eNews entries covering FCIB’s Global Conference from Philadelphia in November). The political will to attack trade issues would seem to be missing, and in developed economies, the subject of trade is always controversial because trade is just what it implies: one has to give something up to get something. However, there are three reasons to believe that trade agreements could potentially become a surprise focus at some point this year, particularly where Europe, Japan and even the United States are concerned.

The first is the increased need for developed economies to find some means by which to grow. Everything else has been tried, and nothing has yet done the trick. The monetary authorities have run out of tricks as interest rates have been at rock-bottom for half a decade, and there is nothing left as far as the bond markets are concerned. For many nations, the solution will have to be increased levels of exports, and that doesn’t seem to happen without the assistance of a trade agreement.

The second reason is the increased need to bolster strategic ties between nations. Geopolitical issues are only getting more complex and must be addressed in some kind of cooperative manner. Given that nations have very different strategic goals, there is a need to find incentives for cooperation. The most consistent weapon first-world economies employ is trade and market access.

The third reason for increased attention to trade agreements is what could be considerable pressure from the business community in first-world economic nations. The financial future of even smaller companies depends on access to overseas markets, and that gets a whole new community engaged in the conversation. Things have changed dramatically in the last few years and now even the very smallest companies have an opportunity to do business outside their borders, making them far more interested in the opportunities that could come with a new trade deal or two.

-Armada Corporate Intelligence
 

Wave of Good News Hits EU Members Near Year-End


Perhaps the most covered story internationally this year has been about the debt struggles throughout the European Union and its impact on the rest of the world. But, for this week anyway, there was a much different and positive tone to coverage about the European sovereigns, especially in Greece and Germany.

Perhaps the most shocking of all came as one of the oft-maligned U.S.-based credit ratings agencies raised the credit profile of one of the euro zone’s most troubled nations. Standard & Poor’s raised Greece’s sovereign credit rating by six steps to a “B-minus” and also placed it in a “stable” outlook category. It’s a massive change for a nation that had been miles below an “investment grade” rating and one that has struggled with a negative outlook by the agency for years. In fact, the rating is the highest Greece has been given since early 2011.

S&P justified the improved rating by noting a deeper commitment and greater transparency therein on the part of EU member nations carried by a Germany that had dragged its feet for some time with calls for increased austerity and related concessions to avert risk. Meanwhile, economic news in Germany turned positive after some recent months of pessimistic attitudes that surprised the fiscal and production powerhouse.  

Germany’s business confidence, which sunk to its lowest level since early 2010 in October, increased for the second time in as many months in December, and did so by more than was forecast. Germany also experienced a noticeable bump in exports and new factory orders, as domestic companies involved in trade have found more opportunities for partnerships outside of an EU it had relied upon so heavily at one time.

-Brian Shappell, CBA, NACM staff writer

Another Port Strike to Threaten U.S. Vendors?


Just days after an eight-day port strike on the West Coast ended, it seems problems brewing on the opposite side of the country are breeding concerns about the possibility of a new, late-year work stoppage...and one that would affect many more markets.

The contract between the International Longshoremen’s Association and the U.S. Maritime Alliance Ltd. is being negotiated to replace one that is expiring on Dec. 29. Getting something in place the last time a port-involved contract dispute came up – also involving the Longshoremen, in the Los Angeles/Long Beach area of California – resulted in some 75% of the largest U.S. port's capabilities being shut down for just over a week. Because of holiday retail-related shipping needs, some estimates noted that upwards of $1 billion in goods per day were blocked during the dispute.

A failure to forge a new deal or some type of extension would almost certainly lead to a lockout or strike in many, if not all of the following ports: Boston, New York/New Jersey, Delaware River, Baltimore, Hampton Roads, Wilmington, Charleston, Savannah, Jacksonville, Port Everglades, Miami, Tampa, Mobile, New Orleans, and Houston, National Retail Federation President/CEO Matthew Shay noted. Shay, who had blasted both sides in the West Coast stalemate, again publicly called on the Obama Administration to intervene because of the lost money potentially at stake.

