Is The U.S. Government Too Big To Fail?
by Marv Dumon
When considering whether the U.S. government is too big to fail, it's helpful to look at historical precursors and ask yourself: Was the Roman Empire too big to fail? How about Genghis Khan and his Mongolian Empire, or Alexander the Great and the Macedonians? Can we find an everlasting civilization in the ancient Egyptians or the early Chinese? History not only teaches, but shows, that civilizations and species are only as fragile as one non-adaptive and careless generation.
Most people believe that incomprehensibly large systems are simply beyond demise, or are somehow invincible. Compared to other nation states and empires that once dotted the globe, America is a fairly young country, at a little over 200 years old. The U.S. boasts the world's biggest economy, which helps to fund and support its gargantuan bureaucracy. Massive amounts of liabilities on the government balance sheet, however, threaten significant cuts on important programs that are aimed at keeping the country strong.
Programs such as education, defense and homeland security, and technological research are reliant on adequate funding (along with effective implementation and execution) for the continuing long-term prosperity of the U.S. Significant fiscal pressures placed on the U.S. government may well reduce future funding of these critical programs - especially if belt tightening becomes the only option for fiscal responsibility. Lack of funding, along with lack of effectiveness of the funded programs, heightens the country's economic, geo-political and defense risks. (Learn more in our Credit Crisis Tutorial.)
Financial Metrics
The U.S. economy is the world's largest, with a gross domestic product (GDP) of approximately $14.5 trillion as of the end of 2008. This economy supports a massive governmental bureaucracy with a budget of $2.9 trillion for 2008. This budget represents annual expenditures spent on defense, homeland security, education, health services, infrastructure and other programs. The latter half of the 2000s saw severe economic pressures on ordinary citizens, the federal government, as well as state and local governments. (Mutual funds devoted to keeping roads, structures and communities safe can make you money, read Build Your Portfolio With Infrastructure Investments.)
A Decade of Missteps
As of the latter half of the decade ending 2010, the federal government and markets underwent the following:
The war on terror cost hundreds of billions of dollars in 2008, and was projected to rise in 2009. Since 2001, the total cost of the war has exceeded $2 trillion.
The years from 2000-2008 brought in the five biggest budget deficits in America's history. In 2008, the federal budget deficit exceeded $450 billion – an all-time high at the time. In 2009, the budget deficit is expected to exceed $700 billion. That deficit figure was highly unforeseeable (if not unimaginable) merely a decade earlier.
2008 saw the U.S. hit a 53-year high for national debt as a percentage of GDP. In the fourth quarter of 2008, the national debt clock in Times Square ran out of space, and had to eliminate the dollar sign in order to add another zero to the government's debt. As of October 2008, the national debt exceeded $10 trillion for the first time. Merely three months later, the national debt exceed $10.6 trillion, and at the time, some were expecting the national debt to increase by $1 trillion within the next year. (Learn more in The Treasury And The Federal Reserve.)
To facilitate the national debt, the federal government had to borrow more money, much of which came from foreign sources including the Middle East, Europe, China and others. Additional liabilities on the balance sheet means that the government has to set aside interest payments that could otherwise be spent on education, healthcare, infrastructure and military programs. Interest payments are essentially a zero sum expenditure with high opportunity costs. (Find out more about these debt obligations in Buy Treasuries Directly From The Fed and Where can I buy government bonds?)
U.S. taxpayers, with their periodic payroll checks, have been funding Social Security and Medicare in anticipation of benefits as they get older and retire. Congress had been spending hundreds of billions of dollars of trust fund money on various spending programs, as opposed to setting it aside for the taxpayers' retirement benefits. In 2008, Congress "borrowed" $674 billion in Social Security trust funds. Social Security and Medicare have been regarded as unfunded liabilities. That is because only a portion of the monies provided by taxpayers are actually set aside. They are also regarded as generational liabilities, which is when a current generation borrows money, and when they die, the bill is handed off to future generations – while the current generation benefits from the current spending. As the U.S. approaches the end of the 2000s, some economists and government accountants estimate that these unfunded liabilities would exceed $80 trillion. (For more, check out Introduction To Social Security.)
A U.S. and global economic recession not seen since World War II was placing financial stress on citizens, affecting the lower, middle, and upper classes. Wall Street's poorest performance since the Great Depression of the 1930s saw stock market wealth worth $6.9 trillion wiped out during 2008.
Over one million jobs were eliminated in the U.S. in 2008, which contributed to the unemployment rate approaching 8%. With U.S. per capita earnings of $48,000, one million layoffs translate to approximately $48 billion in eliminated payroll and earnings for working families. These statistics do not include under-employment figures in the country – it is estimated that one out of nine Americans are underemployed. As of 2007, approximately 12.5% of Americans lived below the poverty line. (From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone in Macroeconomic Analysis and Economic Indicators To Know.)
The housing collapse was expected to require government intervention and action on mortgages that require over $1 trillion. American homeowners saw over $1.9 trillion in home values wiped out in 2008. A frozen credit market forced the government to spend several hundred billion dollars through a stimulus package. Continued frozen credit facilities through 2009 made the economic downturn of 2008-2009 more protracted and more costly for the government.
Future Opportunities
The U.S. continues to be the most technologically advanced nation in the world, with the best research universities. New developments and advances can bring a wave of economic stimulus simultaneously ushering in a new age in commerce activity.
These areas could become the economic rallying cry to uplift the economy and refill government coffers:
•clean / alternative energy and fuel efficiency
•infrastructure building and repair
•nanotechnology
•robotics
•healthcare advances
Parting Thoughts
The ruins of ancient Rome, and numerous other civilizations centuries ago, serve as warning to national leaders against taking rash actions on behalf of their people or on behalf of future generations. Such gambles can spell disaster, and risk the very existence of the state. Fiscal irresponsibility may not bring about such a rapid decline as that of Napoleon's charge on Russia, or Germany's multi-front wars, but it can lead to a longer-term protracted decline similar to ancient Rome's nagging and continued multi-front wars and internal discord.
Fiscal decline is a slower process of reduction in flexibility, which forces leaders to make choices in proportional constriction. Affected citizens encounter reduction in economic wealth and quality of living. The philosophy of monetary and resource conservatism has endured over the millennia, from agricultural to hunter-gatherer societies, for a reason. There is a time when corrective measures in the form of resource conservatism, temperament and an urgency in common sense, are the clarion call of the times. (Learn about the series of events that triggered the Great Depression and other crashes in The Crash Of 1929 - Could It Happen Again? and our Market Crashes Tutorial.)
by Marv Dumon, (Contact Author | Biography)
Marv Dumon serves as a mergers and acquisitions advisor for a middle-market financial services firm specializing in industrial and energy companies. He maintains established relationships with more than 500 mid-market private equity firms. He also serves as a national business and finance columnist for Examiner.com. Dumon's background includes experience in consulting, finance and operations with several organizations including two S&P 500 companies. He received a Bachelor of Arts, a Bachelor of Business Administration and a Master of Accounting from the University of Texas at Austin.
http://www.investopedia.com/articles/economics/09/us-government-too-big-to-fail.asp
Saturday, 5 December 2009
Current Account Deficits: Government Investment Or Irresponsibility?
by Reem Heakal
The current account is a section in a country's balance of payments (BOP) that records its current transactions. The account is divided into four sections:
- goods,
- services,
- income (such as salaries and investment income) and
- unilateral transfers (for example, workers' remittances).
