The National Federation of Independent Business performed some time-bending on its Website Tuesday morning. The link for the much-anticipated July survey of small-business sentiment pointed readers to the previous month's survey; the current one was missing. So, for a brief hour, it looked like small-business owners were slightly more optimistic about the direction of the U.S. economy, as they had been in the June report. That would have been good news amid the din of reports about credit-starved small businesses.
If only. Instead of the NFIB optimism index having risen 1.6 points as it did in June (continuing a gradual ascent), in July it actually dropped by 3.2 points. Small businesses are as pessimistic as they were at the beginning of the year, and trends in the NFIB survey's components are anything but encouraging.
On a seasonally adjusted basis, for example, only 9% of NFIB members have unfilled job openings, and only a net 1% of firms plan to create new jobs. The number of firms planning capital expenditures is still near a 35-year record low, and small businesses continue to liquidate inventories: 21% more firms reported a depletion of inventory in the last three months than those that reported gains, and 3% more firms plan to cut inventories than add them in the coming three months.
It's easy to blame the banks for all this pessimism, and Federal Reserve chairman Ben Bernanke did so in a speech on Monday. "It seems clear that some creditworthy businesses -- including some whose collateral has lost value but whose cash flows remain strong -- have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating," said Bernanke at a Fed meeting on addressing the financing needs of small businesses.
However, the 800 or so members of the NFIB say access to credit is not their biggest problem. No, the top problem is poor sales, say 30% of firms. It's no wonder: data out today shows that retail sales in the U.S. tumbled half a percent in June after falling more than 1% in May. Consumers bought fewer cars and car parts, and less furniture, sporting goods, books, and music. That spells trouble. With revolving consumer credit (credit cards) falling 10% in the latest Fed statistics, government stimulus programs running out, and time travel still in development mode, the economic horizon for small firms looks dark indeed.
To quote Bill Gates: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten." I stumbled across that pearl recently on a Website called BrainyQuote, which triggered a memory of a televised interview with Gates, done around 2000, in which he said much the same with particular reference to the Internet.
The quote I read online ended with, "Don't let yourself be lulled into inaction." With Microsoft now having arguably been passed in relevance by Amazon.com and Google (and "arguably" is generous), Gates may not have taken his own wisdom fully to heart. But in any case, his application of the principle to the Web proved prescient. Even before 2000, everyone had recognized the potential of e-commerce. By 2002, the business landscape was littered with failed dot-coms, and today, buying and selling online is stitched more tightly into everyday life than even a Pollyanna would have guessed a decade ago.
It looks like a similar sequence of scenarios may coalesce with regard to cloud computing. Everyone recognizes its potential, and every technology vendor is now a cloud vendor -- just ask them and they'll tell you, even those that are simply repackaging last year's "service-oriented architecture" as this year's "private cloud service." Yet right now, the revenue pie isn't nearly large enough to support the hordes that are angling for a slice of it. (For all that you've heard about software as a service, the highest-profile subset of the cloud, that entire market was a mere $7.5 billion in size last year, according to Gartner.) If there is a load of failures over the next couple years, as seems likely, it will show that the short-term impact of the cloud was overestimated.
That the long-term outlook may be underestimated is reflected in the message emanating from some companies, mostly larger ones, that they cannot foresee a day when they will entrust their most sensitive information and systems to the cloud. With all due respect, it seems very unlikely that such a day will never come. Data-security concerns will be overcome, and probably sooner than later. Even companies that remain unconvinced on the security issue will have a hard time matching up on costs with competitors that trade a physical infrastructure for a virtual one, so eventually they will move as well. Only a handful of corporate behemoths make a convincing case that many of their key computing workloads will continue to enjoy greater economies of scale when handled within their own data centers.
Cloud-based ERP functionality even for large companies will be on the table; already SAP and, a bit more equivocally, Oracle are making rumblings about moving in that direction. Frankly, I don't think we're going to have to wait 10 years before we see that "cloud computing" and "computing" have morphed into pretty much the same thing.
At the CFA Institute's annual conference in Boston on Wednesday, Nobel Prize-winning economist George Akerlof used a playpen analogy to make a case for regulating derivatives. When toddlers are in a playpen, parents don't need to watch them very closely, he explained. Likewise, if the use and trading of derivatives were carefully regulated, it would reduce the chance that somebody would get hurt.
CFOs may bristle at the idea of increased regulation and government intervention in the financial system, but Akerlof said that's just what the economy needs to regain its footing and keep out of future recessions. Praising the bailout of the banking system as "a true miracle," he called for regulators to be "much less passive."