“A strike of any kind at ports along the East and Gulf Coast could prove devastating for the U.S. economy,” Shay said. “Allowing a strike to occur for even one day could have a negative impact on all of those downstream businesses and employees who rely on the ports. The U.S. economy cannot afford to wait for a strike to occur before we see administration action.”

Granted, with the “fiscal cliff” issue yet unresolved on Capitol Hill and what sounds like a renewed call for new gun control measures in the wake of the mass school shooting tragedy in Connecticut, any intercession appears unlikely in the near-term. That's especially so since the Obama Administration elected not to get involved earlier this month in California.  

-Brian Shappell, CBA, NACM staff writer
 

Obama Signs Bill Establishing PNTR with Russia


President Barack Obama signed H.R. 6156 into law today, officially establishing permanent normal trade relations (PNTR) with Russia.

Much of what the bill does is iterated in its full title, the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law and Accountability Act of 2012. In addition to repealing the Jackson-Vanik amendment, a regularly ignored Cold War regulation that made U.S. preferential tariff rates on Russian products conditional on the country allowing Jews and other minorities to emigrate freely, the bill also normalizes trade relations with Moldova and gives the U.S. the ability to sanction Russian human rights violators according to the terms of the bill's so-called Magnitsky provisions, named after Russian lawyer Sergei Magnitsky who died in Russian prison while investigating allegations of large-scale theft on the part of Russian officials.

Normalizing trade relations with Russia became a priority once Russia officially joined the World Trade Organization (WTO) in August. According to the terms of Russia's WTO accession agreement, the country could increase tariffs on products entering the country from the U.S. until the U.S. normalized trade relations with its fellow WTO member. The presence of the Jackson-Vanik Amendment on U.S. books was considered abnormal, and Russia was, until now, within its rights to discriminate against American products.

President Obama's signature clears the bill's final hurdle and allows U.S. companies to take advantage of the newly expanded market access generated by Russia's WTO membership.

“The United States strongly supported Russia’s accession to the WTO, because it is in the interest of our exporters and the Americans they employ to bring Russia more fully into the global trading system,” said U.S. Trade Representative Ron Kirk. “With the signing of this legislation, American businesses and workers are closer to enjoying the full economic benefits of Russia’s WTO commitments.”

- Jacob Barron, CICP, NACM staff writer

S&P Gets Negative on UK


As draft legislation is honed in the European Union putting limits on what credit ratings agencies can say in analysis and when they can say it in reference to member nations, one of the so-called “Big Three” agencies has placed the United Kingdom into pessimistic outlook territory.

Though Standard & Poor’s affirmed the UK’s “AAA” rating Thursday, the U.S.-based agency revised its long-term ratings outlook to negative from stable and noted a “one in three chance” a ratings downgrade could come in the next two years if fiscal health continues to weaken there.

“We believe this could occur in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation,” S&P wrote.

Like most ratings downgrades or threats of them, it’s not being taken kindly, especially in Europe (see this week’s eNews for more on the EU’s draft legislation to limit ratings agencies activity). However, despite fears from governments struck by downgrades and outlook changes, New York University’s Ed Altman, PhD, who will making an encore appearance as a speaker at the (May) 2013 NACM’s Credit Congress Las Vegas, said the impact of such moves has been shown to be muted. He said France, which lost its prized “AAA”-level rating with two of the three big agencies in 2012, is a prime example.

“While the ratings have taken a hit with downgrades, the yields and the spreads have actually decreased in France, which is very hard to explain,” Altman told NACM. “In other words, if you had acted on that information in terms of investment decision, you would have been wrong. France, if anything, has improved in its situation. I’m not saying markets are ignoring the ratings agencies completely, but they don’t seem to be taking them too seriously in regards to investment grade countries.”

