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Wednesday, November 30, 2011

Financial News 11/30/2011-Central Banks Bet on Liquidity Pumps

Today central banks around the world decided to inject more monetary liquidity into financial markets to help improve credit conditions and fuel economic growth per MarketWatch. As we know from Zimbabwe and the Wiemar Republic, cheap money only goes so far to fix systemic flaws in economies such as unsustainable growth and dysfunctional economic management.

The real reason behind these liquidity pumps might only be to help banks such as Bank of America spend their way out of exposure to bad debt, and Eurozone banks obtain access to money. In other words, yet another bailout of sorts. 

For moves like this to work, they have to cause a chain reaction in the economy. Banks have to want to lend money, and in this sense, increasing liquidity is like using water to extinguish a chemical fire. Moreover, with the dichotomy of today's financial news, economic problems seem hot and cold.
 
ADP: November private sector jobs increased by 206,000
BLS: 3Q, 2011 productivity up 2.3%, labor costs down 2.5%
DXY down near 78, Gold price up near $1,744 per troy ounce
CNBC: Mortgage applications down despite low interest rates
Reuters: Occupy LA evicted by police
WP: China liquifies economy with lower bank reserve requirements

Tuesday, November 29, 2011

Financial News 11/29/2011

Both Thanksgiving weekend and Cyber Monday sales were up this year. Two possibilities for why are U.S. consumers have more money, or they're taking advantage of deals to save money on gifts. 

According to the Economic Security Index, and economic data from the St. Louis, Federal Reserve Bank, Americans do not have more money since the savings rate is closer to 50 year lows than highs. This is supported by data from the Bureau of Economic Analysis indicating personal discretionary income is down for 2011 in terms of inflation adjusted spending power despite rises in personal income levels. 

So what does this mean? This could foreshadow slower Christmas spending unless a large rise in consumer spending power occurs.

USA Today: Cyber Monday sales up 18%
Fitch: U.S. government credit rating 'AAA' with negative outlook
ESI: "More than 1 in 5 Americans economically insecure"
Bloomberg: Eurozone debt crisis unsolved per Chinese finance minister 
MarketWatch: Facebook IPO possible in first half of 2012
WSJ: Chinese real estate market in jeopardy via large price bubble

Monday, November 28, 2011

Financial News 11/28/2011

Amidst international monetary policy scheduled and forecasted for easing going into Q1, 2012 U.S. equity futures markets rallied following a rally in Asia. Possibly a technical bounce fueled by strong Black Friday weekend sales and more rumors about a debt solution from Europe. Even so, Italian bond yields increased again per Marketwatch.

National Retail Federation: Black Friday Weekend sales were $52.4 billion 
• Commerce Department via Census: 307,000 new homes sold in October
OECD: Immediate economic action needed to prevent financial contagion
Moody's: 8 sovereign credit ratings at risk by Eurozone crisis
• Zero Hedge: 'AAA Elite bonds' contemplated by wealthy Eurozone nations
LA Times: Strikes continue in China despite manufacturing slowdown
Bloomberg: 18 central banks forecasted to ease monetary policy by 03/12

Friday, November 25, 2011

Financial News 11/25/2011

Bloomberg: Corporate sustainability ratings opaque and under-regulated
MarketWatch: U.S. Dollar Index pushing 80, gold down below $1,700/toz
Reuters: Eurozone bailout 'mechanism' to possibly exclude private capital
CNNMoney: Italian 2 yr zero-coupon bonds hit 7.8% yield
Zero-Hedge: Risk-adjusted, total-return in bond market evident
Reuters-Afica: France may ban Iranian oil per official statement
Bloomberg: Hungary's credit rating downgraded to junk per Moody's
RT: Portugal credit rating downgraded to junk per Fitch
• S&P via Reuters: Belgian credit rating downgraded to AA

Wednesday, November 23, 2011

Financial News 11/23/2011-Economy Is The Thanksgiving Turkey

There is more reason to be thankful, but less to be thankful for this Thanksgiving. Perhaps the economy is the Thanksgiving Turkey this year as economic data and global events appear to be escalating in the wrong direction. Three of the largest global economies are in jeopardy and mass sentiment indicates social turbulence fueled by economic concerns as evident in world wide protests.

