9.18.09

9.18.09

          The recovery from the recession is questionable for the following reasons. Small businesses, who are perceived to be in pristine financial shape, are likely to get loans from banks, while large companies are starting to tap the capital markets via bond and note sales.

          The problem is that most small businesses are cash flow based, with little profit, and little reserves. And that's the kind of balance sheet that is no longer attractive to banks. That means that when business suffers, and the small business tries to tap its old backup system, its bank, the answer is, more often than not, “No”. That often leads to layoffs, and even plant and store closings, further perpetuating the downward spiral. On the other side, that offers larger business’ and even mid-size business’ with decent balance sheets an opportunity to expand.

          In a sense, the system is working much like nature. The strong survive and the weak perish. The only problem is that in nature, as in business, survival depends on guile, preparation, and a little luck. Small businesses, unfortunately, are caught in a quagmire created in many cases by external events beyond their control. This is strong reminder that “Chaos” is currently the ruling force in the stock market. And that makes everyday life predictably unpredictable.

          Can the government prevent the next shoe from dropping on the financial sector and overall economy? Soaring vacancy rates in office buildings and factories, and the resulting spike up in delinquencies and foreclosures on commercial mortgages, has commercial mortgage-backed securities, which banks packaged and sold to investors, potentially turning into toxic waste similar to that seen last year in residential mortgage-backed securities. Also similar, commercial property owners are unable to obtain refinancing to bring their costs more in line with the plunging property values, and reduced revenues created by the high vacancy rates.

          According to a report in the Journal, the problem is not just in commercial mortgage backed securities held by investors, but that banks hold $1.7 trillion in commercial mortgages and construction loans, the delinquencies on which are already contributing to bank failures. The FDIC reported two more bank failures yesterday, one in Kentucky and one in Indiana, the two banks having a total of 27 branches, bringing the total number of bank failures so far this year to 94.

          And new housing starts rose 1.5% in August. However, that is a misleading number as far as indicating that the single-family housing industry, where the problem lies, is bottoming. The rise in home starts was entirely due to a big jump in the construction of rental apartment houses for those who cannot afford to own a home, which soared 25.3% to 119,000 housing units, while construction of single-family homes fell 3.0% in August.

          We will still be staying in CASH 100% for now. The market is way over-bought at this time and is overdue for a correction.

Till next time

The MTA Staff