Big hitters wary of investing in agriculture

By Jürgen Siemer

Heavy hitters have lost appetite for investing in agriculture. As reported by The Financial Times on 27 January 2013, agriculture -- an industry worth an estimated tenth of total global economic output, with enough demand to drive a projected 70 per cent increase in production by 2050 -- has recently seen a turnaround with investors loosing appetite for entering the sector.

While still appealing to some investors, investing in agriculture has become more of a risky venture for those who take into account the fickle weather, political risk and quixotic governments, which can all have a negative impact on returns. According to the FT, since the beginning of the global financial crisis those factors have triggered a turnaround from earlier years when appetite for investing in agriculture was on the rise, with high-profile financial companies and big names in the investment world entering the sector.

“The last big industrialisation”

The FT quotes Richard Ferguson, director of agricultural consultant Masdar Farming, as saying that agriculture is “the last big industrialisation”. According to Ferguson, this is a process which will take between 20 and 30 years and will consist ofsmaller farms consolidating to form bigger corporate entities. Giving examples of this transformation of the global agricultural sector, Ferguson cited some of today’s big listed groups such asRussia’s Cherkizovo(LON:CHE) and UK-based Black Earth Farming (STO:BEF-SDB), which were formed on the basis of buying individual shares of blocks of land from hundreds of peasants.

Investors seek new routes to investing in agriculture

Analysts explain the decline of investment in agriculture with another factor of concern to prospective investors -- many view this sector as small-scale and localised, where single projects are risky. Based on this concern, new investment opportunities are being sought and investors are exploring ways of making farming more investable, such as by increasing scale or diversity to mitigate risk. An increasing number of investors are tapping agricultural growth via technology and equipment producers in the industry, buying shares in publically-traded companies such as German tractor maker John Deere (FRA:DEE) or Switzerland-based seed supplier Syngenta (VTX:SYNN).

Yet some analysts disagree

And while most estimates point toa trend of accelerating concerns over investing in agriculture and a decline in ventures in the sector, some analysts believe that agriculture is still an appealing and lucrative investment option.

About the author: Jürgen Siemer, senior analyst at Sustainable Asset Management, told the FT: “Prices for land are going up, so investment in agriculture and the value chain is becoming more attractive and there is much more profit to be made.” For more information on the topic visit click here. 

Two high-yield Canadian stocks that could takeoff in 2013

US-PDGov

By Roger Conrad

The appeal of Canadian stocks’ dividends is as great in 2013 as it was in 2012 and the world’s highest payouts are arguably even more attractive now that sudden US austerity and a major recession are off the table. If 2013 turns out to be a turning point in the global recovery, the energy and high-yield groups will produce the biggest winners.

Two companies that I’m particularly bullish on are Ag Growth International Inc (TSX: AFN, OTC: AGGZF) and Atlantic Power Corp (TSX: ATP, NYSE: AT). Both companies have been dramatically expanding their businesses in recent years.

Ag Growth’s annual sales have surged by better than a third the past three years, as it’s taken its grain-handling equipment business global.

Atlantic Power’s revenue is up 120 percent over that same time, thanks to a series of acquisitions of power plants operating in wholesale markets under long-term contracts.

Each company stumbled a bit in 2012. Ag Growth’s US sales were down 20 percent in the third quarter from year-earlier levels due to reduced harvests from an historic drought. Dry conditions are expected to extend in many parts of the country, which accounted for roughly 60 percent of 2012 sales, through at least the first quarter 2013.

Atlantic Power, meanwhile, has been unable to renew contracts set to expire in July and December for the power sold by two natural gas-fired plants in Florida. Last month management announced it would take a USD50 million charge to fourth-quarter 2012 earnings to reflect the impairment of those plants.

The move won’t directly affect cash flow and the ability to pay dividends. But it reaffirms management’s warning that it will face “substantial decreases” in returns from the plants, which it will have to replace by adding new assets. But both companies remain well on track to continue growing their businesses and building shareholder wealth in the process.

Ag Growth's sales outside of North America, for example, actually now exceed its sales in Canada. And with improved profitability selling to agricultural centers in Russia and Ukraine, the company is well on its way toward reaching 30 percent of sales from international sources.

Going global limits Ag Growth’s exposure to adverse weather conditions in North America, which inhibit harvests and, consequently, demand for grain-handling equipment. But the company is also growing its worldwide distribution network to meet high-capacity demand more cheaply, even as it enjoys more repeat sales and relies less on what it calls “transactional business.”

The result is Ag Growth’s sales are far more resilient overall than they were just a few years ago, when a severe drought in the US could have crushed them. Coupled with extremely conservative balance-sheet management, that’s strong protection for the dividend despite the past year’s adverse weather event and its temporary negative impact on distributable cash flows.

As for Atlantic Power, a steep loss of revenue from the Florida plants starting in the third quarter isn’t what management had hoped for. But neither was it unexpected, given recent years’ weakness in wholesale power markets. In fact management has been preparing against it the past several years. Atlantic Power’s acquisition last year of the former Capital Power LP, for example, more than doubled both generating capacity and revenue. That dramatically reduced the Florida plants’ share of overall profits.

In December 2012, the company achieved two additional milestones. First, it closed the previously announced acquisition of Ridgeline Energy, the renewable power assets of Veolia Environment SA (France: VIE, NYSE: VE) in North America. The USD88 million purchase adds 150 megawatts of operating wind power capacity as well as a development pipeline of 20 wind and solar projects totaling 1,000 megawatts of potential capacity.

The latter became a lot more valuable earlier this year, as Congress extended the wind power tax credit for another year. Meanwhile, management has also announced its Canadian Hills wind project in Oklahoma became fully operational Dec. 22, 2012, on time and within budget. The plant is now selling power under a 20-year contract to OG&E Energy Corp (NYSE: OGE).

Getting Canadian Hills running by the end of 2012 was no longer critical once the wind credits won another year of life. But completing the largest project in the company’s history does demonstrate Atlantic Power’s proficiency as a wind power developer, which is very promising for the continued development of the Ridgeline project pipeline. And the more scale the company achieves in this area the easier its expansion efforts are likely to become.

