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ADP Reports Weak Job Growth

ADP has released its National Employment Report for April.   Non-farm private employment increased 32,000 during  the month on a seasonally adjusted basis.   ADP also reported an upward revision of 19,000 jobs for March.  The two consecutive net employment gains reported by ADP indicates that job loss may have bottomed and the slim increase in employment confirms a positive trend is underway.     The massive governmental intervention to recapitalize the banking sector and initiate stimulus programs have stabilized the economy.  The abatement of extreme risk aversion in the credit markets, favorable interest rates, improving consumer sentiment, low inflation and the dramatic rebound in securities markets are all positive growth drivers for the economy.

Highlights of the ADP  report include:

Estimates non-farm private employment in the service-providing sector increased by 50,000.

Employment in the goods-producing sector declined 18,000.

Employment in the manufacturing sector rose for the third consecutive month by 29,000 jobs.

Employment in the construction sector dropped by 49,000.

Large businesses with 500 or more workers  added 14,000 jobs

Medium-size businesses, defined as those with between 50 and 499 workers increased by 17,000.

Employment among small-size businesses with fewer than 50 workers, increased by 1,000 in April.

Employment in the financial services sector dropped 14,000, resulting in over three years of consecutive monthly
declines.

Overview of Numbers

The net gain of 32,000 jobs for the massive US economy is an admittedly weak gain for an economy that has shed 11 million jobs but it is an indication that the economy is stabilizing.

The correlation of the loss of jobs in construction and financial services is an indication of a US economy that continues to transition its dependency on residential and commercial real estate development.  The difficult conditions in the commercial and residential real estate market will continue as excess inventories brought on by high foreclosure rates continue to be worked off.   As the ADP report highlights construction employment has declined for thirty-nine consecutive months, bringing the total decline in construction jobs since the peak in January 2007 to 2,159,000.  Its clear that the US economy has lost two critical recovery drivers.

Soft conditions in the construction sector weighs heavily on small business job creation.  Most contractors are small businesses and with the anemic rate of new housing construction small business job creation will continue to be soft.

Specialty retail is another large component of the small business market.  Improving consumer sentiment will help this sector.  However small retailers have suffered massive business closures during the recession.  A robust recovery in this sector will not commence until commercial lending for start ups and business expansion becomes more readily available from the banks.

The report also indicates that the goods producing sector of small businesses shed 24,000 jobs during the month  to continue the trend in the deterioration of small manufactures.  This decline was offset by a 25,000 gain in service based jobs.  The  growth of the service sector of the US economy continues at the expense of the manufacturing sector.  The growth of small business service sector indicates that businesses continue to managed fixed costs of their business by outsourcing various services.

This ADP report is a positive indication that we may be at a bottom of the economic cycle.  Bottoms don’t mean that things are improving they indicate that conditions are not worsening.  The economic recovery is still confronted with headwinds.  The oil spill in the Gulf of Mexico, the economic and growing political instability of EU countries and the cooling off of the Chinese economy may present some challenges to a sustained and robust recovery in the United States.

Solutions from Sum2

Sum2 advocates the establishment of an SME Bank to sustain long term economic growth.  Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

You Tube Video: Isley Brothers, Work To Do

Risk: unemployment, recession, recovery, SME

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May 5, 2010 Posted by | ADP, banking, credit, manufacturing, real estate, recession, small business, SME, Uncategorized, unemployment | , , , , , , , , , , , , , , , | Leave a comment

Commercial Loans: Be Prepared

The tough conditions in the credit markets require small businesses to communicate and demonstrate their credit worthiness to satisfy exacting credit risk requirements of lenders. Credit channels are open and loans are being made but strict federal regulations and heightened risk aversion by lenders places additional burdens on borrowers to demonstrate they are a good credit risk.

“You have to be prepared,” said Robert Seiwert, a senior vice president with the American Bankers Association. “If you have a viable business model and the banker feels that this business model is going to work in this new economy, you have a very good chance of getting financing. But you have to be ready to show that it will work.”

“Small and medium-sized businesses are the lifeblood of the U.S. economy.  Their ability to prosper and grow is key to job creation to help our nation recover from the economic slowdown. But with the number of bad loans mushrooming in recent years because of the economic downturn, federal regulators have put in more stringent guidelines for qualifying for financing.”, stated Ken Lewis CEO of Bank of America.

Communication with Lenders is Key

Maintaining an open line of communication with your credit providers is key.  During times of prosperity the lines of communication are open; but during times when businesses face adversity the phone stops ringing and lenders start to get nervous.  When business conditions get difficult businesses need to communicate with greater frequency and openness with their lenders.  Bankers don’t like surprises.

Reason to Communicate: Risk Assessment

The entrepreneurial nature of small business owners make them natural risk takers.  They have an unshakable belief in the fail safe nature of their ideas and have strong ego identification with their business.  This often makes them blind to the risks lingering within the business enterprise.  Their innate optimism may also cloud an ability to objectively analyze business risks and prevent them from seizing opportunities as a result of poor assessment capabilities.

Conducting a disciplined risk assessment and opportunity discovery exercise will uncover the risks and opportunities present in the enterprise and in the markets that the business serves.  This risk assessment is a great opportunity to communicate to lenders and credit providers that business management are capable risk managers and are a worthy credit risk.  Lenders will be impressed by the transparency of your risk governance practice and will be more disposed to provide financing for projects and opportunities that will propel future growth

Banks are looking for businesses that are prepared with their financial and business plans. Business owners must present a clear purpose for the loan tied to clearly defined business objectives.   The risk assessment exercise is a vital tool that assists in the construction of a business plan that builds  lender’s confidence in your business.  The assessment will reveal the largest risk factors confronting your business and outline clearly defined opportunities that promises optimal returns on loan capital.