He added that market-watchers are aware of the agencies’ somewhat spotty track record from last decade and don’t rely on them solely when making decisions and analysis.

-Brian Shappell, CBA, NACM staff writer
 

Fed Rates Tied to Employment Data for the First Time


Much of the Federal Reserve’s monetary policy public statement on the heels of its Federal Open Market Committee’s (FOMC) meeting Wednesday was reaffirming long-held policies when it came to Treasury securities purchases and interest rates. However, an increasingly talkative Federal Reserve did shock some market-watchers by tying its stance on the federal funds rate to employment growth.



For the first time in the Ben Bernanke’s era as Fed chairman, the FOMC noted it will hold the target range for the federal funds rate at between 0% and 0.25% until the unemployment rate sinks to or below 6.5%. The Fed – which noted continued moderate economic expansion (aside from weather/Sandy-related problems) and concern over risks associated with “strains in global financial markets” – also tied the historically low range’s stay to inflation rates being no more than one-half percentage point above the FOMC’s 2% longer-run goal. All but Jeffrey Lacker voted for the decision.



"Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability," the Fed noted in its uncharacteristically long statment. "The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."



Otherwise, the committee plans stay the course on recent policy initiatives by "continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month...purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month...maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction."



-Brian Shappell, CBA, NACM staff writer

Vitro Bankruptcy Update: Judge Places 10 Mexican Subs into Bankruptcy


In a case with deep implications for U.S.-Mexico trade relations, a U. S. Bankruptcy Court in Dallas has put 10 subsidiaries of Mexican-based glassmaker Vitro SAB into involuntary bankruptcy. Texas-based Bankruptcy Judge Harlin Hale also gave credence to allegations that the subsidiaries schemed to block U.S. collectors from collecting debts. This all comes less than two weeks after an appeals court upheld a summer decision by Hale not to recognize the terms of Vitro's bankrutpcy plan filed in Mexico.



Several months ago, Hale denied enforcement of Vitro’s Chapter 15 reorganization plan approved in a Leon (Mexico) court because he believed Vitro's plan “manifestly contrives” U.S. bankruptcy policy and the interests of American bondholders and trade creditors. Typically, a judge would affirm such plans out of respect to judges in friendly nations and for trade relations. In late November, the U.S. Court of Appeals in New Orleans denied Vitro's appeal of Hale's initial decision. In the aftermath, Vitro threatened that it was considering legal action as a result.



For its part, Vitro responded to the judge's latest decisions and claims of improper actions by subsidiaries by noting it will proceed with its restructuring in Mexico and that its most important assets are minimally impacted, if at all, by Hale's latest ruling.



-Brian Shappell, CBA, NACM staff writer

Exports, Business Confidence Spiral Downward


There’s no way to dress it up nicely: a near $7 billion drop in exports between September and October and a trade deficit significantly exceeding $40 billion is abysmal news for the U.S. economy and its small- and medium-sized businesses. It’s yet one more blow to confidence that new numbers show was already faltering thanks largely to partisan gridlock among federal lawmakers.



The U.S. Census Bureau and Bureau of Economic Analysis unveiled unsettling trade statistics this week showing total October exports of $180.5 billion and imports of $222.8 billion, a goods and services deficit of $42.2 billion. The revised deficit figure was $40.3 billion in September. The $6.5 billion drop in goods and additional $300 million decreases in services exported for October represents the largest month-to-month total exporting slide since January 2009.

The news should do little for business confidence, which statistics unveiled by the National Federation of Independent Businesses this week before the new trade numbers could even be factored in illustrate is not far from the historically poorest levels. The NFIB Small Business Optimism Index dropped 5.6 points in November to a level of 87.5. The monthly index has been lower only seven times since its inception in 1986. And this can’t even be blamed on “Super Storm” Sandy – the East Coast states affected worst by the storm and its aftermath were excluded from this month’s numbers to avoid event-based distortions.