Financing has been challenging for expanding companies since early 2012. Here too, however, Atlantic Power has demonstrated success, closing a CAD101 million convertible bond offering last month to fund the Ridgeline purchase. That security doesn’t mature until Dec. 31, 2019, and carries a competitive annual interest rate of 6 percent. The company has now also fully repaid the USD272 million construction loan used to finance completion of Canadian Hills, using tax equity funds mostly drawn from a consortium of four institutional equity investors. The total cost of that 300 megawatt project was USD470 million.

Canadian Hills is expected to generate USD16 million to USD19 million in annual cash flows through the end of 2020, with “higher amounts” for the remaining 12 years of the OG&E contract. Expectations for Ridgeline, meanwhile, are for operations to generate an additional USD9 million to USD12 million in cash flow starting in 2013, with more thereafter as the new project pipeline is developed.

In addition, the biomass-fueled Piedmont project is set to come on stream in the first quarter of 2013, while the company’s 50 percent interest in the Orlando project will be producing additional megawatts in 2014. That adds up to USD38 million to USD47 million in new cash flow. It also increases the average life of Atlantic’s power plants’ sales contracts to 9.9 years, insulating profits from likely continued weakness in wholesale electricity prices the next few years.

That closes a substantial portion of the gap left by the loss of cash flow from expired Florida plant contracts. It’s also worth noting that these plants’ debt fully amortizes when their contracts end, so they’ll be unencumbered assets and therefore easier to sell, as management has indicated is its preference. The company is also selling its Path 15 transmission line in California.

Atlantic Power plans to invest CAD300 million to CAD400 million a year of equity capital in transactions utilizing roughly 50 percent debt. That adds up to CAD600 million to CAD800 million in new assets every year in renewable and gas-fired power plants, all secured by long-term contracts. As CEO Barry Welch noted during Atlantic Power’s third-quarter conference call, “We’re confident in our ability to sustain the current dividend level.” In fact the more assets are expanded the more room the company has to increase its payout.

That’s also what I expect to see at Ag Growth, as it expands global revenue over time. Moreover, neither company has any debt coming due before mid-2014, ensuring financial flexibility. What can go wrong at these companies? Even a full-on recession in North America wouldn’t immediately hit their profitability. Both companies actually raised dividends in 2008, as they were able to continue building cash flows in their respective niches despite the chaos around them.

Sluggish economic growth would keep downward pressure on wholesale electricity prices in 2013, making it difficult for Atlantic Power to re-contract the Florida plants. But after taking a USD50 million writeoff in the fourth quarter, the worst is already in the numbers.

Renewable energy contracts, meanwhile, enjoy favorable terms by law. And the Ridgeline acquisition gives the company considerable opportunity for expansion. Rather, the primary risk at Atlantic Power is if management fails to execute on its expansion plans. The delay in the startup of the Piedmont plant into 2013 won’t critically affect cash flow going forward. But it did raise the payout ratio in 2012 and demonstrates clearly the risks involved with construction.

A rise in interest rates could also make it more difficult for Atlantic Power to follow through on project expansion plans by increasing the cost of borrowing. Meaningfully higher rates, however, aren’t likely unless there is a revival of economic growth, which in turn would improve cash flow at the company’s operating projects as well as potential selling prices for assets like Path 15.

Ensuring the company is following through on its expansion plans is my primary concern whenever I study numbers and new developments at Atlantic. And it’s true there are more moving parts at this company than, say, at fellow power company Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF). At this point, however, Atlantic Power is succeeding both in growing its business and returning substantial cash to shareholders. The strategy has provoked skepticism from more conventionally minded analysts, particularly in Canada. But so long as it does succeed, it will reliably build wealth over time.

As for Ag Growth, business would suffer from a sharp drop in prices of agricultural commodities, should that convince farmers to do less planting. Given the growing appetite of Asians and demand for ethanol, however, that doesn’t appear a likely development anytime soon.

Weather conditions are always a threat to derail profits in a given quarter or even fiscal year. But here too the impact is always temporary and likely to be reversed the next year. Even an attempt by the Canada Revenue Agency to collect back taxes resulting from the company’s corporate conversion wouldn’t affect cash flow enough to endanger dividends.

Rather, as with Atlantic Power, the greatest threat to Ag Growth’s dividends lies with management’s effectiveness growing the business. That’s why we have to continue looking at the numbers every quarter. But at least here in February Ag Growth looks like a great candidate for a big capital gain in 2013 as it continues to measure up to the challenges. See my free report for more of my favorite Canadian income investments for 2013.

About the author: Roger Conrad writes a weekly column on dividend investing for Investing Daily.

How ill-gotten gains are legally bypassed

As evident in the infographic below, investment banks and the Treasury Department make money via an unspoken collusion of rewarding ill-gotten gains via the guise of  economic stewardship. One need not look far to see how the Securities and Exchange Commission, and a seemingly weak or soft-handed judiciary has fallen short of firm financial regulation countless times.

In the past, the SEC has even admitted as much per the New York Times. Steve Denning, a contributor to Forbes magazine reiterates the problem that big banks are still getting away with risky derivatives trading that has the potential to cause another financial meltdown. Why? The reason, according to another NYT article by Gar Alperovitz, is that Wall Street is too big to regulate. However, the lucrative fines that are redistributed to the Treasury and cost-benefit of the fines to financial institutions offer another reason, specifically financial incentive.

Source: Wall Street Crimes: What Financial Advisors Don't Tell You via Infographic File: Infographics and Data Visualization

Top 10 investment hotspots around the world

When you start thinking about investing in a property, you are going to want to make sure you have the best possible chance of a great investment. This means you have to be considering a few things, such as the location, what the city has to offer and how much it is going to cost you. As a property investor, you should be looking for hotspots that are going to provide the best result, so consider some of the following investment hotspots!

1.       Sydney

This beautiful and wealthy Australian city is a fantastic place to begin property investment. Not only is it a fantastic tourist destination, the residents also love it! Some suburbs to consider in Sydney include Darling Point, Double Bay and Bellevue Hill. Another thing that makes Sydney appealing is the number of things you can do inexpensively or for free, so you can enjoy the city on a budget!

2.       Paris

This is another very popular tourist destination and it’s no wonder why when some of the most beautiful structures, such as the Eiffel Tower, are located there. Paris has a lot to offer any tourist or resident and it would be a great city to invest in a property. Saving money in Paris is fairly easy too and this is another thing that makes Paris appealing. Instead of paying for transportation, invest in a bike! So many people in Paris ride a bike everywhere, so you will not be alone.