BLS: 393,000 Jobless claims were filed for the week ending 11/19/2011
Reuters: Chinese manufacturing contracted to 32 month low in November
CNBC: Mortgage Bankers Association reports mortgage demand fell 1.2%
Zero Hedge: Renegotiation of failed bank Dexia cautions on French credit
• BEA: Personal incomes for October rose .4%
Bloomberg: German bond auction spells change, trouble or both
MarketWatch: Greek membership in Euro is contended

As the European economy flounders with debt issues, recessionary pressure and political integration issues, the Euro has taken a hit causing the dollar to rise. That could be a good thing as it means confidence in the dollar, but it also affects commodities prices inversely, and funds heavily weighted with commodities priced in U.S. Dollars.

Tuesday, November 22, 2011

Financial News 11/22/2011

BEA: 3Q revised GDP 2% from 2.5%
VIX tops 32, DXI up to 78, LSC oil around $98/brl, Gold  near $1,700/toz
IBT: U.S. middle class being hollowed out via widening income gap
Bloomberg: French AAA credit rating in jeopardy of being lowered
Reuters: Japanese October exports declined 3.7 percent
UK Guardian: Conservative British Lord advocates the Euro in the U.K.

Monday, November 21, 2011

Financial News 11/21/2011

Reuters: Global economy grim; 'unbalanced' economic recovery an option
MarketWatch: BRIC nations growth markets, & Eurozone inadequate
WSJ: October capital outflows from China is a negative indicator
Chicago Fed: National economic activity index -.13 in October
Moody's: Ireland's banking system outlook remains negative
CNN: Congressional debt super-committee presumed non-resolute

Friday, November 18, 2011

The Affect of Labor Force Participation Rate on Corporate Revenue

According to the Office of Economic Cooperation and Development (OECD), the labor participation rate is the ratio of the work force to working age population. Bureau of Labor Statistics Data shows this rate is at the same level it was between 1978-1984. Workforce participation is important because it affects GDP and consumer income that is in turn a driver of domestic corporate revenue.

Labor Force Participation Rate
Source: BLS.gov, US-PD
 
To illustrate the above further,  The Smithsonian claims the percent of population over 65 will increase from 13% to 20% by 2050 meaning higher entitlement spending such as social security and medicare, and lower tax receipts at current levels and labor participation rates. 

In terms of corporate revenue from domestic sources, its seems reasonable to claim flat or lower revenues based on domestic spending not attached to government spending. That is to say spending not tied to increasingly expensive government programs will decline based on a greater proportion of the population living on reduced retirement incomes. 

The National Academy of Social Insurance states 40% of retirees income comes from Social Security. Since social security income is only a fraction of pre-retirement income, the other 60% would have to make up the difference, which it probably doesn't on average because annuity income from pensions and retirement plans generally has to be budgeted with limited new income from sources other than capital gains and dividends refilling the coffers.

Inflationary pressures that cause the cost of living to rise at a faster rate than incomes can further erode the spending power of Americans in the forthcoming decades. For example, in 2009 and 2010 no Cost of Living Increases or COLA adjustments were issued per the Social Security Administration, yet inflation increased in both the years per the BLS meaning consumer income spending power declined.

Financial News 11/18/2011

Gold Council: Central banks increased Q3 gold reserves by 148.4 tons
Bloomberg: Treasury short-term bill issues to lower yields
Federal News: Congress approves spending through mid-December
Yahoo Finance: Automatic spending cuts threaten U.S. economy
Fox Business: Angies List latest in spat of online business IPOs
Philadelphia Fed: Regional manufacturing grew at slower pace

Thursday, November 17, 2011

Financial News 11/17/2011

BLS: 388,000 unemployment claims filed in week ending 11/12/2011
Occupy Wall St. movement streaming NYSE protest attempt via website
• Fitch: "Eurozone debt crisis could worsen U.S. bank credit outlook"
U.S. Census Bureau: 628,000 home starts for Oct., down 2k, permits up
FT: Increase in Chinese loan defaults suspected due to loose credit
Bloomberg: Crude oil tops $100 on pipeline news and supply data
AN.LTD: IMF Europe Director 'resigns' on speculation of bond buying

Wednesday, November 16, 2011

Financial News 11/16/2011

BLS: Consumer prices decreased .1% in October, all items up 3.5%
Reuters: Italian 10-year bond yields near 7% despite EU intervention
U.K. National Statistics: October U.K. unemployment rose to 8.3%
CNBC: Britain on brink of economic contraction
CBO: Income for top 1% grew by 275% between 1979-2007
Business Insider: Occupy movement eying the NYSE

Tuesday, November 15, 2011

Financial News 11/15/2011

U.S. Census: October retail sales by valuation up .5% from September
Yahoo Finance: NYPD breaks up Occupy movement protest
• EU Business: European parliament banned naked CDSs
Reuters: Eurozone GDP grew .2% in Q3, 2011
BLS: Total trade production price inflation declined 1% in October
WSJ: Italian bond yields rise above 7% again
The Atlantic: FHA bailout a real possibility

Monday, November 14, 2011

How To Interpret Bond Yield Curves

Yield curves are the percent return on investment offered by financial instruments such as bonds. Bond yield curves are important indicators of economic activity, risk, monetary policy and market conditions. Consequently, bond yield curves are useful in financial analysis. For example,  bond rating and yield indicate the quality of the bonds, and the angle at which the yield curve slopes indicates how risky longer-term bond issues are perceived to be. Understanding what bond yield curves mean can help investors with assessing risk and in arriving at investment decisions such as which bonds, if any to invest in.