NFIB Chief Economist Bill Dunkelberg argued: "Washington does not have the needs of small business in mind; between the looming ‘fiscal cliff,’ the promise of higher healthcare costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism.”



Key categories “Expect Economy to Improve” and one measuring potential for positive “Earning Trends” each declined in excess of 30% in the latest data.



-Brian Shappell, CBA, NACM staff writer

Economist: Trade Wars, Resource Hoarding Likely Fallout of Downturn


The stress of financial crisis makes nations do a lot of things that distort the normal patterns of the global economy. Trade wars take place as nations try to protect their domestic markets at the same time that they attempt to penetrate other markets with aggressive prices or the establishment of subsidies for their own producers. Within the last few years, there has been another dimension to this protectionism: nations highly developed and less so alike hoarding natural resources.

The hoarding takes the form of buying up commodity production by state agency, locking in commodity production with long-term agreements and stockpiling what that nation can control. A recent series of reports suggests that these actions will become more common and more dangerous in the future.

The three most important threats to the global economy will come from distorted pricing, unreliable supply and uneven distribution of key resources. The hoarding of these commodities will take product off the market, thus driving prices higher regardless of actually supply availability. This will apply to food commodities, metals and oil.

In such events, the supply situation would be upset, as many of the producer nations will not know what the real demand and making price projections will be far less reliable. Only some nations will have the ability to stockpile, and that leaves the poorer states without access to the commodities needed. The expectation is that famine could become widespread, and commodity shortage in the industrial sector will leave many nations without the ability to grow their economies fast enough to contend with their immediate societal needs. Expect the most affected parts of the world to be in Africa and South Asia, where volatility could, in turn, become far more serious.

-Armada Corporate Intelligence
 

Several Key Nations Score Poorly in Corruption Study


An annual report ranking the most and least corrupt nations found most economic powers outside of the top 10 and important emerging economies lagging woefully behind the level considered neutral.  

Denmark, Finland and New Zealand each scored a 90 out of a possible 100 in Transparency International's Corruption Perception Index (CPI), given them a share of the distinction as the least corruption nation on the planet. The trio was followed by Sweden and Singapore to round out the top five.

Among the world’s largest economies, Germany placed 13th (79 rating), Japan 17th (74) and the United States 19th (73). The power trio lagged slightly behind Canada and the Netherlands, which tied for 9th with a CPI score of 84.

On the flip side, two-thirds of the countries ranked by Transparency International fell below the 50 mark that separates those doing well from those performing poorly in metrics tracking sovereign corruption. None of the four BRIC’s nations scored above 50. India ranked a shockingly low 74th (36 score), putting it at an identical level with Greece. Russia, sadly to the surprise of few, fared even worse with an abysmal rating of 28. That level was equal to that of Honduras and Iran.

-Brian Shappell, CBA, NACM staff writer

Senate Approves Russia PNTR Bill in Landslide Vote


On a 92-4 landslide vote, the Senate today approved H.R. 6156, a bill that would establish permanent normal trade relations (PNTR) with Russia. The bill now heads to the President's desk for signature into law.

Specifically, the bill repeals the Jackson-Vanik amendment, a Cold War relic that makes U.S. preferential tariff rates on Russian products conditional on the country allowing Jews and other minorities to emigrate freely. Its presence on U.S. books is considered discriminatory, meaning Russia has, since joining the World Trade Organization (WTO) in August, been within its rights to increase tariffs on products entering the country until the U.S. repealed the amendment.

The bill's passage means that U.S. companies can begin to take advantage of the concessions Russia made in its accession agreement with the WTO, including increased access to several of the nation's fastest-growing markets.

H.R. 6156 also normalizes trade relations with Moldova and imposes sanctions on Russian human rights violators, particularly persons identified as responsible for the detention, abuse or death of Russian human rights lawyer Sergei Magnitsky, who died under mysterious circumstances in a Russian prison in 2009.

