Inflation, the Third C, and Who is Corey Anderson?
Good news? I think so.
Two weeks ago, the Fed raised rates by 0.75% making the Bank Prime rate 7%, and the market could not turn its frown upside down. In fact, the stock market dropped after the Fed chief said they would continue to raise rates as necessary if inflation continued to increase. The implication was that if inflation doesn’t show signs of cooling, they will take it up another 0.75%.
Then, this last week, inflation dropped to its lowest point since January: 7.6%. That’s a lot lower than 8.2% in September and 9.1% in June.
The core inflation rate dropped from 6.6% in September to 6.3% in October, also a welcome to the financial markets, and your 401k is much happier for the news.
So, why is this all big news? The decreasing increase in the consumer price index – CPI or inflation - may, and I put may in bold, cause the fed to increase the Fed Funds rate at a decreasing rate.
In other words, instead of increasing rates by 0.75%, they may increase them by 0.5% in December. Still an increase, but less than the meeting last week.
So, what went up?
In the Services sector, the largest increase came from Airline Fares. Up over 40% from a year ago. However, that seems to have peaked, with prices falling ever so slightly from last month.
In the Food sector, Fats and Oils (we should just call this category Cholesterol) increased almost 25% from a year ago, with Food, and Food at Home, increasing over 10%.
In the Energy sector, Energy Services and Gasoline increased over 15% with Natural Gas increasing over 20%.
The Goods sector had the smallest increases in their categories with New Vehicles at 9%.
Overall, the month-over-month increases stayed even with last month.
The largest month-over-month decreases were Car and Truck Rentals, Natural Gas Services and Used Cars and Trucks.
Overall, I believe the Fed is looking for a reason to reduce the rate they are raising rates and welcome this news. I believe that interest rates will “only” increase 0.5% next month when the fed meets before year-end.
Home sales, retail sales and the producer price index- PPI - come out this week. Home sales should be falling, retail numbers should be flat and may even have an uptick in holiday shopping, and the PPI may follow the CPI. Stay tuned.
Bank Lending – ‘C’ #3 – Collateral
Most lending at federally regulated banks is done so on the basis that the bank can get repaid two ways. The first is usually cash flow from operations. The second is from the liquidation or refinancing of collateral.
For many business owners, this is nothing new. What can the bank get its grubby little fingers on to ensure repayment?
In some instances, such as an operating line of credit, a credit is strong enough that only a general filing securing the borrowers assets is needed, known as a UCC filing or Uniform Commercial Code. This is pretty common and done on the basis that the company’s assets, equipment, or receivables or both, are enough to cover the debt by a significant margin.
In other instances, the line of credit may specifically be for a certain purpose, other than general corporate purposes.
It may be to finance account receivables and the 30 or 60-day window that the borrower’s customers use to pay their invoices. In this case, the line of credit is measured and funds are advanced against the uncollected account receivable balance.
If a company is under stress, this type of lending will be done by a lender that specializes in A/R lending. And may cost a lot more than a standard operating line of credit.
It may be to finance equipment, in which case the bank will advance a percentage of the value of the collateral as a loan. While a strong company will warrant 100% financing, most companies have to put 20% or more as a down payment to purchase the equipment.
Real estate is another type of collateral lending and regardless of the strength of the borrower, it would be highly unlikely that a bank will finance property without 20% or more down.
If the borrower does not have that much cash or the property may be of questionable value, the bank may elect to fund the loan through the SBA – Small Business Administration – programs.
That is a whole other category of lending that I won’t be addressing here.
Ultimately, the bank must be able to show regulators that they are doing prudent lending by first analyzing the primary source of repayment – cash from operations (net income, EBITDA) – but also illustrate a secondary ability to be paid in full should the primary source of repayment fail or weaken.
There are many other types of collateral. Agriculture (cows, pigs, grain), planes, artwork, stocks, bonds, and the best collateral, cash. You need to know what part of your business has the most value to a lender and make sure you can justify the value of that collateral to the bank.
And that’s your bank credit lesson for this week.
Who is Corey Anderson?
Some of you will know who Corey is if you follow MMA fighting – that’s Mixed Martial Arts for most of us.
Corey is a 33-year-old MMA fighter.
Even if you do not care about MMA or any type of fighting or any type of sports, there is a lesson in the end so please read on.
Back in April, he was fighting Russian Vadim Nemkov and seconds away from winning the bout and the Bellator Light Heavy Weight Belt and $1,000,000 for winning Bellator’s Grand Prix final.
Late in the third round, as Anderson was hitting Nemkov with a barrage of punches (and clearly the point leader for that round), the fighters inadvertently clashed heads, opening a deep cut over Nemkov’s eye.
As Anderson said: “I was coming down on top of him and we just collided. I looked at the ref and signaled ‘that was our heads’. The ref thought instead that it was a legal blow, but paused the fight as Anderson pointed to his head. A cageside doctor (yes, they fight in a 30-foot octagon cage with a 6-foot high fence) ruled the cut too deep for Nemkov to continue.
The fight was stopped with 5 seconds left in the third round.
MMA rules state that a fight must go three full rounds for a winner to be declared in the event of the fight being stopped due to an accidental foul.
The winner would be determined by the number of points awarded by the judges to that point in the fight.
Had Anderson not said anything, the clock would have wound down, the round completed, and then Nemkov would have been ruled unable to continue.
Anderson would have been the winner of the Championship Belt. And the $1,000,000.
Instead, the fight was ruled a “no-contest”.
The rematch is scheduled in Chicago on November 18.
Said Anderson: “I look back on it and I think I would do the same thing again. I want to be a good sport. When I win, I want to win fair and square. There’s no extra cheating. I didn’t throw extra weights in the fish, I didn’t deflate a football. I got there the right way.”
THAT is integrity.
The vast majority of business owners operate with the same integrity. There are some that do not. For those business owners that do not, I say this: if you have to cheat on your worker’s comp, classify employees as contractors, or cut other corners just to stay in business, I would suggest that you ought not to be in business. If you can’t run your business the right way, you should not be running it at all. It will save you, your employees and your customers (assuming you care about them) a lot of headaches down the road.
At the end of the day, be like Corey Anderson and “get there the right way.” You’ll sleep better at night because you won’t be worrying about the IRS, EDD, State Board of Equalization or OSHA knocking on your door.
From the contractor in the high desert: “97% who quit are employed by the 3% that never gave up.”
And that’s another issue of the Russell Report. Thanksgiving is next week so plan to show your employees your gratitude. And there are only 41 shopping days until Christmas. Plan your shopping. Don’t expect to go to Best Buy and pick up an iPad for your wife 5 days before Christmas. You’ll be surprised when they tell you they can have it for you in early February.
Adam
See previous Russell Reports here. To be added to the distribution list, just email me at adam@ss4bllc.com.
