Wednesday August 12, 2009
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa
Four criteria to look at when choosing counters that are suitable for long-term investment
LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.
However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.
Market capitalisation
One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.
In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.
Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.
It is not difficult to find out which companies have the largest market cap in any stock exchange.
Such information is available in most major newspapers in that particular country or the stock exchanges themselves.
For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.
Price/earnings ratio
Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.
Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.
If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.
Dividend yield
A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.
Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.
The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.
Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.
Price-to-book ratio
Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.
In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.
As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.
Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/8/12/business/4499990&sec=business
Thursday, 10 September 2009
Keep it Simple and … Smart
Keep it Simple and … Smart
By Benny Lee, Chief Market Strategist, NextView Investors Education Group
You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.
The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.
A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.
Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.
Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.
Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.
Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.
Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.
Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.
By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.
The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.
Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.
Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.
The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.
Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.
Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.
Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )
http://investasiaonline.com/forum/view_topic.php?id=64
Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.
By Benny Lee, Chief Market Strategist, NextView Investors Education Group
You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.
The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.
A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.
Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.
Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.
Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.
Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.
Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.
Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.
By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.
The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.
Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.
Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.
The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.
Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.
Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.
Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )
http://investasiaonline.com/forum/view_topic.php?id=64
Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.
Wednesday, 9 September 2009
China alarmed by US money printing
China alarmed by US money printing
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."
Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.
"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.
China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.
"He who goes borrowing, goes sorrowing," said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."
Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.
"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.
China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.
"He who goes borrowing, goes sorrowing," said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html
FTSE 100 hits 5,000 level for first time since October
FTSE 100 hits 5,000 level for first time since October
The FTSE 100 has touched the 5,000 level for the first time since the height of the banking crisis last October as investors seize on better news from the economy.
Published: 3:17PM BST 09 Sep 2009
The index of blue-chip companies has rallied more than 40pc since slumping to its low for the year in early March. The move to 5,000, a level last touched on October 3, comes as a new survey from Nationwide showed that British consumers are feeling more confident than at any point in the past 12 months.
Home Retail Group, the owner of Argos, was up 1pc, and Tesco, Britain's biggest supermarket, also added 1pc. Beyond retailing, BG Group was one of the biggest risers after telling shareholders that it had discovered a deepwater field off the coast of Brazil that contains between 1 billion and 2 billion barrels of oil.
"Difficult as it is to buy up here, the bulls will be taking confidence from the lack (just yet) of a reaction pull back," said Simon Denham, managing director of Capital Spreads. "The big hope is that all this spending does not just build a short term bubble."
Stock markets around the world have recovered from their lows as investors anticipate a recovery in the global economy. However, given the scale of the rally some analysts question whether the momentum can be sustained.
The six-month rally has driven the price-to-earnings ratio on the FTSE 100 to 70.9, the most expensive level in seven years, according to Bloomberg.
http://www.telegraph.co.uk/finance/markets/6162632/FTSE-100-hits-5000-level-for-first-time-since-October.html
The FTSE 100 has touched the 5,000 level for the first time since the height of the banking crisis last October as investors seize on better news from the economy.
Published: 3:17PM BST 09 Sep 2009
The index of blue-chip companies has rallied more than 40pc since slumping to its low for the year in early March. The move to 5,000, a level last touched on October 3, comes as a new survey from Nationwide showed that British consumers are feeling more confident than at any point in the past 12 months.
Home Retail Group, the owner of Argos, was up 1pc, and Tesco, Britain's biggest supermarket, also added 1pc. Beyond retailing, BG Group was one of the biggest risers after telling shareholders that it had discovered a deepwater field off the coast of Brazil that contains between 1 billion and 2 billion barrels of oil.
"Difficult as it is to buy up here, the bulls will be taking confidence from the lack (just yet) of a reaction pull back," said Simon Denham, managing director of Capital Spreads. "The big hope is that all this spending does not just build a short term bubble."
Stock markets around the world have recovered from their lows as investors anticipate a recovery in the global economy. However, given the scale of the rally some analysts question whether the momentum can be sustained.
The six-month rally has driven the price-to-earnings ratio on the FTSE 100 to 70.9, the most expensive level in seven years, according to Bloomberg.
http://www.telegraph.co.uk/finance/markets/6162632/FTSE-100-hits-5000-level-for-first-time-since-October.html
UK: 40pc chance of a rate cut? Really?
A 40pc chance of a rate cut? Really?
By Edmund Conway Economics Last updated: September 9th, 2009
2 Comments Comment on this article
About a month ago, in a throw-away comment at an economic conference, Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee unwittingly caused a stir in the money markets. As I wrote at the time, he raised the idea of the Bank imposing a negative interest rate, in other words charging a fee, on the cash Britain’s leading banks keep in store at the BoE itself.
The idea has snowballed, to the extent that in the run up to tomorrow’s MPC meeting, the odds on the Bank cutting its rate are, according to market participants, about 40pc. So might tomorrow mark the onset of negative interest rates for the first time in the UK? I am sceptical.
First, let’s examine the problem. The Bank is trying to get the economy going by pumping £175bn into it through quantitative easing. What this actually means is creating money (yes, printing it - electronically) and using this to buy bonds - almost exclusively government bonds (gilts) - off private investors. The upshot is that as that money goes into the system it finds its way pretty quickly to banks’ balance sheets (either because they sell the Bank the gilts or because pension funds pocket the proceeds and put them in their bank accounts).
Banks tend to keep a good deal of their cash in their own equivalent of a current account - reserves at the Bank of
England. So the upshot of quantitative easing has been to lift the amount sitting in reserves at the Bank to unprecedented highs - up from below £10bn to £142bn at the last count, in August. At the moment, the Bank pays banks a 0.5pc interest rate on this “current account” cash - the same as the BoE bank rate.
The problem is that much of this money is sitting dormant in the banks’ reserves rather than being used to lend to businesses, where it will actually help fertilise UK economic growth. This is the problem the Japanese faced in the 1990s and early 2000s when they first experimented with QE.
Anyway, Prof Goodhart’s suggestion was that the Bank should charge banks to keep this cash with them, rather than giving them 0.5pc interest. This is something the Riksbank in Sweden is experimenting with. The result would not necessarily be that reserves would fall throughout the system as a whole, but the cash would at least be sloshed around the system a little more (velocity is the technical term here) in the form of lending to businesses and companies.
It was an interesting suggestion - interesting enough for BoE Governor Mervyn King to say this at the Inflation Report press conference last month:
It is certainly true that it would be useful to think about ways to encourage banks individually to try to convert some of their reserves into say shorter term gilt holdings or purchases of other assets which would then reinforce the transmission mechanism of the direct assets purchases that we make. And in normal circumstances you might expect that to have some impact. And there is no doubt that the interest rate that we pay on reserves does affect the incentives which banks face to turn those reserves bank by bank individually into other assets. And it’s an idea we will certainly be looking at to see whether in fact the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves.
