BUSINESS INTELLIGENCE BRIEF
March 29, 2017
NATIONAL AND INTERNATIONAL NEWS
AFFECTING LOCAL BUSINESS
Short Items of Interest – US Economy
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Dove Gets Hawkish – Over the last several years the most dovish of the regional Fed Presidents has been
Charles Evans of Chicago. He has been a consistent supporter of low interest rates as he deemed the
economy too weak to stand on its own without this support. He has now changed his tune completely as
he asserts that the Fed will likely raise rates two more times this year and that a third is not out of the
question if inflation warrants it. This is an illustration of how the Fed really works and what differentiates
it from others. Evans was a dove when this position seemed the most appropriate for the economy and
now he is a hawk as that is most appropriate. The Fed members are rarely ideologues who stay committed
to some policy regardless of changing circumstances.
Sharp Rise in Consumer Confidence – The survey conducted by the Conference Board shows that
consumer confidence is at a level not seen in 16 years - hitting 125.6 after a reading of 116.1 last month.
The upbeat response is from a survey that was taken prior to the ACA mess and it will be interesting to see
if any of this has dampened enthusiasm in future surveys. The fly in the ointment at this stage is that
consumer confidence has not really translated to increased retail activity so it is not clear how committed
the consumer is to their better mood.
Home Prices Continue to Soar – According to the latest data from the Case Shiller index the price of
housing is surging to levels not seen in over three decades. It is most certainly a seller’s market as there
has been an increase in demand at the same time there has been a drastic shortage of available homes
developing. The demand has been fueled by higher wages and the fact that the older millennials are finally
willing to leave the apartment life. The supply issue has been created by a shortage of construction
workers in key markets and the fact that banks are less interested in construction loans unless there is a
definite buyer on the hook.
Short Items of Interest – Global Economy
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Patience Wears Thin in Argentina – The enthusiasm for Mauricio Macri has started to fray as the expected
reforms have been slow to develop. His poll numbers have been falling and now the population has
started to take to the streets in a demonstration of their frustration. The fact is that Argentina was ruined
by the idiotic policies of Cristina Fernandez and it is unrealistic to think that reform would be swift. The
problem is that Macri promised just that and was counting on global investors to make this a reality. There
has been engagement from the financial community – but not enough and the opposition leaders in
Argentina are ready to exploit the unrest.
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Macron Picks Up Support – The top two finishers in the French election will square off in round two and
neither of them has enough core support to win. They need the help of others. Marine Le Pen is trying to
drift slightly to the center right so she can pick up support from these luminaries but thus far they have
been keeping their distance. Emmanuel Macron needs the support of the Socialists without having to side
with their agenda. He is now starting to get endorsements from important Socialist leaders who are
uncomfortable with either Hamon or Melanchon.
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Impending Chaos in the DRC – The promised elections in the Democratic Republic of the Congo are
increasingly unlikely. It appears that Joseph Kabila will simply keep delaying the vote on security grounds
and that makes a civil war that much more likely. The DRC is barely a country and is best described as a
group of warring factions and warlords who control territory. The possibility of violence is ever present
and the current election mess is just another excuse. The government under Kabila controls no more than
a quarter of the country now and that could be further reduced.
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Hey Kids – Do You Know What Time It Is?
It’s time for the latest edition of the Credit Managers’ Index from the National Association for Credit Management. We have the
privilege of doing the analysis of this data and this is the narrative that accompanies the full report. If you want to see the entire report
complete with all the historical charts and graphs go to www.nacm.org and search for the CMI.
The bloom may have started to fade a bit but the CMI numbers continue to be reasonably strong. As has been pointed out over the
last few months the economy has been in a state of expectation and this has allowed more growth and expansion than might have been
expected otherwise. The markets have certainly been frothy with anticipation but now there seems to be some disappointment setting
in. This survey was taken prior to the ACA defeat in Congress and suggests that there had been some reduction in enthusiasm even prior
to the legislative setback to the Trump agenda. This is typical of a boom fed by expectations – patience wears thin as fast as it develops.