3.       New York

Not only is New York City the home to many huge business headquarters, it also has fantastic transport links that are highly efficient and fairly inexpensive. The Subway in New York City also offers a number of ways to save a bit of extra cash. Just the transport links and the great work opportunities are enough to persuade someone to consider living in this wonderful city. This is why you need to invest in a property in New York.

4.       London

Like New York City, London also has fantastic job opportunities and transport links. Not only does the transport involve the underground and buses, it is also in close proximity to a number of airports, including Heathrow and Gatwick. Great transport links in any city is a huge bonus because it means you can save some money on petrol for your car! Some areas you should consider investing in are Kensington and Notting Hill.

5.       Rio De Janeiro

This Brazilian city is very cultural, so it appeals to a wide range of people. As well as being cultural, it also has great beaches, nightlife and there is simply just a lot to do. Due to the fact that it is appealing to a wide range of people, Rio is a great place for a property investment.

6.       Moscow

The gorgeous Russian city contains some of the best schools, shops and restaurants, so anyone living in Moscow will have absolutely everything they need. Moscow is not the cheapest city to live in, however, there are plenty of ways money can be saved; you can easily live in Moscow without having to spend too much money because there are a number of local markets you can shop at and public transportation is decent.

7.       Hong Kong

Investing in Hong Kong would be great because it is in such a fantastic location. The best places to invest are close to international schools, which are great for English speakers, and close to business districts. These aspects of Hong Kong make it a good place for families and business men and women, so investing in this city would be great.

8.       Toronto

Toronto often attracts investments because of the fantastic economy, the great cost of living and the quality of life. Not only can you live well in Toronto, you can also live fairly inexpensively. This makes the largest Canadian city very appealing to many people and, therefore, would be a great place to invest in a property.

9.       Buenos Aires

Buenos Aires has absolutely everything you could want, including jobs, cheap transport, safe neighbourhoods, great nightlife and so much more. Buenos Aires is also very diverse, so you will not be the only English speaker in the city! Due to the amount of fantastic and inexpensive things this city has to offer, it is a great place to think about investment opportunities.

10.   Tokyo

Tokyo offers a fairly luxurious lifestyle with great neighbourhoods, shops and restaurants. Tokyo has been named the world’s most expensive country; however, this does not stop it being one of the most popular cities in the world! Also, you can save money by not having to purchase a car because there are wonderful transport links that can get you anywhere you need to be. This popular city is a great place for investment.

So there are your top 10 hotspots around the world that are fantastic for property investment. You need to remember, before spending any money, to weigh up all of your options and consider what the city has to offer. Somewhere that has great schools, shops and activities would be great, but you also need to think about financial situations and how you are going to benefit.

About the author: Ericka is a business coach who often has to travel to various cities around the world. She has experienced the life in many of these cities. She recommends referring to property investment specialists if you are thinking about investing.


* All images US-PDGov

Private equity and pension funds: The honeymoon is over, but the marriage is strong

By Matthew Ng

In today's low interest rate environment, pension fund managers have chased high returns by increasing their exposure to alternative investments such as hedge funds and private equity. As pension funds invest heavily in private equity funds, both industries will struggle to adapt to each other in a protracted and iterative process that is likely to be as competitive as it is collaborative.

In the United States, pensions are usually funded with contributions that are periodically adjusted according to actuarial necessity. Historically, contribution levels were discounted against anticipated investment income, but today’s low interest rates have contributed to a shortfall in investment income which has left pension liabilities significantly underfunded. 

Meanwhile, increases in lifespan exacerbate the problem, while changes in the demographic dependency ratio limit the collection of future funds. Pension fund managers find themselves squeezed on both sides, they are pressured by their inability to secure high returns, and motivated to compensate for demographic trends. Understandably, pension funds have embraced private equity funds for their promise of above-market returns.

Last year pension funds increased their exposure to alternative investments by almost 5 percent, resulting in an influx of billions of dollars into private equity. In recent months, however, several state pension funds have sold major holdings in private equity. California, Wisconsin, New Jersey and New York have collectively sold billion dollars of private equity holdings, while Texas and Illinois are poised to make similar divestures. But these recent highly publicized divestures by major state pension funds don’t signal a loss of interest in private equity, but rather a desire for a higher level of engagement with a fewer number of funds.

The losers in the recent exodus are disproportionately the big names in private equity, such as KKR, Carlyle and Blackstone. These larger funds yielded lower returns over the past few years than their smaller counterparts, largely due to the end of the mega-buyout era. While the loosing private equity fund managers are characteristically silent on recent dumping of their funds, pension fund managers have been more forthcoming, citing a misalignment of interests, insufficient returns and high fees.

Talk of misaligned incentives is a backlash against changes in the ownership paradigm of private equity. Since KKR and Blackstone went public in 2007, ownership of private equity management has been up for grabs with public offerings and sales of equity stakes to third parties. These arrangements, according to Wisconsin’s investment consultants, misalign interests between management and the limited partners.

Private equity must reassure skittish pension fund managers that returns for limited partners is the primary goal of the general partners. Also, fund managers must reposition their services as a partnership rather than just money management. This might include providing more services, or discounting fees in return for a large investment, a continued relationship or a longer commitment.

Private equity and pension funds have much to offer each other. In a world where skittish banks are unwilling to back large deals, private equity needs large institutional investors that can tolerate illiquidity. Pension funds need high yield investments that can produce their target 8 percent while providing returns that are uncorrelated with the market. It is no surprise that pension funds and private equity funds have embraced each other. Recent divestures are not a breakup of the marriage, but rather a lover's spat.

Matthew Ng writes on financial investment news and corporations from across Asia. For further reading, he recommends Crescent Point Venture Capital and David Hand Crescent Point Asia.

5 reasons why securities transactions assist with financial goals

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Securities transactions include a wide range of financial products. Carefully investing in a number of these is beneficial to financial goals in a number of ways. If this was not the case, many pensions and retirement accounts would not have the values they do. Moreover, securities transactions are essential to effective financial planning whether the transactions are made independently or not. After knowing which financial instruments to utilize, securities transactions are able to facilitate several financial objectives.

1. Profit

The first, and most important reason to participate in securities transactions is profit. Without it, investing would not be a worthwhile venture. In order to make profits, one must correctly allocate funds at risk levels proportional to one's tolerance for risk and loss. For example, the higher a particular securities transaction's risk becomes, the less amount of money is used to accommodate that risk. This helps ensure money within a portfolio is earned and not lost.