Hence the fact that the market is all of a flutter about the prospects that the Bank would do so at this month’s meeting. However, there are some things people have overlooked. The first is that cutting the rate paid on reserves to banks from, say, 0.5pc to 0pc, would be an overall interest rate cut in all but name. It would push down the overnight rate in money markets to close to zero, which in turn would cut borrowing costs across the wider economy (though it wouldn’t affect tracker mortgages etc). So if you’re cutting the rate paid on reserves, why not cut the Bank rate? It is a prospect that is not beyond the realms of possibility tomorrow, though the Bank did make it pretty clear back in March that it viewed 0.5pc as “effective zero” for rates: below that level weird and not so wonderful things would happen in financial markets; certain businesses could malfunction. Think of it as the “millennium bug” effect for financial markets.
Should the Bank be unwilling effectively to cut Bank rate, it could still charge a fee to banks on a proportion of their reserves, allowing them to keep a certain amount (say, in comparison with the size of their balance sheet) but levying a penalty on any extra cash in their coffers. This is pretty close to what Goodhart was suggesting and is a feasible option tomorrow. But I wouldn’t put a 40pc chance on it.
My scepticism stems from a couple of key points. First, there are some early signs that QE is working even without such assistance. The amount of cash flowing around the wider economy - beyond reserves - is starting to pick up. Second, such a move would effectively amount to a tax on the banking sector as a whole. Third, it would also mean tearing up the complex set of rules and regulations that frame Britain’s monetary system once again.
Fourth, and perhaps most importantly, people seem to have forgotten that at the last MPC meeting something unusual happened: Mervyn King was outvoted. The Governor wanted the QE total to reach £200bn rather than the £175bn the MPC eventually opted for. In other occasions when he was outvoted, King usually attempts to get his way in a subsequent meeting. So might it not be more likely that the Bank will opt for a little more in the way of QE?
Perhaps, perhaps not. The fact is that market participants, having been surprised by the Bank’s decisions again and again in recent months, are suffering a slight degree of paranoia these days. Having been burnt more than once, they are putting greater odds on a surprise decision than they really ought to be. This is a tougher meeting to call than last month’s (to my mind at least, though the markets misjudged that one). And that’s for good reason: the economy is showing at least some signs of recovery - though this does not rule out a further relapse next year, something I’ve written about a number of times. This may well be one of those meetings when the MPC judges it best simply to do as little as possible. A boring MPC meeting? Never thought I’d see the day that one of those would be the exception rather than the norm.
http://www.telegraph.co.uk/?source=refresh
By Edmund Conway Economics Last updated: September 9th, 2009
2 Comments Comment on this article
About a month ago, in a throw-away comment at an economic conference, Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee unwittingly caused a stir in the money markets. As I wrote at the time, he raised the idea of the Bank imposing a negative interest rate, in other words charging a fee, on the cash Britain’s leading banks keep in store at the BoE itself.
The idea has snowballed, to the extent that in the run up to tomorrow’s MPC meeting, the odds on the Bank cutting its rate are, according to market participants, about 40pc. So might tomorrow mark the onset of negative interest rates for the first time in the UK? I am sceptical.
First, let’s examine the problem. The Bank is trying to get the economy going by pumping £175bn into it through quantitative easing. What this actually means is creating money (yes, printing it - electronically) and using this to buy bonds - almost exclusively government bonds (gilts) - off private investors. The upshot is that as that money goes into the system it finds its way pretty quickly to banks’ balance sheets (either because they sell the Bank the gilts or because pension funds pocket the proceeds and put them in their bank accounts).
Banks tend to keep a good deal of their cash in their own equivalent of a current account - reserves at the Bank of
England. So the upshot of quantitative easing has been to lift the amount sitting in reserves at the Bank to unprecedented highs - up from below £10bn to £142bn at the last count, in August. At the moment, the Bank pays banks a 0.5pc interest rate on this “current account” cash - the same as the BoE bank rate.
The problem is that much of this money is sitting dormant in the banks’ reserves rather than being used to lend to businesses, where it will actually help fertilise UK economic growth. This is the problem the Japanese faced in the 1990s and early 2000s when they first experimented with QE.
Anyway, Prof Goodhart’s suggestion was that the Bank should charge banks to keep this cash with them, rather than giving them 0.5pc interest. This is something the Riksbank in Sweden is experimenting with. The result would not necessarily be that reserves would fall throughout the system as a whole, but the cash would at least be sloshed around the system a little more (velocity is the technical term here) in the form of lending to businesses and companies.
It was an interesting suggestion - interesting enough for BoE Governor Mervyn King to say this at the Inflation Report press conference last month:
It is certainly true that it would be useful to think about ways to encourage banks individually to try to convert some of their reserves into say shorter term gilt holdings or purchases of other assets which would then reinforce the transmission mechanism of the direct assets purchases that we make. And in normal circumstances you might expect that to have some impact. And there is no doubt that the interest rate that we pay on reserves does affect the incentives which banks face to turn those reserves bank by bank individually into other assets. And it’s an idea we will certainly be looking at to see whether in fact the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves.
Hence the fact that the market is all of a flutter about the prospects that the Bank would do so at this month’s meeting. However, there are some things people have overlooked. The first is that cutting the rate paid on reserves to banks from, say, 0.5pc to 0pc, would be an overall interest rate cut in all but name. It would push down the overnight rate in money markets to close to zero, which in turn would cut borrowing costs across the wider economy (though it wouldn’t affect tracker mortgages etc). So if you’re cutting the rate paid on reserves, why not cut the Bank rate? It is a prospect that is not beyond the realms of possibility tomorrow, though the Bank did make it pretty clear back in March that it viewed 0.5pc as “effective zero” for rates: below that level weird and not so wonderful things would happen in financial markets; certain businesses could malfunction. Think of it as the “millennium bug” effect for financial markets.
Should the Bank be unwilling effectively to cut Bank rate, it could still charge a fee to banks on a proportion of their reserves, allowing them to keep a certain amount (say, in comparison with the size of their balance sheet) but levying a penalty on any extra cash in their coffers. This is pretty close to what Goodhart was suggesting and is a feasible option tomorrow. But I wouldn’t put a 40pc chance on it.
My scepticism stems from a couple of key points. First, there are some early signs that QE is working even without such assistance. The amount of cash flowing around the wider economy - beyond reserves - is starting to pick up. Second, such a move would effectively amount to a tax on the banking sector as a whole. Third, it would also mean tearing up the complex set of rules and regulations that frame Britain’s monetary system once again.
Fourth, and perhaps most importantly, people seem to have forgotten that at the last MPC meeting something unusual happened: Mervyn King was outvoted. The Governor wanted the QE total to reach £200bn rather than the £175bn the MPC eventually opted for. In other occasions when he was outvoted, King usually attempts to get his way in a subsequent meeting. So might it not be more likely that the Bank will opt for a little more in the way of QE?