- When a current transaction enters the account, it is recorded as a credit; when a value leaves the account, it is marked as a debit.
- Basically, a current account deficit occurs when more money is being paid out than brought into a country.
What a Deficit Implies
When a current account is in deficit, it usually means that a country is investing more abroad than it is saving at home. Often, the logic dictating a country's investment decisions is that it takes money to make money. - In order to try and boost its gross domestic production (GDP) and future growth, a country may go into debt, taking on liabilities to other countries. It then becomes what is termed as a "net debtor" to the world.
- However, a problematic deficit can result if a government has not planned out a sound economic policy and used its debts for consumption purposes, not future growth. (For more insight, see What Fuels The National Debt?)
In other words, other countries are essentially financing the economy, and hence sustaining the deficit.
When determining the economic health of a nation, it is important to understand
- where the deficit stems from,
- how it's being financed and
- what possible solutions exist for its alleviation.
To do so, we need to look at not only the current account, but also the other two sections of the BOP,
- the capital account and
- the financial account.
Foreign funds entering a country from the sale or purchase of tangible assets - as opposed to non-physical assets such as stocks or bonds - are recorded in the capital account of the BOP. (Again, money entering the account is noted as a credit, and money leaving the account is a debit.)
Financial transactions such as money leaving the country for investment abroad are recorded in the financial account.
Together, these two accounts provide financing for a current account deficit.
Why Is There a Deficit?
Is a current account deficit simply a matter of a government's bad planning and/or uncontrollable spending and consumption?
- Well, sometimes.
- But more often than not, a deficit is planned for the purpose of helping an economy's development and growth.
- It can also be a sign of a strong economy that is a safe haven for foreign funds (we'll explain this below).
- When an economy is in a state of transition or reform, or is pursuing an active strategy of growth, running a deficit today can provide funding for domestic consumption and investment tomorrow.
Here are some of the types of deficits, both planned and unplanned, that countries experience.
With the long-term in mind, a country may run a deficit by importing more than it's exporting, with the ultimate goal of producing finished goods for export. In this scenario, the country will plan to pay off the temporary excess of imports at a later time with proceeds made from future export sales. The proceeds made from these sales would then become a current account credit. (To Learn more, read In Praise Of Trade Deficits.)
Instead of saving money now, a country could also choose to invest abroad in order to reap the rewards in the future. The outing funds would be recorded as a debit in the financial account, while the corresponding incoming investment income would eventually be earmarked as a credit in the current account. Often, a current account deficit coincides with depletion in a country's foreign reserves (limited resources of foreign currency available to invest abroad).
When foreign investors send money into the domestic economy, the latter must eventually pay out the returns due to the foreign investors. As such, a deficit may be a result of the claims foreigners have on the local economy (recorded as a debit in the current account).
Sometimes governments spend more than they earn, simply due to ill-advised economic planning. Money may be spent on costly imports while local productivity lags behind. Or, it may be deemed a priority for the government to spend on the military rather than economic production. Whatever the reason, a deficit will ensue if credits and debits do not balance.
Financing the Deficit
Funding channeled into the capital and financial accounts (remember, these accounts finance the deficits in the current account) can come from both (1) public (official) and (2) private sources.
- Governments, which account for official capital flows, often buy and sell foreign currencies. Credit from these sales is recorded in the financial account.
- Private sources, whether institutions or individuals, may be receiving money from some sort of foreign direct investment (FDI) scheme, which appears as a debit in the income section of the current account but, when investment income is finally received, becomes a credit.
To avoid unnecessary extra risks associated with investing money abroad, the financing of the deficit should ideally rely on a combination of long-term and short-term funds rather than one or the other.
- If, for example, a foreign capital market suddenly collapses, it can no longer provide another country with investment income.
- The same would be true if a country borrows money and political differences cut the credit line.
- However, by planning to receive recurrent investment income over the years, such as by means of an FDI project, a country could intelligently finance its current account deficit.
In times of global recession, the financing of a deficit can sometimes be traced to capital flight, that is, private individuals and corporations sending their money into "safe" economies.
- This money is recorded as a credit in the current account but, in reality, it is not a reliable source of financing.
- In fact, it is a strong indication that the world economy is slowing and may not be able to provide financing in the near future.
- In order to determine whether a country's economy is weak, it is important to know why there is a deficit and how it is being financed.
- A deficit can be a sign of economic trouble for some countries, and a sign of economic health for others.
- To support the current account deficits of countries around the world, the global economy must be strong enough so that exports can be bought and investment income repaid.
- Often, however, a current account deficit cannot be sustained for too long - it is widely debated whether the consumption of today will result in chronic debt for future generations.
by Reem Heakal, (Contact Author | Biography)
What is a trade deficit and what effect will it have on the stock market?
What is a trade deficit and what effect will it have on the stock market?
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A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing more goods than it is exporting. The deficit equals the value of goods being imported minus the value of goods being exported, and it is given in the currency of the country in question. For example, assume that the United Kingdom imports 800 billion British pounds worth of goods, while exporting only 750 billion pounds. In this example, the trade deficit, or net exports, would be 50 million pounds.
Measuring a country's net imports or net exports is a difficult task, which involves different accounts that measure different flows of investment. These accounts are the current account and the financial account, which are then totaled to help form the balance of payments figure. The current account is used as a measure for all of the amounts involved in importing and exporting goods and services, any interest earned from foreign sources, and any money transfers between countries. The financial account is made up of the total changes in foreign and domestic property ownership. The net amounts of these two accounts are then entered into the balance of payments. (To learn more, see What Is The Balance Of Payments?, Understanding The Current Account In The Balance Of Payments and Understanding The Capital And Financial Accounts In The Balance Of Payments.)
In terms of the stock market, a prolonged trade deficit could have adverse effects.
http://www.investopedia.com/ask/answers/03/110603.asp
- If a country has been importing more goods than it is exporting for a sustained period of time, it is essentially going into debt (much like a household would).
- Over time, investors will notice the decline in spending on domestically produced goods, which will hurt domestic producers and their stock prices.
- Given enough time, investors will realize fewer investment opportunities domestically and begin to invest in foreign stock markets, as prospects in these markets will be much better. This will lower demand in the domestic stock market and cause that market to decline.
