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Jeffrey Sweeney is an investment banker with years of experience in direct lending and corporate finance for small- to middle-market companies. He is the chairman and CEO of US Capital Partners, an innovator in small- to middle-market business lending. US Capital Partners has been providing prompt, innovative, and reliable financing solutions across the United States and abroad for more than a decade.

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Friday
Apr142017

“Housing IS the Business Cycle”

The above is a quote from UCLA economist Ed Leamer.  He wrote a paper in 2007 claiming “residential investment offers by far the best early warning sign of an oncoming recession.”  Shown below is a chart of the cumulative abnormal contribution to GDP growth by residential investment and recessions.
 
When the blue line is moving down, the contributions are less than normal and the economy is headed for a recession (red bar in the graph above).  When the blue line is rising, residential investment is strong and recession risk is remote.
 
Leamer further decomposes the above graph into residential investment the year leading up to a recession and the two year period following the start of recession.  The years shown on the graph below are the year the recession began.
 
 
The graph shows, with few exceptions, that residential investment declines in the year leading up to a recession (top image) and has a “V” shaped recovery sometime during the two years following the start of a recession (bottom image).
 
Leamer’s work only goes through the first quarter of 2007.  We update his analysis with the chart below showing the residential investment picture from 2007 through October, 2016 (most current data available).  If Leamer is right that “housing is the business cycle,” the chart below gives us some confidence the business cycle has a positive trajectory today.
 
 
Residential investment confirms the no-recession outlook we see in the LEI and Yield Curve indicators (shown at the end of this newsletter).  While there appears to be no looming recession, the stock market has lost upward momentum in the past several weeks as tax season and the corporate quiet period (pause in corporate stock buyback programs) is upon us.  Both of these seasonal issues pass next week and our indicators show the long-term bull trend continues.
 
At US Capital Wealth Management, we are seeking to do better than the market.  Our philosophy honed over decades of experience is to avoid major down markets first and then participate in up markets to achieve superior investment returns. We work with clients in navigating the complexities of investing.

We invite you to call or email anytime if you have questions about how we can help you with your wealth management.  Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com  to learn more.



Stock Market Dashboard



This commentary and a sampling of previous editions are available as PDFs:

4/13/2017: "Housing IS the Business Cycle"
4/7/2017: Bond Risk Rising with Rates
3/31/2017:
 
Exclusive Stock Market, Higher Stock Price
3/24/2017: Indications of a Positive Stock Market Future
3/17/2017: Hallelujah, Reflation!
3/10/2017: Small Cap Stock Divergence
3/3/2017: Velocity Pivot Good for Stocks
2/24/2017: How Safe Are The Banks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: 
Trade What Is, Not What You Think It Should Be – 2017 Outlook

US Capital Partners

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.

THIS NEWSLETTER IS PROTECTED BY COPYRIGHT LAW. UNAUTHORIZED DISTRIBUTION AND/OR REPRODUCTION BY PHOTOCOPY OR ANY OTHER MEANS IS STRICTLY PROHIBITED AND PUNISHABLE BY A FINE OF UP TO $25,000.

Tuesday
Apr112017

Financing Expanding Businesses in the Technology Industry

US Capital Partners has provided or advised on over $250 million in flexible and scalable financing for technology companies across the United States in the last 24 months.

More than anything, technology companies are associated with innovation and invention. Technology is an industry that generally comes with higher R&D overheads and that can require significant levels of capital expenditure. Structuring and securing the right business financing is therefore essential.

Providing Custom Financing for Technology Companies

US Capital Partners’ technology finance team understands the changing technology marketplace and the challenges owners and CFOs of technology companies face. The firm has deep experience in financing businesses across a wide range of technology sectors, including enterprise and application software, internet content and services, networking and communications technology, electronics manufacturing and distribution, and consumer and industrial electronics.

“US Capital Partners has a reputation for being an innovator in the technology financing space,” said Jeffrey Sweeney, Chairman and CEO at US Capital Partners. “In the last 24 months, the firm has already provided or advised on over $250 million in financing for small and medium-sized businesses serving the US technology industry. Our finance professionals understand the challenges and opportunities in the industry, and can design flexible solutions that fit the specific needs of your business.”

Example Transactions

Click on the tombstones below for further details about these selected transactions.



To learn more about how your business can secure the funding it needs, email Jeffrey Sweeney, Chairman and CEO, at jsweeney@uscapitalpartners.net or call (415) 889-1010.

Friday
Apr072017

Bond Risk Rising with Rates

The Federal Reserve is raising interest rates.  The current Fed Funds rate is 0.88%, up from zero in December 2015.  By the end of 2018, the FOMC projection is for the Fed Funds rate to be 2.13%.  The market expectation is 1.75%.  In either case, the Fed Funds rate may more than double in the next couple of years and show at least a 1% increase.
  