2. Hedging

Another good reason to engage in securities transactions is risk management. Hedging not only helps minimise risk exposure, but improves optimisation of one's capital allocations for potentially higher gains. To illustrate, an investor places 10 percent of his or her retirement account capital into small-cap stocks in an industry that is forecast to grow rapidly in the next five years. That same investor hedges this amount by allocating 60 percent of his retirement account's liquid assets into a bond fund consisting of of AAA rated international bonds.

3. Diversification

Diversification is used for hedging, but is different because the principle behind the diversification has less to do with how the transaction is made, and more to do with what the transaction buys. More specifically, diversification works by partaking in capital allocations across a number of industries via financial vehicles such as foreign exchange spread betting, whereas hedging is only performed via individual transaction construction such as a stop-loss order in forex, or bear put spread in stock options trading.

4. Security

Financial security is built through well implemented transactions. Over time the right money management decisions become the catalysts for financial security. However, to avoid investments leading to financial havoc, carefully planning transactions with financial professionals to meet individual or household financial planning objectives is often a good idea. With a well planned portfolio, financial security should grow to meet investment benchmarks, or provide an income via income investing strategies.

5. Retirement

Last but not least, securities transactions facilitate a good retirement. As investors move through life stages, they often make changes to their prior financial decision making, or restructure their investment plan to better meet retirement objectives. For instance, higher 401(k) contributions allow a more rapid saving, and reallocation of funds account for changes in economic conditions. Furthermore, a greater knowledge of new or specific financial products allows for a wider choice of financial transactions.

5 fun ways to spend your retirement more sensibly

By Samantha

You invested your life, energy and time to help build a business, serve in the military or work as a law enforcement officer. Now that you have retired, it is your time to get your life back in your hands. Even though you loved what you did, your retirement is all about spending time doing what you love with the people you love.

To do that usually takes some money. With reports on the news each day on the down state of the economy, you may be wondering whether or not it is reasonable to spend your pension or if you should save it for a rainy day. While saving money is a wise choice, depending on how you spend your money, you could be making an investment for the future without even realizing it. For this reason, many people take out loans from online companies such as www.uspensionfunding.com to help them fund their golden years.

Here are a few fun ways you can spend your retirement money sensibly.

1. Do volunteer work.

Just because you have retired does not mean you will want to sit at home without socializing with other people. Volunteer work is a great way to get out and help a local charity while entertaining yourself with others who are just as passionate about life as you are. It is also a great way to save money.

2. Visit distant relatives.

Combine your love of travel with the comfort and fun of being close to your children and grandchildren. You will likely have a free place to stay and can spend time with the people you love without spending a lot of money.

3. Invest in a local business.

If you have always had a passion for business but were unsure how to get involved, use your loan to invest in a business in your area. You will not only be putting your money to good use, but you will also have a great opportunity to earn a return off of it.

4. Treat yourself to a nice dinner.

You may have pinched pennies during your youth, but now that you have your retirement, treat yourself to some fine dining every once in a while. This is a great way to explore new restaurants in your area and a good excuse to get together with friends.

5. Take a cruise.

Cruise liners are lowering their prices and making it far more affordable to enjoy some luxury on the open seas. This is a perfect chance for you to travel the world without overspending.

Your golden years belong to you, and to get the most out of it, you should live it up while you have your health. Use these tips to make sensible retirement decisions and still have fun.

Samantha really enjoys writing and one of her favorite things to write about happens to be finances. If you'd like to learn more about www.uspensionfunding.com, please visit http://www.uspensionfunding.com/

Stock trading: Test your trading prowess with this stock trading game

This game demonstrates the basics of what actually happens in the stock market every day. Share prices rise and fall as traders buy and sell stock. By selecting how many shares to buy or sell, you can either increase or decrease your profits.

You start out with a $2,000 account and can quickly increase or decrease its value by making quick decisions about which direction prices will move next. Just press on buy when you want to buy, and sell when you want to sell. The arrows position on the scale determine how much you buy or sell.

* Tip: You have to buy shares first before having something to sell. Buy when you think the price is low and will rise, and sell when you think the price is too high and will fall. I made $87,000+ without turning the sound off before getting bored. Too bad its fake money.

* Tip 2: Trades on the simulation do not include commission or fees, therefore they are not an accurate representation of the reality that transactions costs add up and eat away at capital gains and losses.

Add Some Fun To Your Blog!

Pros and cons of economic value added

Effect of regulation on Economic Value Added

Image attribution: Mgmwki; CC BY-SA 3.0

Economic Value Added (EVA) is a term referring to financial gain in excess of profit expectations. In other words, EVA  measures the extra value profits yield for an organization after deducting cost of capital such as dividends to shareholders. Although EVA is an acronym used across multiple industries with different meanings, its significance in finance is specific. Moreover, the usage of EVA often refers to a proprietary version of the calculation claimed to have been created by the Business Advisory Firm Stern Stewart & Co in the late 1980s.

Uses

The EVA metric is primarily used as a business valuation tool. Some proponents of EVA such as P.C. Narayan of the Indian Institute of Management at Bangalore advocate EVA over other profitability metrics because it demonstrates potential future earnings. This according to Narayan, is because measurements such as Earnings Per Share (EPS) only provide a snapshot of how well a company has met stock-holder's past financial expectations and does not reflect potential for capital reinvestment.

Calculation

In terms of the Stern, Steward & Co. formula, EVA is the result of subtracting taxes and weighted average cost of debt and equity capital from net operating profit. This however, is not the only way to determine EVA because the cost of capital calculation varies between businesses. For example, the United States Postal Service version of EVA indexes its operating cost to inflation to more accurately reflect costs after rate increases. Other companies may not need to adjust costs to inflation based on corporate policies and accounting methods. The Stern Steward  & Co EVA formula is shown below:

EVA= (Net Operating Profit-Tax)-(Weighted Average Cost of Equity and Debt)

Advantages

The advantages of EVA are it supplements financial data from other methods of business assessment and valuation. Moreover, it reflects businesses' cost management and demonstrates availability working capital after its original opportunity cost has been deducted. Another benefit of EVA is it can be used as a managerial incentive that helps assure the continued performance of a business. It also evades problems associated with percentage calculations by using specific values according to Aswath Damodaran, a Finance Professor at the New York Stern School of Business.

