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SMEs Dance to the Basel III Shuffle

cap structure sme eu.PNG
I often wonder, what if Basel II capital accords had been in place prior to the Great Recession? 
 
Could the devastating crisis fueled by the serial pops of credit bubbles rumbling through the dismal landscape of G20 principalities been avoided with better capital adequacy safeguards? 
 
Could the precious Post Cold War dividend been preserved; had the fiduciaries of global solvency not toppled the dominoes of economic prosperity and political stability through extreme selfishness and irrational behavior?
 
Some economists assert that had the guidelines of Basel II been in place it would not have mattered. That may certainly be true, but one is still left to wonder if Systemically Important Financial Institutions (SIFI) had followed better governance frameworks the fissures emanating from the epicenter of the global economic meltdown would not have been as deep or as widespread.
 
The lessons learned from the crisis are being codified in the new governance frameworks of Basel III. Whereas previous Basel Accords focused on capital adequacy and loss reserves aligned to risk weighted assets and counterparty exposures, Basel III looks to strengthen capital adequacy by addressing liquidity and leverage risk in the banks capital structure. Basel III recognizes the primacy of mitigating the systemic risk concentrated in the capital structure of a SIFI and lesser designees, and the contagion threat it poses on its counterparties and the greater economy. 
 
To ally solvency concerns, Basel III installs a leverage ratio and bolsters its Liquidity Coverage Ratio (LCR) which will require all banking institutions to increase its regulatory capital reserves of High Quality Liquid Assets (HQLA). An increase in HQLA reserves will raise the cost of capital for all financial institutions requiring it to raise its spreads on credit products. 
 
SMEs will be particularly affected by Basel III initiatives. SME’s are highly dependant on bank capital and credit products and remain highly sensitive to the cyclicality of macroeconomic factors. D&B’s Small Business Health Index reports that SME business failures in the US were in excess of 140,000 per month in 2013. The OECD reported that during 2012 over 800,000 EC SME’s closed shop in 2012. 
 
Eurofact reported that 60% of all non-financial value add to the EC economy is attributable to SMEs. Though SMEs are generally recognized as principal economic drivers in both the developed and lesser developed economies; during the economic crisis SME’s were rationed out of the credit markets. Large capital infusions and accommodative monetary policy by the central bank authorities principally sought to bolster bank capital and inject liquidity into the faltering global banking system. 
 
As such much of the low cost capital provided to banks did not trickle down to SMEs. Better returns were realized by deploying capital to investment partnerships, energy resource development, the acquisition of strategic commercial enterprises and underwriting speculative trading in the global security markets. 
 
Little of the low cost capital found its way onto Main Street; driving the bifurcating wedge between the real and speculative economy. As a more conservative political landscape emerges from the wreckage of the economic calamity created by “elitist” financial institutions and “remote” Brussels based government bureaucrats, the cause of the SME is resonating in the rising voice of a middle class spoken with a distinct nationalist accent. 
 
Politicians, legislators and advocacy groups are fully invested in the cause of the SME. Stakeholders are advocating more government involvement to underwrite and guarantee sponsored loans. In an era where government involvement in markets is under severe attack, political expediency and prudent economics coalesce to fund the incubation of SMEs. Even if greater government intervention is counterintuitive to laissez faire proclivities of the politically engaged, higher taxes would be required to fund the risk of capital formation initiatives. The securitization of SME loans is also a consideration; but aversion to leverage and the risk to encourage poor lending practices raise fears of creating yet another credit bubble.
 
The Government of Singapore recently rose its guarantee on SME loans to cover 70% of principal in response to the increase in cost of capital banks will charge as a result of Basel III. Spreads on SME loans are estimated to increase between 50 to 80 basis points. This rise in the cost of capital will allow banks to recoup Basel III compliance expenses associated with the segregation of regulatory capital requirements to service SME loan portfolios.
 
The risk premia on SME loans is justified by regulators because it guarantees the availability of credit through the business cycle. The financial health of SME’s are highly correlated to the vicissitudes of the business cycle. During times of cyclical downturns risk factors for SMEs are magnified due to the prevalence of concentration risk in products, regions, markets, client and critical macroeconomic factors germane to the SME’s business. Mitigation initiatives are inhibited due to liquidity constraints, resource depletion and balance sheet limitations. The closure of credit channels exacerbates this problem and Basel III risk premia pledges to fund SMEs through a trying business cycle.
 