The impact of a 1% rise in interest rates is negative for many bonds.  Below is a chart showing the sensitivity of various bonds to a 1% increase in rates.
U.S. treasuries (UST) all lose value.  So do inflation protected treasuries (TIPS), mortgage backed securities (MBS), U.S. aggregate bond portfolio (U.S. Aggregate), U.S. investment grade corporate bonds (IG corps), and municipal bonds (Munis).
 
The price returns on convertible, high yield (U.S. HY) and floating rate bonds are also negative.  The total return of these three bond categories is positive because of the relatively high yield overcoming the loss of face value.
 
If interest rates rise by more than 1%, the bond problem becomes worse.
 
Bonds may no longer be a way to de-risk your portfolio.  In the current market environment, bonds may be adding to the risk of loss.
 
The Active Equity Answer
 
World economies are growing.  The chart below shows manufacturing activity by region and country.  Numbers greater than 50 indicate expansion.  Green represents growth.  The time scale runs across the top from April 2015 on the left to March 2017 on the right.  For March 2017, all areas are green(ish) and greater than 50 except for Greece, Korea and Brazil. The global PMI is 53.0.  At 49.6, Brazil looks like it is gaining strength and may move into expansion territory soon.
 
In the Fed Minutes released on Wednesday, some Federal Open Market Committee participants viewed U.S. equity prices as “quite high” relative to standard valuations.  The good news is the equity market is global.  Year-to-date, equities from all major regions have outperformed bonds, REITs and commodities.  International equities have been particularly strong.
 
Using disciplined, quantitative investment methods, many of our investment strategies have increased exposure to international equities year-to-date.  Additionally, we apply quantitative risk mitigation rules to significantly reduce equity exposure when risk rises.  We seek to achieve equity returns with downside protection.  Bond problem solved.  Solution: risk mitigated global equity with proactive downside protection.
 
After an eight year recovery in U.S. equities and a more than three decade bull market in bonds, we may be entering a new investment chapter.  In the new chapter, active asset allocation outside of the U.S. and active portfolio risk mitigation may deliver materially better results with lower risk than the S&P 500 index and the traditional buy-and-hold 60%/40% stock/bond portfolio.

One of the keys to investing is sifting through all available information and sticking to a plan.  Somehow, we need to control our emotions about something that is very important to each of us. We invite you to call or email anytime if you have questions about how we can help you with your wealth management.  Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com  to learn more.



Stock Market Dashboard



US Capital Wealth Management is your investment solutions partner. 

We are eager to speak with investors and investment advisors looking for a new trusted partner.
Please give us a call at 415-249-6337 if you would like to talk.

  


This commentary and a sampling of previous editions are available as PDFs:

4/7/2017: Bond Risk Rising with Rates
3/31/2017:
 
Exclusive Stock Market, Higher Stock Price
3/24/2017: Indications of a Positive Stock Market Future
3/17/2017: Hallelujah, Reflation!
3/10/2017: Small Cap Stock Divergence
3/3/2017: Velocity Pivot Good for Stocks
2/24/2017: How Safe Are The Banks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: 
Trade What Is, Not What You Think It Should Be – 2017 Outlook

US Capital Partners

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.

THIS NEWSLETTER IS PROTECTED BY COPYRIGHT LAW. UNAUTHORIZED DISTRIBUTION AND/OR REPRODUCTION BY PHOTOCOPY OR ANY OTHER MEANS IS STRICTLY PROHIBITED AND PUNISHABLE BY A FINE OF UP TO $25,000.

Wednesday
Apr052017

Unitranche Financing for Lower Middle Market Businesses

Businesses across the US are increasingly benefiting from US Capital Partners’ unitranche financing solutions, which offer the advantages of speed, simplicity, and certainty of closing.

Throughout the past year, US Capital Partners Inc. has continued to experience rising demand for unitranche loans (also known as “senior stretch”), which blend senior and junior or mezzanine debt into a single debt facility. Rather than approach a senior lender, typically a bank, and then also one or more additional junior lenders, borrowers with a unitranche structure have a single secured loan facility, in which all the debt is subject to the same terms. US Capital Partners has increasingly been providing such loans for its clients.

Unitranche Solutions for the Small and Lower Middle Market

First created in 2005, unitranche loans were used primarily for middle market transactions, by borrowers with annual EBITDA of up to $50 million and sales of up to $500 million. A deal size of about $100 million was fairly typical. Today, however, this hybrid loan structure is being increasingly used in the small and lower middle market, in place of traditional bank financing.

