Credit Managers' Index Expected to Rebound

The Credit Managers’ Index (CMI), due for release by NACM on Thursday morning, isn’t expected to set any records, but the February statistics do appear set to track more favorably than in January.

One of the most important factors to watch, sales, is expected to show an uptick even though non-business factors seem to be playing a significant role as a drag on the category. “The strength of this indicator can’t be overlooked, as this signals substantial activity despite all the concerns registered over the ‘fiscal cliff,’ the debt ceiling and the sequester” said NACM Economist Chris Kuehl, PhD. “However, the impact has been hard to figure out. On the one hand, it is pretty obvious that the lower GDP number from the fourth quarter was directly related to fiscal cliff concerns within the business community, but the latest revisions show no dip into recession, as first thought.”

Unfavorable factor index categories are expected to show progress or at least stability. Also expected to track well are service-side indicators, in part because of what appears to be the long-awaited rebound of the housing sector. Granted, it has a long way to go. The manufacturing sector likely will be dicier in the February CMI.

Words like “caution” and “reluctance” appear to be the most bandied about in the manufacturing world, again, most likely because of ongoing problems to get things done by Washington, DC lawmakers. And, since manufacturing-based decisions must be made in advance, confidence in where things are going is crucial. That has been largely absent in advance of the February CMI.

“All of this is taking place against a backdrop of political drama that many believe will cause serious economic dislocation before all is said and done, and it seems to be the manufacturing sector that is harboring the most concern,” said Kuehl. Fortunately, with some of the most stressed sectors on the service side making what look to be a series of comebacks, it should be enough to offset the uncertainty that is dogging manufacturing at present.

-National Association of Credit Managment

The February CMI, with full statistics and analysis, are available now at

'Significant Credit Strengths' Not Enough to Save UK's Pristine Rating

Moody’s Investors Service caught a lot of attention going into the weekend by downgrading the United Kingdom’s domestic and foreign-currency government bond ratings by one notch. However, what’s been covered significantly less in the mainstream media headlines is the ratings agency’s bright outlook on the UK’s stability going forward.

Moody’s noted it lowered the credit rating because of continued growth outlooks in the medium term in part because of its own austerity measures along with spillover from problems with its debt-hobbled European Union counterparts. While it predicted the slower growth will stretch into the second half the decade, Moody’s got significantly less attention for keeping the UK in a “stable” category and, within parts of its statement explaining the downgrade yet a stable outlook, seemingly gushing about the sovereignty:

“The UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include a highly competitive, well-diversified economy; a strong track record of fiscal consolidation and a robust institutional structure; and a favourable debt structure, with supportive domestic demand for government debt… the underlying economic strength and fiscal policy commitment which Moody's expects will ultimately allow the UK government to reverse the debt trajectory.”

-Brian Shappell, CBA, NACM staff writer

Russia Set to Disrupt Ag Markets (Again)

The assessment of the commodities markets in the world was already complex and threatening. The U.S. drought is not showing any signs of breaking up, and it is already clear that wheat harvests will be less than in previous years. The situation is going to get much worse and soon as Russia apparently is preparing to buy more grain from the western states than it has in many years.

The crop in Russia was a disaster, and there are already serious shortages months before the next harvest is due. The assessment of this year’s output is that it will be worse than last year, setting the scene for some notably high crop prices in the very near future.

Unless the spring rains arrive as they have in past years, the United States will be heading into the system with very low soil moisture, meaning corn, wheat and soybeans will be affected. Back in the 1970s, the Soviet Union executed what was referred to as the “Great Grain Robbery,” bringing over 10 million tons of wheat from the U.S., creating a domestic shortage here. That now seems to be the setup for this year unless there is some sizeable rebound in supply. Given the forecast for U.S. farming, such a rebound appears unlikely.

-Armada Corporate Intelligence

Small-Business Credit Quality Slides Going into Early 2013

Despite hope of clarity-based improvement after the election and avoidance of the fiscal cliff (albeit temporarily), the credit quality of U.S. small businesses decreased in a troubling, considerable fashion in 2012’s final quarter. Analysts in a new study report that the bad news can’t be hung on the easy scapegoat, Hurricane Sandy.

