LOS ANGELES -- Bank of America Corp., under pressure to raise capital and cut risks, is severing lines of credit to some small-business owners who have used them to stay afloat.
The Charlotte, N.C., bank is demanding that these customers pay off their credit line balances all at once instead of making monthly payments. If they can't pay in full, they are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.
I have repeatedly warned small businesses of this risk and am almost-universally laughed off.
Folks, this is personal experience speaking here. In the early 1990s I had a very good friend who ran a small manufacturing outfit for highly-proprietary, very expensive devices. Nice stuff, good quality, good guy. Straight-up no-BS dude. He had an operating line from the bank where he had done business for 20 years.
One day he got a phone call: His credit line was being pulled.
He had never been late, business was fine, his financials were ok, he had no problems with trades, making payments on time, taxes or anything else. The bank simply needed to reduce its portfolio and he was "it."
He was done overnight. Literally.
When I ran MCSNet I had our bankers literally pawing me every time I went in the place or talked to them about anything. They were constantly trying to get me to take an operating line of credit along with whatever other facility they were pushing this day or that. They knew damn well that we had a hell of money in their bank and what our gross receipts were like, since they literally saw them on a daily basis. They knew what our payroll was too since they cashed the checks and took the tax deposits (this was before EFPTS online; tax deposits were made with coupons at the bank.)
Several times over the years I looked at their loan commitment paperwork. In every single case I found some term or combination of terms that would allow them to yank that credit line any time they wanted.
I was always assured that "they'd never do that" but in the end that's crap -- they both could under the contract and I assumed they would if for any reason they felt it was to their advantage to do so.
I never borrowed a nickel.
One such customer, Babak Zahabizadeh, was told in a letter that the $96,000 debt carried by his Burbank messenger service must be repaid Jan. 25. A loan officer offered multiple alternatives over the phone that Zahabizadeh called unaffordable, including paying off the debt at 12 percent interest over two years. That's about $4,500 a month, nearly 10 times his current interest-only payment.
Bluntly: Babak is a fool. He got in debt far enough that he couldn't pay it off immediately. And if he could pay it off immediately why take the loan in the first place? There's no reason to -- the interest, even if low, is an operating cost you don't need to pay!
"If small businesses are going to lead the way out of the economic doldrums we now face in this country, they must have access to capital, not only to hire more people but to protect the jobs they are currently providing," Hauge said.
Small business can only lead the way out and is only viable if it can generate enough cash flow and operating profit to expand on the merits.
Doing so on credit is a gamble and you're gambling with other people's money.
MCSNet, as an Internet company, was in the unenviable position of having to roll over our technology about every 18 months. This was insanely capital-intensive and what's worse is that IRS depreciation rules meant we had hardware on the books long after it had any economic value at all. As a consequence any material error in vendor or product selection during one of those replacement cycles and we were done.
That risk belonged properly to the shareholders and, as the majority shareholder, that meant the risk was in large part mine. I took that execution risk with the operating capital of the firm and did so in a form and fashion that allowed us to rebuild that capital and have the ability to make those investments as required to grow the business. A proper business plan, which you damn well ought to have drawn before you open the doors and which you should keep updated, will show you whether what you intend to do at the outset has a decent probability of actually working without using this sort of leverage and taking the risk of having the rug pulled out from under you.
Most small businesses do not write such plans and do not keep them updated. This is a critical error and when you compound it by taking on leverage that you cannot get rid of on short (or no!) notice when your line gets yanked you find yourself utterly and completely screwed.
Let me reiterate: The reliance on "credit" as opposed to capital is a critical error in small business planning, and indeed in business planning of all sorts.
This is an inherently-unstable paradigm and we must abandon it!
Manufacturing activity in the central Atlantic region pulled back in August after stalling in July, according to the Richmond Fed’s latest survey. The index of overall activity was pushed lower as growth in new orders and shipments declined further into negative territory. Employment remained in positive territory but grew at a pace below July’s rate. Other indicators also suggested weakening activity. District contacts indicated that backlogs and capacity utilization continued to contract, while delivery times turned negative. Moreover, manufacturers reported that inventory building remained on pace with July.
Looking ahead, manufacturers’ optimism regarding future business prospects dropped considerably in August. An increasing number of firms anticipated slower growth across the board for all future activity indicators.
That ain't good. How bad is it? Let's look:
There's no good in here. New orders and shipments had been mildly negative, but now are severely underwater. Backlog has collapsed as has capacity utilization. While employees has not yet gone negative, workweek has, which fits with capacity slack, and layoffs are next - probably imminently if not happening right now.
Prices paid .vs. received haven't calmed down much at all. In fact, the latter seems to imply some material pushback in July and August. The amusing part of this picture is that forward expectations on received prices continue to advance. Those better turn into realization rather than disappointment, or we're in big trouble.
Ditto on the rest - it appears we have the Unicorn brigade out in force in the six month expectations, unlike Philly. Again, the belief in a "temporary and small soft patch" is good, but if it turns out to be unrealized, well, then it's bad.
The best summary is this: It sucks now but we expect a better tomorrow.
You choose what to believe.
The Attorney General's office of Illinois has disavowed the "press release" referenced in this morning's article.
As a consequence, the entirety of the previous article has been removed.
.... I see some of the same things Goldman Sachs does.....
As Zerohedge points out (hattip to Tyler, of course) there's some real issues here.
The last table is the most-expositive:
The problem here in this table is the expectation for P/E and reported earnings even if you believe the bullish side. Remember that the current forecast for 2011 is S&P earnings near $90. This is where the forecasts are, and which I have maintained for the last year is pure lunacy. Yet these have not been meaningfully ratcheted down.
Even under Goldman's "Best Case" they're seeing $85, which is a nice little haircut from $90. And they're also expecting to see 20x on the P/E, which is ridiculous. At a more-normal 15x the best case falls to an SPX of 1275, which is not much better than where we are now.
And that's the good case. If reported earnings are $70 (their "median case") and P/E is 15, we're now talking 1050 for the end of year 2011 on the SPX, a roughly 10% haircut from where we are now.
The "Bad Case", however, is where I'd like to focus. If we're talking about $42 in reported earnings and a 10x P/E, well, we're not talking operating or trend earnings either. We're talking about the potential for a market to trade under 500 during 2011.
I get scared with Goldman and I see some of the same problems and possibilities, as Goldman's "research" has been an insane fade for years. When they get bearish, they're usually buying and lying, and when they're bullish, they're using distributing and selling. That's history folks, and you can look at their calls over the last couple of years and find a hell of a lot of inverse correlation with what really happens. At some point you have think it's not just darts on the board.
Nonetheless, this is an interesting counter-balance to the Teppers of the world, and in addition, it points out that even with the "QE" games (which Goldman assumes WILL happen) there's no particular reason to believe that this will be bullish for the markets - or for you.
The new format for the blog (being under AKCS-WWW) has now been "in force" for a couple of weeks, and I wanted to update everyone on some of the new features - and how you can make them work for you.
There are more improvements coming over time - the AKCS software is continually in development, and on average I'm posting 2-3 small code "commits" a week, and typically one large one on a monthly basis or thereabouts. Much of the codebase changes are invisible to users, but all are intended to dramatically improve the user experience.
Thank you for being loyal Market Ticker readers over the last three and a half years, and I look forward to continuing to publish articles in The Market Ticker that you find both topical and interesting in your daily economic and political life.
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