Its music to a bankers ears that clients are managing risk well and have identified the most promising opportunities  for business investments.  It is usually a recipe for success and that will allow you and your banker to develop a trusted business relationship based on honesty and transparency.

Sum2’s Profit|Optimizer

Sum2 publishes the Profit|Optimizer.  The Profit|Optimizer is a risk assessment and opportunity discovery tool for small and mid-sized businesses.  It assists managers to identify and manage risk factors confronting their business. The goal of the Profit|Optimizer is to help business mangers demonstrate creditworthiness to lenders and make make informed capital allocation decisions.

Sum2 boasts a worldwide clientele of small and mid-sized business managers, bankers, CPA’s and risk management consultants that utilize the Profit|Optimizer to help their clients raise capital with effective risk governance.  Subscribe to The Profit|Optimizer here: Profit|Optimizer

Risk: small business, SME, credit, bank,

May 3, 2010 Posted by | banking, credit, Profit|Optimizer, risk management, small business, SME, Sum2 | , , , , , , , , , , , , | 1 Comment

Drill Baby Drill: The Bill Comes Due

Louisiana has declared an emergency shrimping season for the off shore beds at the mouth of the Mississippi River.  The emergency harvest of shrimp, oysters and stone crabs is a desperate attempt to grab a final yield from a once bountiful aquaculture that sustained  a way of life and  helped define the regional identity  for multiple generations of Cajun people.  The spreading oil slick gushing from a toppled offshore oil platform threatens to bury that life as it covers the delicate ecology with a toxic cloak that may cast a death blow to a regions way of life.

It is estimated that 210,000 gallons of crude oil are gushing into the Gulf of Mexico every day following the explosion and collapse of British Petroleum’s Deepwater Horizon offshore drilling platform that killed 11 workers. The Transocean rig was reportedly not equipped with a special safety devise that should have capped the well with the collapse of the oil platform. This assertion is being denied by Transocean stating that the well was equipped with the devise but unfortunately it failed to work. The use of the safety devise is a regulatory requirement for any offshore drill platforms in Europe but in the United States this safety devise is not required and is considered an optional operational risk devise. Like the  recent coal miner disaster at Massey Mines, and word today that two more miners have died in Kentucky,  occupational wages sometimes result in death.  We need to understand that preservation of life and environmental safety are critical components of a cost of doing business that must be factored into ROI calculations and risk assessment scenarios.

The Coast Guard is in charge of emergency response to this growing disaster. The Coast Guard is skimming surface oil and using containment booms to control the growing oil slick. The Coast Guard is also considering igniting controlled burns of the surface oil which would release toxicity into the air. Another strategy being considered is the injection of chemicals into the spill to coagulate the oil. This strategy has never been attempted at such an extreme 5,000 foot depth and would also release additional toxins into the water. Technological solutions like the drilling of a relief well or the construction of a containment vessel would take months to accomplish. Man made solutions to cap the environmental disasters of their making always seem to pale in comparison to the scale and fury unleashed by the unrestrained power of nature.

This event marks yet another example of making an honest assessment of the true costs of our behavior and choices. Like the global economic meltdown that was the result of the unfettered credit orgy the bill for risky behavior always comes due. The continued focus on the exploitation and extraction of fossil fuels at the expense of alternative sources of energy comes at a great cost. This disaster may indeed be the death blow to an aqua industry that nurtured a region for many generations and informed a cuisine and culture highly treasured by the world. And like any excursion to a fine NOLA restaurant, someones got to pick up the tab.

The bill always comes due. We want to gorge ourselves at the well of cheap energy only to discover how dear the price of this devil’s bargain really is. Environmental degradation is the most obvious tip of a precarious iceberg that threatens to tip as it melts into an ocean of unsustainability. A destroyed eco-culture of marshlands and animals, abandoned hamlets and townships no longer able to extract a living from the land are the immediate visible signs of the cost of this deal with the devil gone bad.  We must begin to realize that the cost of cheap energy also requires our nation to continually engage in wars and military actions to protect this vital resource.  Cheap oil has badly skewed our economic infrastructure.  It has encouraged our businesses to produce inefficient cars that led to the decline of a strategic industry and destruction of cities like Detroit and Gary Indiana.  It caused the terrible moniker of rust belt cities to be pinned on a region of our country that was once the source of our nations wealth.  Cheap energy help turn our prized manufacturing centers into economic anachronisms.  Cheap oil has forestalled commitment to developing innovative green technologies that continues us to cede our position as a global manufacturing power. As we watch China and Brazil march forward with massive commitments to the development of energy innovation industries that will serve future needs of an energy dependent global economy, America is engaged in a bloody rear guard action to defend the ways of an old dying world too protect  depleting trickles of oil.

Tonight as Americans go to sleep in their energy inefficient homes it is hoped that they may pause to consider that drill baby drill is a rallying cry for an unsustainable dying future. Think of the villages along the Louisiana bayous and how their way of life is coming to an end.   Its time to consider the real costs of a Drill Baby Drill economy and begin to chart a course to a sustainable future.

You tube Music Video: Cajun Music: DL Menard and Louisiana Aces, Out My Backdoor

Risk: economic, environmental, culture

April 30, 2010 Posted by | culture, economics | , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

How Deep is the Ocean?

The crisis in the credit markets is creating some new American superheroes. Fed Chairman Bernanke and Treasury Secretary Geithner are today’s dynamic duo engaged in a titanic struggle with the evil forces of inflation, stagflation, a weak dollar and dysfunctional credit markets. Their mission is to keep the specter of a recession from reappearing again.