The Experian/Moody’s Analytics Small Business Credit Index noted that improvement in small business’ aggregate credit quality is expected to rise by late this year or early 2014. However, that is a part of the scant good news in the index, which declined 6.8 points to land at a historically low level of 97.3. The authors noted that reduced personal income growth drove a domino effect of lower retail sales, more cautious interest in investment on the part of the businesses and, in an increasing number of cases, borrowing to cover payroll expenses. It all adds up to smaller outfits having problems paying down credit obligations. The study noted:

“Balances less than 60 days overdue rose nearly 20% on the quarter…this was enough to push the share of delinquent dollars higher, to 9.7% from 9.4% in the third quarter...Nearly all of the climb is the result of firms that previously had been current on their payments falling behind.”

The study also dispelled the notion that a driver of the poor results could be tied to the recent storm, noting Sandy had very little real impact on statistics for the quarter.

- Brian Shappell, CBA, NACM staff writer

For more on this study, view this week's edition of NACM's eNews, available Thursday afternoon. Watch your inbox for the email link, or go directly to the eNews page at

New Route Means New Delays for Keystone XL Pipeline

Nebraska's largest electric utility announced this week that last month's revision to the proposed route for the Keystone XL oil pipeline would delay work on transmission lines for the project. This means more progress on the pipeline will be delayed until 2015 at least, even if it receives presidential approval.

TransCanada, the company actually building the pipeline, had originally set a deadline for construction of transmission lines to be completed by the end of 2014. But Nebraska Public Power District (NPPD) officials admitted that the revised route, approved by Nebraska Governor Dave Heineman (D) in January, would delay the project, NPPD Chief Operating Officer describing the original deadline as "wishful thinking."

The pipeline's original route was rejected by President Barack Obama early in 2012, but revisions have continued since then to make the pipeline less of an environmental eyesore. Specifically, the U.S. State Department, which has jurisdiction over the project because it crosses the U.S.-Canada border, sought proposals to reroute the pipeline around Nebraska's environmentally-sensitive Sand Hills region.

TransCanada made the changes and received Heineman's approval, but the revision also complicated the other infrastructure changes that were necessary for the pipeline's construction.

The project has been a lightning rod for controversy, with thousands of protesters descending on Washington earlier this month to protest the pipeline. Their objections are economic and environmental, with opponents arguing that the project won't create as many jobs as TransCanada claims, and that the tar sands oil the pipeline will transport from Alberta, Canada to the U.S. Gulf Coast will only further increase America's dependency on fossil fuels.

- Jacob Barron, CICP, NACM staff writer

Credit Conditions Unchanged, Small Businesses in "Maintenance Mode" inLatest NFIB Survey

Credit conditions remained unchanged in the latest National Federation of Independent Business (NFIB) index of small business optimism, which increased 0.9 points to 88.9 in January. Despite the increase, 88.9 remains one of the lowest readings in the survey's 40-year history, indicating that small businesses are keeping their heads above water by reverting to "maintenance mode" in terms of spending and borrowing.

Only 6% of survey respondents said that all their credit needs were not met, the same reading as December's. Thirty-one percent of respondents reported that all their credit needs were met and only 3% considered a lack of financing to be their business' top problem. Another 31% of all owners reported borrowing on a regular basis, which was up two points from December's readings, but still a historically low figure.

News on planned capital outlays by small businesses was even worse, with the net percent of owners expecting better business conditions in six months stuck in a net negative 30%, a five point improvement from December but still the fourth lowest reading in nearly 40 years. Surveyed businesses seem content to maintain their current situations, focusing less on investment and growth and more on reducing inventory.

Economic uncertainty from Capitol Hill continues to be the dominant narrative driving respondents' pessimism. "Bad news continued to dominate the information flow to business owners. Gross Domestic Product (GDP) actually fell in the fourth quarter, and grew less than 2% for all of 2012. A sharp decline in defense spending subtracted about 1.3 percentage points from the growth rate, a warning as to what might happen if sequestration actually occurs with no deal to change its magnitude and timing," said NFIB Chief Economist Bill Dunkelberg. "A sharp decline in inventory building also knocked a point or more off the GDP growth rate. But even if those events had not occurred, overall growth would have still been around 2%."