Duration

The length of time until a bond's face amount becomes due to the buyer is called the duration. Generally, with longer durations, the yield of a bond goes up because the opportunity cost and investment risk rises with time. It is for this reason that yield curves tend to curve upward, however the slope of these curves can either be low or high depending on the issuer's credit rating. For example, the U.S Treasury Bond yield curves below are from the Federal Deposit Insurance Corporation (FDIC) and show a higher yield for 30 year bonds than they do for 6 month bonds.  More up to date bond yield curves can be viewed at the U.S. Department of the Treasury.

U.S. Treasury Security Yield Curves
 Source: FDIC US-PD

Classification

The kind of bond also affects the bond yield curve. As evident in the above bond yield curve graphs, conventional bond yield curves are placed higher than the Treasury Inflation Protected Securities or TIPS. This is because investors are willing to pay in the form of lower yield for the inflation protection of security that is not offered by conventional bonds according to the Wall Street Journal. Moreover,  when the demand for TIPS is higher, then the yield will be lower. The reason the yield isn't higher regardless of demand is because the inflation protection is not incorporated into the yield, but rather the principal balance according to Treasury Direct.

Issuer

Bond yield curves also differ by bond issuer. For example, a country with a high credit rating is more likely to have lower bond yields, and a flatter bond yield curve due to the low-risk associated with those bonds. However, if an economy is performing badly, the affect on bond yields tends to be toward higher yields and more vertical curvature. This is evident in recent rises to Italian and Spanish bond yields after being downgraded by Standard and Poor's per Reuters. In other words, with lower-risk bond issues, price rises with demand, but the yield curve then moves down. 

Risk

Market risk also affects bond yields. To illustrate, consider an especially highly rated bond; these are thought to be a financial safe haven or low-risk investments for large institutional investors, sovereign wealth funds and individual investors seeking to lower investment risk via diversification into bonds. If other investments seem too volatile for investors, they may invest a larger amount into bonds because of their safety. The affect of this increased investing on the bond yield curve will be  a downward movement of the whole curve where the longer-term issues still curve up, but at lower yields due to increased demand.

Policy

Bond yield curves can also reflect monetary policy. A good example of this is the Federal Reserve Bank's bond buying programs. Quantitative easing as it is also known adds money to the financial system because the central bank purchases more bonds. This causes the Federal Reserve's assets to increase, and also puts downward pressure on the bond yield curve. Another example of this is the Federal Reserve Banks' 'Maturing Extension Program and Reinvestment Policy' or selling of short-term Treasury Securities and buying of long-term ones. This causes the yield curve to flatten at the back end and become more horizontal which subsequently demonstrates the influence of monetary policy on the bond yield curve.

Financial News 11/14/2011

CNBC: 44% of polled consumers used overdraft in the last 12 months
Bloomberg: Italian 5 year notes sold at 6.57% yield
IBT: Japans Q3 GDP grew 1.5%, Q1 and Q2 were -.9% and -.5%
• OECD via Reuters: Large economies headed for a slowdown
CNN: Oakland, CA rounds up Occupy movement protestors
U.S News: Chinese real estate market is a global economic threat
WP: 'Super Committee's' debt resolution capacity doubted

Friday, November 11, 2011

Financial News 11/11/2011

BEA: Trade deficit shrank $1.8 billion, to $43.1 billion in September
Reuters: Consumer sentiment index rose 3.3 points to 64.2
Yahoo Finance: DJIA recovered steep losses from earlier in the week
• MarketWatch: Oil prices surged toward the $100.00 mark
NYT: Chinese imports and export data indicates growing domestic market
NIT: Indian economy skidding on bank downgrades and high inflation