What Is The Balance Of Payments?
What Is The Balance Of Payments?
by Reem Heakal
The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time.
The Balance of Payments Divided
The BOP is divided into three main categories:
The Current Account
The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.
The Capital Account
The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of
The capital account is broken down into the monetary flows branching from
The Financial Account
In the financial account, international monetary flows related to investment in
Also included are government-owned assets such as
/div>
The Balancing Act
The current account should be balanced against the combined-capital and financial accounts. However, as mentioned above, this rarely happens.
When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP.
Liberalizing the Accounts
The rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations. With the advent of the emerging market economic boom - in which capital flows into these markets tripled from USD 50 million to USD 150 million from the late 1980s until the Asian crisis - developing countries were urged to lift restrictions on capital and financial-account transactions in order to take advantage of these capital inflows.
by Reem Heakal, (Contact Author | Biography)
http://www.investopedia.com/articles/03/060403.asp
Also read:
http://www.investopedia.com/terms/c/currentaccountdeficit.asp
by Reem Heakal
The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time.
- Usually, the BOP is calculated every quarter and every calendar year.
- All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country.
- If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit.
- Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance.
- But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.
The Balance of Payments Divided
The BOP is divided into three main categories:
- the current account,
- the capital account and
- the financial account.
The Current Account
The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.
- Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid).
- Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights.
- When combined, goods and services together make up a country's balance of trade (BOT).
- The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports.
- If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.
- Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account.
- The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received.
The Capital Account
The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of
- non-financial assets (for example, a physical asset such as land) and
- non-produced assets,
The capital account is broken down into the monetary flows branching from
- debt forgiveness,
- the transfer of goods, and financial assets by migrants leaving or entering a country,
- the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income),
- the transfer of funds received to the sale or acquisition of fixed assets,
- gift and inheritance taxes,
- death levies, and,
- finally, uninsured damage to fixed assets.
The Financial Account
In the financial account, international monetary flows related to investment in
- business,
- real estate,
- bonds and stocks
Also included are government-owned assets such as
- foreign reserves,
- gold,
- special drawing rights (SDRs) held with the International Monetary Fund,
- private assets held abroad, and
- direct foreign investment.
/div>
The Balancing Act
The current account should be balanced against the combined-capital and financial accounts. However, as mentioned above, this rarely happens.
- We should also note that, with fluctuating exchange rates, the change in the value of money can add to BOP discrepancies.
- When there is a deficit in the current account, which is a balance of trade deficit, the difference can be borrowed or funded by the capital account.
- If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow. However, the sale of that fixed asset would be considered a current account inflow (earnings from investments). The current account deficit would thus be funded.
When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP.
Liberalizing the Accounts
The rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations. With the advent of the emerging market economic boom - in which capital flows into these markets tripled from USD 50 million to USD 150 million from the late 1980s until the Asian crisis - developing countries were urged to lift restrictions on capital and financial-account transactions in order to take advantage of these capital inflows.
- Many of these countries had restrictive macroeconomic policies, by which regulations prevented foreign ownership of financial and non-financial assets.
- The regulations also limited the transfer of funds abroad.
- But with capital and financial account liberalization, capital markets began to grow, not only allowing a more transparent and sophisticated market for investors, but also giving rise to foreign direct investment.
- For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation's overall gross domestic product by allowing for greater volumes of production.
- Liberalization can also facilitate less risk by allowing greater diversification in various markets.
by Reem Heakal, (Contact Author | Biography)
http://www.investopedia.com/articles/03/060403.asp
Also read:
http://www.investopedia.com/terms/c/currentaccountdeficit.asp
Understanding The Current Account In The Balance Of Payments
by Reem Heakal
The balance of payments (BOP) is the place where countries record their monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. Within the BOP there are three separate categories under which different transactions are categorized:
- the current account: goods, services, income and current transfers are recorded.
- the capital account: physical assets such as a building or a factory are recorded.
- the financial account: assets pertaining to international monetary flows of, for example, business or portfolio investments, are noted.
The balance of the current account tells us if a country has a deficit or a surplus. If there is a deficit, does that mean the economy is weak? Does a surplus automatically mean that the economy is strong? Not necessarily. But to understand the significance of this part of the BOP, we should start by looking at the components of the current account: goods, services, income and current transfers.
Now that we have covered the four basic components, we need to look at the mathematical equation that allows us to determine whether the current account is in deficit or surplus (whether it has more credit or debit). This will help us understand where any discrepancies may stem from, and how resources may be restructured in order to allow for a better functioning economy.
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers
Theoretically, the balance should be zero, but in the real world this is improbable, so if the current account has a deficit or a surplus, this tells us something about the state of the economy in question, both on its own and in comparison to other world markets.
Analyzing the Current Account
Exports imply demand for a local product while imports point to a need for supplies to meet local production requirements. As export is a credit to a local economy while an import is a debit, an import means that the local economy is liable to pay a foreign economy. Therefore a deficit between exports and imports (goods and services combined) - otherwise known as a balance of trade deficit (more imports than exports) - could mean that the country is importing more in order to increase its productivity and eventually churn out more exports. This in turn could ultimately finance and alleviate the deficit.
- The volume of a country's current account is a good sign of economic activity.
- By scrutinizing the four components of it, we can get a clear picture of the extent of activity of a country's industries, capital market, services and the money entering the country from other governments or through remittances.
- However, depending on the nation's stage of economic growth, its goals, and of course the implementation of its economic program, the state of the current account is relative to the characteristics of the country in question.
- But when analyzing a current account deficit or surplus, it is vital to know what is fueling the extra credit or debit and what is being done to counter the effects (a surplus financed by a donation may not be the most prudent way to run an economy).
- On a separate note, the current account also highlights what is traded with other countries, and it is a good reflection of each nation's comparative advantage in the global economy.
by Reem Heakal, (Contact Author | Biography)
What's the difference between absolute P/E ratio and relative P/E ratio?
What's the difference between absolute P/E ratio and relative P/E ratio?
The simple answer to this question is that absolute P/E, which is the most quoted of the two ratios, is the price of a stock divided by the company's earnings per share (EPS). This measure indicates how much investors are willing to pay per dollar of earnings. The relative P/E ratio, on the other hand, is a measure that compares the current P/E ratio to the past P/E ratios of the company or to the current P/E ratio of a benchmark. Let's look at both absolute and relative P/E in more detail.
The nominator of this ratio is usually the current stock price, and the denominator may be
- the trailing EPS (from the trailing 12 months [TTM]),
- the estimated EPS for the next 12 months (forward P/E) or
- a mix of the trailing EPS of the last two quarters and
- the forward projected EPS for the next two quarters.
For example, if the price of the stock today is $100, and the TTM earnings are $2 per share, the P/E is 50 ($100/$2).