- Jacob Barron, CICP, NACM staff writer

Industries to Watch: Eastern U.S. Gaming Not A Long-Shot But No Sure Thing for Creditors

The appetite for gambling in the United States is one of those things that never seems to fall out of fashion. And, while there has been quite a boom in the Eastern U.S. for legalization of gaming operations in recent years, the surge could cause some operators to eventually go bust to the surprise of some flat-footed creditors.

Maryland is just the latest state to allow, by voter referendum in this case, expanded gaming operations at several sites throughout the state, which will include table games as well as “slot-parlor” offerings. Ohio is a recent player in the market, too, with several operations. This adds to relative newcomers in recent years like Pennsylvania (there are at least three casinos running within the borders of Philadelphia alone), West Virginia and Delaware, not to mention the many longtime operators of Atlantic City, NJ and a couple on Native America land in Connecticut.  What does that mean to suppliers of everything from gaming machines to carpeting to food services to cups for beverages that end up in these casinos? It means there is plenty of competition and real potential for market saturation, according to Patrick Spargur, ICCE, credit & collections manager with Bally Technologies Inc.

Large appetite for gaming or not, some operators likely will face the reality that there is not enough demand for everyone to thrive or even survive without solvency issues. Spargur, who will moderate the May 22 FCIB-designed educational session “Working Capital Management & Cash Forecasting” during Credit Congress in Las Vegas, told NACM some that he believes some companies will indeed face danger because of the high number of operators.

“There’s just a lot more competition in the surrounding region, and it’s major competition,” Spargur said. “Analysts I follow say, in Atlantic City alone, three to five properties need to be either shut down or converted into boutique hotels. There are too many players: Ohio is pulling [customers] from Pennsylvania; Pennsylvania is pulling from Atlantic City; West Virginia is pulling from Pennsylvania.”

In short: the spreads for various legal casino operations are going to be different from place to place and need to be monitored like a hawk by credit departments of direct suppliers to them and those upstream alike. It serves as a reminder that is critical to know an industry well, beyond overall numbers for a large region.

-Brian Shappell, CBA, NACM staff writer

Industries to Watch is a new feature of NACM’s blog (first run) and eNews. It will be a semi-regular look at areas where business credit professionals need to be focusing on for potential solvency issues because of a bevy of reasons (supply glut, government regulations or policy changes, dropping demand, etc.).

Venezuelans Slammed with Devaluation

In an announcement timed to take the bulk of the population by surprise -- just as the majority of the country was heading off to enjoy a national holiday -- the Chavez government sprung a plan to devalue the currency (the bolivar), which analysts believed was being artificially supported.

The exchange rate has gone from 4.3 bolivars to a dollar to a 6.3-1 ratio. That is a significant enough shift but still falls way short of what most suggest would be an accurate ratio. The black market exchange rate is nearly four times the new rate. Within hours of this announcement, the population packed stores trying to buy imports at the old exchange rate. The moment the new rates came to be, that surge ended with a thud. The population is now far poorer than it was at the start of the weekend, and the government is as shaky as it has been in years. Hugo Chavez made the decision from his hospital bed in Cuba, and there are signs that even his vice president was taken by surprise by the whole thing. The public outcry is dramatic and seems people are erroneously blaming interim leader Nicolas Maduro instead of Chavez.

The bolivar still remains overvalued, and demand for dollars is as great as ever. For years, the Chavez regime has deliberately kept the bolivar higher than is remotely justified as this essentially subsidized the economy. He counted on the dollar revenues from oil to cover this bet, but the tactic has been less than effective for the past few years.

The cost of bringing oil to market in a given nation is the key to how much that nation gets from its key resource. It is hard to get accurate data on Venezuela, but the estimate is that it is costing around $100 a barrel, nearly triple the cost faced by those in Saudi Arabia. This leaves almost no margin at all. The upshot is that the country is not earning the dollars it used to – that compromises its economy as a whole. The country is in deep trouble no matter what direction it chooses to go. Maduro will likely be the one that faces the immediate consequences of Chavez’s increasingly erratic decision-making.

-Armada Corporate Intelligence

Update: Labor Deal Back on at West Coast Port

Update: The West Coast port deal that seemed threatened by a group of holdouts was finally ratified by said dissenters late last week, about two weeks after holdout labor organizations shockingly voted against ratification.