To maintain profitability of SME lending, banks will enhance quality standards and haircut collateral margins; a potentially onerous demand since asset valuations remain severely distressed from the effects of the Great Recession. Banks will avoid SMEs with enhanced risk profiles, make greater use of loan covenants, expand fee based services and hike origination fees to protect margins and instill enhanced credit risk controls to minimize default risk.
 
As the strictures of Basel III take root within commercial banks alternative credit channels are opening to better match an SME’s credit requirements and market situation with a financial product that best addresses their business condition. D&B has initiated a timely capital formation initiative for SMEs. Access to Capital – Money to Main Street is an event tour that is bringing together regional providers of funding for SMEs and startups. 
 
The economic recovery is combining with technology to energize innovations in SME funding options. Crowd-funding, micro-lending, asset financing, leasing, community bank loans, credit unions and venture capital channels are a few of the many options available for small business funding. Each channel offers distinct terms and advantages that match a funding option to the specific situation of an SME. 
 
SME associations and advocacy groups are surfacing in the EU that seek to harness the residual capital created by SME failures. Second Chance and Fail2Suceed are initiatives that seek to harness the intellectual capital garnered by entrepreneurs in unsuccessful enterprises. It is a clear recognition that a great failure can be the mother of greater wisdom. This may augur well for the success of Basel III as it seeks to build on the shortfalls of its forebears to better protect the global banking system as it promotes the wealth of nations by equitably funding the growth of the global SME segment.
 
Sum2 offers a portfolio of risk assessment applications and consultative services to businesses, governments and non-profit organizations. Our leading product Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to manage enterprise risk and attract capital to fund initiatives to achieve business goals. Credit Redi helps SMEs improve credit standing to demonstrate creditworthiness to bankers and investors. On Google Play: Get Credit|Redi
 
Risk: SME, Basel III, commercial lending, political stability, economic growth, USA, EU, alternative credit channels, credit risk, global banking, business failure, OECD, SIFI

April 14, 2014 Posted by | Uncategorized | , , , , , , , , , , , , , | Leave a comment

ADP Employment Report: Solid Job Growth Gathers Steam

Private-sector employment increased by 217,000 from January to February on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The estimated change of employment from December 2010 to January 2011 was revised up to 189,000 from the previously reported increase of 187,000. This month’s ADP National Employment Report suggests continued solid growth of nonfarm private employment early in 2011. The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000).

The fears of a jobless recovery may be receding but the US economy has a long way to go before pre-recession employment levels are achieved. As we stated previously the economy needs to create over 200,000 jobs per month for 48 consecutive months to achieve pre-recession employment levels. The six month average of 63,000 is still well below the required rate of job creation for a robust recovery to occur.  The Unemployment Rate still exceeds 9%.

The February report is encouraging because it points to an accelerating pace of job creation. The post Christmas season employment surge represents a 30,000 job gain over January’s strong report that triples the six month moving average. The service sector accounted for over 200,000 of the job gains. The manufacturing and goods producing sector combined to create 35,000 jobs. Construction continues to mirror the moribund housing market shedding an additional 9,000 jobs during the month. The construction industry has lost over 2.1 million jobs since its peak in 2008.

The robust recovery in the service sector is welcomed but sustainable economic growth can only be achieved by a robust turn around in the goods producing and manufacturing sectors. Service sector jobs offer lower wages, tend to be highly correlated to retail consumer spending and positions are often transient in nature. Small and Mid-Sized Enterprises (SME) is where the highest concentration of service jobs are created and the employment figures bear that out with SMEs accounting for over 204,000 jobs created during the month of February.

Large businesses added 13,000 jobs during the month of February. The balance sheets of large corporations are strong. The great recession provided large corporates an opportunity to rationalize their business franchise with layoffs, consolidations and prudent cost management. Benign inflation, global presence, outsourcing, low cost of capital and strong equity markets created ideal conditions for profitability and an improved capital structure. The balance sheets of large corporations are flush with $1 trillion in cash and it appears that the large corporates are deploying this capital resource into non-job creating initiatives.