Perhaps, perhaps not. The fact is that market participants, having been surprised by the Bank’s decisions again and again in recent months, are suffering a slight degree of paranoia these days. Having been burnt more than once, they are putting greater odds on a surprise decision than they really ought to be. This is a tougher meeting to call than last month’s (to my mind at least, though the markets misjudged that one). And that’s for good reason: the economy is showing at least some signs of recovery - though this does not rule out a further relapse next year, something I’ve written about a number of times. This may well be one of those meetings when the MPC judges it best simply to do as little as possible. A boring MPC meeting? Never thought I’d see the day that one of those would be the exception rather than the norm.
http://www.telegraph.co.uk/?source=refresh
Building a Financial Plan
Sales forecast
Two to three years
Detailed assumptions
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Two to three years
Detailed assumptions
- Sales per customer
- Number of customers
- Sales growth rate
Cost forecast
Costs of operating and costs per sale
Income statement and balance sheet
a/r, a/p
Cash flow forecast
Summary statement of sources & uses of cash
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Cash Flow Calculations
Net income
+ depreciation
working capital from operations
- net increase in current assets
+ net increase in current liabilities
cash flow from operations
- net increase in gross fixed assets
+ net increase in debt & equity invested
- dividends paid
net cash flow
+ beginning cash balance
- required ending cash balance
net cash surplus or borrowing required
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Business Model Analysis
+ depreciation
working capital from operations
- net increase in current assets
+ net increase in current liabilities
cash flow from operations
- net increase in gross fixed assets
+ net increase in debt & equity invested
- dividends paid
net cash flow
+ beginning cash balance
- required ending cash balance
net cash surplus or borrowing required
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Business Model Analysis
Tuesday, 8 September 2009
The Importance of Cash Flow Management
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The Importance of Cash Flow Management
By Miranda on August 27th, 2009
One of the things that can make you or break you financially is your skill at cash flow management. For the purposes of personal finances and individual wealth management, your cash flow is the way money moves through your own small financial system. It’s the way your income flows into your bank accounts and then flows out to expenses and investments. And what is left over. Figuring out how your cash moves through your personal financial system is vital if you want to turn your money to better use, and if you want to be financially successful.
Figuring your cash flow
You will want to know whether your cash flow is positive, negative or zero. With a positive cash flow, you will have a surplus at the end of the month. With a negative cash flow, it will appear that you are overrunning your income — leading to excess debt and additional costs due to interest. And, finally, zero cash flow means that your inflows and outflows are balanced. (If you are into the zero-based budget, your goal is to reach zero cash flows.) One of the easiest ways to figure your cash flow is to use a calculator.
However, you can also do it on your own. First, add up your monthly income from all sources, including what you get from dividends or other income investing. Pay attention to where you are getting your money from. Next, add up all of your expenses. This includes money that you put into savings, retirements accounts and other investments, and money that you give to charity or your church. Catalog where your money is going. There are many tools available in the market, some even online, that can help you understand and plan your income, expenses, debt and savings.
I like to take it a step further, and look at when I receive income and when expenses are due. In cash flow management, when matters. I found this out the hard way a couple of years ago. Excited about a new client, I wrote a bunch of checks for bills, even though some of them weren’t due until the end of the month. What I forgot to figure was that my mortgage payment came out automatically on the 15th. And my mid-month income didn’t come until that day — and it takes three to four business days to get it from PayPal into my bank account. As you might imagine, overdraft charges ensued (no bounced checks, though). $300 in bank charges taught me to schedule bill payments in a manner that matches up with when I am paid.
Tweaking your cash flow
After you have an idea of where you are at (a calculator or personal finance software can provide it for you in all it’s color-coded glory), it’s time to tweak the way money moves through your personal financial system. Look at your expenses. As much as possible, they should be focused on things that will pay you back some how. Examine your priorities to see what provides you a benefit. If you enjoy eating out, but you aren’t that into watching TV, perhaps you should shift some of your resources toward eating out, and cut your cable package.
You should also examine where you can put more money into items that will pay you back down the road. Being able to increase money outflows into investments are likely to repay you, justifying the expense. Charitable giving provides intangible benefits such as a feeling of satisfaction from helping others or spiritual benefits (for believers). And besides, there’s a tax benefit.
Thoughtfully arranging your spending so that you make the most of the money you have coming in can help you in the future. Understanding how money moves through your personal financial system right now can help you cut back on waste, and help you create a realistic financial plan that can help you walk the path to financial freedom.
http://personaldividends.com/money/miranda/the-importance-of-cash-flow-management
The Importance of Cash Flow Management
By Miranda on August 27th, 2009
One of the things that can make you or break you financially is your skill at cash flow management. For the purposes of personal finances and individual wealth management, your cash flow is the way money moves through your own small financial system. It’s the way your income flows into your bank accounts and then flows out to expenses and investments. And what is left over. Figuring out how your cash moves through your personal financial system is vital if you want to turn your money to better use, and if you want to be financially successful.
Figuring your cash flow
You will want to know whether your cash flow is positive, negative or zero. With a positive cash flow, you will have a surplus at the end of the month. With a negative cash flow, it will appear that you are overrunning your income — leading to excess debt and additional costs due to interest. And, finally, zero cash flow means that your inflows and outflows are balanced. (If you are into the zero-based budget, your goal is to reach zero cash flows.) One of the easiest ways to figure your cash flow is to use a calculator.
However, you can also do it on your own. First, add up your monthly income from all sources, including what you get from dividends or other income investing. Pay attention to where you are getting your money from. Next, add up all of your expenses. This includes money that you put into savings, retirements accounts and other investments, and money that you give to charity or your church. Catalog where your money is going. There are many tools available in the market, some even online, that can help you understand and plan your income, expenses, debt and savings.
I like to take it a step further, and look at when I receive income and when expenses are due. In cash flow management, when matters. I found this out the hard way a couple of years ago. Excited about a new client, I wrote a bunch of checks for bills, even though some of them weren’t due until the end of the month. What I forgot to figure was that my mortgage payment came out automatically on the 15th. And my mid-month income didn’t come until that day — and it takes three to four business days to get it from PayPal into my bank account. As you might imagine, overdraft charges ensued (no bounced checks, though). $300 in bank charges taught me to schedule bill payments in a manner that matches up with when I am paid.
Tweaking your cash flow
After you have an idea of where you are at (a calculator or personal finance software can provide it for you in all it’s color-coded glory), it’s time to tweak the way money moves through your personal financial system. Look at your expenses. As much as possible, they should be focused on things that will pay you back some how. Examine your priorities to see what provides you a benefit. If you enjoy eating out, but you aren’t that into watching TV, perhaps you should shift some of your resources toward eating out, and cut your cable package.
You should also examine where you can put more money into items that will pay you back down the road. Being able to increase money outflows into investments are likely to repay you, justifying the expense. Charitable giving provides intangible benefits such as a feeling of satisfaction from helping others or spiritual benefits (for believers). And besides, there’s a tax benefit.