While all seemed well on the shipping front with a (tentative) December labor deal on the West Coast followed by early this month on the East Coast, a wrench has been thrown into a California deal. The pact involving the parties associated with the busy Los Angeles/Long Beach port – the International Longshoremen’s Association and Union’s Local 63 Office Clerical Unit and the Harbor Employers Association – was delayed after clerical workers for three organizations rejected the contract over additional concession demands. Said contract had been agreed to by a total of 12 organization representing port workers following a costly, eight-day work stoppage that stretched into early December, the peak shipping season based on holiday-related retail demand.

The National Retail Federation, which was extremely critical of the parties for failing to come to a deal before the December disruption, pleaded publicly since early February ratification failure that they parties needed to avoid another work stoppage through the duration of the newly revisited dispute and potential restart of negotiation. The December work stoppage in Los Angeles/Long Beach resulted in 75% of the largest U.S. port's capabilities being shut down for just over a week. Some estimates noted that upwards of $1 billion in goods per day were blocked during the dispute.

-Brian Shappell, CBA, NACM staff writer

CMI Celebrates 10 Years of Remarkably Accurate Economic Predictions

The latest edition of the National Association of Credit Management's (NACM's) Credit Managers' Index (CMI) marks its 10th-year anniversary of providing financial professionals, economists and policymakers with a startlingly accurate forecasting tool.

Since its inception in January 2003, the CMI's methodology has undergone a number of revisions, but never stopped being an immensely powerful economic predictor. In 2007 it was even able to tip analysts off to the start of the "Great Recession" in December 2007, showing a noteworthy decline in October of the same year.

Throughout the recession, the CMI reflected a remarkable sensitivity to the intricacies of the economic downturn, and resisted the month-to-month swings that characterized other economic indicators. Eventually it anticipated the recession's end as well, showing signs of market stabilization and nascent growth as early as February 2009, while the actual recession came to an end four months later in June.

The CMI's strength as a forecasting tool comes from the insight of credit and risk management professionals, whose responsibility it is to know what's coming next. "I think it's the nature of credit management," said NACM Economist Chris Kuehl, PhD. "Credit managers are as concerned about the condition of their clients 15, 30, 60 and 90 days from now as they are today. The tendency is to think ahead."

Moreover, the structure of the CMI survey eliminates the opportunity to speculate. Other economic indices ask respondents what their company intends to do in the coming months, but intentions don't always align with reality. "As soon as you start getting into that kind of conjecture, you kind of weaken the data," said Kuehl. "When responding to the CMI question, 'Do you have more credit applications?' there isn't a lot of room for interpretation. You're getting responses that have to do with credit applications and the status of accounts, and most of that stuff is oriented to the future."

Over the last decade these factors have combined to create an unrivaled forecasting tool that's relied upon by those in the highest levels of finance and economic policy. As participation continues to grow and people continue to recognize its value, the CMI looks poised for another winning decade.

For more on the CMI, or to participate, click here.

- NACM staff

Mood Improves Among Young Executives

The latest survey of the executives active in the Young Presidents’ Organization (YPO) is somewhat more encouraging than the one conducted last year, but there are still far more who have a negative outlook than those with a positive one.

Last year, 33% thought that business conditions were improving – that improved to 39%. While it is progress, it still means that some 60% are still skeptical. The main motivation for the improved attitude was the last minute fix that kept the nation from flying off the fiscal cliff. However, the present problem is that many see the next crisis as imminent. The overall impression is that there will be nothing on the horizon but wave after wave of government-inspired crises.

The most often-cited issues were the expiration/consumer impact of the payroll tax holiday and the consequences of sequestration. These would be the respondents that would be most accurately described as worried about the short term. They contrast with those who have more long-term concerns. These are the respondents who put the loose monetary policies pursued by the Federal Reserve and the heavy borrowing activities of the government at the top of their list of issues.

The reactions of those in the YPO reflect the industry sector in which they are involved. Those closest to retail and the consumer are the least supportive of the tax. Those in the banking and financial sectors are most concerned about long-term issues like inflation. Once again there is the issue of whose ox is being gored.

-Armada Corporate Intelligence

More Shooting of the Messenger? U.S. Justice Dept. Ready to Bear Down on Ratings Agency

(Update 2)  The U.S. government confirmed what started as widespread speculation from media sources and eventually the defendant, itself, late Monday by filing a lawsuit against one of the "big three" credit ratings agencies.