The restructuring of the economy continues. The Federal stimulus program directed massive funds to support fiscally troubled state and local government budgets. The Federal Stimulus Program was a critical factor that help to stabilize local government workforce levels. The expiration of the Federal stimulus program is forcing state and local governments into draconian measures to balance budgets. Government employment levels are being dramatically pared back to maintain fiscal stability. Public service workers unions are under severe pressure to defend employment, compensation and benefits of workers in an increasingly conservative political climate that insists on fiscal conservatism and is highly adverse to any tax increase.

The elimination of government jobs, the expiration of unemployment funds coupled with rising interest rates, energy and commodity prices will drain significant buying power from the economy and create additional headwinds for the recovery.

Macroeconomic Factors

The principal macroeconomic factors confronting the economy are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The Tea Party tax rebellion has returned congress to Republican control and will encourage the federal government to pursue fiscally conservative policies that will dramatically cut federal spending and taxes for the small businesses and the middle class. In the short term, spending cuts in federal programs will result in layoffs, and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME’s to invest capital surpluses back into the company to stimulate job creation.

The growing uncertainty in the Middle East and North Africa is a significant political risk factor. The expansion of political instability in the Gulf Region particularly Iran, Egypt and Saudi Arabia; a protracted civil war in Libya or a reignited regional conflict involving Israel would have a dramatic impact on oil markets; sparking a rise in commodity prices and interest rates placing additional stress on economic recovery.

Political uncertainty tends to heighten risk aversion in credit markets. The financial rescue of banks with generous capital infusions and accommodating monetary policies from sovereign governments has buttressed the profitability and capital position of banks. Regulatory uncertainty of Basel III, Dodd-Frank, and the continued rationalization of the commercial banking system and continued concern about the quality of credit portfolios continue to curtail availability of credit for SME lending. Governments are encouraging banks to lend more aggressively but banks continue to exercise extreme caution in making loans to financially stressed and capital starved SMEs.

Highlights of the ADP Report for February include:

Private sector employment increased by 217,000

Employment in the service-providing sector rose 202,000

Employment in the goods-producing sector declined 15,000

Employment in the manufacturing sector declined 20,000

Construction employment declined 9,000

Large businesses with 500 or more workers declined 2,000

Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000

Employment among small-size businesses with fewer than 50 workers, increased 21,000

Overview of Numbers

The 202,000 jobs created by the SME sectors represents over 90% of new job creation. Large businesses comprise approximately 20% of the private sector employment and continues to underperform SMEs in post recession job creation. The strong growth of service sector though welcomed continues to mask the under performance of the manufacturing sector. The 11 million manufacturing jobs comprise approximately 10% of the private sector US workforce. The 20 thousand jobs created during February accounted for 10% of new jobs. Considering the severely distressed condition and capacity utilization of the sector and the favorable conditions for export markets and cost of capital the job growth of the sector appears extremely weak. The US economy is still in search of a driver. The automotive manufacturers have returned to profitability due to global sales in Latin America and China with a large portion of the manufacturing done in local oversea markets.

The stock market continues to perform well. The Fed is optimistic that the QE2 initiative will allay bankers credit risk concerns and ease lending restrictions to SMEs. A projected GDP growth rate of 3% appears to be an achievable goal. The danger of a double dip recession is receding but severe geopolitical risk factors continue to keep the possibility alive.

Interest rates have been at historic lows for two years and will begin to notch upward as central bankers continue to manage growth with a mix of inflation and higher costs of capital. The stability of the euro and the EU’s sovereign debt crisis will remain a concern and put upward pressure on interest rates and the dollar.

As the price of commodities and food spikes higher the potential of civil unrest and political instability in emerging markets of Southeast Asia, Africa and Latin America grows. Some even suggest this instability may touch China.

The balance sheets of large corporate entities remain flush with cash. The availability of distressed assets and volatile markets will encourage corporate treasurers to put that capital to work to capitalize on emerging opportunities. The day of the lazy corporate balance sheet is over.

Solutions from Sum2

Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to attract and minimize the cost of capital. Credit Redi helps SMEs improve credit standing and demonstrate to bankers that you are a good credit risk.