Their weapon of choice is a high octane capital swap, low interest generator and paper guarantee machine. The machine produces accelerated capital flows by pumping liquidity into credit channels faster than water surging through the Hoover Dam at the height of a Rocky Mountain snow melt.

Just as the great Colorado River brings life and growth to the parched deserts of the American southwest so to is liquidity the essential condition to sustain the economic viability of a corporate enterprise.

Liquidity concerns grow particularly close to the bone of small businesses. Liquidity is their bread of life and small businesses must master the fine art of liquidity management. Unlike large corporations and governments, the ability of small businesses to print money, tap commercial paper markets, leverage or sell assets or engage in other forms of exotic balance sheet alchemy is limited. So at the end of the day, when the payroll is due, a key supplier is waiting by the receptionist for a check and your best sales person is doing her best to close that huge new deal your anxiety grows a bit as you ponder your cash position and begin to project the next three months.

You call your local banker. You are a long standing and valued customer but “risk aversion” continues to creep into the discussion and they tell you that their funding sources have grown “risk averse” due to losses in the sub-prime mortgage market and finding new funding sources have been difficult. So for now at least the expansion of a credit facility with them is not an option.

You keep getting calls from those merchant finance companies that are offering short term loans but the prospect of paying usurious rates of 18%-30% on future credit card receivables will put a major dent in your profit margins. That makes this credit channel’s cost of operating capital prohibitively expensive.

That’s where risk management comes in. Many small business owners are masters at risk management. They are skilled entrepreneurs that put personal capital at risk. They got major skin into the game and that motivates them to continually evaluate how to protect their assets and maximize returns. Many small business owners are extremely gifted at leveraging assets to address opportunities. Assets such as monetary capital, people, intellectual capital, suppliers, facilities and products are routinely utilized to enhance and extend liquidity. But as credit markets tighten all small businesses need to become more aware of preserving liquidity. This can be accomplished by incorporating a few simple risk management practices.

A good place to start is to make sure your systems and business processes are optimized to support efficiencies. Many of the traditional cash management techniques are well known. Small business accounting software and the availability of internet banking tools are a great help to small businesses. These tools help to extend and manage payment cycles, match assets to liabilities and a good banker will help you develop specific strategies and practices to address these issues and improve your cash position.

Another area to consider is to arbitrage credit providers. Obviously this tactic works great during times of enhanced liquidity but credit channels are still vibrant and the market is crowed with numerous providers and products. Though it is true that as more participants enter markets they tend to become more efficient resulting in small spreads the volatility of the credit markets can work to your advantage. If you can replace a line of merchant finance credit with a bank offered facility you will increase your margins by the spread of the savings.

Sources of capital leakage from the company are a major threat to liquidity. Small business managers must be aware of how to assess this risk factor and how to minimize potential damage it can cause. By “leakage” of enterprise capital we mean to suggest that capital invested by the business did not create an acceptable rate of return. A concerted approach to assessing and managing risk factors preserves liquidity, builds equity and a strong balance sheet.

The principal villains that contribute to capital leakage are poor cash management and inappropriate, non-prioritized or misdirected capital allocation initiatives. These initiatives are acquisitions or projects requiring the investment of time, money, personal energy and corporate resource that do not produce an optimal rate of return.

Small businesses need to incorporate opportunity cost in determining ROI on business initiatives. This is because a small business must limit the number of projects it can engage. It must be certain that current projects will build greater value for the business then the project it declined to pursue. An understanding of value at risk (VaR) is also a useful metric to determine what initiative or project will mitigate the greatest risk and produce the greatest return on capital expenditures.

Risk assessment is a powerful opportunity discovery exercise that requires intentionality and discipline. Many small business owners do these assessments in their head and make decisions based on gut feeling or intuition. An opportunity discovery methodology that walks you through an objective assessment of risk factors is a wonderful complement to the fine tuned business instinct of the small business owner.

Lastly, small businesses need to focus on their most profitable products, best clients and key suppliers within their most promising markets. This may seem obvious but many businesses are reluctant to alter their business models to accommodate this blatant reality. Inertia, culture and ego are the principle culprits and ironically clients, products, suppliers and markets pose some of the greatest risks to small businesses.

It is true that a rising tide lifts all boats. We have just experienced one of the greatest economic expansions in the history of the global economy. It’s been a great run. But the party is over. The era of an unending flow of easy credit and cheap capital is over for now. Until happy days return again we must adapt and protect our solvency through effective liquidity management practices. During times of economic uncertainty and distress it’s a great opportunity to build financial health through effective risk management because when the tide goes out the rudderless businesses captained by poor stewards will crash upon the rocks and get beached on unforeseen shoals or sink into the depths of the unforgiving briny deep.

You Tube Music Video:  Billie Holiday,  How Deep is the Ocean?

Risk: credit, small business,  SME, recession, liquidity

April 29, 2010 Posted by | banking, credit crisis, risk management, small business, SME | , , , , , | 1 Comment

NFIB Small Business Optimism Report for April

The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for April 2010. The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.

This months report indicates a decline in business optimism. The NFIB index fell 1.2 points in March to 86.8 That’s up from the lows of March 2009, but has been below 90 for 18 months. The report reading is a contra indicator of economic recovery.  Small business owners are by nature and temperament optimistic and the report provides a sobering insight into the mind of US entrepreneurs and risk takers.

