About like it has been (4 week average is 628K, originally reported as 631K). Economy is starting to firm up a bit but the job numbers are being held down by the recent further tightening in bank credit lines for small businesses. Banks did this in order to focus bank resources on “things they can sell to the government in boatload quantities” that have a huge return for the bank. Banks have frozen working capital lines, home equity lines, personal lines and nonconforming mortgages (jumbos) for even top quality borrowers. Jobs can’t pick up until small companies can borrow money again.
This problem is concentrated in large banks–many community banks took no government money and are still lending. As we have learned in recent weeks, Geithner (the Doogie Howser of finance) has large bank CEOs on his speed dial and Treasury and White House officials are not above blackmailing CEOs to get what they want (even if it means violating their fiduciary duty to shareholders and bondholders.
HISTORICAL NOTE: For those of you who are new to the investment world, the terms SHAREHOLDER and BONDHOLDER are quaint 20th century terms which were used to describe the people who owned businesses, back when people were allowed to OWN businesses and contracts and property rights were part of our culture.
The chart above shows the same data–large bank business loans–as the increase in lending, in billions of dollars, over a year earlier. There are two interesting things to see in this chart. First, the spike in loans that happened a year ago, in mid-2008, when the capital market slammed shut like a snapping turtle. Large companies like to get their working capital in the commercial paper or asset-backed lending markets, rather than from banks, because it is cheaper. They also maintain standby lines of credit with banks (for which they pay a small fee as a percentage of the undrawn line just in case the capital market is not open for business. When the capital markets closed last spring/summer (think Bear Stearns, AIG, FNMA, Lehman) big companies were forced to draw down their standby bank lines–hence the big jump last year.
The second thing you see is the huge dropoff this year, in part due to large bank responses to the government bailout activities. This is the reduction in working capital I am writing about.
Some people ask how can I be sure that the drop represents a reduction in availability, rather than a lack of demand from business borrowers. If I asked this question to a roomful of small business owners they would be rolling on the floor laughing. Or crying.
We get calls from real business owners every week on Strategy Room, our 3PM Friday Foxnews.com small business show and on Your Questions, Your Money, our noon-2PM Saturday Fox Business show for entrepreneurs. They all report the same thing; their banks have either frozen, reduced or called their working capital credit lines. We have also polled banks with the same result. In one case, a bank officer reported that their new policy to reduce a small business credit line dollar for dollar every time the borrower made a payment was new policy from the top. Unbelievable.
So what does this mean for investors? First, it means it is a hell of a lot better deal today to be a bank than to be their customer so overweight bank stocks and underweight real businesses. Second, small companies rely on bank loans more than big ones so overweight a portfolio in large cap stocks and underweight small cap stocks. Third, the recovery in jobs and growth is likely to be a little more drawn out than it would be if Doogie and his guys weren’t mucking around with the banks. But the U.S. economy will eventually recover–it always does. When people see the recovery their next worry is going to be inflation, which means rising bond yields. That means I would rather own equities than bonds today.