Relative P/E
Relative P/E compares the current absolute P/E to
- a benchmark or
- a range of past P/Es over a relevant time period, such as the last 10 years.
Relative P/E shows what portion or percentage of the past P/Es the current P/E has reached.
- Relative P/E usually compares the current P/E value to the highest value of the range, but investors might also compare the current P/E to the bottom side of the range, measuring how close the current P/E is to the historic low.
- The relative P/E will have a value below 100% if the current P/E is lower than the past value (whether the past high or low).
- If the relative P/E measure is 100% or more, this tells investors that the current P/E has reached or surpassed the past value.
Suppose a company's P/Es over the last 10 years have ranged between 15 and 40.
- If the current P/E ratio is 25, the relative P/E comparing the current P/E to the highest value of this past range is 0.625 (25/40), and the current P/E relative to the low end of the range is 1.67 (25/15).
- These value tell investors that the company's P/E is currently 62.5% of the 10-year high, and 67% higher than the 10-year low.
- There is, however, a lot of discretion that goes into interpreting relative P/E.
- Fundamental shifts in the company such as an acquisition of a highly profitable entity can justifiably increase the P/E above the historic high.
- Continuing with the example above where we have a current P/E ratio of 25, suppose the P/E of the market is 20.
- The relative P/E of the company to the index is therefore 1.25 (25/20).
- This shows investors that the company has a higher P/E relative to the index, indicating that the company's earnings are more expensive than that of the index.
- A higher P/E, however, does not mean it is a bad investment. On the contrary, it may mean the company's earnings are growing faster than those represented by the index.
- If, however, there is a large discrepancy between the P/E of the company and the P/E of the index, investors may want to do additional research into the discrepancy.
Absolute P/E, compared to relative P/E, is the most-often used measure and is useful in investment decision making; however, it is often wise to expand the application of that measure with the relative P/E measure to gain further information.
http://www.investopedia.com/ask/answers/05/051005.asp
The 2007-08 Financial Crisis In Review
by Manoj Singh
When the Wall Street evangelists started preaching "no bailout for you" before the collapse of British bank Northern Rock, they hardly knew that history would ultimately have the last laugh. With the onset of the global credit crunch and the fall of Northern Rock, August 2007 turned out to be just the starting point for big financial landslides. Since then, we have seen many big names rise, fall, and fall even more. In this article, we'll recap how the financial crisis of 2007-08 unfolded. (For further reading, see Who Is To Blame For The Subprime Crisis?, The Bright Side Of The Credit Crisis and How Will The Subprime Mess Impact You?)
Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times. In 2001, the U.S. economy experienced a mild, short-lived recession. Although the economy nicely withstood terrorist attacks, the bust of the dotcom bubble, and accounting scandals, the fear of recession really preoccupied everybody's minds. (Keep learning about bubbles in Why Housing Market Bubbles Pop and Economic Meltdowns: Let Them Burn Or Stamp Them Out?)
But, every good item has a bad side, and several of these factors started to emerge alongside one another. The trouble started when the interest rates started rising and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% (which remained unchanged until August 2007).
There were early signs of distress: by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.
Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out.
It became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the United State's borders. The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. By that time, central banks and governments around the world had started coming together to prevent further financial catastrophe.
The subprime crisis's unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet.
- The financial crisis of 2007-08 has taught us that the confidence of the financial market, once shattered, can't be quickly restored.
- In an interconnected world, a seeming liquidity crisis can very quickly turn into a solvency crisis for financial institutions, a balance of payment crisis for sovereign countries and a full-blown crisis of confidence for the entire world.
- But the silver lining is that, after every crisis in the past, markets have come out strong to forge new beginnings.
The Dangers of Unmanaged Growth: What Lessons Should You Learn?
Let's say you get a huge promotion and raise at work. You look at everything you own and think about upgrading your lifestyle. Should you get a bigger house, hire a personal trainer, or replace all your clothes in one Neiman Marcus shopping spree?
- Before you adjust your lifestyle, you should think about how long the raise could last. Maybe you should wait a year or two and see if your higher income persists.
- And even if your company does well, what happens to your job when the rest of the country cuts back on expenses?
Just as with Iceland, in a globalized world, no person, company or even country is a self-contained and independent entity. Therefore, Iceland's troubles showed that thinking ahead, even in the best of times, is an important survival strategy.
Iceland's Near Collapse: What Can We Learn?
Iceland's Near Collapse: What Can We Learn?
by Reyna Gobel,MBA (Contact Author | Biography)
While it's common to hear of companies going bankrupt, many were shocked when the entire country of Iceland almost fell into a state of bankruptcy in 2008. How could a country get to this point? And, once there, what could be done to mitigate the problem? Read on for a cautionary tale's description of what preceded Iceland's near economic collapse.
Cause of the Crisis
During the mid-1990s, Iceland flourished. Business was booming as financial products such as bank loans, investments and entrepreneurship became Iceland's biggest export. The country's economic reach became greater than ever. In fact, when you walk into the posh Handley's toy store in London to buy a five-foot-high plush Kangaroo, you're standing in an Icelandic company's investment.
Other new things were shaping up for Iceland during this time as well. For the first time in history, Iceland established its own domestic stock market in 1985. The growing economy greatly improved income for citizens, and wages increase by 45% between 1995 and 2000.
But with much of the banks' capital being loaned outside of the country, Iceland became overly dependent on other countries' economies staying afloat and those countries' residents and businesses paying off their debt.
Iceland's problems really began when it became a victim of poor currency trading rates, called carry rates. When currencies dropped in other markets, the Icelandic krona's value fell catastrophically. (For more information on what causes a country's currency to fall, read What Causes A Currency Crisis?)
Impact on the Average Icelandic Citizen
•Skyrocketing Interest Rates. Banks and the Icelandic government - which was forced to nationalize to stabilize some of Iceland's banks - needed to raise capital. Banks raise capital either by selling stocks or bonds. Unfortunately, both options were impossible in this situation. The third option was to raise interest rates, which limits lending in difficult times and encourages people in other countries to once again invest in Iceland's banking systems in the hope of a high return on a now-risky investment. But for the average Icelander, this rate hike caused mortgage rates to skyrocket, hitting a key interest rate of 18% in October of 2008, the highest level in Europe.
•International Travel Woes. When a national currency and homeland banks aren't viewed as very stable, traveling outside of the country becomes difficult for citizens. This is because other countries will have issues with accepting large amounts of Icelandic krona as payment.
The Rescuers: The International Monetary Fund
The International Monetary Fund is an international organization of 186 countries that aims to help nations avert financial crises by providing loans to countries with balance of payment issues, along with technical assistance. In October 2008, IMF announced a $2.1 billion loan plan with Iceland with the goal of restoring confidence in the banking system. Iceland must also adhere to an IMF-supported economic program. By March 2009, conditions in Iceland appeared to be improving, although it was maintaining very stringent controls on the flow of capital. (Chances are you've heard of the IMF. But what does it do, and why is it so controversial? See What Is The International Monetary Fund?)