Highlights of the Report:

  • Jobs: After a devastating period of employment reductions, employment change per firm hit the “zero line” in March, setting the stage for a resumption in job creation. Nine percent (seasonally adjusted) reported unfilled job openings, down two points, a “negative” for hope that the unemployment rate will fall. Over the next three months, seven percent plan to reduce employment (down one point), and 15 percent plan to create new jobs (up
    two points), yielding a seasonally adjusted net negative two percent of owners planning to create new jobs, weaker than February and still more firms planning to cut jobs than planning to add.
  • Credit: Regular NFIB borrowers (35 percent accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 15 percent reported loans harder to get than in their last attempt, up three points from February. Eighty-nine (89) percent of the owners reported all their credit needs met or they did not want to borrow. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many good borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities. Only five percent of the owners reported “finance” as their top business problem (up two points). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. What businesses need is sales, giving them a reason to hire and make capital expenditures and borrow to support those activities.
  • Profits: Reports of positive profit trends worsened by four points in March, registering a net negative 43 percentage points (39 points worse than the best expansion reading reached in 2005). The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending. For those reporting lower earnings compared to the previous three months (58 percent, up three points), 62 percent cited weaker sales, two percent blamed rising labor costs, five percent higher materials costs, three percent higher insurance costs, and seven percent blamed lower selling prices. Five percent blamed taxes and regulatory costs. Owners continued to reduce compensation at historically high rates, with 10 percent reporting reduced worker compensation and 10 percent reporting gains. Seasonally adjusted, a net zero percent reported raising worker compensation, only two points better than February’s record low reading of negative two percent.
  • Prices: The weak economy continued to put downward pressure on prices.  Seasonally adjusted, the net percent of owners raising prices was a negative 20 percent, one point better than last month. Plans to raise prices fell one point to a net seasonally adjusted nine percent of owners. On the cost side, five percent of owners cited inflation as their number one problem (e.g. costs coming in the “back door” of the business) and only three percent cited the cost of labor, so neither labor costs no r materials costs are pressuring owners.

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages, Credit Markets

The NFIB Report can be downloaded from the Sum2 website. NFIB Optimism Index

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

You Tube Music Video: Stevie Ray Vaughan, Couldn’t Stand the Weather

Risk: sme, small business, economic recovery

April 27, 2010 Posted by | recession, small business, SME, unemployment | , , , , , , , , , | Leave a comment

Credit Tight from SBA Lenders

Last year lending to small businesses evaporated with glaring exception of Wells Fargo which increased its lending through Small Business Administration (SBA) programs.  With bank lending to small businesses nearly frozen many small businesses are scrambling for the credit lines and loans they need to keep their companies alive.

The landscape of lenders willing to provide credit to small business is evolving.  Wells Fargo has emerged as the principal provider of credit to the small business market becoming the number-one lender through the SBA loan programs during 2009.

CIT Group, JPMorgan Chase, Banco Popular and Bank of America have cut their SBA lending by more than 70% this year.  While Wells Fargo buttressed by its acquisition of Wachovia, increased its loan volume 4%, from $583 million in 2008 to $605 million during 2009.

Wells Fargo acquisition of Wachovia closed three months into the 2009 fiscal year allowing Wells Fargo to book only nine months of Wachovia SBA lending which totaled $742 million a decrease of  24% from aggregate SBA loans extended during 2008.   During 2009 the number two lender to small businesses was U.S. Bank which made $250  million in loans through the SBA’s lending program.

The large banking institutions that received TARP funds  used that infusion to prop up the capital ratios to improve weak balance sheets.  Little of these funds were used to fund credit programs for small businesses.  Wells Fargo’s capital ratios were healthier then its larger competitors.  This allowed Wells Fargo to take advantage of their rivals distraction from the small business market.  Indeed the bankruptcy filing by CIT, the management tremors at Bank of America, Citibank’s scramble for capital and JP Morgan Chase digestion of Bear Stearns allowed Wells Fargo to fill the large vacuum in the  neglected SBA lending market.

Wells Fargo also had the advantage of not being dependent on securitizing its SBA loans and selling them in the  secondary market.  As evidenced by CIT’s bankruptcy filing,  funding for securitized loans disappeared as the risk aversion of institutional investors grew and liquidity evaporated from the market.  These market events led Wells Fargo to develop a focused discipline on the small business lending market.  The bank was committed to closing larger 7(a) SBA loans which are held and managed in the banks loan portfolio.  Wells Fargo’s small business strategy discouraged originating SBA Express Loans that offer lower credit limits and tend to have much higher default rates.  Wells Fargo’s SBA program and business model should be studied and replicated by community banks to energize small business lending.

Small business lending and capital formation in the sector is a critical component for sustainable economic growth.  Banks need to engage the small business market with a deeper understanding of the risks associated with the market.  Small business managers must demonstrate to bankers and shareholders that they are worthy stewards of credit and equity capital by implementing sound risk management and corporate governance practices.  This assures bankers that  small business managers are a good credit risk capable of building a mutually profitable business relationship for the many years to come.

Risk: SME, SBA, credit, small business, banking, community banks

March 11, 2010 Posted by | banking, bankruptsy, credit, credit crisis, recession, risk management, SME, TARP | , , , , , , , , , , , , , | Leave a comment

Sum2’s Hamilton Plan Getting Scholarly Attention

The following research paper on The Hamilton Plan was written by Deepak Verma, a business student at Baruch College. To our knowledge it is the first scholarly research that incorporates the Hamilton Plans theme of a focus on SME manufacturing.