Thoughtfully arranging your spending so that you make the most of the money you have coming in can help you in the future. Understanding how money moves through your personal financial system right now can help you cut back on waste, and help you create a realistic financial plan that can help you walk the path to financial freedom.
http://personaldividends.com/money/miranda/the-importance-of-cash-flow-management
$7 a day will make you a million
$7 a day will make you a million
by William Spetrino Jr
How would you like buy a stock at 30 years ago prices? How would you like to be partners with the one investor who has made over 100 billion dollars solely from investing? This article will get you started on the road to financial independence.
33 years ago you could have bought Berkshire Hathaway at 40 dollars per share .Today the same shares are about $110,000 . Question if you knew back then you wanted to own Berkshire 33 years ago what price would you have wanted to pay for the shares, $40 dollars or $110,000 per share? Obviously $40 would be a "bit cheaper". Back then someone who had the ingenuity to raise $1000 dollars and could "free up 20 cents per day" Someone who could borrow $1000 dollars at 7% from a relative would have paid $70 dollars debt service on their 25 shares of BRK-A. Today that $70 a year “investment” would be worth a grand total of 2.7 million dollars. And guess what how much tax you have paid? ZERO.
Berkshire B (BRK-B) now trades at $3590 per share. Someone who borrowed $36000 dollars could buy 10 BRK-B shares. The same 7% loan would cost you $2520 per year or a little over $200 a month which is about 7 dollars a day. Just assuming a 12% return rate (Pabrai thinks 15% at price of $5000 but let’s be conservative), your stock will be worth 1,152,000 million dollars in 30 years and guess how much tax you pay, ZERO! What about 15% compounded like Pabrai "projects" in 33.6years that stock will be worth over 4.6 million.
What are the odds that Berkshire B will be worth less in 30 years? Looking for the "extra 7 dollars" a day and raising the seed capital is ALL that stands in your way. You don't need to change your present investment but just add this to "your arsenal". Many financial advisors stress "diversification" and this simple idea could add millions to your net worth in the future
Ok what’s stopping you? Will most of you achieve wealth and financial independence anyhow if you have not already? Probably so. Anyone out here bought a nice vehicle to treat yourself for achieving "wealth". Think of this article and my book as a great way to "tune up" the engine and make your dream car run "even faster". The small investment in time and money could be worth millions. Would you drive your expensive dream car and have no insurance or spare tire? Think about it.
http://www.atfreeforum.com/billyticketswin/viewtopic.php?t=8&sid=3cad471082afa7fd5d2acf583a92a5e4&mforum=billyticketswin
by William Spetrino Jr
How would you like buy a stock at 30 years ago prices? How would you like to be partners with the one investor who has made over 100 billion dollars solely from investing? This article will get you started on the road to financial independence.
33 years ago you could have bought Berkshire Hathaway at 40 dollars per share .Today the same shares are about $110,000 . Question if you knew back then you wanted to own Berkshire 33 years ago what price would you have wanted to pay for the shares, $40 dollars or $110,000 per share? Obviously $40 would be a "bit cheaper". Back then someone who had the ingenuity to raise $1000 dollars and could "free up 20 cents per day" Someone who could borrow $1000 dollars at 7% from a relative would have paid $70 dollars debt service on their 25 shares of BRK-A. Today that $70 a year “investment” would be worth a grand total of 2.7 million dollars. And guess what how much tax you have paid? ZERO.
Berkshire B (BRK-B) now trades at $3590 per share. Someone who borrowed $36000 dollars could buy 10 BRK-B shares. The same 7% loan would cost you $2520 per year or a little over $200 a month which is about 7 dollars a day. Just assuming a 12% return rate (Pabrai thinks 15% at price of $5000 but let’s be conservative), your stock will be worth 1,152,000 million dollars in 30 years and guess how much tax you pay, ZERO! What about 15% compounded like Pabrai "projects" in 33.6years that stock will be worth over 4.6 million.
What are the odds that Berkshire B will be worth less in 30 years? Looking for the "extra 7 dollars" a day and raising the seed capital is ALL that stands in your way. You don't need to change your present investment but just add this to "your arsenal". Many financial advisors stress "diversification" and this simple idea could add millions to your net worth in the future
Ok what’s stopping you? Will most of you achieve wealth and financial independence anyhow if you have not already? Probably so. Anyone out here bought a nice vehicle to treat yourself for achieving "wealth". Think of this article and my book as a great way to "tune up" the engine and make your dream car run "even faster". The small investment in time and money could be worth millions. Would you drive your expensive dream car and have no insurance or spare tire? Think about it.
http://www.atfreeforum.com/billyticketswin/viewtopic.php?t=8&sid=3cad471082afa7fd5d2acf583a92a5e4&mforum=billyticketswin
Footnotes: Early Warning Signs For Investors
Footnotes: Early Warning Signs For Investors
by Rick Wayman
Understanding accounting disclosures gives investors the ability to recognize early warning signs that can help prevent investment disasters. Companies are required to disclose the impact of adopting new accounting rules. This information sometimes reveals some bad news that may hurt stock prices. The adverse reaction could come from the revelation of off-balance-sheet entities, reduced earnings per share (EPS) or increased debt load. Reading between the lines of these disclosures will give the diligent investor an advantage. This overview provides a quick way to evaluate the investment risk that arises from adopting new accounting rules. (For related reading, see An Investor's Checklist To Financial Footnotes.)
Finding the Disclosures
Companies are required to disclose the potential impact of adopting new accounting regulations. Unfortunately, the disclosures are filled with legal boilerplate that may be difficult to read.
Accounting policy disclosures have their own financial notes and/or are discussed in another note. Some companies also repeat the disclosures in the management discussion and analysis (MD&A) section of their 10-K, 10-Q filings and annual company reports. The disclosure may be addressed in several areas, but the main one is usually one of the notes to financial statements with a title like "Summary of Significant Accounting Policies." In 10-Qs and company quarterly reports, the discussion of new accounting rules will most likely be limited to a note entitled "Recently Adopted Accounting Policies." Generally, each new rule is discussed in its own paragraph.
A quick way to read these disclosures is to focus on the second and last sentence. The second sentence will talk about what the rule does and the last sentence discloses management's expectation of what impact the new rule will have. The first sentence generally gives the name of the rule and indicates when the company has or will adopt it. It is best to read the entire disclosure to fully understand the potential ramifications, but focusing on both the second and the last sentence provides the most important information.
Determining What the Disclosures Reveal
Investors should focus on the last sentence where management discusses the new accounting techniques that may impact the company. There are three phrases investors should pay attention to that will raise green, yellow or red flags.
The Green Flag
"No material impact" according to management's assessment indicates the change will have no impact on financial reporting. An example of this is in Huffy Corp.'s, 10-Q for June 2003. Note 11 discussed recently adopted accounting standards. The first item is Statement of Financial Accounting Standards (SFAS) 143, which is accounting for asset retirement obligations. The last sentence reads, "The cumulative effect of implementing SFAS 143 has had an immaterial effect on the company's financial statements taken as a whole." (To view delisted stocks financial statements, visit the U.S. Securities and Exchange Commission)
The Yellow Flag
Phrases may vary, but pay attention if the last sentence tells you that rule will have an impact. You need to be extra careful of elusive language, which management may use because it is reluctant to disclose bad news. Look out for statements like: "The adoption of SFAS 142 did not have an impact on the company's results of operations or its financial position in 2002." Note that this statement does not address how the new rule may impact future results.