Disadvantages

Economic value added cannot measure how well capital asset managers utilize retained earnings via project management and other business ventures. Moreover, capital asset managers may squander liquid reserves instead of effectively increasing the future return on capital by  reinvesting it with the aim of lowering operational costs via profitability instead of cost cutting. Economic value added also cannot valuate return on expenses such as research and development. Moreover, despite being an income statement operating expense, research and development actually has the potential to yield  future earnings not measured by EVA.

Guide to dividend payments

Diagram: How corporations allocate dividends

Image attribution: Urbanrenewal; CC BY-SA 3.0

Shareholder dividends are a form of monetary distribution most commonly paid to owners of business stock and mutual funds. The dividends for company stock are made from corporate earnings and income earned from mutual funds. In the case of mutual funds, how the dividend is treated depends on the type of investments made by the fund. For example, bond funds are sometimes exempt to state tax because they invest in tax free bonds. In the case of corporations, the issuance or increase of a dividend sometimes leads to an increase in stock trading activity.

Corporate dividends are issued by boards of directors, and increases or decreases to dividend amounts are typically announced via quarterly reports. To qualify for a dividend payment the shareholder has to own the shares by a specific date. This date is called the record date. In addition to owning the shares by the record date, the shareholder must hold the shares until the ex-dividend date, the day of dividend distribution.

When dividend payments are made, they are either deposited directly into a Federal Deposit Insurance Corporation (FDIC) insured account such as a money market account or a FDIC defined non-insured investment sweep account. As an alternative to having funds deposited into a sweep account, dividends can be reinvested into the issuing corporation via a Dividend Reinvestment Plan or DRIP. Dividends may also be paid into retirement accounts and life insurance polices that hold shares in either stocks or mutual funds.

Qualified dividends

Qualified dividends are paid to investors at a lower tax rate and generally dividends issued by U.S. Corporations. Moreover, qualified dividends are taxed at a maximum rate of 15 percent per the Internal Revenue Service (IRS). Income earners in the lowest tax bracket pay less than 15 percent according to the brokerage firm Fidelity Investments. Qualified dividends earnings are are reported on a Form 1099-Div that is typically sent to taxpayers in January of each year and use for tax filing purposes on IRS Schedule-D.

Ordinary dividends

The IRS describes ordinary dividends as payments made from the earnings of corporations that do not qualify for the net capital gains tax rate. One such qualification is the holding period of shares. For example, when shares are not held by investors for a certain amount of time they are paid as ordinary dividends. According to Fairmark, mutual funds that are owned for 60 days or less don't qualify for lower tax rates. Since ordinary dividends are not subject to a maximum of 15 percent tax, they are taxed at the regular income tax rate.

Special dividends

Special dividends are usually one time, larger than average dividends paid to shareholders when corporations have extra earnings. In the case of public companies, these dividends are reported to the Securities and Exchange Commission (SEC) using a Form 8-K. It is important to note that share prices can drop proportionate to the size of the dividend on the ex-dividend date. For example, if Company A has a share price of $100 and issues a $10 special dividend per share on January 26, then the share price opens for trading at $90 on that ex dividend date, it is most likely due to the special dividend according to the Motley Fool.

How book building works

Image attribution: Freedigitalphotos.net; standard royalty free license

Book building is the valuation of  new financial securities carried out by securities underwriters known as book runners. When a company issues new bonds or shares, they have to be priced. This pricing is performed by the book builder(s) who market the new financial instruments for the issuing company. This price assessment is partially based on a measured demand for the security by both institutional, private and public investors. However, book value for securities is also determined using financial formulas such as the discounted value of future cash flows.

Initial public offerings (IPOs) such as the Dunkin' Brands Group, Inc. IPO in July 2011 serves as an illustration of how  additional issuer based valuation influences book building. The IPO had shares offered at $19 per a July Wall Street Journal report. Arriving at this initial offering price is theoretically the role of book building, but is also be influenced by the issuers capitalization needs. In other words, if the IPO is designed to raise money, the amount of money to be raised can influence the IPO price per share regardless of book building valuations.

In light of the competing motives behind IPOs the process of book building involves capitalization requirements, buyer demand for financial securities, and actual valuation of corporate worth as represented by the financial security. Some financial observers also believe book building undervalues valuation. For example, in academic research published by New York University and authored by two professors named Boyan Jovanovic, and Balázs Szentes, it is suggested initial public offerings are pre-valued below actual worth before soliciting bids from buyers in an effort to share 'super-normal' returns with preferred clients for business purposes. 

The actual value of shares to be offered via an IPO are only issued shortly before the offering takes place according to research in the Journal of Corporate Finance. Moreover, according to this research, yet another variable affects the valuation of book building. Specifically, regulatory environment as evident in the form of opt out rules. In other words, the author of the study demonstrates that since book-builders can withdraw their offering of securities if demand is not high enough, the undervaluation that can take place during IPOs is accepted due to the surety made possible via the opt out option.

The function of book building is fundamentally straightforward, however what actually happens when organizational entities seek to raise funds by issuing financial securities via book-building isn't quite so simple. This process and the valuation of securities is carried out by book-builders that are securities underwriters or book-runners. However, the actual price of the securities offered, IPOs in particular, are affected by several factors including book-builder financial motives, the issuer's financial security, and investor demand.

Pros and cons of online securities trading

US-PDGov

The ability to utilize expertise and resources to acquire capital gains is essential to the success of individual traders of financial instruments. In this sense it is the responsibility of traders to discern between poor and prosperous techniques and strategy. Numerous drawbacks befall even the best and most talented of industry experts. However, once a trader becomes experienced, knowledgeable, and refined in his or her practices, avoiding the financial pitfalls associated with online securities transactions becomes more possible.

Opportunity

A key factor that draws millions of people to online securities trading is the substantial opportunity to increase personal wealth. Monetary gains on well implemented trades often yield returns far above more conservative forms of money management such as federal treasury bonds. The potential to earn hundreds, thousands and even millions is possible via online securities trading and via several financial instruments such as spread betting on currency pairs.

Experience

A key benefit of trading financial instruments online is the acquisition of tactical knowledge and ability to implement learned trading strategy. Using brokerage tools helps develop awareness of the affects of market forces such as volume and economic events on asset prices. Furthermore, the trading process and simulations help acclimate brokerage account holders with the best trading mechanisms to use at specific times. For instance, in intraday arbitrage, knowing when to buy or sell using limit orders vs market orders and all or nothing trades, is important, if not essential to a well implemented transaction.