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: John Handy, Hard Work

Risk: unemployment, recession, recovery, SME, political

March 3, 2011 Posted by | ADP, banking, Basel II, commercial, commodities, credit, Credit Redi, economics, government, labor relations, manufacturing, political risk, politics, recession, regulatory, risk management, small business, SME, social unrest, Sum2, Treasury, unemployment, unions, US dollar | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

To Regulate or Not To Regulate: Is That a Question?

Last year during the height of the banking crisis I remember Larry Kudlow stating that the US market has a choice. It could pursue the EU model of high regulated markets producing low consistent returns or the American model of less regulation and volatile cycles of high risk and potentially higher returns. If the sole focus of government was the peace of mind and well being of investors Mr. Kudlow’s observation would be valid. Government however must consider a larger community of stakeholders in its scope of concern. Regulatory oversight, the harmony of capital and labor and the incubation of an economic culture that is favorable to and supportive of SMEs are the critical questions confronting all governments particularly those in developed economies.

The EU’s social democratic economic models embody the best and worst aspects of these issues. The social democratic state attempt to combine entrepreneurial impulses of capitalism with the management and administration of social welfare for all its citizens. Democratically “elected administrators” use the apparatus of the state to facilitate and manage the competing interests of capital and labor, free markets and regulation while seeking to balance an entrepreneurship friendly culture with long term sustainability.

Yesterday a toxic tsunami of aluminum sludge coated 16 square miles of pristine Hungarian countryside. It is a telling example of a severe risk event that confronts modern life. A lassiaz-faire approach to the event is not viable and offers no solace to those harmed by this assault.  Communities cannot be asked to suffer a market response that promises to correct the problem of the next instance of this event.  The construction of better berms and the implementation redundant protection devises to safeguard against this risk  for the future is little compensation to those who were killed, injured and lost property or livelihoods as a result of MAL Zrt poor risk management practices.

Better to suffer a regulatory initiative that is based on an understanding of an economic ecosystem as complex and inhabited by competing interests of diverse stakeholders.  The ecosystem including the shareholders of MAL Zrt, residents of the surrounding communities, plant workers (also community residents), small businesses (SME) and down stream farmers making a living on arable land and access to clean water all have a stake,  albeit competing,  in the safe operation of the plant. The possibility that the toxic sludge may find its way into the Danube poses a threat to the water supply of other eastern European nations.  This elevates this catastrophic event to other EU jurisdictions. The inter-dependencies and interconnectedness of the pan-regional and larger global economy requires vigorous regulatory safeguards, mitigation initiatives and enforcement response.

The true cost of this event is potentially staggering. It supersedes the narrow interest and economic value of shareholders rights and capital invested in MAL Zrt.  Bad economic behavior exemplified by BP’s Horizon Deepwater failure to install redundant protective devises to keep production costs to a minimum, ended up costing BP shareholders and Gulf Coast stakeholders dearly.

State intervention in markets and the reemergence of managed economies is a reality of the global economy. The “managed economy” of the Peoples Republic of China places western style “free market” economies at a disadvantage. The managers of the PRC efficiently deploy and manage capital, effect trade and market protections and scrupulously manage currency valuation. It has created enormous social wealth for China and has contributed to its rapid rise as a preeminent world power.  China’s rise requires better coordination of private capital and government to marshal a competitive market response to the challenges posed by managed economies to free and open markets of western democracies. The massive pools of capital deployed by sovereign wealth funds of oil producing regencies and the growing insurgency and power of underground economic activity also pose significant challenges to the viability of unregulated markets.

America’s free market model that eschewed regulation since the 1980’s evolved into a mercantile economy with a weakened economic base. The outsourcing of manufacturing infrastructure loosened free market impulses that left in its place a debtor nation whose warped economy depended on housing/commercial real estate construction (collateral creation/securitization), credit marketing, retailing and a service sector that was designed to support the new economic paradigm. It is a model that has proven itself to be wasteful, costly and unsustainable.