The fact is good numbers still dominate – they are just not quite as good as they had been.
The combined score for the CMI dipped a little from 55.4 to 54.3 and this was despite a small gain in the unfavorable category. The
very high readings in the favorable categories notched last month have faded a little although most of the sub-categories are still above
60. The combined favorable readings are at 60.6 after reaching 63.6 last month. This remains the third highest reading in the last
twelve months. The combined score for the unfavorable reading was 50.2 and that is a very slight improvement over the 50.0 score
from last month. As usual the interesting information lies in the specific sub-categories.
The “sales” score was 61.2 and that is down just a bit from the 62.6 notched in February. This remains the third highest reading in the
last year. The “new credit applications” reading slipped from 62.0 to 60.5 but all three months this year have been over 60 and that
contrasts with the previous year when that 60 barrier was never broken. The “dollar collections” score took the biggest hit as it went
from 63.0 to 56.4. This is worrisome as it suggests that a good number of companies are suddenly struggling to pay their debts and it is
expected that this will start to show up in the unfavorable numbers sooner than later. The “amount of credit extended” also fell but is
still the second highest reading in the last year as it went from 66.8 to 64.4. For the last several months all the good news has been
coming from the favorable readings but this month these scores were generally lower and the encouraging data was coming from the
unfavorable categories.
There was an improvement in the “rejections of credit applications” as it went from 51.4 to 51.6 and this is significant given that
there were slightly fewer applications. There was also an improved reading for “accounts placed for collection” although it has not yet
moved out of the 40s. It is closer though as it has gone from 48.2 to 49.8. The score for “disputes” fell slightly and remains firmly in
contraction territory with a reading of 48.5 after last month’s 48.7. The reading for “dollar amount beyond terms” slumped badly and
that is consistent with the drop in dollar collections noted in the favorable category analysis. It was at 51.0 and slipped back into the 40s
with a reading of 47.4. The “dollar amount of customer deductions” category sported an improvement and is very close to exiting
contraction territory as it went from 47.6 to 48.9. There was a slight improvement in the “filings for bankruptcies” category as well –
moving from 53.2 to 53.8. The overall improvement in the unfavorable category was very slight – the numbers are essentially flat but
that is better news than has been the case in earlier months when the sections continued to show stress. Right now, there are two
categories that are in expansion territory and four that are still in contraction but it is encouraging to note that two of these categories
are very close to the 50-level with readings of 49.8. The hope is that they trend a little higher in the months to come.
Manufacturing Sector - The scores for the manufacturing sector slipped a bit as far as the favorable categories are concerned but there
was a minor (but encouraging) improvement in the unfavorable categories. The combined score for the manufacturing sector was 54.1
and that is down from 55.1. This is still a good number but the trend is not heading in the right direction. The combined score for the
favorable factors slipped quite a bit from last month’s 63.4 to this month’s 60.2. It is still above 60 but only barely. The combined
unfavorable reading improved slightly from 49.6 to 50.0 but it is certainly encouraging to get back to expansion territory – if only by a
slim margin.
The “sales” category stayed positive and actually improved over what it was last month – going from 60.7 to 61.7. The “new credit
applications” category fell out of the 60s with a reading of 59.7 compared to the 61.6 that was notched the month prior. The “dollar
collections” reading was the one that dragged this whole sector down as it fell hard from 64.1 to 56.1. There is some obvious distress
manifesting as companies seem to be struggling to stay current with their debt. The category of “amount of credit extended” also
slipped from the very high reading of last month when it hit 67.2. At 63.4 the numbers still look pretty good and higher than they have
been for the past year.
The reading for “rejections of credit applications” stayed almost steady with a reading of 52.1 compared to 52.3 last month. This is
good news given the reduction in applications for credit overall as it suggests the applicants are generally creditworthy. The “accounts
placed for collection” improved a little and that comes as some surprise given some of the weakness in the favorable. It is now in the
expansion zone with a reading of 50.6 as compared to 47.4 in February. The “disputes” category stayed exactly the same with a reading
of 47.4. Stability is nice but it would be more welcome if it was stable in the expansion zone. The major damage is seen in the category
of “dollar amount beyond terms” and this explains the big drop in dollar collections. This reading went from 52.1 last month to 48.2 this
month. The expectation is that these slow pays will show up in expanded collection efforts in the months to come.