Value

Another important benefit of securities trading is the value provided by online brokers. For example, discount brokers that only charge transaction fees and exclude commissions via self-directed accounts often only cost pennies on the dollar. Moreover, the larger the transaction amount is, the smaller the proportional cost associated with that trade becomes. In addition, a wide range of complementary digital tools such as a spread betting demo account assist traders learn how to make the most of their money.

Risk

Online securities trading is risky. The financial products are not typically insured and market volatility has a dramatic affect on the price of securities. When combined with leverage or margin, capital losses are multiplied and substantially lower asset worth if prices go the wrong direction. Reducing risk exposure entails locating financial instruments that have higher yield for the least amount of risk. Ideal risk management also involves allocating assets in such a way that overall portfolio yield rises despite any capital losses on riskier assets.

Complexity

There is a significant learning curve associated with online securities trading. If trading platforms are simplified, they do not necessarily make up for a lack of market knowledge and experience. Moreover, most digital brokerage services provide glossaries, demonstration accounts and tutorials precisely because there is a level of complexity involved with the trading process. Not being fully aware of the pitfalls of online trading such as failing to use a stop-loss order, or using too much leverage on risky buy order makes it that much easier to make a small, but costly error.

Guest post: A personal review of Barron's Magazine - Reasons to unsubscribe from Forbes

By: James Geddens

I have recently cancelled by subscription to Forbes Magazine and have instead started subscribing to Barron’s Magazine, simply due to the fact that I found it hard to keep up with some of the analysis.  The editorial articles inside Barron’s are extremely well authored and offer a superb perspective on what happened during the prior week’s financial world.  It also includes sections which tell you what is going to be happening during the following week’s stock market trading.

Get the Latest Stock Market Prices & Tables

The Market Laboratory pull out section is essential too because this includes all the latest stock and bond prices for the next 7 days, although it can be a little bit too in-depth and you can tend to get this detail off the web anyway.  However, it’s still handy to have all the stock tables in front of you as one easy read.  Since making the switch from Forbes I have found that I have actually been able to read every single weekly edition of Barron’s.  It makes a change to having magazine piled up on my desk that I never get around to reading! 

Get Invaluable Investment Leads Like the Professionals Do

One of the other reasons that I subscribe to Barron’s Magazine is that I like to know what the business leaders are reading.  According to research, the average worth a Barron’s reader is $3 Million US Dollars.  Whilst I don’t have that much money, it’s still pretty cool to know that I can benefit from the same investment leads that those guys get each week.  Over the course of my subscription to Barron’s I have seen my own stock portfolio’s value rise by 21% as I owe a lot of that down to the advice that I get inside the different pages by the expert columnists.  A lot of the commentary in the magazine is also quite humorous and makes a change from the rather staid and stuffy reporting seen in rival publications. 

Value for Money with Up to Date Finance News

Barron’s Magazine might be quite expensive but it does come weekly which make the annual $99 Dollars subscription fee offer value for money in my view.  If you are an investor like me then you will already be aware of the importance of getting the most timely financial information – and Barron’s certainly seems to offer that.  Whether you want to know the latest oil prices, details on the latest corporate takeover, or what’s hot or not in finance, then it should tick all the boxes for you. 

No Over the Top Advertising Space

Another plus point to Barron’s is the fact that it does not have large and over the top advertising space on any of the pages.  There are a few ads, but these are always placed contextually and don’t interfere with your reading.  The ads usually blend quite well into the articles so you almost tend not to notice them. 

It’s Like Forbes Magazine but Without the “Fluff”

How I like to describe Barron’s Magazine, is that it is like the Wall Street Journal or Forbes… but without all the fluff.  You can either subscribe to it via post in traditional magazine format, or get it via email with a login to the Barrons.com website.  In the most simple terms possible I would say that Barron’s Magazine is a must read for people who love stock market numbers.  If you want to keep ahead of the competition and make better investment choices and picks then it could work for you.  Personally I love it and could not do without it nowadays. 

Author Bio: James Geddens is a 32 year old investment trader based in New York who reads Barron’s Magazine each week.  If you want to know more about Barron’s then you should click here for more info on this independent subscriptions website that hosts information about most financial magazines.

Advantages and Disadvantages of Investing in Warrants

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Warrants are a type of financial instrument similar to stock options. They offer the choice to purchase underlying financial securities such as stock at a specific price. If a company is destined to grow along with its price per share, a favorably priced warrant is a reasonable investment, but is not without its disadvantages.

Complete article link: http://www.helium.com/items/2332037-are-warrants-worth-investing-in

The best and worst weekdays to buy and sell stocks

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In historical research it has been demonstrated that some days of the week have indeed been better than others for buying and selling shares. However, since finance and economics is generally not a pure science, conditions for verifying such a pattern are limited to scenarios that are not necessarily perpetually accurate or realistic representations of broader market conditions.

Days of the week to buy and sell shares change with the prevailing market and share related conditions, but don't necessarily fail to demonstrate some indication as to which day of the week is better to buy or sell shares. The best day of the week to buy shares and the worst day of the week to sell shares conforms more to the logic of the time and the place than any pre-established long-term pattern.

The 'Day of the week effect'

Trends and patterns present themselves in the stock market all the time; this much is documented. For example, in the Journal of Economics and Finance, Volume 25, number 2, 2001, it was empirically demonstrated that the days of the week do not have the same volatility in price movement and also do not provide the same levels of daily returns as evident in statistical research on the S&P 500 Stock Index between 1973-1997.

According to this particular study, the days of the week with the best returns was Wednesday, and the day of lowest return was Monday with Fridays having the highest volatility. Such being the case, it would appear as though some time during Monday would be the best day to buy shares, and at some point on Wednesdays would be the best day to sell shares.  

Pattern changes over time

The findings in the aforementioned study may be convincing, but they aren't absolutely conclusive. This is because the time periods in which the measurements were made are finite within a longer market timeline. For example, in the book 'Stock Market Rules' it is claimed the market tended to drop on Mondays and rise on Fridays for a period of 37 years between 1953 and 1989. Also according to the book, this Monday decline pattern changed in the 1990s essentially providing a counter claim to any definitive long-term day of the week effect.

