The Banks are Lending, the Banks are Lending...NOT!!

As the market digests the federal governments "How to fix the economy in as few easy steps as possible and not cream the taxpayer," plan, it's more than instructive to address some of the fallacies surrounding this monumental and historic event.
What to make of the underpinnings? First, let's take a look at some of the popular mis-conceptions about what ails the American economy:
1. "The banks aren't loaning any money to any one." Somewhat true, although the American consumer and corporations took on so much debt that its like balancing a watermelon on a toothpick...it's gonna collapse under the weight of it. They are lending, just not as much as they have in the past.2. "The banks aren't lending because of all the toxic assets that are really not toxic, just priced incorrectly." Banks are fearful of many things, but the biggest one? Losses that cripple their liquidity. Banks simply aren't going to make loans to entites that can't pay them back, thus creating the potential for future bumps in their equity.3. "Toxic assets can't be accounted for because the market doesn't understand what they're really worth." Let's examine this one...these assets are bad because they are worth less than the banks say they are. $5 trillion dollars say that's about right in the form of residential real estate losses alone. Hey, why should the banks shoulder that economic burden? If they share it all, they will be wiped out so let's just pawn the losses off on the taxpayer! Novel idea that looks like it's going to work, although we have NO say on the matter.4. "When these bad assets are off the banks balance sheets, they'll surely start lending again." Oh, they'll be lending again, (see #1), but the housing market and economy will still be hampered, so they'll wait to see the economy wait to hit the very bottom. They have time to wait, the capital seeker doesn't, unfortunately.5. And finally, "When the banks start lending, the economy will recover." And why would someone think that? The American consumer will still have crippling debt, the housing market just doesn't spring to life again and the poor soon to be retired type? Back to the workforce again! Let's face it, consumers have no more place for debt even if the banks are ready to bus them in to their branch to sign them up yet again.
So, in the end result, the overwhelming debt won't evaporate overnight, it will just be passed from the banks to the taxpayer until the government admits it was shortsighted, (sure), and the taxpayer will continue the long hard fight to not only pay their way, but their Big Brothers way too.

Stability Starting to Rear It's Head?

Close to a bottom? We certainly hope so, but not without a few more curves thrown our way. Let's see what has happened this week: the stock market had its best week since November, retailers have reduced inventories so when any signs of a pickup in demand will force them to restock, oil prices are up and core indicators are starting to show signs of life.
Need more proof? The Consumer Price Index appears to be stabilizing, if you call a less than expected drop to be encouraging. Why not? Retailers are practically paying you to take the merchadise and good bargains can only last for so long. Simple economics on this one: producers got stuck with too much inventory after consumers cut back dramatically last year. Now they have to cut back further to cleasr their shelves of stockpiled goods. So, the best way to reduce inventories is to sell more.
How about the behemoth industries? Fertilizer production has improved as the spring season approaches and inventory clears. Industrial metals are showing signs of better days ahead: prices for industrial copper are up 18% for the year, indicative of the metals use in construction and electronics, scrap prices are rising as companies drain their excess inventories and shipping freight rates are nudging up from hibernation. Demand for moving goods around the world is rising.
So what does this mean? Try a little dose of confidence that is sorely needed today. The enthusiasm about things improving can do a lot of the heavy lifting from the almighty consumer, who, in the end, is the biggest linchpin to getting the American economy back on track.

Middle Market Deals and What I'm Seeing

We're starting to see a trend in the investor's appetite for new deal flow, specifically, sound middle to late market companies. A good percentage of the investors listed on the Capital MatchPoint are seeking middle market firms and the demand thus far is outstripping the inventory of these types of companies. That's not to say they're not out there, but an huge request for them indicates these firms are not seeking investments and seem to be laying low and weathering out the storm by sitting on cash.
However, if indeed this is the majority of cases, hoarding cash is nearly as bad as spending it profligately. Cash returns are woeful and many firms may be sitting on cash reserves that demand less than a passing interest from investment houses, hence the dearth of middle market companies seeking it.
There may come a day very soon when these cash reserves may entice management to seek out weaker rivals and make impetuous decisions. If public, wouldn't it be prudent to re-purchase their stock while their valuations are as lo or lower than they've been in recent memory? If not, the cash balances would continue to grow while the economy continues to contract.
So, do they need an outside influx of capital? Maybe not. Is the competitive landscape for firms seeking this type of capital becoming more acute? We say yes, judging by the investor corps on our site. This may certainly be a small microcosm of the situation at large, but there is something behind the demand for these firms and the lack of discovering the really good ones.