Deregulation has led to the dislocation of the capital markets from the real economy. It has contributed to the massive disparities in social wealth and a crumbling infrastructure.  Milton Friedman’s mistaken belief that free market impulses would preserve infrastructure investment has been proven incorrect. Ironically this has added to the government’s burden to provide social assistance to segments of the population disenfranchised from economic participation. Some believe that the basis for the prosecution of the wars in Iraq and Afghanistan are economic stimulus programs designed to keep the economy going due to the vacuum created by the loss of manufacturing.

China’s example nor the resurrection of the soviet socialist model is not a desirable alternative for western democratic capitalist societies. Centralized control and state economic planning is rife with inefficiencies. State run economies threatens liberty, stifles innovation and encumbers economic dynamism. The virtues of capitalism (innovation, dynamism, liberty) needs to be encouraged and blended into the new economic reality of a highly dependent and interconnected world that requires cooperation, coexistence, sustainability, fair asset valuation, and the equitable sharing of resource and responsibility. SME’s are at the forefront of innovation, value creation and dynamism and will play a leading role in the creation of new social-political values as sources of sustainable growth and wealth in the emerging economic paradigm.

You Tube Music Video: Chevy Chase and Mike Myers: I’m Looking Over a Four Leaf Clover

Risk: regulatory, capitalism, sustainability

October 6, 2010 Posted by | capitalism, compliance, economics, infrastructure, labor | , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments

ADP Reports Third Consecutive Month of Job Gains

ADP has released its National Employment Report for May.   Non-farm private employment increased 55,000 during  the month on a seasonally adjusted basis.   ADP also reported an upward revision of 33,000 jobs for March, bringing the number of new jobs created during the month to 65,000.  The three consecutive net employment gains reported by ADP indicates that while the number of new job creation remains modest, positive momentum is developing.

A stabilized labor market is a key ingredient to a sustained economic recovery.  The economy lost over 9 million jobs during the recession and recovery will require the creation of 200,000 new jobs per month for the next 4 years to get back to pre-recession employment levels.  Last years massive Federal stimulus programs directed funds to state and local governments to help stem layoffs. The expiration of those programs will force fiscally challenged local governments to resort to austerity measures that will require the public sector to trim jobs.

Macroeconomic factors continue to be challenging the economic recovery.  The sovereign fiscal crisis in Europe, slowing growth in China, tepid credit markets and political uncertainty counterbalance the positive effects of a stabilizing housing market, low interest rates and benign  inflation.

The economic impact of the Gulf oil spill will not be confined to the region. The local aqua-cultural industries, fishing and tourism to the region has been immediately impacted by the spill.  A prolonged duration of the event will have a profound impact on the economies of the entire Caribbean. The economies and fiscal stability of American cities such as Pensacola, Mobile, Tampa,  New Orleans and Key West are directly threatened by the unfolding events.  Cities and regions along the Texas Coast and Mexico also remain remain at risk and share the unfortunate distinction of being in the probability cross hairs of suffering extreme toxic damage as a result of a hurricane.  Shipping lanes and the closure of ports due to oil contamination could impact America’s vital agricultural industry.  The moratorium on deep water drilling has placed pressure on the oils services sector and may impact the industries long term financial health.   The impact on the price of oil and refined petroleum products remains to be seen.

Highlights of the ADP  report include:

Estimates non-farm private employment in the service-providing sector increased by 55,000.

Employment in the goods-producing sector declined 23,000

Employment in the manufacturing sector rose 15,000

Employment in the services sector rose 78,000.

Large businesses with 500 or more workers  added 3,000 jobs

Medium-size businesses, defined as those with between 50 and 499 workers increased by 39,000

Employment among small-size businesses with fewer than 50 workers, increased by 13,000

Overview of Numbers

The net gain of 52,000 jobs in the small and mid-sized enterprise (SME) sector, compared to the creation of 3,000 jobs in large enterprises is a telling statistic about the changing topology of the US job market.   During the past decade, a large proportion of job growth occurred in the public and small mid-size enterprises (SME) sector.  Large businesses have led the way in implementing lean enterprises and have outsourced and off shored many jobs and business functions to accomplish this. Job creation by SME’s during the past month represented over 90% of new job creation.  America’s reinvention and economic renaissance must be led by the SME sector.  It is vital that capital formation initiatives and credit availability is positioned to foster the growth and development of the SME sector.