The Red Flag
The absence of any conclusive statement indicating the impact of the accounting changes is a big red flag. If the disclosure is missing in this statement, it could mean that management either has not determined the effect of the new accounting or has chosen not to break any bad news to investors. If a definitive impact statement is missing, investors will need to read the entire disclosure in order to evaluate the investment risk.
Take a look at General Electric's (NYSE:GE) 2002 financial statements. In the "Accounting Changes" section of the financial notes, GE states:
"In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The resulting disclosure provisions are effective for year-end 2002 and such disclosures are provided in notes 29 and 30. Recognition and measurement provisions of FIN 45 become effective for guarantees issued or modified on or after January 1, 2003.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities and an Interpretation of Accounting Research Bulletin No. 51. FIN 46's disclosure requirements are effective for year-end 2002 and such disclosures are provided in note 29. We plan to adopt FIN 46's accounting provisions on July 1, 2003."
The disclosure only indicates that these changes will become effective in the future and does not provide any information on the impact of the change. Investors need to determine what this impact may be. In this case, GE had significant amounts of off-balance-sheet liabilities that would increase the debt load on its balance sheet. Investors need to evaluate how the market might react when the debt is consolidated. In GE's case, there might be little reaction due to the stature of the company and its management. In other situations, such news may be unexpected to those who did not bother to read between the lines.
The Bottom Line
Changes in generally accepted accounting principles (GAAP) are meant to correct accounting rules that can result in financial disasters for investors. Companies must disclose when the rules will be adopted and what impact they will have. Reading between the lines of disclosures made in Securities and Exchange Commission filings and corporate reports may give investors an early warning system to spot potential issues such as increased debt load from consolidating off-balance-sheet entities. Unambiguous impact statements are signs of a credible and competent management team. Lack of a clear impact statement or no statement at all is a warning sign. (For more insight, see Footnotes: Start Reading The Fine Print.)
by Rick Wayman, (Contact Author Biography)
http://investopedia.com/articles/analyst/03/101503.asp
by Rick Wayman
Understanding accounting disclosures gives investors the ability to recognize early warning signs that can help prevent investment disasters. Companies are required to disclose the impact of adopting new accounting rules. This information sometimes reveals some bad news that may hurt stock prices. The adverse reaction could come from the revelation of off-balance-sheet entities, reduced earnings per share (EPS) or increased debt load. Reading between the lines of these disclosures will give the diligent investor an advantage. This overview provides a quick way to evaluate the investment risk that arises from adopting new accounting rules. (For related reading, see An Investor's Checklist To Financial Footnotes.)
Finding the Disclosures
Companies are required to disclose the potential impact of adopting new accounting regulations. Unfortunately, the disclosures are filled with legal boilerplate that may be difficult to read.
Accounting policy disclosures have their own financial notes and/or are discussed in another note. Some companies also repeat the disclosures in the management discussion and analysis (MD&A) section of their 10-K, 10-Q filings and annual company reports. The disclosure may be addressed in several areas, but the main one is usually one of the notes to financial statements with a title like "Summary of Significant Accounting Policies." In 10-Qs and company quarterly reports, the discussion of new accounting rules will most likely be limited to a note entitled "Recently Adopted Accounting Policies." Generally, each new rule is discussed in its own paragraph.
A quick way to read these disclosures is to focus on the second and last sentence. The second sentence will talk about what the rule does and the last sentence discloses management's expectation of what impact the new rule will have. The first sentence generally gives the name of the rule and indicates when the company has or will adopt it. It is best to read the entire disclosure to fully understand the potential ramifications, but focusing on both the second and the last sentence provides the most important information.
Determining What the Disclosures Reveal
Investors should focus on the last sentence where management discusses the new accounting techniques that may impact the company. There are three phrases investors should pay attention to that will raise green, yellow or red flags.
The Green Flag
"No material impact" according to management's assessment indicates the change will have no impact on financial reporting. An example of this is in Huffy Corp.'s, 10-Q for June 2003. Note 11 discussed recently adopted accounting standards. The first item is Statement of Financial Accounting Standards (SFAS) 143, which is accounting for asset retirement obligations. The last sentence reads, "The cumulative effect of implementing SFAS 143 has had an immaterial effect on the company's financial statements taken as a whole." (To view delisted stocks financial statements, visit the U.S. Securities and Exchange Commission)
The Yellow Flag
Phrases may vary, but pay attention if the last sentence tells you that rule will have an impact. You need to be extra careful of elusive language, which management may use because it is reluctant to disclose bad news. Look out for statements like: "The adoption of SFAS 142 did not have an impact on the company's results of operations or its financial position in 2002." Note that this statement does not address how the new rule may impact future results.
The Red Flag
The absence of any conclusive statement indicating the impact of the accounting changes is a big red flag. If the disclosure is missing in this statement, it could mean that management either has not determined the effect of the new accounting or has chosen not to break any bad news to investors. If a definitive impact statement is missing, investors will need to read the entire disclosure in order to evaluate the investment risk.
Take a look at General Electric's (NYSE:GE) 2002 financial statements. In the "Accounting Changes" section of the financial notes, GE states:
"In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The resulting disclosure provisions are effective for year-end 2002 and such disclosures are provided in notes 29 and 30. Recognition and measurement provisions of FIN 45 become effective for guarantees issued or modified on or after January 1, 2003.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities and an Interpretation of Accounting Research Bulletin No. 51. FIN 46's disclosure requirements are effective for year-end 2002 and such disclosures are provided in note 29. We plan to adopt FIN 46's accounting provisions on July 1, 2003."
The disclosure only indicates that these changes will become effective in the future and does not provide any information on the impact of the change. Investors need to determine what this impact may be. In this case, GE had significant amounts of off-balance-sheet liabilities that would increase the debt load on its balance sheet. Investors need to evaluate how the market might react when the debt is consolidated. In GE's case, there might be little reaction due to the stature of the company and its management. In other situations, such news may be unexpected to those who did not bother to read between the lines.
The Bottom Line
Changes in generally accepted accounting principles (GAAP) are meant to correct accounting rules that can result in financial disasters for investors. Companies must disclose when the rules will be adopted and what impact they will have. Reading between the lines of disclosures made in Securities and Exchange Commission filings and corporate reports may give investors an early warning system to spot potential issues such as increased debt load from consolidating off-balance-sheet entities. Unambiguous impact statements are signs of a credible and competent management team. Lack of a clear impact statement or no statement at all is a warning sign. (For more insight, see Footnotes: Start Reading The Fine Print.)
by Rick Wayman, (Contact Author Biography)
http://investopedia.com/articles/analyst/03/101503.asp
Accounting Losses and Investors' Expectations
”Accounting losses, investors’ growth expectations and the association between stock returns and accounting earnings”
The importance of stock market data in accounting studies is nowadays commonly accepted by the international research community. It is widely recognized that the stock market offers accounting researchers a real-time laboratory to study many of the most essential questions of the modern accounting research. As a consequence, the success of this research area has been amazing.