"The dramatic actions taken by the government in the fall of 2008 saved us from a reenactment of the Great Depression," said Akerlof. Without the bailout, he said, the United States could be facing an unemployment rate of 25%. He also argued that the government should be engaging in deficit spending to boost employment.
Going forward, Akerlof said the financial sector needs more regulation to control for the irrationalities at work in the market -- forces he and fellow economist Robert Shiller described in their recent book, Animal Spirits. Such factors as overconfidence, corruption, illusions, and trust all played a role in the recent economic boom and bust, Akerlof maintained.
"Most investors surmise the value of assets through what other people tell them. And when they are overconfident, they trust what people are telling them and prices rise," he said. "Events like the Madoff [Ponzi] scheme and the boom in subprime mortgages were indications of people's lack of skepticism about where they parked their money."
The Securities and Exchange Commission's recent case alleging fraud at Goldman Sachs helped soften the regulator's bruised reputation, at least temporarily. It created an image of the SEC as a proactive enforcer against banking behemoths, after more than a year of high-profile misses (such as Bernard Madoff's Ponzi scheme).
But the initial glow from the lawsuit's announcement last month has faded, as it appears likely the two sides will settle to make the matter go away. If that happens, the regulator will once again face criticism of its settlements. The SEC's announcements in such cases tend to include few details, and give accused companies a clean slate by allowing them to say they "neither admit nor deny" wrongdoing in the press releases that accompany the deals.
Indeed, this habit rankled Judge Jed Rakoff when he oversaw the initial $33 million settlement between the SEC and Bank of America in late 2009 (BofA later agreed to pay $150 million over disclosure issues surrounding its Merrill Lynch acquisition). He called the agreement "a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry."
The SEC is well aware of the frustration lingering after some of its settlements. "If we take away this tool [of "neither admit nor deny"], companies would have little reason to settle, and many more cases would end up in litigation," said SEC chairman Mary Schapiro via video at the CFA Institute's annual conference in Boston on Tuesday.
Moreover, the regulator leans toward settling with defendants in order to bring more cases forward. According to Schapiro, her resource-strapped agency couldn't maintain its level of enforcement actions if it had to increase its court appearances. Settlements at the commission have been on an upward trend over the past year, according to NERA Economic Consulting. The SEC settled with 354 defendants during the first half of its 2010 fiscal year, an 8% increase over the same period in 2009. Ninety-seven of those agreements involved companies.
Schapiro offered hope for critics of the details (or lack thereof) that come out of SEC settlements. She said she's "interested" in including more data about the findings that lead to civil charges, something that would be welcomed by investors but likely fought by companies as they negotiate terms to close their cases. It's an area where the SEC could hold itself to the same standard of transparency that it requires of its registrants.
Last week's free fall in the stock market took a momentary toll on the market caps of some large companies, but prices snapped back minutes later. More important for the economy and CFOs was the flock of initial public offerings that failed to take wing last week due to spikes in the Chicago Board of Exchange Volatility Index.
Globally, $6 billion of IPOs were postponed or withdrawn, and many companies cut their deal sizes substantially before pulling the plug. Chinese outfit New Century Shipbuilding shelved a $1.7 billion offering, real estate company Swire Properties canceled a $3 billion Hong Kong issuance, and U.S. REIT Americold Realty Trust pulled its $600 million coming-out party.
Another seven deals are scheduled to price this week, although the largest is $368 million, which may make it easier for bookrunners to attract investors. It may help also that the S&P 500 was up nearly 4% by Monday afternoon. Even if some of these deals make it to the market this week, though, their CFOs have to be uneasy. Of the 15 IPOs that have priced since the beginning of April, as of Monday only 5 were trading at or above their initial price.
In other capital-raising arenas, the stats last week were just as jarring: the spread investors demanded to hold corporate debt instead of government securities jumped 28 basis points to 177, according to Bank of America Merrill Lynch's corporate bond index. And in the bank market, three-month U.S. dollar LIBOR, upon which many loans are based, closed the week up 8.2 basis points.
Are these symptoms of a coming drought in liquidity that will drive up the price of equity and debt, or merely a temporary setback caused by investor fears of Greek contagion? Hard to tell. CFOs often proclaim that timing is not the crucial element when looking to raise funds. That's true, but this capital-raising environment bears close monitoring. The difference of a week or two can mean real money.
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