This months ADP report is an indication that the US economy continues at the bottom of an extreme down economic cycle.  The danger of a double dip recession unfortunately still lurks as a possibility.  The oil spill in the Gulf of Mexico, the potential of market contagion from EU credit distress, China’s slowdown and the anemic rate of job creation in the wake of massive government expenditures and budget deficits presents continuing challenges to a sustained and robust recovery in the United States.

Solutions from Sum2

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: Monty Python, Silly Job Interview

Risk: unemployment, recession, recovery, SME

June 3, 2010 Posted by | ADP, Profit|Optimizer, risk management, Sum2, unemployment | , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

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

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

Prognostications and Expostulations for 2010

We’re going out on a limb with this one or given thats its winter we’ll say we’re walking on thin ice.   We’ll gaze into the crystal ball and pontificate on eleven  subject areas for 2010.  With some we hope we will be wrong.  With some we hope we will be right.

1.  Stock Market:  Buoyed by well managed earnings by the large multinational companies in the DOW, principally as a result of cost reduction initiatives and exposure to global markets the Index will finish up 6% and close at 11, 011 on the last trading day of 2010.   Given an inflation rate of 4% investors will realize a 2% gain on equity investments in DOW constituents.  S&P 500 and NASDAQ will be flat gaining 2% for the year.

2.  Iraq War:  The war in Iraq will continue to wind down.  America will scale down its military presence in the country.  Troop levels in the country will approximate 85,000 by the close of 2010.  Though direct American military involvement in conflicts will decline,  Iraq will experience civil unrest as Kurd nationalists, Shiite and Sunni Muslims seek to protect their political and economic interests.

3.  Afghanistan War:  The escalation of America’s military presence in Afghanistan will move the theater of war further into Pakistan.  The Taliban will be satisfied to harass US forces by engaging in a guerrilla war.   Taliban and Al-Qaeda supporters will use the opportunity to increase the level of urban terrorist attacks in the large cities of Pakistan.  Al-Qaeda confederates will seek to reestablish base of support in Somalia, Yemen and ties will begin to emerge in Latin American narco-terror states.

4. Iran: The political situation in Iran will continue to deteriorate.  This is a positive development for regional stability because it will force the ruling regime to cede its nuclear program development initiatives.  Iran will not be able to capitalize on the US draw down in Iraq.  It will become increasingly isolated as Hezbollah and Hamas pursue actions that are less confrontational to Israel in Palestine and Lebanon.   The ruling Caliphate position will weaken due to internal political dissent and external economic pressures.

5.  China:  It will be a year of ultra-nationalism in China.  Its stimulus program that is targeted to internal development will sustain a GDP growth rate of 8%.  China will use this opportunity to strengthen the ideological support of its citizens to fall in line with the national development initiative.  Globally China will continue to expand its interests in Africa and will cull deeper relationships with its Pacific Rim club member Latin America.  China will continue to use US preoccupation with its wars in Afghanistan, Iraq and skirmishes in Yemen and Somalia as an opportunity to expand its global presence with a message of peace and cooperation.

5.  US Mid Term Elections:  Republicans will gain a number of seats in Congress.  The continued soft economic conditions, state and local government fiscal crisis, war weariness and cut back in services and rising expenses will make this a bad year for incumbents and the party in power, namely the democrats.  Sarah Palin will play a large role in supporting anti-government candidates drooling over the prospect of  winning a seat in government.

6.  Recession:  Though the recession may be officially over, high unemployment, home foreclosures and spiking interest rates will hamper a robust recovery.  The end of large government stimulus programs  and the continued decrease in real estate values also present strong headwinds to recovery.  We predict a GDP growth rate of 2% for the US economy.  Outsourcing will abate and a move to reintroduce SME manufacturing  will commence.