Just weeks after the European Union voted on measures essentially designed to censor overly-negative analysis, true or not, by the agencies, the U.S. federal government is taking aim, but going after just one of them. Coincidentally (or perhaps not at all), the target is the only of the three agencies to have downgraded the United States’ prized “AAA” credit rating.

Standard & Poor’s, and later the federal government, each confirmed Monday that the U.S. Department of Justice filed suit against the firm in civil court. S&P is being targeted for poor ratings/analytical performance, like others, in the run-up to the 2007 housing collapse that played a role in the eventual downturn, both domestically and internationally. S&P was also accused by some experts of having commercial incentives and an interest in padding the ratings in a positive way because some of the products and services it either sold directly or from which it benefitted.

S&P vehemently denied wrongdoing in a statement Monday and noted that the “failure of virtually everyone” in predicting the full magnitude of the eventual housing downturn. It is worth noting that in August 2011, S&P downgraded the American sovereign credit rating on what it described as unease with a political “brinksmanship” that shook its confidence in the nation’s ability to deal with its large debt with the highest level of proper or efficient manner. It also characterized policymaking among current lawmakers as “less stable, less effective and less predictable” than in the past, which clearly did not sit well at the time and since with members of Congress.  

It’s the latest shot against S&P from sovereignties unhappy with its ratings. The last one, however, involved Moody’s Investment Services and Fitch Ratings as well. EU leaders voted to approve legislation last month that restricts the timetable in which any of the three agencies could release news of sovereign credit ratings related to any member nation in Europe. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or malpractice on the agencies' parts. Statements all but confirmed the leadership collectively was angry at the ratings agencies for lowering the ratings or warning of those with massive and escalating debt problems as well as its desire to “reduce the reliance,” if not importance, of the agencies on the global stage.

-Brian Shappell, CBA, NACM staff writer

Union, Shipping Alliance Strike Tentative Deal to Keep Port Labor Peace

The two sides locked in a contract talks affecting activity at more than a dozen Eastern U.S. ports announced late Friday that they have come to a tentative agreement and face only small hurdles in finalizing a deal.

During a recent extension period to the existing contract under the direction of Federal Mediation and Conciliation Service Director George H. Cohen, the International Longshoremen’s Association and the U.S. Maritime Alliance Ltd. came to agree on the major points of a new collective bargaining agreement. Granted, local agreements still need to be worked out and ratification is still necessary, but the greater negotiation has become a done deal. Still, scant details are being released by either organization.

"We have come away from these Master Contract negotiations with landmark agreements on automation, protection of chassis work and powerful jurisdiction language," ILA President Harold Daggett said.

The contract between the two organizations was set to expire during in late December. Importantly, the two sides agreed to extend. The deal came as a relief to companies involved in trade, especially after the last time a port-involved contract dispute arose – in early December, also involving the Longshoremen, but in the Los Angeles/Long Beach area of California – a majority of the largest U.S. port's capabilities were closed for just over a week. Some estimates noted that upwards of $1 billion in goods per day were blocked during the dispute.

Similar daily losses were forecast in this instance, and a lockout or strike would have affected 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.

-Brian Shappell, CBA, NACM staff writer

CMI Sends Mixed Signals, Dips Slightly in January

The January Credit Managers' Index (CMI), published by the National Association of Credit Management (NACM), dipped slightly as it painted the picture of an economy in transition.

To find the kind of variety found in the most recent edition of the CMI, one would have to travel all the way back to 2008, in the months that preceded the slide into the recession. For every sign that things were deteriorating at that time, there was a part of the index that looked solid and unaffected by the impending crisis. Now, however, that transition is showing again, but seems to point in the opposite direction: for every factor suggesting that the economy is still in the doldrums, there are one or two other factors that point to better days ahead.

For example, while sales improved in this month's report, new credit applications declined, signaling potential trouble ahead. "The number for new credit applications is important in that it tends to anticipate the gains some of the other factors will have later,” said NACM Economist Chris Kuehl, PhD. “If there is not much in the way of new credit activity, it is a signal that fewer companies are in expansion mode."

The complete CMI report for January 2013 contains more commentary, complete with tables and graphs and individual data for the manufacturing and services sectors. CMI archives may also be viewed on NACM’s website.

-NACM staff