Advantages of Unitranche Financing

  • Simplicity. Unitranche structures have a single creditor agreement and single interest rate, and often also a single lender. This provides a streamlined process for ongoing administration and decision-making. Covenants become simpler to report and administer.
  • Reduced risk the deal will fall apart. With unitranche financing, there is no need for the borrower to mediate inter-creditor agreement negotiations between the senior and junior lenders.
  • Higher loan amounts. Risk is better mitigated if only one lender is involved. This can result in higher loan amounts because of the comfort of not having competing interests.
  • Speed. Unitranche facilities provide a faster way to borrow, because dealing with multiple lenders takes time, especially if the borrower is negotiating separate first and second lien facilities. This makes a unitranche solution especially suitable for financing acquisitions, for instance, where speed is often of utmost importance.
  • Savings. Unitranche loans can sometimes produce a lower cost of capital, because the entire loan amortizes over time, not just the senior debt as in a typical senior and mezzanine debt deal. With no competing interests between lenders, this type of financing also eliminates expensive legal posturing and duplicate default work with the borrower by competing legal counsel.

How US Capital Partners Can Help

The lending marketplace for smaller businesses continues to be highly fragmented. Specialty lenders are generally willing to lend only against their favored asset class. Finding the most appropriate mix of financing at the best cost, and then coordinating the different specialty lenders to a successful closing, can be a challenging process. In most cases, US Capital Partners has the ability to provide a single unitranche loan to vastly simplify the situation.

Saturday
Apr012017

Exclusive Stock Market, Higher Stock Price


The total number of publicly listed U.S. stocks peaked in 1998 at 7,562.  At the end of 2015, the number was roughly half at 3,812 publicly traded U.S. stocks.
 
The number of companies offering their stock publicly in the U.S. is shrinking.  In the five years 1996 through 2000, an average of 548 companies went public a year.  That equates to more than two initial public offerings (IPOs) every single stock market trading day a year.  The total number of IPOs during this time was 2,742.  That is 780 more IPOs than the number of IPOs for the next 15 years.

Companies are waiting longer before going public as they are able to raise a significant amount of money in the private market.  From 1996 through 2000, companies were about three years old before they went public.  For the past five years, companies were nearly seven years old before they went public.
Merger and acquisition activity is reaching record highs today.  The high level of mergers and acquisitions relative to the diminished number of IPOs is a major driver of the shrinking number of publicly traded companies.
The stock market today is comprised of fewer companies, but they are much larger.  The average market capitalization of companies traded on the New York Stock Exchange (NYSE) in January of this year was $20.2 billion.  In January, 2004, the NYSE average market capitalization was $12.5 billion.
The secular change to fewer companies offering publicly tradable stock has the following ramifications:
  1. On average, the stocks we buy today are shares of large, dominate companies.  In the late 1990s, many of the stocks traded were of companies that did not have a defensible market position or offer customers an important value proposition.  Those weakly positioned companies are no longer in business as independent entities or at all.  Think Google versus Ask Jeeves, Inktomi, Excite, Infoseek, AltaVista, Lycos, LookSmart, Pets.com, etc.
  2. Large, industry-dominate companies usually are a less risky investment than smaller companies who have less product/customer diversification and less market share.  Lower risk helps raise the Price Earnings (P/E) multiple of the overall stock market and reduce volatility.
  3. Large, industry-dominate companies have incredible access to capital and many have massive cash stockpiles – e.g., Apple (AAPL).  Much of this capital is being used to buy stock back, raise dividends and buy other companies (both public and private). Since 2010, Google has bought on average a company each week.  Apple, Microsoft, Cisco, Oracle, Amazon are also serial buyers.
  4. There is a rising scarcity value of publicly traded U.S. equity.  Low trading costs and instant liquidity of the publicly traded equities market are significant positives relative to asset classes like real-estate and private equity including venture capital.  Scarcity, liquidity and low fees are a positive for valuation.

 

Today’s stock market is a case of “what does not kill you only makes you stronger.”  The roughly 3,650 surviving companies with publicly traded stock are substantially larger and better positioned than the average company was ten or fifteen years ago.  While the price of the stock market is higher, the quality of the market has also risen. 

One of the keys to investing is sifting through all available information and sticking to a plan.  Somehow, we need to control our emotions about something that is very important to each of us. We invite you to call or email anytime if you have questions about how we can help you with your wealth management.  Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com  to learn more.



Stock Market Dashboard



US Capital Wealth Management is your investment solutions partner. 

We are eager to speak with investors and investment advisors looking for a new trusted partner.
Please give us a call at 415-249-6337 if you would like to talk.

  


This commentary and a sampling of previous editions are available as PDFs:

3/31/2017: Exclusive Stock Market, Higher Stock Price
3/24/2017: Indications of a Positive Stock Market Future
3/17/2017: Hallelujah, Reflation!
3/10/2017: Small Cap Stock Divergence
3/3/2017: Velocity Pivot Good for Stocks
2/24/2017: How Safe Are The Banks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: 
Trade What Is, Not What You Think It Should Be – 2017 Outlook

US Capital Partners

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.

THIS NEWSLETTER IS PROTECTED BY COPYRIGHT LAW. UNAUTHORIZED DISTRIBUTION AND/OR REPRODUCTION BY PHOTOCOPY OR ANY OTHER MEANS IS STRICTLY PROHIBITED AND PUNISHABLE BY A FINE OF UP TO $25,000.

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