ISSUES MANAGEMENT PROJECT
Prof. Michael Kirk Stauffer

DEEPAK VERMA
The Societal and Governmental Environment of Business
Baruch College, the City University of New York
December 16, 2009

Table of Content

Topic Page No
1. Executive Summary 2
2. The Issue: Shrinking Manufacturing Base 3-4
3. The Origin of the Issue and Solution 4-5
4. Small & Medium Enterprises; Catalyst of Sustainable Growth 6
5. Initiative for Development of SMEs 7-8
6. Future of SME and SMEs in USA 9
7. Appendix : References 10

EXECUTIVE SUMMARY
Living beyond means is not sustainable. One of the primary reasons of prolonged Economic and Credit Crisis in United States is its low manufacturing base and American way of consuming more than what is produced. This research paper will examine issue of shrinking manufacturing base of USA, unfair and unethical business practices adopted by countries such as China to boost export thereby causing trade deficit to USA, reasons for low manufacturing base and role of small and medium enterprise (SME) manufacturers in developing a sustainable manufacturing base of the US economy.

Prior to coming at Baruch College for pursuing MBA in finance and investments, I worked for over 10 years with Small Industries Development Bank of India (SIDBI), an apex financial institution of India engaged in the development and financing of SMEs and micro financial institutions. Having worked with this financial institution, I realized the importance of SMEs in bringing sustainable economic development and employment creation, particularly in a mixed economy like India.

The paper will discuss on public-private initiative in USA for development of SMEs, their efforts and capital investment for empowerment and financing of SMEs. Various initiatives taken by private and public sector will be analyzed. Efforts have been made to forecast future of SMEs vis a vis manufacturing sector, role of community development financial institutions (CDFIs), and flow of commercial bank credit and private equity investment in SMEs in the United States.

THE ISSUE: SHRINKING MANUFACTURING BASE
Why should shrinking manufacturing base be an issue in a market driven service oriented economy like US? Federal Reserve Chairman Ben Bernanke stated on Feb. 28, 2007, “I would say that our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.” Strong Manufacturing base is the only solution to rising trade deficit and industrial job loss. Manufacturing promotes innovation which leads to investments in equipment and people, research and development, improved products and processes and increase in productivity and higher standards of living. Increase in manufacturing leads to increase in demand for raw materials and other commercial services.

United States has transitioned from an agricultural economy to Industrial economy to a service economy. Over a period of this transition US has lost its manufacturing base substantially and has been importing goods from around the world which has resulted into huge trade deficit and industrial job losses. IMF has categorized the US current account deficit as unsustainable. Warren Buffet also once commented “The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.”

Since the United States joined the WTO, US trade deficit has risen from $150.6 billion in 1994 to $817.3 billion in 2006. US reliance on imports ranges from electronic items to apparels and other consumables. For example, electronic items sold in United States are developed by companies such as Philips, Toshiba, Sony, Hitachi, Samsung and Sharp. We have lost significant market share in Auto Industry also. Toyota has surpassed General Motors to become leading auto manufacturer in terms of global sales. Ironically, items such as clothing and apparel where USA had its dominance are also being imported from foreign countries. Over 90 percent of clothing and shoes sold in the United States are made in foreign countries. US economy has thrived on consumerism which has led to increase in demand for goods over the years but production of domestically manufactured goods has been declining, thereby giving rise to imports from foreign countries and loss of industrial jobs.

Critics of the argument say it is the increase in production efficiencies, resulted from technological innovation and advancement that has resulted in loss of jobs. Additionally, it is the increase in consumption which is the root cause of import deficit rather than shrinking manufacturing base. Undoubtedly long term data indicates an increase in US manufacturing, but the way we are loosing our manufacturing share from last 2 decades and if we continue shrinking, we will soon have no choice but to consume whatever is dumped in our market and will be on the mercy of foreign imported goods. Increase in manufacturing has not kept pace with global growth in manufacturing in USA. Since 2000 global manufacturing growth has been 47%, whereas USA has recorded a growth rate of only 19%.

ORIGIN OF THE ISSUE & SOLUTION
What is causing shrinking manufacturing base in the United States? Is it purely competitive and cheaper products manufactured in Asia and Europe or some other factors are also responsible? Undoubtedly competitive global business environment has severely affected domestic production in the United States, this crisis in large arises due to unfair and unethical business practices adopted by its trading partners mainly China. Some of those practices are significant government subsidies, currency manipulation, large-scale dumping in the U.S. market, and other market-distorting practices. Additionally, unfavorable govt. policies, tax structure, increase in cost involved in healthcare, litigation, and regulation has significantly affected the bottom line. Increase in cost and strict regulation forced manufacturing units to move their facilities to other countries where companies do not face those kinds of impediments. Companies operating in the U.S. started outsourcing low-value tasks like simple assembly or circuit-board stuffing, but lower cost of outsourcing and shrinking margin lured them to continue outsourcing sophisticated engineering and manufacturing capabilities that are crucial for innovation in a wide range of products. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.

Is there any way to bring back our manufacturing base?
The view that the U.S. should focus on R&D and services is completely flawed. Manufacturing is part of the innovation process and United States has to expand its manufacturing base to remain a world leader.

Following may be suggested to address the issue:

(1) Increase the tariffs on foreign goods so that they are more expensive than domestic goods.
(2) Demand the same level of quality in all foreign goods as American goods.
(3) Diplomatic measures should be taken to create pressure on foreign countries particularly China to stop manipulating their currencies.

Efforts should be made to open up foreign consumption markets adequately to U.S. producers so as to increase export and minimize trade deficit and should endeavor to combat predatory foreign trade practices aimed at undermining U.S. producers in their home market. Next big step is to promote small and medium enterprises to set-up manufacturing units.

SMALL & MEDIUM ENTERPRISES (SMEs); CATALYST OF SUSTAINABLE GROWTH
The issue of shrinking manufacturing base in the United States has been discussed by economist, policymakers, industrialists, and think tanks since economic integration and various measures to improve domestic manufacturing base have been suggested. But considering our free market dominance no sincere efforts were made to expand manufacturing base. Alarming rise in trade deficit and current economic and credit crisis which resulted in to massive industrial job loss has called for immediate intervention of private-public participation to protect and develop domestic manufacturing base for long term sustainable economic growth of United States. It is this time only that the role of SME manufacturers was felt inevitable to address this alarming issue.