Thursday, November 10, 2011

Financial News 11/10/11

MarketWatch: October foreclosures rose 7% 
NAR: 2011 Q3 median home prices fell 4.7%
Bloomberg: Alabama county files for largest U.S. municipal bankruptcy
DOL: 390,000 jobless claims were filed the week ending 11/05/2011
Reuters: Chinese trade surplus shrank .6% in October
NPR: Eurozone warns of recession as debt crisis escalates
BLS: October import prices down .6%, export prices dropped 2.1%

Wednesday, November 9, 2011

How to use the Dupont Identity to analyze business performance

The Dupont identity is a financial analysis tool used to assess the performance of corporations. According to FCS Commercial Financial Group, an advantage of the Dupont identity is it allows more in depth assessment than a single profitability ratio. This is because the formula evaluates corporate profit in terms of assets, equity leverage and actual sales figures rather than sales forecasts. When calculating the Dupont Identity, two equations are used; one is used to evaluate return on assets, and is a sub-component of the second that ultimately determines business profitability.

Components

The three component parts of the Dupont Identity per the FCS Commercial Financial Group include return on equity, total asset turnover and the equity multiplier. These are three financial ratios that are also individually used in financial analysis. The first of these ratios determines profit margin or the percentage earnings of total revenue. The second ratio demonstrates how well a company's assets are being used in terms of generating revenue. The equity multiplier shows how much assets a company has in terms of equity capital.

1. Profit Margin: Profit/Sales
2. Total asset turnover : Sales/Assets
3. Equity multiplier: Assets/Equity

Equation(s)

The first of the two equations determines a businesses return on assets or ROA by multiplying profit margin by total asset turnover.

1. Return on Assests= Profit margin x total asset turnover

The second equation of the Dupont identity determines return on equity (ROE) by mulitplying ROA by equity leverage.

2. “Extended” DuPont Identity= Profit margin x total asset turnover x equity multiplier

Example:

A Securities and Exchange Commission corporate filing by Walmart Stores, Inc. had a July 31, 2011 quarterly profit of $3.801 billion on sales of $109.366 billion with total assets valued at $193.656 billion and equity of $67.941 billion. With these numbers the component parts of the Dupont formula can be calculated.

1. Profit margin= profit/sales= $3.801 billion/$109.366 billion =3.475%
2. Total asset turnover= sales/assets= $109.366 billion/$193.656= 56.47% (1.77 x sales)
3. Equity multiplier= assets/equity= $193.656 billion/$67.941= 2.85
   
Since Total Asset Turnover is expressed as a multiple of sales rather than the result of division, multiplying 1x2= 6.151%. Therefore, the result of the DuPont equation is which is 6.151% x the equity multiplier of 2.85 = 17.529%

The higher the extended Dupont identity is, the better a corporation is performing. This method of calculating corporate profitability enables analysts to more accurately determine the cause(s). For example, if the total asset turnover ratio is high, but profit margin and the equity multiplier are low, then it indicates strong use of assets and capital but high operational costs. 

In the case of Walmart, a strong aspect of the businesses performance seems to be derived from its total asset turnover and high equity leveraging than profit margin. This means the company makes good use of investor capital and sells a high percentage of product, but with minimal profit on each individual sale.

Financial News 11/09/2011

WSJ: General Motors profits sank 15% in Q3 2011
CNBC: Possibility of banking crisis more likely than not
Yahoo Finance: Italian national debt costs spook investors
Moody's: Belarus credit rating confirmed with negative outlook
SBT: Indian trade deficit hits four year high
UK Guardian: Leaked IAEA report questions Iran's nuclear intent

Tuesday, November 8, 2011

Financial News 11/08/2011

NFIB: Small business optimism index up to 90.2 in October
MW: Financial firms 'projected' to trim bonuses and employees
Reuters: Global liquidity receding via deleveraging
CNBC: Oil prices to remain high on low supply and demand
SBT: Short-term U.S. bonds in high demand
Bloomberg: Equity markets may hinge on Italian budget vote

Monday, November 7, 2011

Financial News 11/07/2011

SBT: 48% of unemployed Americans not receiving U.I. benefits
Yahoo Finance: France to implement7 billion in deficit budget cuts
CNBC: BRIC nations offer financial assistance via IMF with conditions
NBR: German industrial productions declined 2.7% in September
Reuters: Seasonal hiring expected to fall despite 20,000 in Fed Ex hires
OT: Occupy movement continues national bank withdrawal protest

Friday, November 4, 2011

Financial News 11/4/2011

Bloomberg: U.S. natural gas reserves proportionally similar to Saudi oil
BLS: U3 unemployment rate notches down to 9.0% in October
WSJ: ECB holds 6% of Spanish and Italian bonds per estimate
FT: October retail sales decelerated to 3.8% growth
ZH: G-20 Summit undecided on solid financing solution for Eurozone
SBT: Eurozone unemployment reaches 10.2% in September