By no means, the research area is only of scientific interest. For firm managers, it is important to know what are the value relevant factors of the firms. For investors, it is essential to try to identify which stocks may be over- and underpriced in the market. For accountants, it is important to know what kinds of accounting figures have relevance. Market-based accounting research provides useful information to all of these decision makers. The list of the potential users of the results of this line of research could be easily continued.
The exact purpose of the current thesis is to investigate how accounting losses affect investors’ growth expectations for firms and consequently the observed association between stock returns and accounting earnings for different types of firms and over time. The theoretical background for the analysis relies on dividend based valuation and signaling theories.
Based on theoretical analysis, three main hypotheses are stated and empirically tested in the study.
- First, accounting losses are not assumed to be positively related to investors’ growth expectations. The background for this hypothesis is the assumption that investors’ cash flow expectations are related to persistent earnings, but not to earnings that are temporary by nature. Losses can be assumed to be more temporary than profits, because owners have the opportunity to sell their shares at the price of the market value of the net assets of the firm. If losses would reflect future cash flow expectations, then owners should, in principle, liquidate the firm if the firm reports a loss.
- The second hypothesis of the thesis suggests that accounting losses are assumed to dampen the observed relationship between stock returns and accounting earnings especially for firms that have high growth opportunities and low financial leverage. The theoretical analysis of the thesis shows that the valuation impact of earnings is high for firms with high growth opportunities and low leverage. As a consequence, losses have an especially small impact on prices of these types of firms. This can be seen as a big dampening effect of losses on the observed earnings response coefficients (ERCs) that measure the relationship between stock returns and accounting earnings.
- Moreover, as a third hypothesis, it is assumed that because the existence of accounting losses varies differently over time for different industries facing different business conditions, the observed earnings response coefficients are dampened for different industries in different time periods.
The empirical analysis of this study is based on a sample of New York Stock Exchange (NYSE) firms between 1975 and 1990. It appears that the relative frequency of losses in the sample of 9,316 firm-year observations is 7.7 percent, suggesting that losses are common among the NYSE firms during the sample period. The large amount of losses suggests that the impact of losses on the relationships between earnings-to-book equity and market-to-book equity ratios as well as on ERCs is likely to significant if the assumption on the temporary nature of accounting losses holds true. It further appears that the amount of losses varies significantly across different types of firms and industries.
The evidence on the relationship between the market-to-book and earnings-to-book ratios suggests that the two ratios are not significantly positively related if accounting earnings are negative. For positive earnings, however, the positive relationship exists for the largest and least levered firms. These findings support the hypothesis that investors regard accounting losses as temporary, not reflecting future cash flow expectations.
Profits are considered more persistent,especially for the largest and least levered firms. Moreover, it appears that the impact of accounting losses on the relationship between earnings-to-book and market-to-book ratios varies across firms. This may be because earnings persistence varies between firms, earnings of the largest and least levered firms being persistent.
The empirical results further suggest that accounting losses affect the estimated ERCs differently across firms that have different levels of growth opportunity and financial leverage. The impact is highest in the subgroup including high growth opportunity firms and in the subgroup of the firms with low financial leverage. In the subgroup including high financial leverage or low growth opportunity firms the exclusion of losses has hardly any impact on ERCs. Moreover, the results indicate that the different impact of losses on ERCs in different growth opportunity and financial leverage subgroups are at least to some extent incrementally important, and are not sensitive with respect to firm size. In addition, the results indicate
that the impact of growth opportunities and financial leverage on ERCs is clearly observable, especially when losses and profits are analyzed separately.
This thesis also finds that the relative frequency of losses varies significantly over time among industries. While Carla Hayn in her seminal study in Journal of Accounting and Economics in 1995 reports that in general losses have increased through time, the results of this study indicate that this is not the case for all industries, apparently because of their different business cycles. Moreover, certain industries report losses considerably more often than others. The results further suggest that estimated ERCs are considerably higher in those years when losses are infrequent.
Although loss patterns vary considerably between certain industries, the results indicate that there also exists considerable contemporaneous covariances between certain industries that should be taken into account when estimating ERCs using time series regressions. The recognition of this type of covariance improves the efficiency of the ERC estimates. In this study this is done by applying the seemingly unrelated regression technique.
Earlier studies focusing on the time-series estimates of ERCs typically use ordinary least squares separately for each model’s regression estimates, these studies neglect the existence of contemporaneous covariances between models. By taking into account these contemporaneous covariances, more accurate estimates can be attained when more information is incorporated into the system investigated. The empirical evidence of this study suggests that the observed time-series ERCs for individual industries are considerably strengthened by recognizing the contemporaneous covariances between industryspecific models. This is especially the case with respect to the accuracy of the ERC estimates.
In general, the empirical results of this thesis strongly support the research hypotheses stated in the beginning of the study. This is obviously because investors consider losses as temporary. Since the loss patterns vary considerably among industries and different types of firms, it should be noted that the temporary components of their earnings may vary. Therefore, comparisons based on earnings data should take into account this observation. To illustrate, assume that a decision maker is interested in how growth opportunities affect ERCs in a given industry. If losses and profits are pooled in the analysis, the observed results are likely to be downwards biased because of the temporary nature of losses.
The results are also potentially interesting to firm managers. This thesis suggests that losses do not significantly affect stock prices if the market thinks that they are temporary. Therefore, it is important for managers to inform the market if this is the case. An interesting study in this context is provided by Kasznik and Lev, who report that firms facing large earnings disappointments are more likely to provide discretionary disclosures than firms that are facing large positive earnings surprises. Further evidence on these issues would obviously be of great interest.
Finally, the results of this study are also of interest to people interested in the quality of earnings. Evidence on ERCs is potentially of great interest when assessing the effect of a change in accounting rules, for instance, on earnings quality. This study provides further evidence which hopefully helps us to better understand what an ERC is and what are the fundamental factors behind this. Again, further evidence on these issues is needed, however. Potentially interesting aspects are, for instance, the magnitude of ERCs around changes in accounting and tax regulations and in different markets.
http://lta.hse.fi/1998/4/lta_1998_04_s8.pdf
Do Sophisticated Investors Understand Accounting Quality?
Do Sophisticated Investors Understand Accounting Quality?
Evidence from Bank Loans
Since banks significantly rely upon financial statements to assess and monitor borrowers’ accounting quality, we measure accounting quality as the magnitude of abnormal operating accruals, after controlling for industry and the firm’s normal level of activity. Operating accruals represent the difference between the reported earnings and the operating cash flows of a firm. Large deviations between earnings and operating cash flows make it harder for the bank to assess the ability of borrowers to generate cash flows in the future. Differentiating between earnings and cash flows is crucial for the bank because the payments by borrowers in the form of interest or principal will be serviced out of cash flows.