President Obama during an interview said “We’ve got to make sure that we’re cultivating small businesses and entrepreneurs who are going to be driving employment growth,” the President said, “so that 20 years from now we can look back and we can say, ‘This was the pivot point, this is where we started to turn the corner.”

US need to change course at this point of time and need to develop a network of small and medium enterprises focusing on cleaner and green technology. The U.S. can explore strategies used in emerging markets for development of SMEs. According to Hau L. Lee, a professor at Stanford Graduate School of Business, “America needs large industrial zones devoted to specific industries–similar to zones in Taiwan, Singapore, Malaysia, and much of China. Such areas offer tax breaks, cheap or free land, workforce training, plenty of water and power, and agencies that serve as one-stop shops for all of the necessary permits and regulatory approvals.” A national level specialized financial institution may be created to provide low cost credit to newly setup SMEs in the manufacturing sector. US strength lies in high end technology, innovation, R&D, robust infrastructure, and know-how.

INITIATIVE FOR DEVELOPMENT OF SMEs

US govt. runs a number of programs for providing technological know-how, contracting opportunities, counseling and assistance, financing, and R&D facilities to small and medium enterprises. Some of the prominent programs run by US department of commerce are Manufacturing Extension Program, Advanced Technology Program, Technology Transfer, and Small Business Innovation Research (SBIR) Program. State govt. and number of govt. agencies are deployed for implementation of these schemes across the United States. SBA provides technical and financial assistance to SMEs through its partner lending institutions.

On November 17, 2009 The Goldman Sachs Group, Inc. launched 10,000 Small Businesses — a $500 million initiative for development of 10,000 small businesses across the United States. The plan envisaged to provide greater access to business education, mentors and networks, and financial capital to small businesses. Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs quoted “Small businesses play a vital role in creating jobs and growth in America’s economy.” Warren Buffett, CEO of Berkshire Hathaway also mentioned “Our recovery is dependent on hard working small business owners across America who will create the jobs that America needs. I’m proud to be a part of this innovative program which provides greater access to know-how and capital – two ingredients critical to success.”

Sum2 LLC, a firm which assists SMEs in implementing sound business practices by offering a series of programs and products, announced The Hamilton Plan on Labor Day. The Hamilton Plan is a ten point program to foster the development of manufacturing in the United States by tapping the entrepreneurial energy of small and mid-size enterprises (SME). The Hamilton Plan requires concerted focus of investment capital to fund development and establishment of an SME Development Bank (SDB) which will focus, manage and administer capital formation initiatives to incubate and develop SME manufactures.

I contacted James McCallum, CEO of Sum2llc to discuss the issue of shrinking manufacturing base and how SMEs can help in restoring manufacturing base in the United States. In response to my comment here is what he stated “It is pretty amazing that the United States has not done more to specifically encourage and address the unique needs of this critical economic driver. Many Asian countries are miles ahead of the US in SME banking and capital formation. These banks have extensive portfolios of finance products and technical assistance they provide to SME’s. The reasons that the US lacks focus in this area are many. US commitment to free market forces has badly warped our economic infrastructure. SMEs in the US have primarily relied on community banks for financing. Most of which went for real estate and construction projects. SME manufactures have just about disappeared from the economic landscape of the US. The credit crash and the economic malaise are awakening our understanding of the critical nature of SMEs and our need to manufacture products. Goldman’s 10,000 Businesses Initiative coalesces nicely with the Hamilton Plan we developed in 2008.”

USA MANUFACTURING & SMEs IN YEAR 2030

With the concerted government efforts for promotion and development of SMEs and private sector initiatives such as “10,000 Small Businesses plan” by Goldman, SMEs will be largely benefited having access to innovative financial products and services from a network of financial institutions. Ten point program suggested in Hamilton plan, if implemented, will bring cluster based development of SME manufacturers. Cleaner and green technology will drive long term sustainable growth, increase national income and result in employment creation. Healthy SMEs will be focusing on export of goods thereby reducing the trade deficit and offer a new market for commercial banking sector. High-tech growth oriented SMEs will also have access to private equity investments and will offer a new avenue of diversification to private equity industry.

But the task of SME development is a challenging task and requires strong will on the part of different stakeholders. SMEs are considered to be the riskiest segment of borrowers from a financial institution’s perspective and thus struggle for timely and adequate credit. Access to technical and market information, financial assistance and trained and educated workers is the biggest challenge for SMEs. Future SMEs require sound business practices such as corporate governance, risk management, stakeholder communications and regulatory compliance.

I believe that SMEs are sine qua non for manufacturing sector & I can foresee a bigger space for SMEs in next 20 years from now. I am so intrigued with the idea of SMEs development and their contribution in the economic growth that in the long run I wish to work as a freelancer offering consultancy and advisory services on financial and strategic matters to SMEs. I would work with a network of financial institutions, venture capitalists, engineers, environmentalists, social workers, suppliers, and policy makers so as to offer SMEs a comprehensive set of services.

APPENDIX: REFERENCES

U.S. Needs to Return to Its Manufacturing Base
http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base

Securing America’s Future: The Case for a Strong Manufacturing Base, A Study by Joel Popkin and Company, Washington, D.C. June 2003, Prepared for the NAM Council of Manufacturing Associations

http://www.pmihome.org/Popkin_Study_3-03.pdf

President predicts it will take decades to revive declining U.S. manufacturing base?

http://www.sodahead.com/united-states/president-predicts-it-will-take-decades-to-revive-declining-us-manufacturing-base/question-637119/

Manufacturing & Investment Around The World: An International Survey Of Factors Affecting Growth & Performance, ISR Publications, revised 2nd edition, 2002. ISBN 978-0-906321-25-6.