What Lessons Should You Learn?
•The Dangers of Unmanaged Growth. Let's say you get a huge promotion and raise at work. You look at everything you own and think about upgrading your lifestyle. Should you get a bigger house, hire a personal trainer, or replace all your clothes in one Neiman Marcus shopping spree? Before you adjust your lifestyle, you should think about how long the raise could last. Maybe you should wait a year or two and see if your higher income persists. And even if your company does well, what happens to your job when the rest of the country cuts back on expenses?
Just as with Iceland, in a globalized world, no person, company or even country is a self-contained and independent entity. Therefore, Iceland's troubles showed that thinking ahead, even in the best of times, is an important survival strategy. (For related reading, check out The Globalization Debate.)
•One Country's Problems Can Impact the Global Economy. In a world where global economies are as important as national economies, one country's woes can either echo across the world, or the world's woes can encroach on any country worldwide. Iceland's banks had account holders and investors in a variety of countries shivering out of fear of losing their money. (For information on the global economy read Taking Global Macro Trends To The Bank.)
•Government Oversight of the Banking Industry. After the U.S. credit crisis of 2007-2008, mortgage rates didn't rise above 18% as they did in Iceland. However, pension and mutual funds dropped rapidly in value, home foreclosure rates skyrocketed and banks lost money to the extent of needing federal bailouts. The situation in Iceland questions the balance between a deregulated banking system and securing the stability of financial institutions that provide most of the funds for citizens' personal and professional lives. Iceland's crisis, as well as the one in the U.S., suggests that a line has to be drawn showing exactly when and how to intervene and stabilize a financial crisis. (To learn more, read Free Markets: What's The Cost?)
Conclusion
Iceland went to the brink of bankruptcy due to unmanaged, rapid growth of the banking industry in the mid-1990s. Icelandic citizens deal with high interest rates and some difficulty using their currency in other countries. Learn from this unfortunate event, and avoid the chill of unmanaged growth by analyzing and planning for major purchases in your own life - because you never know when a financial ice storm will hit your personal economy.
by Reyna Gobel (Contact Author | Biography)
Reyna Gobel is a freelance journalist and self-professed financial geek, who realized in her finance classes that personal finances weren't nearly as complicated as she thought they'd be and set out to spread the word.Gobel is also the author of "CliffsNotes Graduation Debt: How To Manage Student Loans And Live Your Life", which will be hitting the shelves in March of 2010.
http://www.investopedia.com/articles/economics/09/iceland-bankruptcy.asp
by Reyna Gobel,MBA (Contact Author | Biography)
While it's common to hear of companies going bankrupt, many were shocked when the entire country of Iceland almost fell into a state of bankruptcy in 2008. How could a country get to this point? And, once there, what could be done to mitigate the problem? Read on for a cautionary tale's description of what preceded Iceland's near economic collapse.
Cause of the Crisis
During the mid-1990s, Iceland flourished. Business was booming as financial products such as bank loans, investments and entrepreneurship became Iceland's biggest export. The country's economic reach became greater than ever. In fact, when you walk into the posh Handley's toy store in London to buy a five-foot-high plush Kangaroo, you're standing in an Icelandic company's investment.
Other new things were shaping up for Iceland during this time as well. For the first time in history, Iceland established its own domestic stock market in 1985. The growing economy greatly improved income for citizens, and wages increase by 45% between 1995 and 2000.
But with much of the banks' capital being loaned outside of the country, Iceland became overly dependent on other countries' economies staying afloat and those countries' residents and businesses paying off their debt.
Iceland's problems really began when it became a victim of poor currency trading rates, called carry rates. When currencies dropped in other markets, the Icelandic krona's value fell catastrophically. (For more information on what causes a country's currency to fall, read What Causes A Currency Crisis?)
Impact on the Average Icelandic Citizen
•Skyrocketing Interest Rates. Banks and the Icelandic government - which was forced to nationalize to stabilize some of Iceland's banks - needed to raise capital. Banks raise capital either by selling stocks or bonds. Unfortunately, both options were impossible in this situation. The third option was to raise interest rates, which limits lending in difficult times and encourages people in other countries to once again invest in Iceland's banking systems in the hope of a high return on a now-risky investment. But for the average Icelander, this rate hike caused mortgage rates to skyrocket, hitting a key interest rate of 18% in October of 2008, the highest level in Europe.
•International Travel Woes. When a national currency and homeland banks aren't viewed as very stable, traveling outside of the country becomes difficult for citizens. This is because other countries will have issues with accepting large amounts of Icelandic krona as payment.
The Rescuers: The International Monetary Fund
The International Monetary Fund is an international organization of 186 countries that aims to help nations avert financial crises by providing loans to countries with balance of payment issues, along with technical assistance. In October 2008, IMF announced a $2.1 billion loan plan with Iceland with the goal of restoring confidence in the banking system. Iceland must also adhere to an IMF-supported economic program. By March 2009, conditions in Iceland appeared to be improving, although it was maintaining very stringent controls on the flow of capital. (Chances are you've heard of the IMF. But what does it do, and why is it so controversial? See What Is The International Monetary Fund?)
What Lessons Should You Learn?
•The Dangers of Unmanaged Growth. Let's say you get a huge promotion and raise at work. You look at everything you own and think about upgrading your lifestyle. Should you get a bigger house, hire a personal trainer, or replace all your clothes in one Neiman Marcus shopping spree? Before you adjust your lifestyle, you should think about how long the raise could last. Maybe you should wait a year or two and see if your higher income persists. And even if your company does well, what happens to your job when the rest of the country cuts back on expenses?
Just as with Iceland, in a globalized world, no person, company or even country is a self-contained and independent entity. Therefore, Iceland's troubles showed that thinking ahead, even in the best of times, is an important survival strategy. (For related reading, check out The Globalization Debate.)
•One Country's Problems Can Impact the Global Economy. In a world where global economies are as important as national economies, one country's woes can either echo across the world, or the world's woes can encroach on any country worldwide. Iceland's banks had account holders and investors in a variety of countries shivering out of fear of losing their money. (For information on the global economy read Taking Global Macro Trends To The Bank.)
•Government Oversight of the Banking Industry. After the U.S. credit crisis of 2007-2008, mortgage rates didn't rise above 18% as they did in Iceland. However, pension and mutual funds dropped rapidly in value, home foreclosure rates skyrocketed and banks lost money to the extent of needing federal bailouts. The situation in Iceland questions the balance between a deregulated banking system and securing the stability of financial institutions that provide most of the funds for citizens' personal and professional lives. Iceland's crisis, as well as the one in the U.S., suggests that a line has to be drawn showing exactly when and how to intervene and stabilize a financial crisis. (To learn more, read Free Markets: What's The Cost?)