IV. Conclusion
We examine if banks have the ability to understand the relationship between operating accruals, future earnings and cash flows. Differentiating between earnings and cash flows is crucial for the bank because, the payments to the loan contracts in the form of interest or principal will be serviced out of cash flows and not earnings of the borrower.
This issue is important since various papers have documented that stock market investors (Sloan (1996); Xie (2001)) as well as sophisticated bond market investors (Bhojraj and Swaminathan (2004)) do not seem to price poor accounting quality as reflected in accruals.
In sharp contrast to these studies we find evidence in support of (Working Capital/ Total Assets) + 0.076 (Current Liabilities/ Current Assets) – 1.72 (1 if Total Liabilities >Total Assets, 0 otherwise) – 0.521 ((Net Incomet - Net Incomet-1)/( Net Incomet + Net Incomet-1)) the banks being able to discern the true accounting quality of borrowers and incorporate loan terms, price and non-price terms, appropriately.
Our paper makes four contributions to the literature.
http://www.bis.org/bcbs/events/rtf04sunder.pdf
Evidence from Bank Loans
Since banks significantly rely upon financial statements to assess and monitor borrowers’ accounting quality, we measure accounting quality as the magnitude of abnormal operating accruals, after controlling for industry and the firm’s normal level of activity. Operating accruals represent the difference between the reported earnings and the operating cash flows of a firm. Large deviations between earnings and operating cash flows make it harder for the bank to assess the ability of borrowers to generate cash flows in the future. Differentiating between earnings and cash flows is crucial for the bank because the payments by borrowers in the form of interest or principal will be serviced out of cash flows.
IV. Conclusion
We examine if banks have the ability to understand the relationship between operating accruals, future earnings and cash flows. Differentiating between earnings and cash flows is crucial for the bank because, the payments to the loan contracts in the form of interest or principal will be serviced out of cash flows and not earnings of the borrower.
This issue is important since various papers have documented that stock market investors (Sloan (1996); Xie (2001)) as well as sophisticated bond market investors (Bhojraj and Swaminathan (2004)) do not seem to price poor accounting quality as reflected in accruals.
In sharp contrast to these studies we find evidence in support of (Working Capital/ Total Assets) + 0.076 (Current Liabilities/ Current Assets) – 1.72 (1 if Total Liabilities >Total Assets, 0 otherwise) – 0.521 ((Net Incomet - Net Incomet-1)/( Net Incomet + Net Incomet-1)) the banks being able to discern the true accounting quality of borrowers and incorporate loan terms, price and non-price terms, appropriately.
Our paper makes four contributions to the literature.
- First, by showing that banks consider the deviations between cash flows and earnings in pricing and structuring their contracts, we provide direct evidence supporting the specialness of financial intermediation. The financial intermediation literature has hitherto relied on indirect evidence supporting the specialness of banks.
- Second, we add to the growing body of evidence that investors misprice information in financial statements, by showing that some sophisticated investors (banks, in our case) properly use this information while structuring financial contracts.
- Third, we advance the explanation that our results support, and are consistent with, the notion of limited information as a source of risk – a view increasingly gaining currency in the asset pricing literature.
- Finally, we show how accounting quality has a direct and measurable impact on a firm’s cost of capital.
http://www.bis.org/bcbs/events/rtf04sunder.pdf
Maybank climbs on earnings upgrades
Maybank climbs on earnings upgrades
Published: 2009/09/08
Malayan Banking Bhd rose the most in a month in Kuala Lumpur trading, leading gains among lenders, after Credit Suisse Group AG said analysts had increased their profit estimates.
Malayan Banking, the country’s biggest bank and known as Maybank, climbed 1.5 per cent to RM6.60 at 10:22 am local time, set for its biggest advance since August 3. Analysts have raised their estimates for Malaysian bank earnings by 11 per cent for 2009 and 16 per cent for 2010 over the past six months, Danny Goh, an analyst at Credit Suisse, wrote in a report today.
“The earnings upgrades were to a large extent a reflection of increased optimism over the outlook for non-performing loans,” Goh said. “Improvement in non-interest income growth prospects could also be another key driver.”
Malaysian bank earnings may surge a “sterling” 34 per cent next year as the economy strengthens, CIMB Investment Bank Bhd said on September 3. Malaysia’s economy, the third-biggest in Southeast Asia, is forecast by the government to return to growth in the fourth quarter after slipping into its first recession in a decade last quarter.
Bumiputra-Commerce Holdings Bhd, the second-biggest, added 0.4 per cent to RM10.38, while RHB Capital Bhd added 0.8 per cent to RM5.04.
Loan applications in Malaysia in July rose 19 per cent, the largest monthly increase since August 2008, central bank data show. Since September, the banking industry’s gross non- performing loan ratio has fallen to its post-Asian financial crisis low of 3.9 per cent, Ng Wee Siang, a banking analyst at BNP Paribas, wrote in a report last month.
BNP Upgrade
BNP Paribas upgraded Malaysia’s banking industry to “buy” from “reduce” in August, saying positive government initiatives and an improving economy are helping to curb bad debts and revive lending growth.
Analysts’ estimates for Bumiputra-Commerce’s profit have been “materially upgraded but are still 3-4 per cent below Credit Suisse’s 2009 and 2010 estimates,” Credit Suisse’s Goh said in the report. Credit Suisse’s forecasts for Public Bank Bhd’s earnings are below analysts’ estimates, he said. -- Bloomberg
Published: 2009/09/08
Malayan Banking Bhd rose the most in a month in Kuala Lumpur trading, leading gains among lenders, after Credit Suisse Group AG said analysts had increased their profit estimates.
Malayan Banking, the country’s biggest bank and known as Maybank, climbed 1.5 per cent to RM6.60 at 10:22 am local time, set for its biggest advance since August 3. Analysts have raised their estimates for Malaysian bank earnings by 11 per cent for 2009 and 16 per cent for 2010 over the past six months, Danny Goh, an analyst at Credit Suisse, wrote in a report today.
“The earnings upgrades were to a large extent a reflection of increased optimism over the outlook for non-performing loans,” Goh said. “Improvement in non-interest income growth prospects could also be another key driver.”
Malaysian bank earnings may surge a “sterling” 34 per cent next year as the economy strengthens, CIMB Investment Bank Bhd said on September 3. Malaysia’s economy, the third-biggest in Southeast Asia, is forecast by the government to return to growth in the fourth quarter after slipping into its first recession in a decade last quarter.
Bumiputra-Commerce Holdings Bhd, the second-biggest, added 0.4 per cent to RM10.38, while RHB Capital Bhd added 0.8 per cent to RM5.04.
Loan applications in Malaysia in July rose 19 per cent, the largest monthly increase since August 2008, central bank data show. Since September, the banking industry’s gross non- performing loan ratio has fallen to its post-Asian financial crisis low of 3.9 per cent, Ng Wee Siang, a banking analyst at BNP Paribas, wrote in a report last month.