Economy Watch: Economy, Investment & Finance Report

http://www.economywatch.com/world_economy/usa/export-import.html

USA Manufacturing output continues to increase (over the long run), Curious cat, Investing and economics blog

http://investing.curiouscatblog.net/2008/12/02/usa-manufacturing-output-continues-to-increase-over-the-long-term/

Alliance for American Manufacturers http://www.americanmanufacturing.org/issues/manufacturing/the-us-manufacturing-crisis-and-its-disproportionate-effects-on-minorities/

Can the future be built in America? http://proquest.umi.com.remote.baruch.cuny.edu/pqdweb?index=28&did=1860761601&SrchMode=1&sid=2&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1259505905&clientId=8851

TO SAVE AMERICAN MANUFACTURING: USBIC’S PLAN FOR AMERICAN INDUSTRIAL RENEWAL BY Kevin L. Kearns, Alan Tonelson, and William Hawkins

http://americaneconomicalert.org/USBIC_Save_American_Manufacturing_Jobs_Plan.pdf

Goldman Sachs Launches 10,000 Small Businesses Initiative

http://www2.goldmansachs.com/our-firm/press/press-releases/current/10-k-business.html

Goldman Sachs as Social Entrepreneur https://sum2llc.wordpress.com/

Hamilton Plan by Sum2llc https://sum2llc.wordpress.com/2008/09/03/sme-development-bank/

You Tube Video: Isley Brothers, Work to Do

Risk: SME, manufacturing, economic revitalization, social wealth

February 3, 2010 Posted by | business, commerce, credit crisis, economics, Hamilton Plan, manufacturing, recession, SME, Sum2 | , , , , , , , , , , , , , , | 1 Comment

New Day Rising: ADP Employment Report

Rising Sun Taft McWhorter

ADP has released its National Employment Report for January.   Non-farm private employment decreased 22,000 during  the month on a seasonally adjusted basis.   The ADP report indicates that job loss is decelerating.   Many believe that the massive governmental intervention to recapitalize the banking sector and stimulus programs extending unemployment benefits and the provision of funding aid to state governments are key elements that are helping to stabilize the economy.

Highlights of the ADP  report include:

January’s ADP Report estimates non-farm private employment in the service-providing sector increased by 38,000, the second consecutive monthly increase.

Employment in the goods-producing sector declined 60,000, with employment in the manufacturing sector dropping 25,000.

The employment decline in the manufacturing sector was the lowest since January of 2008.

Large businesses, defined as those with 500 or more workers, saw employment decline by 19,000 while small-size businesses with fewer than 50 workers, declined 12,000.

Employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 9,000, the first increase in employment since January of 2008.

Employment in the financial services sector dropped 16,000.

Construction employment dropped 37,000. This drop marks the third straight year of consecutive monthly employment declines and brings the total decline in construction jobs since the peak in January 2007 to 1,804,000.

Sum2 advocates the establishment of an SME Bank to sustain long term economic growth.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

You Tube Video: Johnny Cash, Bob Dylan, You Are My Sunshine

Risk: unemployment, recession, recovery, political

February 3, 2010 Posted by | Uncategorized | , , , , , , , , , | Leave a comment

Schulte Roth & Zabel Navigating A Brave New World

This years Schulte Roth & Zabel’s  (SRZ) 19th Annual Private Investment Funds Seminar stuck a very different pose from last years event.  One year on from the global meltdown of financial markets, languishing institutional certainty and the  pervading crisis of industry confidence has been replaced with a cautious optimism.  The bold swagger of the industry however is gone, in its place a more certain sense of direction and expectation is emerging.  Though managers continue to labor under unachievable  high water marks due to the 2008 market devastation, 2009 marked a year of exceptional performance.   Investment portfolios rebounded in line with the upturn in the equity and bond markets.  Liquidity improved and net inflows into the industry has turned positive during the last quarter as large institutional investors and sovereign wealth funds returned to the sector with generous allocations.  These are taken as clear signs that the industry has stabilized and the path to recovery and the healing of economic and psychological wounds are underway.  Yes the industry will survive and ultimately thrive again but it will do so under vastly different conditions.  The new business landscape will require an industry with a guarded culture of  opaqueness to provide much greater transparency while operating under a regimen of greater regulatory scrutiny.

The 1,900 registered attendees heard a message about an industry at a cross road  still coming to terms with the market cataclysm brought on by unfettered, unregulated markets and excessive risk taking.  SRZ offered an honest assessment in examining the industries role in the market turmoil.  Speakers alerted attendees to an industry at a tipping point.  To survive the industry must adapt to a converging world that believes that uniform market rules and regulations are the surest safeguards against catastrophic systemic risk events.  A global political consensus is emerging  that expresses  support for industry regulation as an effective tool to mitigate the pervasiveness of fraud and market manipulation that undermines investor confidence and ultimately the functioning of a fair and efficient open free market.

Paul Roth, Founding Partner of SRZ,  noted in the events opening remarks that the market is beginning to recover as evidenced by industry AUM once again exceeding the $2 trillion mark;  but  he warned  that any exuberance needs to be tempered with the understanding that the new normal would not resemble the pre-crash world.  The days of  cowboy capitalism and radical laissez-faire investing are clearly over.   Indeed Mr. Roth wryly observed “the industry must develop a maturity about the need for change.  He concluded “that the industry must respond by playing a constructive role in forming that change.”