Trends are different across markets

A problem with quasi-scientific research is variance within the shares studies themselves. In other words, because the conditions are different across studies it is difficult to prove any universal accuracy of finding no matter how statistically valid any single study is. To demonstrate this principle, it is helpful to look at another 'day of the week effect' research study by Yelis Yalcin of the Gazi University Department of Econometrics and Eray M. Yucil of the Turkish Central Bank. The findings from this study show the best days of the week to buy and sell shares varies across multiple emerging markets indicating no one good day to buy shares or bad day to sell shares across multiple markets.

Individual financial products vary

Many studies make use of averages to verify hypotheses about particular events or subjects. In the case of days of the week for buying and selling shares this tends to exclude the individual price movements of shares. Such being the case for some shares Monday may be the best day to buy shares and the worst day to sell shares, but at a different time, or in the same market with different shares this may not be the case. This is because the underlying financial conditions of a company or financial instrument which the shares represent can vary and influence price independently of market movement. This tendency is measured by a statistic called the Beta coefficient.  

In summary, if investors or traders can act on shorter term patterns in which recognizable share price movements do occur, then there may indeed be a best day of the week to buy and a worse day of the week to sell shares in that context. The bottom line however, is that any pattern, trend or market condition can change with a multiplicity of market, economic and share specific variables that are not easily nor accurately accounted for or measured using empirical research techniques.

How to pick lower risk stocks

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Picking lower risk stocks involves finding good returns on investment for low risk. Ideally low-risk stocks are as safe as a savings account insured by the Federal Deposit Insurance Corporation (FDIC). A good starting point in knowing how to pick conservative stocks is understanding how much stock to invest in, and for how long as even invested money in conservative stocks becomes risky if that investment may be needed in the short-term.

• Protect against risk

A 'conservative stock' that maintains or grows value during most parts of an economic cycle doesn’t necessarily mean it's conservative during a recession; this possibility makes the whole concept of conservative stock somewhat fallacious. That is to say, since market and economic conditions can change relatively quickly, unless one has picked conservative stocks able to withstand share price volatility, then the value of those shares can drop.

• Identify low-risk

If there is such a thing as a conservative stock, one’s chances of picking the right one might be somewhere between finding the holy grail and spotting a $1 bill in a parking lot. In other words, be prepared to do some research. An important step in performing due diligence on investments is defining low-risk. This could mean a number of things; high dividend, low beta, and consistent profit margin are what some might look for. Moreover, according to Investopedia, low beta measures the risk of volatility a stock's price experiences relative to movements in the broader market. 

• Forecast future risk

Just because a company is low risk in the present doesn’t mean it will be a conservative stock in the future. It is not impossible for a large, stable blue chip stock to take a turn for the worse. To illustrate how a blue chip stock can decline, according to Yahoo Finance.com, Merck & Co,. Inc. (MRK), the large pharmaceutical firm, dropped from an all time high over $80.00 per share in the early 2000’s, to the low $30s in 2011. A part of the risk for Merck might of included expiration of drug patents and not enough high demand patent protected drugs to grow revenue.

• Assess capital gains

To pick a conservative stock, the value of the company’s shares, or total investment in the stock, should also rise over time. The conditions for long-term capital gains are quite diverse and vary by industry, economy, and market conditions. An investor can increase the  chance of capital gains by locating a well managed company with strong financial statements. Companies that have a high percentage of market share and consistent product or service demand  have a potentially increased chance of consistent capital gains.

• Evaluate capital structure

The capital asset management of a business is also an indicator of how 'conservative' a stock is. This is because use of capital in part indicates how a company plans to grow, maintain revenue stream, and improve profit margin. Companies that invest in projects with high internal rates of return, and operate with low costs and efficient  cash conversion cycles are examples of potentially good capital structure.

Summary

Selecting conservative stocks is not really a fool proof endeavor as stocks themselves do not provide guaranteed returns nor are they insured financial instruments. For this reason, picking conservative stocks is more akin to choosing lower risk stocks. Lower risk stocks sometimes share a few characteristics, some of which include profitability under adverse conditions, strong and proven business models, and legacies of success that help ensure at least medium-term investment stability.

How technical analysis of stock prices works

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Technical analysis in stock trading refers to the evaluation of stock price changes over time. These changes are measured and plotted using formulas, charts and graphs and assessed in terms of patterns, and strength of stock price movement. A number of basic technical tools, and techniques are used to help technical analysts or chartists assess if specific indicators have occurred.

After a technical indicator has occurred, a confirmation of that indicator may follow using another technical analysis metric. Technical analysis is not an exact science, and generally shouldn't be considered as always being reliable. Rather basic technical analysis is sometimes used in stock trading to assist in substantiating or validating other methods of stock analysis.

• Moving averages

Moving averages are measured in days, usually up to 200. When longer-term moving averages have been moved through by stock prices, it sometimes indicates a significant price movement. Sometimes stock price support and resistance are formed near moving averages, and when these price levels are significantly broken it can mean a possible price momentum trend. In other words, moving averages are at times used as pivot points where a stock may have a pattern of rebounding upward or downward.  

• Candlestick charting

Candlestick charting is a form of technical analysis that began in East Asia. In this type of analysis price movements are represented by black or white candlesticks with lines at the top and bottom. Sometimes colors such as green or red replace the black and white in candlesticks. The color, length and positioning of these candles are placed on a chart and scaled in terms of time and stock price . The technical analysis of these charts will then interpret the candles based on past patterns of similar candle positioning.

• Oscillators

Oscillators are used to determine upper and lower limits of price movements. Examples of oscillators are the Relative Strength Index (RSI), and the Rate of Change (ROC) indicators. These basic stock technical analysis tools plot values on a scale between 0-100 using mathematical formulas. When certain value levels are reached, the oscillators are sometimes thought to show an increased probability of a price being close to a high or low.

• Trading levels

Trading levels constitute the amount of stock trading that takes place during a specific period of time and is another widely used basic aspect of technical analysis in stock trading. Trading levels are measured using volume and when it ncreases it can mean a growing momentum in the movement of a trend may be occurring or about to occur. Volume can also indicate overall market participation. For example, during holidays, volume can be quite low due to the absence of investing activity on those days in holiday when the stock market is open.

• Line graphs

Line graphs are also used in basic technical analysis of the stock market. When stock prices are plotted onto line graphs over time, the movement of that price can be analyzed for patterns in a similar way to candlestick charting. For example, a stock price line graph may create a pattern called 'head and shoulders', which literally takes the shape of a left and right shoulder with a head in the middle. If patterns like this become evident, stock prices sometimes follow similar movements to previous occurrences when a similar pattern was observed in that or other financial securities' line graphs.