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Credit Managers’ Index Continued
The “dollar amount of customer deductions” improved quite a bit but remains in contraction territory with a reading of 49.2. That is
still better than the 46.1 notched last month. The “filings for bankruptcies” stayed very close to what was seen last month with a reading
of 52.7 compared to 52.3 in February
In general, the manufacturing news has been positive – at least as far as the data from the Purchasing Managers’ Index is concerned
but the CMI data is exposing weakness that is likely to show up later this year. Much of the expansion has been anticipatory – built on the
hope that the big infrastructure plan will come to fruition and right now that is a risky bet.
Service Sector - In some of the previous months the service sector and the manufacturing sector deviated one from another. If one was
going through a bad patch the other might be able to carry the other. This month the two sectors are behaving similarly and that is not
necessarily a good thing. The combined score for the service sector is 54.6 and that compares to the 55.8 that was notched the month
before. The combined favorable reading slipped but remained in the 60s with a reading of 61.0 compared to the 63.8 in February. The
combined score for the unfavorable categories was 50.3 and that is nearly identical to the 50.4 that was noted last month.
The “sales” category slid from 64.5 to 60.6, taking this score back to levels that have been common over the past year. The “new credit
applications” category fell a bit but not hard as it went from 62.4 to 61.3. As with manufacturing the big decline was seen in the “dollar
collections” category as it fell from 61.9 to 56.7. This is a theme this month and a worrying one. Companies that are not staying current
on their debt will soon be showing up in all those unfavorable segments. The “amount of credit extended” remained close to what it was
last month but slightly down from 66.4 to 65.3. The bigger companies with good credit are still accessing larger sums.
The “rejections of credit applications” remained more or less steady with a slight improvement from 50.5 to 51.1 and that is certainly
good news since the level of new credit application has weakened a little. The “accounts placed for collection” was exactly the same as
last month with a reading of 49.0. It is tantalizingly close to expansion territory but remains stuck in the contraction zone for now. The
“disputes” category slipped just slightly from 49.9 to 49.7 and this is another category that is just so close to breaking back above 50. The
“dollar amount beyond terms” is as big an issue for the service sector as it has been for manufacturing with a steep drop from 49.8 to
46.7. The slow pay is feeding the reduction in dollar collections noted above. The “dollar amount of customer deductions” category
sports a slight improvement and enough to get the scores back into expansion territory. The February reading was 49.2 and this month it
is 50.4. The “filings for bankruptcies” also saw a slight uptick from 54.0 to 54.9.
This is a transitional period for the retailer and if there is going to be a struggle to stay solvent this will be the time. There is no big
holiday spend to drive the consumer and this is also tax time, a period that tends to drive consumers into hiding. Those that did not do as
well as expected last holiday season are now struggling to pay their bills and at the same time prepare for next year.
Not a Lot of Patience Among Investors
The “Trump Bump” has been the talk of the investment community for several months now. There was an assumption that the
markets would fall when it was obvious he was going to win the day but instead there was a major rally based to some degree on what
was expected to change under a GOP led government. By now we are all familiar with these expectations – infrastructure spend, the end
to the ACA, de-regulation, tax reform, adjusted trade pacts and more. The agenda was ambitious and past experience would suggest that
these moves would be hard to execute. Just how hard has been made obvious as the ACA has yet to be replaced and the opposition to
Trump came from within his own party.
Analysis: The investor is not generally prone to patience. They want and demand immediate response and the defeat of the health care
reform measure has unsettled the markets. Those enthusiastic assumptions have been replaced with trepidation. The dollar has
weakened a little, small business has suddenly stalled, bank stocks have lost ground and treasuries are rallying as investor sentiment
dims. The assumption was that reforming the ACA would be the easy move given the vociferous opposition from the GOP since its
inception. The problem is that repealing it was the easy part – the stumbling block is the need to replace it with something else. The
feeling is that all the other reforms will be even harder to pull off.