Conclusion
Iceland went to the brink of bankruptcy due to unmanaged, rapid growth of the banking industry in the mid-1990s. Icelandic citizens deal with high interest rates and some difficulty using their currency in other countries. Learn from this unfortunate event, and avoid the chill of unmanaged growth by analyzing and planning for major purchases in your own life - because you never know when a financial ice storm will hit your personal economy.
by Reyna Gobel (Contact Author | Biography)
Reyna Gobel is a freelance journalist and self-professed financial geek, who realized in her finance classes that personal finances weren't nearly as complicated as she thought they'd be and set out to spread the word.Gobel is also the author of "CliffsNotes Graduation Debt: How To Manage Student Loans And Live Your Life", which will be hitting the shelves in March of 2010.
http://www.investopedia.com/articles/economics/09/iceland-bankruptcy.asp
Evaluating Country Risk For International Investing
The following are two main sources of risk that need be considered when investing in a foreign country.
•Political risk: This risk refers to the political decisions made within a country that might result in an unanticipated loss to investors. While economic risk is often referred to as a country's ability to pay back its debts, political risk is sometimes referred to as the willingness of a country to pay debts or maintain a hospitable climate for outside investment. Even if a country's economy is strong, if the political climate is unfriendly (or becomes unfriendly) to outside investors, the country may not be a good candidate for investment.
- A country with a higher credit rating is considered a safer investment than a country with a lower credit rating.
- Examining the credit ratings of a country is an excellent way to begin the analysis of a potential investment.
- Different analysts prefer different measures, but almost everyone looks at a country's gross domestic product (GDP), inflation and Consumer Price Index (CPI) readings when considering an investment.
- Investors will also want to carefully evaluate the structure of the country's financial markets, the availability of attractive investment alternatives, and the recent performance of local stock and bond markets.
- (For more insight, see The Consumer Price Index: A Friend To Investors and The Importance Of Inflation And GDP.)
There are many excellent sources of information on the economic and political climate of foreign countries.
- Newspapers, such as the New York Times, the Wall Street Journal and the Financial Times dedicate significant coverage to overseas events.
- There are also many excellent weekly magazines covering international economics and politics; the Economist is generally considered to be the standard bearer among weekly publications.
- Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country.
- The Economist Intelligence Unit also provides ratings for most of the world's countries. These ratings can be used to supplement those issued by Moody's, S&P, and the other "traditional" ratings agencies.
Finally, the internet provides access to a host of information, including international editions of many foreign newspapers and magazines. Reviewing locally produced news sources can sometimes provide a different perspective on the attractiveness of a country under consideration for investment.
When considering international investments, there are three types of markets from which to choose.
- Their economic systems are well developed, they are politically stable, and the rule of law is well entrenched.
- Developed markets are usually considered the safest investment destinations, but their economic growth rates often trail those of countries in an earlier stage of development.
- Investment analysis of developed markets usually concentrates on the current economic and market cycles; political considerations are often a less important consideration.
- Examples of developed markets include the U.S., Canada, France, Japan and Australia.
- This strong economic growth can sometimes translate into investment returns that are superior to those that are available in developed markets.
- However, emerging markets are also riskier than developed markets; there is often more political uncertainty in emerging markets, and their economies may be more prone to excessive booms and busts.
- In addition to carefully evaluating an emerging market's economic and financial fundamentals, investors should pay close attention to the country's political climate and the potential for unexpected political developments.
- Many of the fastest growing economies in the world, including China, India and Brazil, are considered emerging markets. (For related reading, see What Is An Emerging Market Economy?)
•Frontier markets represent "the next wave" of investment destinations.
- Frontier markets are generally either smaller than traditional emerging markets, or are found in countries that place restrictions on the ability of foreigners to invest.
- Although frontier markets can be exceptionally risky and often suffer from low levels of liquidity, they also offer the potential for above average returns over time.
- Frontier markets are also not well correlated with other, more traditional investment destinations, which mean that they provide additional diversification benefits when held in a well-rounded investment portfolio.
- As with emerging markets, investors in frontier markets must pay careful attention to the political environment, as well as to economic and financial developments.
- Examples of frontier markets include Nigeria, Botswana and Kuwait.
•Investing in a more limited portfolio focused on either emerging markets or developed markets
•Investing in a specific region, such as Europe or Latin America
•Investing only in a specific country(s)
- Choosing to invest an entire portfolio in a single country is not prudent. In a broadly diversified global portfolio, investments should be allocated among developed, emerging and perhaps frontier markets.
- Even in a more concentrated portfolio, investments should still be spread among several countries in order to maximize diversification and minimize risk.
- Investment options include sovereign debt, stocks or bonds of companies domiciled in the country(s) chosen, stocks or bonds of a U.S.-based company that derives a significant portion of its revenues from the country(s) selected, or an internationally focused exchange-traded fund (ETF) or mutual fund.
- The choice of investment vehicle is dependent upon each investor's individual knowledge, experience, risk profile and return objectives.
- When in doubt, it may make sense to start out by taking less risk; more risk can always be added to the portfolio at a later date.
- As in the U.S., economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging or frontier markets.
- Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates.
- Overseas investing involves a careful analysis of the economic, political and business risks that might result in unexpected investment losses.
- This analysis of country risk is a fundamental step in the process of building and monitoring an international portfolio.
- Investors that use the many excellent sources of information available to evaluate country risk will be better prepared when constructing their international portfolios.
by Brian Perry, (Contact Author | Biography)
Economics Basics: What Is Economics?
In order to begin our discussion of economics, we first need to understand (1) the concept of scarcity and (2) the two branches of study within economics: microeconomics and macroeconomics.
Scarcity, a concept we already implicitly discussed in the introduction to this tutorial, refers to the tension between our limited resources and our unlimited wants and needs. For an individual, resources include time, money and skill. For a country, limited resources include natural resources, capital, labor force and technology.
Macro and microeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole, Adam Smith noted that there was an "invisible hand" turning the wheels of the economy: a market force that keeps the economy functioning.
by Reem Heakal
When the price of a product you want to buy goes up, it affects you. But why does the price go up? Is the demand greater than the supply? Did the cost go up because of the raw materials that make the CD? Or, was it a war in an unknown country that affected the price? In order to answer these questions, we need to turn to macroeconomics.
Macroeconomics is the study of the behavior of the economy as a whole. This is different from microeconomics, which concentrates more on individuals and how they make economic decisions. Needless to say, macroeconomy is very complicated and there are many factors that influence it. These factors are analyzed with various economic indicators that tell us about the overall health of the economy.
•Businesses use macroeconomic analysis to determine whether expanding production will be welcomed by the market. Will consumers have enough money to buy the products, or will the products sit on shelves and collect dust?