BNP Upgrade
BNP Paribas upgraded Malaysia’s banking industry to “buy” from “reduce” in August, saying positive government initiatives and an improving economy are helping to curb bad debts and revive lending growth.
Analysts’ estimates for Bumiputra-Commerce’s profit have been “materially upgraded but are still 3-4 per cent below Credit Suisse’s 2009 and 2010 estimates,” Credit Suisse’s Goh said in the report. Credit Suisse’s forecasts for Public Bank Bhd’s earnings are below analysts’ estimates, he said. -- Bloomberg
Genting gains, seen as cheaper option
Genting gains, seen as cheaper option
Published: 2009/09/07
Shares in Genting, Asia’s largest casino operator by market share, were higher as the stock is seen as a cheaper option for exposure to its Singapore casino business than its unit Genting Singapore.
By 0704 GMT, Genting shares have gained 4.6 per cent to RM7.27 a share on volume of 7.8 million shares.
Genting Singapore was up 4.5 per cent at S$1.17.
“The upside in Genting lies in two key angles, 1) the explicit re-rating of Genting Singapore as a subsidiary and 2) the narrowing of the “discount to entry” as a parent (company),” said CLSA in a research note published today.
“The current share price is pricing in a value of S$0.63 per share for Genting Singapore and we thus advocate a buy call on Genting Bhd on the premise that investors are paying around 50 per cent “discount to entry”, said CLSA.
Malaysian gaming stocks are also playing catch-up with their regional peers, which rose sharply last week on reports gaming revenue in Macau, the world’s top gambling market, rose to a new high in August, said a dealer from a local brokerage. -- Reuters
http://www.btimes.com.my/Current_News/BTIMES/articles/20090907170417/Article/index_html
Published: 2009/09/07
Shares in Genting, Asia’s largest casino operator by market share, were higher as the stock is seen as a cheaper option for exposure to its Singapore casino business than its unit Genting Singapore.
By 0704 GMT, Genting shares have gained 4.6 per cent to RM7.27 a share on volume of 7.8 million shares.
Genting Singapore was up 4.5 per cent at S$1.17.
“The upside in Genting lies in two key angles, 1) the explicit re-rating of Genting Singapore as a subsidiary and 2) the narrowing of the “discount to entry” as a parent (company),” said CLSA in a research note published today.
“The current share price is pricing in a value of S$0.63 per share for Genting Singapore and we thus advocate a buy call on Genting Bhd on the premise that investors are paying around 50 per cent “discount to entry”, said CLSA.
Malaysian gaming stocks are also playing catch-up with their regional peers, which rose sharply last week on reports gaming revenue in Macau, the world’s top gambling market, rose to a new high in August, said a dealer from a local brokerage. -- Reuters
http://www.btimes.com.my/Current_News/BTIMES/articles/20090907170417/Article/index_html
Introduction of new accounting standards for listed companies
Advice to ignore 'bumpy accounting surprises'
Published: 2009/08/31
In the run-up to the introduction of new accounting standards for listed companies, HwangDBS Vickers Research Sdn Bhd has advised investors to ignore "bumpy accounting surprises" in locally listed companies' earnings or book value.
Instead, they should focus on the companies' core operating performance and its implication on valuation models.
"As it gets increasingly hard to project the (com-panies') accounts due to the presence of erratic accounting distortions, investors are expected to ignore bumpy accounting surprises in earnings or book value," the research house said in its report to clients last week.
Regulators have set January 2012 as the deadline for listed companies to migrate to the Financial Reporting Standards (FRS) to be in line with international accounting standards.
While HwangDBS believes that there is a possibility that the more complex standards may be pushed back from their initial effective dates due to a generally low sense of awareness in the corporate world, full implementation is still expected to meet its given deadline.
HwangDBS singled out eight standards that could have material implications on locally listed companies: FRS 139, IFRIC 12, IFRIC 15, FRS 141, IFRIC 4, IFRIC 13, FRS 7 and FRS 8.
It said that while FRS7 and FRS8 were expected to improve transparency in all companies, other standards might see greater volatility in reported earnings for airlines, exporters, conglomerates and plantation companies; a distortion in earnings stream for concessionaires; and lumpy profit recognition for property developers.
Banks, however, might see a slight positive earnings impact upon initial adoption, while power firms could see their balance sheet items reshuffled and retail consumers might have marginally lower revenue recognition initially.
"FRS will result in reported earnings and book values being more volatile and harder to project because of greater application of fair value accounting. However, there will be no immediate effect on cash flow positions," HwangDBS said.
In addition, the financial statement covering a wider scope will report accounting changes in a more transparent and timely manner.
It will also involve more judgement calls as many assumptions must be made when preparing the accounts.
"Our best bets for Malaysian equities are Public Bank Bhd, IJM Corp Bhd and Genting Malaysia Bhd, while Sime Darby Bhd remains our top sell idea," HwangDBS said.
Published: 2009/08/31
In the run-up to the introduction of new accounting standards for listed companies, HwangDBS Vickers Research Sdn Bhd has advised investors to ignore "bumpy accounting surprises" in locally listed companies' earnings or book value.
Instead, they should focus on the companies' core operating performance and its implication on valuation models.
"As it gets increasingly hard to project the (com-panies') accounts due to the presence of erratic accounting distortions, investors are expected to ignore bumpy accounting surprises in earnings or book value," the research house said in its report to clients last week.
Regulators have set January 2012 as the deadline for listed companies to migrate to the Financial Reporting Standards (FRS) to be in line with international accounting standards.
While HwangDBS believes that there is a possibility that the more complex standards may be pushed back from their initial effective dates due to a generally low sense of awareness in the corporate world, full implementation is still expected to meet its given deadline.
HwangDBS singled out eight standards that could have material implications on locally listed companies: FRS 139, IFRIC 12, IFRIC 15, FRS 141, IFRIC 4, IFRIC 13, FRS 7 and FRS 8.
It said that while FRS7 and FRS8 were expected to improve transparency in all companies, other standards might see greater volatility in reported earnings for airlines, exporters, conglomerates and plantation companies; a distortion in earnings stream for concessionaires; and lumpy profit recognition for property developers.
Banks, however, might see a slight positive earnings impact upon initial adoption, while power firms could see their balance sheet items reshuffled and retail consumers might have marginally lower revenue recognition initially.
"FRS will result in reported earnings and book values being more volatile and harder to project because of greater application of fair value accounting. However, there will be no immediate effect on cash flow positions," HwangDBS said.
In addition, the financial statement covering a wider scope will report accounting changes in a more transparent and timely manner.
It will also involve more judgement calls as many assumptions must be made when preparing the accounts.
"Our best bets for Malaysian equities are Public Bank Bhd, IJM Corp Bhd and Genting Malaysia Bhd, while Sime Darby Bhd remains our top sell idea," HwangDBS said.
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