Thursday, November 3, 2011

Financial News 11/3/2011

BLS: Q3, 2011 non-farm labor productivity up 3.1%
DXY near 77 despite ECB interest rate cut to 1.25%
DOL: 397,000 jobless claims for week ending October 29
Daily Mail: New Middle East war possible
CBS: Oakland economic protestors and police clash
Reuters: Financial bailout referendum destabilizing Greece

Wednesday, November 2, 2011

Financial News 11/2/2011

IBD: U.S and European bond yields rise after Greek PM declares vote
• ISM: October U.S. manufacturing growth index slowed to 50.8
• Reuters: Chinese October manufacturing index slowed to 50.4
CNBC: Australian Reserve Bank lowers interbank overnight rate to 4.5%
ADP: National non-farm employment rose 110,000  in October
NYT: BofA debit card fee dropped despite debit transaction price control

Tuesday, November 1, 2011

Financial instruments and accounts that provide protection from creditors

Creditors are limited by laws that protect consumers even if those consumers are late on their bills or are sued for liability compensation. Examples of these laws are state statutes of limitations, and federal credit protection laws such as the Consumers Credit Protection Act.

Despite consumer protection from creditors, these laws do not necessarily protect individuals from liens or seizing of assets by the Internal Revenue Service (IRS) or from specific court rulings.  Having said that, several types of financial instruments and accounts protect consumers from creditors allowing an opportunity to keep retirement savings safe from difficult financial situations. 

Homesteads 

Homesteads are a type of property rather than a financial instrument, but they can also provide financial safety from creditors according to The Coleman Law Firm. Moreover, the Coleman Law Firm states the Homestead exemption provides asset protection for land 160 acres or less in size. The following state exemption chart at Creditor Exemption outlines which states allow homestead exemptions. 

Insurance

Both Ginger Applegarth of MSN Money and Attorneys at Law Unrah, Turner, Burke and Frees appeal to cost effective insurance solutions to asset protection. Namely, auto, and homeowners insurance are able to protect assets from liability lawsuits for less than asset protection insurance and in terms of creditor claims, term life insurance also provides more cost effective financial security. However, it is probably a good idea to keep in mind life insurance financial protection is limited. This limitation is elaborated by Gideon Rothschild and Daniel S. Rubin of Moses & Singer LLP.  For example, although Title 11 of the U.S. Code does protect assets from creditors, the focus is beneficiaries or dependents and not owners.

Trusts

Trusts are a type of legal entity used in estate planning and are often considered financial instruments used to protect assets. Cornell University Law School  describes Trusts as right to property via a fiduciary relationship i.e. not ownership but retention of rights of ownership. Several types of trusts exist, and according to Estate Street Partners, LLC an irrevocable asset protection trust combined with a limited liability corporation provides 'fortress' like asset protection. Several kinds of Trusts can be used for protection according to the Law Offices of Janet Brewer Moreover, of those discussed are Qualified personal residence trusts, irrevocable life insurance trusts and inter-vivos qualified terminable interest property trusts.

IRAs

Individual Retirement Accounts or IRAs are another financial instrument that protect consumers from creditors. However, according to the New York Times,  in the event of bankruptcy, funds in an IRA are only protected up to one million dollars with the exception of rollovers from corporate retirement plans. The New York Times also refers to difference in state law exemption amounts for non-bankruptcy lawsuit protection. In other words, how much monetary protection provided by an IRA varies between states for creditor claims not associated with a bankruptcy filing. 

Pensions

Defined contribution plans such as 401(k)s and 403(b)s are protected by the Employee Retirement Income Security Act (ERISA). However, according to Executive Capital Resources, these types of accounts are not protected against Qualified Domestic Relations Orders (QDROs) which are judicial claims against retirement assets during events such as divorce proceedings. Moreover, according to the Wall Street Journal, a kind of 401(k) called the Solo 401(k) is not protected from creditors in every states.

Financial News 11/01/2011


Global Credit Ratings: G=AAA, T=AA, LB=A, B=BBB

 Image source: PD CC0 1.0 Attribution: NovaNovaBn
 
OECD: "Bold G20 action needed" next week to restore 'confidence'
SBT: Global job market 5 years behind 2007 levels
Bloomberg: S&P 500 index rose more than 10 percent in October
Moody's: Aaa rating affirmed for European Financial Stability Fund 
NYT: Hundreds of Millions in customer money missing from MF Global
MarketWatch: Greeks to vote on potential budget busting referendum