•Governments turn to the macroeconomy when budgeting spending, creating taxes, deciding on interest rates and making policy decisions.
Macroeconomic analysis broadly focuses on three things:
- national output (measured by gross domestic product (GDP)),
- unemployment and
- inflation. (For background reading, see The Importance Of Inflation And GDP.)
Output, the most important concept of macroeconomics, refers to the total amount of goods and services a country produces, commonly known as the gross domestic product. The figure is like a snapshot of the economy at a certain point in time.
The unemployment rate tells macroeconomists how many people from the available pool of labor (the labor force) are unable to find work. (For more about employment, see Surveying The Employment Report.)
The third main factor that macroeconomists look at is the inflation rate, or the rate at which prices rise. Inflation is primarily measured in two ways: through the Consumer Price Index (CPI) and the GDP deflator. The CPI gives the current price of a selected basket of goods and services that is updated periodically. The GDP deflator is the ratio of nominal GDP to real GDP. (For more on this, see The Consumer Price Index: A Friend To Investors and The Consumer Price Index Controversy.)
What ultimately determines output is demand. Demand comes
- from consumers (for investment or savings - residential and business related),
- from the government (spending on goods and services of federal employees) and
- from imports and exports.
A simple example of monetary policy is the central bank's open-market operations. (For more detail, see the Federal Reserve Tutorial.) When there is a need to increase cash in the economy, the central bank will buy government bonds (monetary expansion). These securities allow the central bank to inject the economy with an immediate supply of cash. In turn, interest rates, the cost to borrow money, will be reduced because the demand for the bonds will increase their price and push the interest rate down. In theory, more people and businesses will then buy and invest. Demand for goods and services will rise and, as a result, output will increase. In order to cope with increased levels of production, unemployment levels should fall and wages should rise.
The government can also increase taxes or lower government spending in order to conduct a fiscal contraction. What this will do is lower real output because less government spending means less disposable income for consumers. And, because more of consumers' wages will go to taxes, demand as well as output will decrease.
A government will tend to use a combination of both monetary and fiscal options when setting policies that deal with the macroeconomy.
- The performance of the economy is important to all of us.
- We analyze the macroeconomy by primarily looking at national output, unemployment and inflation.
- Although it is consumers who ultimately determine the direction of the economy, governments also influence it through fiscal and monetary policy.
Economic Indicators: Jobless Claims
Economic Indicators: Jobless Claims Report
By Ryan Barnes
Release Date: Weekly; Thursdays, prior to market open
Release Time: 8:30am Eastern Standard Time
Coverage Previous week (cutoff date is previous Saturday)
Released By: U.S. Department of Labor
Latest Release: http://www.dol.gov/opa/media/press/eta/main.htm
Background
The Jobless Claims Report is a weekly release that shows the number of first-time (initial) filings for state jobless claims nationwide. The data is seasonally adjusted, as certain times of the year are known for above-average hiring for temporary work (harvesting, holidays).
Due to the short sample period, week-to-week results can be volatile, so reported results are most often headlined as a four-week moving average, so that each week's release is the average of the four prior jobless claims reports. The release will show which states have had the biggest changes in claims from the previous week; the revised edition shows up about a week later, at which time a full breakdown by state and U.S. territory is available.
Also released with this report are the relatively minor data points of the insured unemployment rate and the total unemployed persons. These are not seen as valuable indicators because the total unemployed figure tends to stay relatively constant week to week. (To learn more, read Surveying The Employment Report.)
What it Means for Investors
New jobless claims for the week reflect an up-to-the-minute account of who is leaving work unexpectedly, reflecting the "run rate" of the economy's health with little lag time. The Jobless Claims Report gets a lot of press due to its simplicity and the theory that the healthier the job market, the healthier the economy: more people working means more disposable income, which leads to higher personal consumption and gross domestic product (GDP).
The fact that jobless claims are released weekly is both a blessing and a curse for investors; sometimes the markets will take a mid-month jobless claims report and react strongly to it, particularly if it shows a difference from the cumulative evidence of other recent indicators. For instance, if other indicators are showing a weakening economy, a surprise drop in jobless claims could slow down equity sellers and could actually lift stocks, even if only because there isn't any other more recent data to chew on.
A favorable Jobless Claims Report can also get lost in the shuffle of a busy news day, and hardly be noticed by Wall Street at all. The biggest factor week to week is how unsure investors are about the future direction of the economy.
Most economists agree that a sustained change (as shown in the moving averages) of 30,000 claims or more is the benchmark for real job growth or job loss in the economy. Anything less is deemed statistically insignificant by most market analysts.
Strengths:
•Weekly reporting provides for timely, almost real-time snapshots.
•As a tightly-presented release, investors can easily pick up the raw release and quickly apply the information to market decisions.
•Initial claims are provided gross and net of seasonal adjustments, and give a breakdown for every state's individual results.
•Some states' figures are shown along with a comment from that state's reporting agency regarding specific industries in which noteworthy activity is happening, such as "fewer layoffs in the industrial machinery industry".
Weaknesses:
•Summer and other seasonal employment tends to skew the results.
•Highly volatile - revisions to advance report can be very big on a percentage basis
•Jobless claims in isolation tell little about the overall state of the economy.
•No industry breakdowns are provided, just the national figure.
http://www.investopedia.com/university/releases/joblessclaims.asp
By Ryan Barnes
Release Date: Weekly; Thursdays, prior to market open
Release Time: 8:30am Eastern Standard Time
Coverage Previous week (cutoff date is previous Saturday)
Released By: U.S. Department of Labor
Latest Release: http://www.dol.gov/opa/media/press/eta/main.htm
Background
The Jobless Claims Report is a weekly release that shows the number of first-time (initial) filings for state jobless claims nationwide. The data is seasonally adjusted, as certain times of the year are known for above-average hiring for temporary work (harvesting, holidays).
Due to the short sample period, week-to-week results can be volatile, so reported results are most often headlined as a four-week moving average, so that each week's release is the average of the four prior jobless claims reports. The release will show which states have had the biggest changes in claims from the previous week; the revised edition shows up about a week later, at which time a full breakdown by state and U.S. territory is available.
Also released with this report are the relatively minor data points of the insured unemployment rate and the total unemployed persons. These are not seen as valuable indicators because the total unemployed figure tends to stay relatively constant week to week. (To learn more, read Surveying The Employment Report.)
What it Means for Investors
New jobless claims for the week reflect an up-to-the-minute account of who is leaving work unexpectedly, reflecting the "run rate" of the economy's health with little lag time. The Jobless Claims Report gets a lot of press due to its simplicity and the theory that the healthier the job market, the healthier the economy: more people working means more disposable income, which leads to higher personal consumption and gross domestic product (GDP).