7.  Technology:  The new green technology will focus on the development of nuclear power plants.  The clash of the titan’s between Google’s Droid and Apple’s I Phone will dominate tech news during the year.  Lesser skirmishes  between Smart Phones makers or the war of the clones will continue to explode altering the home PC market and continue to change the market paradigm for old line firms like DELL, Microsoft and HP.   SaaS or cloud computing will gain on the back of lean business process initiatives and smart phone application development and processing infrastructure will encourage cottage industries fueling the cloud and making for some new millionaires.  The tension between the creators of content and search and delivery will begin to tilt back toward the content providers.  Litigation involving social networking sites will be filed to create safeguards against  its use  as a tool to control and manipulate behaviors thus threatening civil liberties and privacy rights.

8.  Culture:  The Googlization of civilization will allow individuals to embrace paternal corporatism as a pillar to add efficiency and order to their lives.  Multiculturalism will continue to grow in the US.  However a growing political backlash against it will become more of a prominent theme as Teabaggers agitate for a return to the true values of America.  Electronic arts will make major leaps and bounds as commodification continues to be a driving force in the world of art.  Printed words like books and newspapers will continue to dramatically decline.  Writing, drawing and playing musical instruments skills will  ebb as people prefer to develop digital skill sets.  Texting and Tweeting make for poor practice for extended compositions.

9.  Latin America:  Instability will grow in Latin America as narcodollars continue to undermine political stability in Columbia, Venezuela, Mexico and Panama.   The US will increasingly become involved in the conflicts between petro and narcodollars.  Mexico’s stability will be increasingly undermined by the power and corruptible influence of the drug trade.  China’s influence on the continent will grow.

10. European Union:  The EU will continue to manage itself for stability.  It will yearn to return to its aristocratic roots and will become increasingly conservative.  It will continue to have a complex relationship with the expanding Muslim community.  A call to deeper nationalism will arise out of a growing influence of Islam and the inefficiencies of EC bureaucrats in Belgium.  The EU will continue its union of expediency to counterbalance their distrust of Russia and their distaste for America.

11.  Environmental Justice:  Though awareness continues to grow concerning the need to mount and implement large scale solutions to halt the problem of global climate change;  the political will and resources required to drastically alter the planets current trajectory in growth of carbon emissions from the burning of fossil fuels remains unaltered.  Social responsible enterprises, small businesses and individuals continue to make a difference.  Eco friendly small businesses, urban farming, capital formation initiatives around renewable  energy  businesses are hopeful signs of a market response to the pressing problem.  China is investing heavily in becoming a market leader out of business savvy and environmental necessity.  Until the great powers of the world can come to some  collective agreement on how to limit , cap or trade carbon credits we’ll have to be content to separate the trash and recycle, reuse and reduce.

You Tube Music Video: Donald Byrd, Stepping Into Tomorrow

Risk: unfulfilled predictions will make me look bad

January 5, 2010 Posted by | commerce, environment, manufacturing, sustainability | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 3 Comments

G-20 Mulls Sustainable Recovery

800px-G20_2008_summit_participants.svgLast year when the G-20 convened in November it was billed as the Bretton Woods II.  The global economy was in the throes of a banking crisis that rivaled the Great Depression of the 1930’s.  Central bankers and political leaders were struggling to formulate the right mix of policies to strike the proper balance of interventionist programs needed to arrest the accelerating economic decline brought on by the frozen credit markets.  Most believe it worked.

Today in Pittsburgh, conferees  will begin to assess weather the accommodative monetary policies, massive capital infusion programs and historic low interest rates can continue to stabilize the global banking system and bear fruit of real economic growth.   Though economic growth appears to have emerged in the US and the EU, there is  a concern that recovery has become too dependent on the massive government stimulus programs.  The development of a stimulus exit strategy will certainly be on the G-20 agenda.  How to sustain economic recovery without the massive government spending programs is the primary challenge that G-20 leaders need to address.

Global trade agreements and a consistent tax policy across G-20 domiciles will also be areas of focus for conferees.  Regulatory tax arbitrage is an issue that G-20 countries are keen to address.  The days of utilizing domiciles with favorable tax laws to protect assets and revenue derived from a domicile with a less accommodating tax structure is an area that all tax hungry G-20 countries want resolved.  Recognizing taxable revenue streams and repatriating capital gains taxes are particularly pressing concerns considering the massive budget deficits many countries are confronted with.