The conference subject matter, speakers and materials were all top shelf.  Break out presentations on risk management, regulatory compliance, distressed debt deal structuring, tax strategies and compensation issues all reinforced the overriding theme of an industry in flux.  The presenters passionately advocated the need to intentionally engage the issues  to confront accelerated changes in market conditions.  By doing so, fund complexes will be in a position to better manage the profound impact these changes will have on their business and operating culture.  Subject issues like insider trading, tax efficient structuring, hedge fund registration,  preparing for SEC examinations and the thrust of DOJ litigation initiatives and how to respond to subpoenas were some of the topics explored.

To highlight the emerging regulatory environment confronting the industry, a  presenter pointed to the Southerization of the SEC.  This is an allusion to the hiring of former criminal prosecutors from the Department of Justice, Southern District of New York to go after wayward fund managers.  The SEC is ramping up its organizational capability to effectively prosecute any violations of the new regulatory codes.   The growing specter of criminal prosecutions and the growing web of indictments concerning the high profile case of Mr. Raj Rajaratnam of the Galleon Group was presented as evidence of an emerging aggressive enforcement posture being pursued by regulators.  Managers beware!

Presenters made some excellent points about how institutional investors are demanding greater levels of TLC from their hedge fund managers.  This TLC stands for transparency, liquidity and control.  Creating an operational infrastructure and business culture that can accommodate these demands by institutional investors will strengthen the fund complex and help it to attract capital during the difficult market cycle.

The evening concluded with an interesting and honest conversation between Paul Roth and Thomas Steyer,  the Senior Managing Partner of Farallon Capital Management.  The conversation included increased regulatory oversight, compensation issues, industry direction and matching investor liquidity with fund strategy, capacity, structure and scale.   Mr. Steyer manages a multi-strategy fund complex with $20 billion AUM,  his insights are borne from a rich industry experience.  He made the startling admission that Farallon has been a registered hedge fund for many years and he believes that the regulatory oversight and preparation for examiners reviews helped his fund management company to develop operational discipline informed by sound practices.

Mr. Steyer also spoke about scale and that additional regulatory oversight will add expense to the cost of doing business.  Mr. Steyer believes that it will become increasingly difficult for smaller hedge funds to operate and compete under these market conditions.

Another interesting topic Mr. Steyer addressed were issues surrounding investor redemption and fund liquidity.  During last years SRZ conference investor liquidity was the hot topic.  Fund preservation during a period of market illiquidity and a fair and orderly liquidation of an investment partnership were major themes that ran through  last years  presentations.  Mr. Steyer struck a more conciliatory tone of investor accommodation.  He confessed his dislike for the use of “gates” as a way to control the exit of capital from a fund.  In its place he offered a new fund structure he referred to as a “strip” to allocate portfolio positions to redeeming partners in proportion to the overall funds liquid and illiquid positions.  He stated he believed that strategy to be more investor friendly.

Schulte Roth & Zabel has once again demonstrated its market leadership and foresight to an industry clearly in flux, confronting multiple challenges.  These challenges will force fund managers to transform their operating culture in response to the sweeping demands of global market pressures, political impetus for regulatory reform and the heightened expectations of increasingly sophisticated investors.   The industry could not have a more capable hand at the helm to help it navigate through the jagged rocks and shifting shoals endemic to the alternative investment management marketplace.

You Tube Music Video: Beach Boys, Sail On Sailor

Risk: industry, market, regulatory, political

January 15, 2010 Posted by | hedge funds, institutional, investments, operations, politics, private equity, regulatory, reputational risk, risk management, SEC, sovereign wealth funds | , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

NFIB Reports Decline in Small Business Optimism

The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for January 2010.  The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.

This months report indicates a decline in business optimism.  The NFIB index fell 0.3 points in December to 88. That’s up from the lows of March 2009, but has been below 90 for 15 months. “Optimism has clearly stalled in spite of the improvements in the economy,” the NFIB said.

Highlights Reported by Forbes Digital:

  • Jobs: 10% of the owners increased employment (the highest reading of 2009), but 22% reduced employment (seasonally adjusted). Over the next three months, 15% plan to reduce employment (down two points), and 8% plan to create new jobs (up one point), yielding a seasonally adjusted net-negative 2% of owners planning to create new jobs, a one-point improvement from November.
  • Credit: Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15% reported loans harder to get than in their last attempt, unchanged from November. Although “that is not nearly as severe as the financial distress reported in the pre-1983 period, 24 months of recession have sapped the financial strength of many small firms,” Dunkelberg said. Eight percent of all owners reported that their borrowing needs were not satisfied, down two points from November. The remaining 92% of all owners either obtained the credit they wanted or were not interested in borrowing.  Only 4% of the owners reported finance as their number one business problem (down one point).
  • Profits: 54% reported lower earnings compared to the previous three months. Of those, 65% cited weaker sales, 4% each blamed rising labor costs, higher materials costs and higher insurance costs, while 6% blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits.
  • Prices: 10% of the owners reported raising average selling prices, but 33% reported price reductions yielding a net-negative 22% (seasonally adjusted) of owners who cut prices in December. Plans to raise prices fell one point to a seasonally adjusted net 3% of owners, 35 points below the July 2008 reading. “The weak economy continued to put downward pressure on prices,” said Dunkelberg. “Widespread price cutting contributed to the reports of lower nominal sales.”
  • Costs: On the cost side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the “back door” of the business) fell two points to 2%, and only 3% cited the cost of labor.

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages, Credit Markets

The NFIB Report can be downloaded from the Sum2 website.  NFIB Optimism Index

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

You Tube Music Video: Louis Armstrong, Sunny Side of the Street

January 12, 2010 Posted by | business, commerce, credit, credit crisis, recession, SME | , , , , , , , | Leave a comment