The Black Owl Report – An Executive Intelligence Brief
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through various business organizations. This is written for the general business community and deals with the broad economy – national
and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that
move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you
would like to take a look at the BOR please contact [email protected] and we will start a one-month free trial – there are no
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The Power of Competition
I have been addressing a supplier conference that has been pulled together by a company called Altec. You have seen their machines
all over the place as they are engaged in everything from construction to landscaping. The conference is an opportunity to talk with those
that supply Altec with the thousands of parts and assemblies used. This is a progressive company that works with these suppliers to
achieve mutually beneficial arrangements and they take an active role in advising the companies they buy things from. This is where I see
the power of competition.
One supplier was discussing the suggestions that the Altec team had made – pointing out that a rod they used to make their hydraulic
systems could be manufactured more efficiently than it could be purchased. This company had been buying this part for years from a
company just a mile or two down the road but it was discovered they could make this part themselves and for less money. This would not
be good news for the company that used to sell that part but inevitably there was an adjustment on the part of the company that used to
supply that item as they seek to hang on to their market.
This is the joy of competition – the relentless pursuit of efficiency and quality and cost control. The productivity debate has identified
three sectors of the economy that are less productive than others and it is no accident that all three are generally protected from real
competition (education, health care and the government).
These are quick summaries of articles that appear in a recent Black Owl Report. We invite you to start a one
month trial subscription so that you can see the variety we offer in this publication.
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The 10-Year Treasury “Death Ascent” (TIC). O.K., tongue-in-cheek, that’s what it feels like when we read headlines that portray a
change in the 10-Year US Treasury as leading to a “market crash”. Analysts have put a target yield rate of 3.5-4% as the “inflexion” point
where we transition from Bull to Bear Market. We wanted to see if the data supports it.
Red Ball of Death: Department Stores. I mentioned about 4 weeks ago that I would do an update to the Red Ball of Death chart for
Department Stores – it’s here. Using 2017 data, I’ve updated the chart and it shows some very interesting market pressures playing out.
We know that a few big retailers are in some moderate trouble, and the chart actually bears that out. You can build a chart like this for
your industry…and it will give you some strategic insights that might help with planning.
Tough Politics Coming. There’s a battle brewing that could be very dangerous for 20 million American’s – and it could come down to
tough politics and “playing chicken” negotiation. A vote in the House of Representatives on the AHCA is scheduled for Thursday, if the
Republicans can get enough support to override Democratic opposition. But, nobody is talking about what happens if they don’t get a
bill introduced.
Why a Shift in Production Regions Could Be Impacting Data. If you have been watching our reports on weekly rail carload activity, you
would know that petroleum shipments are down 15.5% YTD. That might not be surprising, but we think that it doesn’t tell the whole
story for the petroleum sector – and the production of crude oil could be better than this.
The Comey Comment You Missed. There was a hearing on Capitol Hill yesterday in which the Director of the FBI James Comey and NSA
Director Admiral Michael S. Rogers testified on Russian meddling in the 2016 campaign (and they also answered questions about the
alleged wiretapping of Trump Towers). It was a comment that was buried down in the testimony that struck us as most interesting with
long-range impact – and something the general media won’t mention.
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Chamber of Commerce (The Chamber), through an agreement between Armada and Chamber Management Services, LLC (CMS). Neither CMS nor The
Chamber assumes any responsibility for the editorial content, and any such editorial content shall not be construed as an official position of either CMS or The
Chamber. Armada has taken all reasonable steps to verify the accuracy of the content of the information in the BIB, and therefore, Armada shall not be
responsible for any errors or omissions.
Armada Staff –Chris Kuehl, Keith Prather, Karen Sanchez
P.O. Box 733 – Lawrence, Kansas 66044 – [email protected]
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