Approval of the bill was not always a guarantee in the Senate, as a group of prominent senators sought to expand the so-called Magnitsky provisions to apply to human rights violators from all countries, rather than just those in Russia. The expanded version of the measure was authored by Sen. Ben Cardin (D-MD) who dropped his objections to moving forward with H.R. 6156 while debating the bill last night. "I hope we will make this statutorily global," he said. "We will have that debate at a later date."

- Jacob Barron, CICP, NACM staff writer

Fiscal Cliff CanĂ¢€™t Stymie Auto Sales


Uncertainty is the enemy of business, and the “fiscal cliff” battle between the Obama White House and Congressional Republicans has continued levels of uncertainty well beyond an election that was supposed to set more of a clear path, one way or another, again. Still, one business segment in the United States appears to be immune, at least in recent weeks.

Automotive sales surged at the best clip in more than four years, according to statistics unveiled Tuesday. Sales in the category increased by 15% to a level of just over 1.1 million for November, as consumers ignored the potential for tax increases and a government standoff in deference to replacing aging cars and (non-industrial) trucks. Experts also note that the Hurricane Sandy aftermath helped substantially in providing a regional bump in the Northeast.

The news was positive, somewhat surprising and almost certainly needed/helpful since it came about 24 hours after the Institute for Supply Management reported manufacturing levels at their lowest domestically since summer 2009. The disappointing results, unlike those of auto statistics, were pinned by the Institute almost exclusively on the fiscal cliff budget issues in Washington, D.C. And the index wasn’t just a little off – its troubling 49.5 reading was below the 50 mark that divides expansion from contraction. Even during the recession’s massively underwhelming early recovery days, manufacturing generally tracked above the 50 level.

-Brian Shappell, CBA, NACM staff writer
 

Four Reasons Fourth Quarter Will Disappoint


This is often the quarter that makes or breaks the economy, as this is the moment that the consumer rides to the rescue in an economy that relies on consumption for 80% of the nation’s GDP. The retailers do not refer to the days after Thanksgiving as Black Friday weekend for nothing. There is a pessimistic sense that economic growth will fall by over a point, and the average will be between 1% and 1.5%. Some of the more pessimistic assertions predict the rate will be less than 1% for the quarter. That takes annual growth down an anemic level.

The reasons for all this pessimism vary, but most of the analysts hold that four factors are playing a part. The first of these is the massive storm that hit parts of New York and New Jersey could not have been more badly timed. The economic damage from Sandy was staggering—estimates are running between $80 and $120 billion. The loss of business is not calculable at this point, but the retail community in the region has already reported the slowest period of sales in decades. The loss is made worse by the timing, as this is the portion of the year that matters the most to business. If a silver lining exists, it is that next year the impact will see the reverse, assuming that the money for rebuilding is forthcoming. Traditionally, a disaster like this one is followed by significant economic growth as communities are put back together.

The second reason to worry is that consumers are not responding as aggressively as had been expected earlier in the season. It would appear that the consumer is not yet enthusiastic about going into debt to buy presents. As such, they are reacting more frugally than expected. The Black Friday numbers were decent, but the details showed that consumer snapped up the big discounts and shunned virtually everything else.

The third reason to fear a bad fourth quarter is the too familiar by now "fiscal cliff" fiasco. The business community and the consumer fully expect the economy to be affected negatively by all of this. Even if a last minute solution emerges, the damage has already been done. Most business has slowed in anticipation of a bad start to the next year, and consumers are saving their cash in order to be ready for those tax bites.

The fourth inhibition is global. The U.S. has become increasingly dependent on exports very recently. In the last year, the growth of key foreign economies has stalled, and the U.S. export sector has faltered. Europe is a disaster that shows no signs of abating and even the fast-moving economies have now slowed to a crawl in some cases: China is barely staying above their recession-level growth, while Brazil has tumbled beneath 1%.

-Armada Corporate Intelligence