The fact that jobless claims are released weekly is both a blessing and a curse for investors; sometimes the markets will take a mid-month jobless claims report and react strongly to it, particularly if it shows a difference from the cumulative evidence of other recent indicators. For instance, if other indicators are showing a weakening economy, a surprise drop in jobless claims could slow down equity sellers and could actually lift stocks, even if only because there isn't any other more recent data to chew on.
A favorable Jobless Claims Report can also get lost in the shuffle of a busy news day, and hardly be noticed by Wall Street at all. The biggest factor week to week is how unsure investors are about the future direction of the economy.
Most economists agree that a sustained change (as shown in the moving averages) of 30,000 claims or more is the benchmark for real job growth or job loss in the economy. Anything less is deemed statistically insignificant by most market analysts.
Strengths:
•Weekly reporting provides for timely, almost real-time snapshots.
•As a tightly-presented release, investors can easily pick up the raw release and quickly apply the information to market decisions.
•Initial claims are provided gross and net of seasonal adjustments, and give a breakdown for every state's individual results.
•Some states' figures are shown along with a comment from that state's reporting agency regarding specific industries in which noteworthy activity is happening, such as "fewer layoffs in the industrial machinery industry".
Weaknesses:
•Summer and other seasonal employment tends to skew the results.
•Highly volatile - revisions to advance report can be very big on a percentage basis
•Jobless claims in isolation tell little about the overall state of the economy.
•No industry breakdowns are provided, just the national figure.
http://www.investopedia.com/university/releases/joblessclaims.asp
Markets and the US Dollar Turn Higher Sign in to Recommend
Markets and the Dollar Turn Higher Sign in to Recommend
By DAVID JOLLY
Published: December 4, 2009
Stocks and the dollar rose Friday and bonds fell after the release of a much-better-than-expected jobs report in the United States.
The Dow Jones industrial average reached a high for the year, gaining 95 points, or 0.9 percent, in late morning trading. The Standard & Poor’s 500-stock index rose 1.1 percent, and the Nasdaq 1.5 percent.
On the year, the Dow is up 19 percent while the S.&P. 500 is 23 pecent.
The Labor Department said in Washington that the United States lost 11,000 jobs in November, less than a tenth of the roughly 125,000 job losses economists had been expecting. The unemployment rate improved to 10 percent from 10.2 percent in October.
While companies are still shedding workers, the pace was the best since the recession began in December 2007, and suggested to some analysts that the economy is headed toward recovery.
Jeffrey Saut, chief investment strategist for Raymond James, characterized the November job-loss number as “an outlier.”
“There’s no doubt the recession is in the rear-view mirror,” he said, “but I wouldn’t be surprised to see the jobless rate ticking up again in the months ahead.”
Unemployment, he added, is a lagging indicator, so investors who wait for the labor market to turn around have historically missed out on major market gains.
Lawrence Glazer, managing partner at Mayflower Advisors in Boston, said would-be stock buyers remained somewhat cautious, despite the surprising data.
“Investors are still seeing a divergence between Wall Street’s gains and Main Street’s malaise,” he said. “The market has been anticipating better data all along. The question hasn’t been ‘is the market pricing in a recovery,’ but ‘is the market pricing in too big of a recovery.’ ”
Mr. Glazer said institutional investors had already begun to close positions and did not want to be reshuffling portfolios toward the end of the year, damping the effect of the positive surprise.
In other economic news, the Commerce Department reported that orders to American factories unexpectedly rose 0.6 percent in October, which was better than the flat reading that economists had expected.
In Europe, the Dow Jones Euro Stoxx 50 index of euro zone heavyweights was trading 1.4 percent higher after the data, while the FTSE-100 index in London was up 0.7 percent. In Asian trading, the Tokyo benchmark Nikkei 225 stock average rose 0.5 percent. European markets had been down before the American jobs report was released.
The yield on the benchmark 10-year Treasury rose one-tenth of a percentage point to 3.5 percent.
The dollar rose against other major currencies. The euro fell to $1.4911 from $1.5053 Thursday, and the British pound fell to $1.6572 from $1.6540. The dollar rose to 89.81 yen from 88.26 yen.
Spot gold fell 2.3 percent to $1,180.20 an ounce.
http://www.nytimes.com/2009/12/05/business/05markets.html?_r=1&ref=business
By DAVID JOLLY
Published: December 4, 2009
Stocks and the dollar rose Friday and bonds fell after the release of a much-better-than-expected jobs report in the United States.
The Dow Jones industrial average reached a high for the year, gaining 95 points, or 0.9 percent, in late morning trading. The Standard & Poor’s 500-stock index rose 1.1 percent, and the Nasdaq 1.5 percent.
On the year, the Dow is up 19 percent while the S.&P. 500 is 23 pecent.
The Labor Department said in Washington that the United States lost 11,000 jobs in November, less than a tenth of the roughly 125,000 job losses economists had been expecting. The unemployment rate improved to 10 percent from 10.2 percent in October.
While companies are still shedding workers, the pace was the best since the recession began in December 2007, and suggested to some analysts that the economy is headed toward recovery.
Jeffrey Saut, chief investment strategist for Raymond James, characterized the November job-loss number as “an outlier.”
“There’s no doubt the recession is in the rear-view mirror,” he said, “but I wouldn’t be surprised to see the jobless rate ticking up again in the months ahead.”
Unemployment, he added, is a lagging indicator, so investors who wait for the labor market to turn around have historically missed out on major market gains.
Lawrence Glazer, managing partner at Mayflower Advisors in Boston, said would-be stock buyers remained somewhat cautious, despite the surprising data.
“Investors are still seeing a divergence between Wall Street’s gains and Main Street’s malaise,” he said. “The market has been anticipating better data all along. The question hasn’t been ‘is the market pricing in a recovery,’ but ‘is the market pricing in too big of a recovery.’ ”
Mr. Glazer said institutional investors had already begun to close positions and did not want to be reshuffling portfolios toward the end of the year, damping the effect of the positive surprise.
In other economic news, the Commerce Department reported that orders to American factories unexpectedly rose 0.6 percent in October, which was better than the flat reading that economists had expected.
In Europe, the Dow Jones Euro Stoxx 50 index of euro zone heavyweights was trading 1.4 percent higher after the data, while the FTSE-100 index in London was up 0.7 percent. In Asian trading, the Tokyo benchmark Nikkei 225 stock average rose 0.5 percent. European markets had been down before the American jobs report was released.
The yield on the benchmark 10-year Treasury rose one-tenth of a percentage point to 3.5 percent.
The dollar rose against other major currencies. The euro fell to $1.4911 from $1.5053 Thursday, and the British pound fell to $1.6572 from $1.6540. The dollar rose to 89.81 yen from 88.26 yen.
Spot gold fell 2.3 percent to $1,180.20 an ounce.
http://www.nytimes.com/2009/12/05/business/05markets.html?_r=1&ref=business
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