Small Business Optimism Fading Into Fiscal Cliff

When small businessmen responded to the survey of the National Federation of Independent Business (NFIB) President Obama had not yet been reelected. Judging by the reaction of the stock market, I expect it’s safe to say that a good deal of businessmen were surprised by the result. So, in a few weeks, when they are asked again about how they feel, I likewise expect the slightly improved optimism that small businessmen expressed in October’s Small Business Optimism Index will disappear.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Reported Tuesday, the NFIB’s Small Business Optimism Index gained by 0.3 points, rising to a mark of 93.1. Despite the improved headline figure, concern was clearly evident in the record high percentage (23%) of business owners expressing uncertainty about business conditions six months forward. NFIB Chief Economist William Dunkelberg noted that the stalemate in Congress and the same government balance (read loggerhead) that existed before November 5th will probably paralyze business activity through the close of the year. As the fiscal cliff approaches, the same stubborn stances that led Standard & Poor’s (of McGraw-Hill (NYSE: MHP)) to downgrade the United States last year seem likely to pervade again. As a result, Dunkelberg says not to expect small businessmen to invest capital or to hire employees.

It’s my view that heading into the election, small businessmen and Americans generally did not consider fully what they might find on the other side. Now that nothing has changed with regard to the stalemate in Washington D.C., fear is the main driver of capital preservation. That means money is coming out of risky investments and being kept from new investment in assets and people.

The report that is the focus of this article seems to reflect that view. It shows October increases in inventory, and expected improvement in sales and plans to make capital outlays six months out. But the gains were minute, and given the decreased probability of satisfactory result now, businessmen are likely to lose hope.

In an earlier article, we noted that stocks should now be moved here and fro by developments in Washington D.C. The SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY) and the PowerShares QQQ (Nasdaq: QQQ) are relatively unchanged heading into the close of trading Tuesday. The SPDR S&P 600 Small Cap Index ETF (NYSE: SLY) is lower by 0.4%. Efforts to resolve the issue have only just begun, with Congress convening today for the first time since before the election. President Obama met with labor union bosses today to discuss the issue with them.

In my opinion, this should be the top priority of every government representative every single day, and resolution should be targeted for sooner rather than later. Each day that businessmen lack clarity on the tax and economic outlook is another day of economic damage done to the economy, ironically in the name of that same economy. The seriousness of this issue cannot be overstated, and so I suggest every reader who cares about his country call his Congressman and demand a compromise be worked out immediately. Let us take this opportunity to discuss and debate specific ideas for compromise.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Undermining Small Business Confidence

The National Federation of Independent Business (NFIB) produced its monthly Small Business Optimism Index Tuesday for the month of February. The measure of the small business mood gained for the sixth consecutive month, rising 0.4 points to a mark of 94.3. The NFIB warns that the reading is still low based on historical comparison, and that the rate of improvement is “glacial.” We would add that it comes just in time to be undermined by the fiscal and economic failings of Europe and the geopolitical fumbling of the world. In other words, before you get too excited about today’s slight victory, take a look at the tough schedule ahead this season.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Relative tickers: NYSE: SLY, NYSE: VB, NYSE: VBK, NYSE: VBR, NYSE: VIOO, Nasdaq: SCLP, NYSE: PZI and NYSE: WMCR.

Small Business

The popular spin on confidence today will be centered around the positives, including the month’s height against its 2007 grounding. That fact will overshadow the truth about its sitting lower than last February, and potentially following the trend of last year, where early gains were undermined. Last year, we saw mostly fear driven decline, though followed by some setback in economic activity. Certainly those same two factors should come into play again this year, given Europe’s self-deprecation and the battle fleet sitting offshore of the tinderbox of Iran.

