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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (16513)	11/21/2004 8:22:48 PM
From: Elroy Jetson	Read Replies (2) \| Respond to of 116555

An increased level of C&I loans can presage an economic turn-down. Businesses frequently borrow to finance their ballooning inventories when sales don't meet expectations. But reading a significant meaning into such a tiny statistical twitch is best left to charlatans and mystics. MZM economagic.com Anyone caught obsessing about the statistical noise causing the tiny 0.18% decline in last months MZM should ask themselves this question. Why they weren't far more excited about the previous one-month declines in MZM? Over the past two years there have been four and they were far larger. .

To: mishedlo who wrote (16513)	11/22/2004 9:31:23 PM
From: GraceZ	Respond to of 116555

Now, why after 4 years would C&I tick up, just as it appears (not just in the US but worldwide) that housing is starting to slow? The two aren't related. You have to remember why it is that businesses take out bank loans (as opposed to using money they get from the equity or bond markets or their retained earnings). They use them to finance inventory and expenses related to near term revenues. Like my buddy Tom who runs a decorative and restorative painting biz. Last summer he won his first million dollar bid. The job will take a year, his company will profit 250k, that means 750k will be expenses he has to lay out over a year in advance of any money he gets paid. He'll get paid in stages and then the client will retain close to 10% for almost a year after he finishes the job. Now all of a sudden you can see the cashflow issues that a small company that usually has 250-500k in revenues would face if he tried to wing it without setting up financing ahead of time. I'd say he needs, at the very least, 100k to 300k additional in a line of credit to do that job and keep doing all his regular work. The cost of the financing is factored in the bid. His business has zero to do with housing or consumer spending, as do most of the companies who work for other companies or institutions. What would screw him up is a sharp rise in financing cost, material or labor because remember the cost of that is bid up front. OTOH, if a business is wanting to do something which involves risk like expand, or open new branches, or go into a new line of work, they use contribution capital or bonds, not bank loans. You use bank loans to factor your inventory and to get you through the cash flow hell of an expanding business. Is this a necessary thing for a downturn to begin that EVERYONE has to believe a consumer led recession will be delayed until 2010 or whatever? Those companies which lead coming out of a consumer lead recession (which last a year or two?) are those that continue to invest in capital improvements during the recession. What we came out of was not a consumer lead recession, but a collapse in capital spending. A great deal of the capital equipment in the world right now has the shelf life of fresh vegetables. This wasn't always true. I have a photographic processing machine which is pretty close to state of the art and is over 15 years old. In the same time period, I've been through 10 generations of computers, software and digital printers. Some would make nice boat anchors. Companies will have to continue to invest regardless of near term prospects in the economy. A retailer, slow biz or not, who fails to make the move from bar codes to RF tagged inventory stands to get creamed by one who does. A pharmacuetical company that fails to adopt modern drug discovery equipment will be left behind by one that does, a service fleet which doesn't incorporate mobile computing technology and state of the art scheduling/fuel efficiency software will not be able to stay in biz. It's a dog eat dog world and a consumer lead recession which might last a year or eighteen months is the least of their worries. You can't implement these kinds of changes while you are working "balls to the wall" (Thanks Don Hillen for that colorful expression) you do them when you are waiting out the next expansion. Business investment up and housing down but that to me seems a prelude to disaster. That's because you think demand drives business investment. Businesses invest long before demand shows up. Just think if you were a home builder and you waited for housing demand to be a sure thing before optioning land. What did you do when we had the last housing mark down? I remember a lot of bitching and moaning about people being under water but it did not lead to wholesale foreclosure activity. Because the commercial sector was also hit I do remember it trashed more than one bank balance sheet. I remember buying Maryland National Bank stock for 1 5/8, or .7 to book after they'd written off millions in bad commercial RE loans and everybody assumed that it was the tip of the iceberg. They were taken out at $7 in less than a year! We also bought a few houses that could be rented for twice the mortgage payments....I love RE consolidations. Nothing would make me happier than to see RE fall +20. But you know, you can't always get what you want.