Pros and cons of Constant Proportion Portfolio Insurance (CPPI)

Constant proportion portfolio insurance is a form of investment risk management that is based on asset allocation. In other words, it is investment insurance however it is not insured by a company that provides the insurance. According to Rama Cont and Peter Tankov of the University of Columbia Center for Financial Engineering, constant proportion portfolio insurance allows investors to make risky investments that can grow by using multiples i.e. having more 'risk-free' assets to counterbalance the riskier assets.

How it works

To insure against risky investments constant proportion portfolio insurance requires the following three  amounts and one allocation per Investment Week. In other words, one has to first define how much capital one has to invest, then decide how much is an acceptable amount to lose, then assign a percentage loss the risky allocation of assets. These measurements are entered into a formula to arrive at an amount for asset allocation.

1. Capital              Ex. $200,000 (C)
2. Risk metric       Ex. $20,000   (D)
3. Maximum loss  Ex 75%          (M)
4. Asset structure. Ex. $26,000 in Stocks, $174,000 in Treasury Bonds

In order to arrive at #4's asset structure numbers 1-3 have to be entered into the CPPI formula. This formula basically determines how much money is allowed to be invested in a high-risk asset in order to not exceed more than $20,000 loss with a maximum asset price drop of 75%. In other words, 75% of $26,000 is equal to $20,000 using the formula  (1/M)x (D)=(1/.75) x ($20,000)= $26,000. 

To illustrate further, suppose Mr. A has $200,000 and wishes to lose no more than $20,000 and expects the riskiest assets can fall as much as 75% in value. Given these parameters constant proportion portfolio insurance can be calculated using the aforementioned formula. This however, is only half the process, as there is still the question of return on investment, and asset instruments. That is to say, what investment instruments will yield a high enough return to justify a 75% risk. First it is a good idea to look at the advantages and disadvantages of CPPI.

Advantages

1. Does not require derivatives

Since constant proportion portfolio insurance is more of a formula or technique the financial instruments used to fulfill the requirements of that technique are flexible. This means an investor can choose investments he or she feels comfortable with rather than something more complicated or unknown.

2. Fewer management expenses

Since derivatives are not required and flexibility is allowable within the CPPI formula, financial instruments that have lower management expenses, commissions and fees can be selected to optimize the portfolios cost effectiveness.

3. Adjustable risk and reward

Another advantage of constant proportion portfolio insurance is it can be periodically adjusted. For example, if an investors risk level or total investment capital changes, the formula can easily be recalculated and assets reapportioned to suit that change.

Disadvantages

There are a few disadvantages to constant proportion portfolio insurance. These disadvantages can be minimized with effective decision making, and accurate assessment of market risk but should be addressed to properly meet financial objectives, risk tolerance and goals.

1. Upside ROI may be unknown

Risky investments tend to not have fixed rates of return which means the portfolio could lose value and not gain a cent. For someone seeking steady consistent growth this type of asset insurance allocation is less likely to be acceptable. However, this does not have to be the case, CPPI can still be used with fixed rates of return and very low risk levels but then becomes somewhat pointless as there is nothing to really insure against.

2. Risk level estimate may be wrong

Another potential problem with CPPI is the risk level estimate may be wrong. For example, the market may drop more than the investor expects for a given asset. Moreover, a faulty risk assessment can dampen the potential ROI or cause the investor to lose more than thought possible. In light of this, it is important to balance realistic expectation  about what the market can do, and what is also most likely to occur.

3. Opportunity cost of insurance

A third problem with constant proportion portfolio insurance is the opportunity cost. Money used to insure risky assets is money not invested in other risky assets. Granted that opportunity cost may actually amount to opportunity savings if those risky assets do not perform. However, there may also be safer assets with higher returns that increase the cost of financial opportunity provided by CPPI.

Stock Options Trading: The Long Strangle Doesn't Lie

Another exotic sounding name for a financial instrument about nothing guaranteed. These types of financial tools challenge the mind to think in dynamic ways, but are more like working for a fee than investing. In other words, to implement the long-strangle stock option, traders are charged a fee to purchase two stock options making it more like paying to play with a sophisticated financial toy. It might make one look like they're clever, but if the money is not flowing, who cares about that. Bottom line is if it costs money, and does not guarantee payment, there is room for either party to win or lose. Moreover, a strong market sense can help leverage the power of stock options, but recognizing if one has that sense or not is a good idea. 

To clarify further, the long-strangle is a trading method and not an investment strategy. The technique involves the purchase of a long-call and long-put per the Options Industry Council (OIC). Don't be fooled by the elaborate language, it's financial jargon for the option to purchase at a discount while simultaneously having the option to sell at a little less of a discount. Figuratively speaking, it's not really comparing pears to grapes to say if someone buys 10 apples on discount but sells 9, their net worth will rise if apples increase in value and a lower  pre-arranged price was negotiated. So why not just buy 10 apples? Better yet, why not grow them?

The long-strangle insures the purchase of stock shares on discount through the long-put which is the instrument that sells on discount. In other words, the call option gives the purchaser the right to buy shares at a price lower than the future market price if the price rises and the put option gives the purchaser the right to sell shares at a higher price than a future market price if shares decline in value. In both cases the options might cost a little less than actually buying the shares directly if the contract fee doesn't offset that discount. If only the call option had been purchased there is no downside protection. In this sense, the put option is like a partial refund if the apples go bad before eating or selling them. Sounds complicated doesn't it. If it is too confusing to invest without knowing exactly what is going on, consider that a red flag.

Why is it called a long-strangle? TD Ameritrade's “Think or Swim” says it's because the stock option  strangle takes advantage of both sides of the position i.e. up or down price movements. So it is like strangling the price from both sides but applying a little less pressure on the upside because you think that's the direction it's going to go. It's also an intellectual stranglehold on common sense for the 13 reasons described by Ex-Options trader Stephen Whitney who came clean on his losses. Learn from Mr. Whitney's mistakes, you don't necessarily need to think very hard to swim, you just have to know how. In other words, if making money is more about understanding how to do it instead of knowing when more is better than less, then stock options trading tactics such as the long-strangle might not necessarily be such a good technique to be using.