Any fluffing of the data will certainly not be the fault of the NFIB’s Chief Economist, Bill Dunkelberg, the guy who probably doesn’t remember giving me my undergraduate business degree at Temple University. His view has been wisely tempered throughout the recovery, properly reflecting the cautious mood of the group of typically optimistic entrepreneurs. This month, he noted the “wildcard” that gasoline prices play in the vulnerable small business marketplace. Of course, the last few months climb in petroleum distillates would be dwarfed by what would follow any engagement of Iran in battle. Considering that all the guys opposing President Obama, save Ron Paul, already have their hands on the trigger, concern is well-placed. Yet, it might be better suited today, as wars tend to start in surprising fashion, and big guns already sit with targets set upon one-another.

You might want to note that the details of the survey are anything but enthusing. Some 22% of small business owners, the same number as was reported in January, said their biggest problem was “poor sales” in February. Take note as well that more small businesses reported declining sales than reported rising sales in February. Considering the seminal importance of the core issue, you might want to restrain your natural inclination to tout the four-tenths gain and refrain from your long bets for the long-term. That said, generally speaking over the long-term and under normal business conditions, I would expect more small businesses to fail than to survive, and the survivors to provide more than enough economic value to compensate.

Capital expenditures were up again, but remain near historical lows. What’s worse is that few business operators view today as a good time to expand. Not enough of them have real plans to expand in a significant way either. There’s a good reason for that I suppose; the number of small business owners expecting better business conditions in six months sits in negative territory. While a significant portion of that figure is certainly determined by business expectations, it’s also affected by other factors. Those cited most by small businessmen were taxes and regulation. Surprisingly, credit access was not a central issue. Washington seems to finally be taking notice, with less emphasis on Federal Reserve actions and increasingly more attention upon fair trade and business incentives. Presidential elections tend to focus the attention of public servants well…

While job creation was up in February and over the last three months, plans to increase hiring in the future fell off among the nation’s smaller businesses. A greater net of employees were added, yes, but on a greater increase in employees at a smaller number of firms than cut at a greater number of firms. That was generally consistent with the latest improving trends in the government’s employment data. However, what’s more important, and we paraphrase Eddie Murphy, is what employers have done for us lately. In this case, I mean the near future.

The latest economic data out of Europe, save perhaps today’s investor confidence improvement in Germany where the stink of the PIIGS has yet to really bite, has been generally deteriorating. Can you believe it, austerity (read starvation and blood-letting) isn’t working? The problem for us, save compassionate hearts should they still exist, is that we sell roughly 20% of our exports into Europe and that Europe buys a bunch of stuff from all over the world. The entangled global marketplace is therefore at risk of noticing European strife, and that’s before a Lehman like event could drive swift striking crisis. So the latest tiny gains in small businesses are not impressive and stand at high risk of being undermined.

The market was off to a solid start despite the mediocre small business report Tuesday, instead taking its lead from February’s Retail Sales data, which while only showing in-line numbers, still rose 0.6% ex-gasoline and autos. The SPDR Dow Jones Industrial Average ETF (NYSE: DIA), SPDR S&P 500 (NYSE: SPY) and PowerShares QQQ Trust (Nasdaq: QQQ) were each up about a half point at the start of trading on that driver. Even the SPDR S&P 600 Small Cap ETF (NYSE: SLY), which you might expect to better reflect the small business view, was up a half point. That said, I think the omen seen in the expectations of small businessmen will be considered increasingly, and seen in data to come.

This article should interest investors in small cap stock securities like the SPDR S&P 600 Small Cap ETF (NYSE: SLY), Vanguard Small Cap ETF (NYSE: VB), Vanguard Small-Cap Growth ETF (NYSE: VBK), Vanguard Small-Cap Value ETF (NYSE: VBR), Vanguard S&P Small Cap 600 Index ETF (NYSE: VIOO), Russell Small Cap Low P/E ETF (Nasdaq: SCLP), PowerShares Zacks Micro Cap ETF (NYSE: PZI) and Wilshire Micro-Cap ETF (NYSE: WMCR).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.