Global trade issues and the East/West balance of trade continues as concern for conference participants.  The fall of the dollar and China’s growing reticence to continue their purchase of US government debt is an interesting backdrop to the brewing trade spat over US tariffs imposed on the importation of tires manufactured in China.  China has retaliated with an examination of US trade practices and American’s need to keep their fingers crossed that China continues to regularly appear at the government bond auctions with its sizable check book.

You tube Music Video: Edvard Grieg, Anitra’s Dance

Risk: trade, recession, political, economic

September 24, 2009 Posted by | banking, economics, government, recession, regulatory, sustainability, Treasury, Uncategorized, US dollar | , , , , , , , , , , , , , , , | 1 Comment

The Tax Man Cometh

taxmanThe IRS has reached agreement with UBS over disclosure of the identity of US citizens holding private bank accounts with the firm in Switzerland.  The agreement calls for UBS to release the names of 4,450 clients who are suspected of using the bank to hide assets and avoid taxation.   UBS has private banking relationships with with over 52,000 US citizens with assets approximating $15 billion.

Private banking is an important pillar of the Suisse economy.  This action may pose a significant threat to the Suisee banking industry.   Compliance with the IRS request for the names of private bank account holders  damages the venerated wall of secrecy Suisse banks employ to attract assets and clientele.  Other EU banking centers like Luxembourg and Liechtenstein may also feel pressure to comply with news standards of transparency and disclosure.  This may have the effect of driving investors to seek more exotic havens to park assets.  Offshore domiciles in the  Indian Ocean, Southeast Asia and Latin America may benefit from this action.  It may also add to the risk of investors seeking safe havens for their assets.

For US taxpayers, the resolution signifies that the IRS is serious about its intention to ramp up enforcement of the tax code.  The IRS has enhanced its focus on US citizens and corporations utilizing foreign banks and offshore investment vehicles.  The agency is concerned that investment products and financial services offered by foreign banks have enabled US citizens and corporations to avoid tax liabilities.  Products such as credit cards, hedge funds and other investment partnerships are coming under the exacting microscope of the IRS.

The IRS is under pressure to enforce compliance with federal tax statutes.  The US Treasury coffers are seriously depleted given all the stimulus and economic recovery expenditures.  The IRS is mandated to assure that compliance is adhered to so taxpayers pay taxes on all legal capital gains and income.  As this blog reported, the IRS has developed an Industry Focus Issue, (IFI) audit strategy that  profiles investment partnerships and other corporations that use offshore domiciles to harbor assets.  IFI guides field audit personnel through a risk based assessment of investment partnerships.  The IFI aggregates and ranks  Three Tiers of high risk tax compliance issues.  Examiners will conduct rigorous reviews of these issue sensitive factors.  Many of the factors concern the recognition of income and assets in custody outside of the US and repatriation of revenue derived in foreign domiciles.

Sum2 has published a product, IRS Audit Risk Program (IARP) that guides corporate tax managers and tax professionals through a risk assessment of their exposure to IFI risk factors.  The IARP is a strategic tool that corporate tax professionals utilize to score risk exposures, determine mitigation actions, estimate remediation expenses and manage tax controversy defense strategies.  The IARP is available for purchase on Amazon.com.

The IRS action against UBS is the opening salvo in the new era of enhanced compliance.  UBS is a marquee brand that indicates that the IRS is serious about compliance. As a result of the UBS settlement other Suisse banks are coming forward to make voluntary disclosures about US citizens suspected of tax-evasion.  Those bank  include, Credit Suisse, Julius Baer Holding, Zurcher Kantonalbank and Union Bancaire Privee.  UBS has  previously turned over approximately 250 names to the IRS.  It is believed that the IRS has issued indictments to 150 people from that list of names.

This high profiled action against UBS has helped to publicize the IRS amnesty program that expires September 23rd.  In an effort to encourage Americans to voluntarily disclose information about  accounts they illegally withheld, the IRS created an amnesty program. Under the amnesty program, any taxpayer who successfully completes the requirements will not be criminally prosecuted for their acts.  More details on the IRS amnesty program can be found here on the FIND LAW website.

Risk: tax, reputation, compliance,


August 21, 2009 Posted by | compliance, CTA, hedge funds, IARP, IRS, regulatory, reputational risk, Tax, Uncategorized | , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment