Inflation: some insight into inflation and its effects.

Inflation: some insight into inflation and its effects.

For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation.

Some points to remember:

• Inflation is a sustained increase in the general level of prices for goods and services.
  
• When inflation goes up, there is a decline in the purchasing power of money.
  
• Variations on inflation include deflation, hyperinflation and stagflation.
  
• Two theories as to the cause of inflation are demand-pull inflation and cost-push inflation.
  
• When there is unanticipated inflation, creditors lose, people on a fixed-income lose, "menu costs" go up, uncertainty reduces spending and exporters aren't as competitive.
  
• Lack of inflation (or deflation) is not necessarily a good thing.
  
• Inflation is measured with a price index.
  
• The two main groups of price indexes that measure inflation are the Consumer Price Index and the Producer Price Indexes.
  
• Interest rates are decided in the U.S. by the Federal Reserve. Inflation plays a large role in the Fed's decisions regarding interest rates.
  
• In the long term, stocks are good protection against inflation.
  
• Inflation is a serious problem for fixed income investors. It's important to understand the difference between nominal interest rates and real interest rates.
  
• Inflation-indexed securities offer protection against inflation but offer low returns.
  

Also read:
Table of Contents
1) Inflation: Introduction
2) Inflation: What Is Inflation?
3) Inflation: How Is It Measured?
4) Inflation: Inflation And Interest Rates
5) Inflation: Inflation And Investments
6) Inflation: Conclusion

What is GDP and why is it so important?

Investment Question
What is GDP and why is it so important?

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy.

It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either

• by adding up what everyone earned in a year (income approach), or
• by adding up what everyone spent (expenditure method).

Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies.

The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.

A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

For more on this topic, see this section of our Economic Indicators tutorial and the article Macroeconomic Analysis.

http://www.investopedia.com/ask/answers/199.asp?ad=feat_fincrisis

What causes a recession?

Investment Question
What causes a recession?
According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in

• real gross domestic product (GDP),
• real income,
• employment,
• industrial production and
• wholesale-retail sales".

More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.

Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as

• increased production costs,
• higher energy costs and
• national debt.

(For more on this topic, see All About Inflation.)

In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.

For further reading, see
Recession-Proof Your Portfolio and
Recession: What Does It Mean To Investors.

This question was answered by Chizoba Morah.

http://www.investopedia.com/ask/answers/08/cause-of-recession.asp?ad=feat_fincrisis

How do central banks inject money into the economy?

Investment Question
How do central banks inject money into the economy?

Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions are referred to as monetary policy. While the Federal Reserve Board (the Fed) could print paper currency at its discretion in an effort to increase the amount of money in the economy, this is not the measure used.

Here are three methods the Fed uses in order to inject (or withdraw) money from the economy:

1. The Fed can influence the money supply by modifying reserve requirements, which is the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply.
2. The Fed can also alter the money supply by changing short-term interest rates. By lowering (or raising) the discount rate that banks pay on short-term loans from the Federal Reserve Bank, the Fed is able to effectively increase (or decrease) the liquidity of money. Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, so the Fed must be careful not to lower interest rates too much for too long.
3. Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.

To learn more about central banks and their role in monetary policy, check out Formulating Monetary Policy.

http://www.investopedia.com/ask/answers/07/central-banks.asp?ad=feat_fincrisis

Where do investors tend to put their money in a bear market?

Investment Question
Where do investors tend to put their money in a bear market?
A bearish market is traditionally defined as a period of negative returns in the broader market to the magnitude of between 15-20% or more. During this type of market, most stocks see their share prices fall, often substantially. There are several strategies that are used when investors believe that this market is about to occur or is occurring, which depend on an the investor's risk tolerance, investment time horizon and objectives. (For related reading, see Surviving Bear Country.)

One of the safest strategies, and the most extreme, is to sell all of your investments and either hold cash or invest the proceeds into much more stable financial instruments, such as short-term government bonds. By doing this, an investor can reduce his or her exposure to the stock market and minimize the effects of a bear market.

For investors looking to maintain positions in the stock market, a defensive strategy is usually taken. This type of strategy involves investing in larger companies with strong balance sheets and a long operational history, which are considered to be defensive stocks. The reason for this is that these larger more stable companies tend to be less affected by an overall downturn in the economy or stock market, making their share prices less susceptible to a larger fall. With strong financial positions, including a large cash position to meet ongoing operational expenses, these companies are more likely to survive downturns. These also include companies that service the needs of businesses and consumers, such as food businesses (people still eat even when the economy is in a downturn). On the other hand, it is the riskier companies, such as small growth companies, that are typically avoided because they are less likely to have the financial security that is required to survive downturns.

These are just two of the more common strategies and there is a wide range of other strategies tailored to a bear market. The most important thing is to understand that a bear market is a very difficult one for long investors because most stocks fall over the period, and most strategies can only limit the amount of downside exposure, not eliminate it.

http://www.investopedia.com/ask/answers/06/investduringbearmarket.asp?ad=feat_fincrisis


Most Popular Questions
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Are all bank accounts insured by the FDIC?
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If my mortgage lender goes bankrupt, do I still have to pay my mortgage?
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FTSE 100 on course for worst ever year

FTSE 100 on course for worst ever year
The FTSE 100 is almost certain to complete its worst-ever annual performance today.

By Graham Ruddick Last Updated: 11:09AM GMT 31 Dec 2008

In 12 months of volatile trading, the UK's leading index of shares has fallen 32pc – opening the year on 6456.90 and declining to 4392.68 by New Year's Eve – and recorded five of its most dire trading days. The market closes at 12:30pm today.
The overall annual drop puts 2008 ahead of 2002's dotcom crash of 24.48pc and the 16.15pc fall in 2001 after the 9/11 terrorist attacks in New York. Other notable 12-month declines include 11.52pc and 10.32pc in 1990 and 1994 respectively as the UK economy struggled through its last recessionn.
Confidence has deserted stock markets this year as the global banking crisis hammered shares of banks -with Royal Bank of Scotland and HBOS both recording falls of about 90pc - and fears about the depth of the global downturn hitting the previously buoyant mining shares.
David Buik, an analyst at BGC Partners, said that the size of the drop in certain sectors had been exacerbated by the fear that swept investors this year as the crisis unfolded.
"There is nothing more toxic than fear and uncertainty to galvanise equity operators to dump their books unceremoniously," he said. "That's exactly what happened in extreme degrees of volatility that had never before been experienced in the living memory of mature markets."
As the financial crisis escalated following the collapse of US investment bank Lehman Brothers in September, the FTSE recorded five of its worst ever trading days. The sharpest percentage fall of 2008 came on Friday, October 10, when it lost 8.85pc as rattled G7 leaders met in Washington in an effort to bring calm to markets. That week, during which Gordon Brown unveiled the Government's £500bn bail-out of the country's banks, saw the market slump 21.05pc, the biggest weekly fall of 2008.
However, despite the year being a miserable year one for equity markets, the FTSE's largest daily and weekly losses remain from the week of Black Monday in 1987. The market fell 10.84pc on Monday, October 19 and 12.22pc the following day, driving it to a weekly loss of 28.23pc. Overall though, the FTSE actually ended 1987 up 2.01pc.
Ironically, the financial crisis of late 2008 produced the largest four daily gains ever for the FTSE 100. The index, which began in 1984, rose a record 9.84pc on November 24, pre-Budget report day.
The FTSE has ended 2008 relatively strongly, gaining 4pc this week, and Mike Lenhoff, the chief strategist at Brewin Dolphin, predicts next year could see a recovery to the 5,000 mark because of falling inflation and interventionist policies from governments.
"Monetary and fiscal policies are expansionary, in some cases aggressively so," he added. "Not only have we witnessed the biggest financial upheaval of our time, we are also witnessing the biggest policy response of our time from central banks and governments the world over.
"Also, falling inflation worldwide will boost real household incomes and this should provide something of a boost to the growth of consumer spending – worldwide. On the corporate side, commodity deflation should help profit margins – worldwide. Commodity price deflation could end up being a powerful stimulus for global demand growth."

http://www.telegraph.co.uk/finance/markets/4043815/FTSE-100-on-course-for-worst-ever-year.html

Will oil prices recover after tanking in 2008?

Will oil prices recover after tanking in 2008?
The oil price gyrated wildly in 2008 – but what's in store for the price in 2009, asks Garry White.

Last Updated: 5:56AM GMT 30 Dec 2008
Comments 17 Comment on this article

Oil prices have experienced wild fluctuations in 2008
The oil price gyrated wildly in 2008, hitting an all-time high above $147 a barrel on July 3 – followed by four-year lows. The big question now is: Where next?
Until the credit crunch saw global markets freeze, demand for oil had been rocketing, mainly because of rapid development in countries such as India and China.
However, the financial crisis changed that. Demand plummeted in the latter part of 2008 and global inventories grew. In the third quarter of 2008, US oil consumption shrank by about 1m barrels per day (bpd) – or around 5pc. It is likely to have fallen further in the fourth quarter.
To keep the market in balance, Opec cut supply. In December, the cartel, which controls 40pc of global oil output, agreed its deepest cut ever, bringing the total cut in quotas in the second half of 2008 to 4.2m bpd.
But even this failed to support the price, which fell almost 10pc in the next two sessions.
There were two reasons for this fall.

• It is obvious that demand deterioration continues as the global economy falls deeper into recession, but
• the market was also sceptical whether Opec members would comply with the cut.

This followed news that only 85pc of the previous 1.5m barrel quota reduction had been implemented.
The latest cut of 2.2m bpd is due to start on January 1. Analysts are unsure whether members will stick to their production quota, so there is uncertainty about oil supply over the next few months.
Then there's Russia, the world's second-largest oil exporting nation. Opec had hoped the country would join in with co-ordinated cuts in output. Russia sent its highest-level delegation ever to Opec's December meeting, but said it was not going to join in with Opec's actions. US pressure was probably behind Russia's decision. Analysts warned that Congress could campaign to have Russia thrown out of the G8 if it got too close to Opec.
One other cause of the oil-price spike was a slide in the value of the dollar. As the currency weakened investors bought dollar-denominated assets as a hedge against inflation, helping propel oil to close to $150 a barrel.
However, the global economy's deterioration saw investors repatriate assets they saw as risky. This caused a flight back into cash and these positions were unwound.
Over 2009, the currency markets are likely to be volatile and difficult to predict. If dollar strength persists, this is likely to keep the oil price subdued.
However, the Federal Reserve has slashed US interest rates and signalled that it could soon be printing money to try to stop the recession turning into a depression. Many analysts feel that this will be bearish for the dollar, and a dollar fall would once again boost the oil price.
Ultimately, what happens to the oil price depends on whether the recent fiscal stimulus packages work. If they do and economies improve then demand recovery will be bullish for the oil price.
If the packages fail the outlook for a recovery in oil prices is bleak. Economic contagion in the West is already hitting China's manufacturing base.
Earlier this month Merrill Lynch oil analyst Francisco Blanch said the oil price could drop to $25 in 2009 if China falls into recession. He put the chances of this happening at one in three. However, he added: "If we reignite economic growth, we will have a shortage of energy again." In this case, Mr Blanch predicted oil at $150 a barrel in two or three years.
Most analysts are downbeat on the oil price in the short term. Deutsche Bank analyst Michael Lewis said: "Many commodity prices are set to overshoot to the downside in response to the worst downturn in economic activity since the Great Depression."
In the long term, low oil prices could be damaging, as they stop investment in the discovery of new sources. Speaking at a recent summit of energy ministers held in London, Gordon Brown warned that if nations cut investment in oil production, demand will eventually exceed supply again, forcing prices up.
Geo-political issues may also come into play. The escalation of attacks between Israel and Hamas in Gaza caused a spike in the oil price on Monday. If problems persist in the region this is likely to provide a floor for the oil price in the early part of the year.
There are also the actions of the Movement for the Emancipation of the Niger Delta (MEND) in Nigeria. Attacks by the rebels contributed to the oil price spike in early 2008, as the country is the world's eighth-largest crude oil exporter and the US's fifth-largest source for imported oil. Major exporters Iran and Venezuela also continue to sabre rattle with the US, which could prompt more supply fears.
Ultimately, however, the outlook for the oil price in 2009 depends on where or not government action to tackle the economic crisis works. Mervyn King has warned that the UK could flirt with deflation in 2009 – and if deflation becomes a major global problem the outlook for the oil price is decidedly bearish.
Should the stimulus packages start to work and become reflationary this would be bullish for the price of oil. When it comes to the direction of the oil price in 2009, it's quite simple really – as Bill Clinton once said: It's the economy, stupid.

http://www.telegraph.co.uk/finance/financetopics/oilprices/4014817/Will-oil-prices-recover-after-tanking-in-2008.html

Buffett's Investment in Goldman Sach

Some interesting thoughts.

Examples: The similarities between Salomon and GS--Warren never will, and will never need to, take on a role at GS that is similar to the one he did at Salomon. The only way Buffett will lose with the GS deal is if the company goes under--not impossible, but extremely unlikely. In the meantime he is collecting 10% interest, is assured return of capital (except if GS goes under), an is assured a 10% fee if the debt is repaid early. The warrants, if he gets to exercise it for a profit, is icing on the cake.

Another example: his 1999 call of a sideways market until 2016 was brilliant indeed. But remember the SP500 was in the 1300 to 1400 range then. In Nov 2008, with the SP500 around 750, the 1999 call if proven right, means a 1350 or so SP 500 in 2016--or an approximately 80% gain in 8 years. This is a annualized return of about 7 or 8%, plus a dividend of over 3% --for a cumulative return of around 10% for the next 8 years. Perhaps Mr. Cooper considers this inadequate. REMEMBER: Graham defined Investment as "an operation which, upon thorough analysis promises safety of capital and an adequate return"

http://seekingalpha.com/article/112389-buffett-s-biography-is-goldman-sachs-the-new-salomon-brothers

Hyperinflation: Dollar is key to Zimbabwe survival

Page last updated at 14:31 GMT, Friday, 19 December 2008

Dollar is key to Zimbabwe survival


Many Zimbabweans do not have access to foreign currency

To get (US) dollars I have to do assignments abroad… there are not many Zimbabweans who can do that
Professor John Makombe, University of Zimbabwe

Zimbabweans queue for the new $500 million banknote in Harare

Hyperinflation renders Zimbabwean dollars valueless in days. This man's wife tried to buy maize with their last dollars. But they were worthless. He was forced to beg for food for his children.

By Karen Allen BBC News, Zimbabwe
Last week the reserve bank issued a new Zimbabwean banknote - a $500m bill. Its value changes by the day, but a rough estimate of its worth now is about US $50 (£33).
Its release was enough to see a surge of people flock onto the streets and form huge queues outside the banks. Harare's pavements were gridlocked for most of the day.
But increasingly it is only US dollars that are accepted in Zimbabwe's shops. Petrol stations are among those now turning away people who offer fistfuls of local currency.
Even water bills - for what little clean water there is - have to be paid in hard US cash. And bread is now a dollar commodity in many parts of the country.

'Dollarisation'
There has been a surge in cross-border trade in recent weeks with the lifting of restrictions on US dollar transactions.
Consumer goods, food and cars are being brought across from neighbouring South Africa.

To get (US) dollars I have to do assignments abroad… there are not many Zimbabweans who can do that
Professor John Makombe, University of Zimbabwe

Supermarkets are now stuffed with food, filling shelves that just a month or so ago were empty.
These supermarkets are for Zimbabwe's tiny dollar elite - the type that drive brand new cars into the car parks as others try to fend off starvation. They only accept US dollar bills in these swanky shops.
John Makombe, professor of political science at the University of Zimbabwe, estimates that 80% of the population here has no access to US dollar bills.
"Even I sometimes don't have foreign currency and I'm a university professor. To get dollars I have to do assignments abroad," he says. "There are not many Zimbabweans who can do that."
The value of Professor Makumbe's monthly salary, he reveals, is equivalent to US $30. That is just a little more than the price of a jar of instant coffee in the supermarkets which have become a refuge of the dollar rich.
The "dollarisation" of the Zimbabwean financial system is propping up a collapsed Zimbabwean economy.
But it has created an unwieldy free market where the government, unable to control basic prices, is merely a bystander.
A shortage of change and small US banknotes is now creating a new US dollar inflation.
"Zimbabwe is like a house of cards… one puff and it could come down," says a Zimbabwe-based Western diplomat with a depressed tone. "The problem is… there isn't the puff to blow it down."
It seems to be an accurate observation. Massive food shortages, hyperinflation, cholera and continued political turmoil are a heady cocktail.
In any other country in the world, this combination might have triggered a coup. But not here. People are simply too scared.

Critics vanished
Journalists, human rights activists and other critics of Robert Mugabe's presidency have recently vanished.

Many Zimbabweans do not have access to foreign currency
More than 20 people have disappeared in just the past few weeks - people are terrified.
Reporting the Zimbabwe story is risky for all concerned - not least those on the other side of the microphone.
Not surprisingly many are reluctant to speak out - yet thankfully, some still do. Like Elliot and Molly - a retired couple now living on a small farm, whose geographical details I dare not divulge for fear they are punished for speaking to me.
"Africa needs to be responsible for its own problems," says Elliot boldly. "It's about our own mismanagement… we can't blame former colonies like Britain."
It is a sentiment that runs deep here, though few will speak openly about it.
When I arrived tensions were high following the disappearance of Jestina Mukoko - a prominent human rights campaigner and former journalist, who had allegedly been abducted.
Her safety has been playing on the minds of so many here ever since. Yet Zimbabwe's neighbours continue to offer legitimacy to Robert Mugabe.
Despite a power-sharing deal back in September, he still holds all the cards. He is revered as a liberation hero by many influential figures on the continent, with just Botswana and Kenya breaking rank and speaking out.
One political campaigner for the opposition MDC described the present climate in Zimbabwe as "coerced control" - an environment where intimidation rules.
It means that ordinary Zimbabweans, already enduring so much, may still face the prospect of worse to come - resisting the instinct to revolt with a sense of fear.

http://news.bbc.co.uk/2/hi/africa/7791404.stm

An Introduction to Stock Options

An Introduction to Stock Options

Stock options provide advanced investors with additional opportunities for potentially rewarding returns. But stock options do possess risks that require an in-depth understanding of how they work. This article provides a basic overview of stock options.

Before You Start
Pull out all paperwork describing your workplace benefits coverage to learn whether your employer grants stock options to employees.
Review the expiration dates on any stock options you currently own.
Review the buy/sell prices for your stock options.

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Topics
An Introduction to Stock Options
The Basics of Stock Options
Components of an Option's Value
Employee Stock Options
Consider Option Strategies Carefully

1 An Introduction to Stock Options
Options on stocks and stock indexes are derivative instruments. Stock investors may use stock options

• to hedge against a price decline,
• to lock in a future purchase price, or
• to speculate on the future price of a stock.

Employees may also receive stock options through an employee compensation plan. For employees, stock options represent the potential for growth in value and the possibility that the increase in value will be taxed at a favorable capital-gains tax rate.Back to top

2 The Basics of Stock Options
A stock option is essentially a contract that gives one party the right to purchase or sell a stated number of shares of a stock at a specified price. The price at which the shares may be purchased or sold is known as the strike or exercise price. The right to exercise lasts for a stated period of time, which may be months or years, until the expiration date. If not exercised on or before the expiration date, the option expires.
Options come in two forms: calls and puts. A call option gives the option purchaser the right to buy the underlying stock. A put option gives the option purchaser the right to sell the underlying stock.
A call option is valuable to the extent that the exercise price is below the market value of the underlying stock. For example, if a stock is trading at $100 per share and you hold a call option entitling you to buy the stock at $72 per share, your option has an immediate value to you of $100 - $72 = $28, before taking into account any tax consequences or transaction fees.
A put option is the mirror image of a call option. A put option becomes more valuable as the price of the stock moves below the exercise price. For example, if you have purchased a put option with a strike price of $90 and the stock price moves to $80, you may choose to exercise the option and sell the underlying stock at $90 for an immediate unrealized per share gain of $90 - $80 = $10.
With both calls and puts, the purchaser of the option has the right to exercise, while the option seller is obligated to respond if the option is exercised. The option purchaser pays an upfront fee known as the premium to the option seller in return for the right of exercise. The option buyer has a known investment risk -- if the option expires unexercised, the purchaser of the option recognizes the premium paid as a loss. Conversely, the option seller undertakes potentially unlimited market risk in return for the premium received. Back to top

3 Components of an Option's Value
Option contracts are traded on regulated markets, and their values may fluctuate throughout the trading day. The price of an option at any given time is based on several factors, including the current price of the underlying stock, the price volatility of the underlying stock, the time to maturity, and interest rates.
Intrinsic value -- the intrinsic value of the option is the difference between the exercise price and the price of the underlying security. An option is "in the money" when the intrinsic value is positive.
Volatility -- part of an option's value reflects the volatility of the underlying security. If a stock price is highly volatile, there is a relatively greater chance that the option will be "in the money" at expiration, and therefore, the option will carry a higher premium than an option on a less a volatile stock.
Time value -- the more time remaining until the expiration date of the option, the greater the potential for a significant change to occur in the price of the underlying security and the greater the value of the option. Time value diminishes as the expiration date of the option approaches.
Interest rates -- the option premium is a cash payment that can be invested by the option seller to generate interest income. Higher interest rates present opportunities for potentially greater earnings on the option premium.
Intrinsic value, volatility, and time value can significantly affect an option's market value. An option with an exercise price above the current market value of the underlying security may still have considerable potential value.
For example, if you hold a call option with an exercise price of $72 and the current share price is $65, your option would generate a loss if it were exercised today. However, as stated above, option contracts typically are valid for months or years, until the stated expiration date. The time value of the call option is the potential that the share price will rise over time and eventually exceed the option exercise price. Back to top

4 Employee Stock Options
Employee stock options are call options granted by an employer as part of an employee compensation plan. There are two main types of employee stock options: incentive stock options and nonqualified stock options. Incentive stock options offer special income tax benefits to the employee.
An incentive stock option (ISO) must meet a number of criteria to qualify for favorable tax treatment. As long as the shares acquired through an ISO are held for at least one year following exercise and are not disposed of until at least two years after the option is granted, the difference between the option price and the sale price is taxed as a long-term gain. The tax is applied at the sale of the stock. If you don't meet the one-year holding-period requirement, the transaction is considered a "disqualifying disposition" and your gains are taxed as ordinary income.
A nonqualified stock option (NSO) is an option that doesn't meet the ISO criteria. Gains on NSOs are taxed as ordinary income at the time of exercise.

OPTION TERMINOLOGY
Call option
An option that gives the option buyer the right to purchase the underlying security.
Exercise date
The date by which the option must be exercised.
Expiration date
The date that the option will expire (same as the exercise date).
Intrinsic value
The difference between the strike price and the current price of the underlying security.
Premium
An upfront fee paid by the option buyer to the option seller.
Put option
An option that gives the option buyer the right to sell the underlying security.
Strike price
The stated price at which the underlying security can be purchased or sold (also called the exercise price).
Time value
The component of an option's price that reflects the time left to expiration.
Volatility
The tendency of the underlying security to fluctuate in price.Back to top

5 Consider Option Strategies Carefully
Options are leveraged investments that can offer significant potential advantages and risks. As part of an overall investment strategy, put and call options may offer opportunities to temporarily alter the risk/return characteristics of a portfolio. Before investing in options, it is important to thoroughly understand the potential risks and benefits. You should consult a qualified tax advisor as to how option transactions may affect your tax situation. If you are an employee and have received stock options as employee compensation, you will want to carefully consider how exercise of your options may affect your cash flow and tax liability.Back to top

Summary
An option is a contract entitling the option purchaser to buy or sell the underlying stock at the stated exercise price. A call option gives the holder the right to buy the underlying stock; a put option gives the holder the right to sell the underlying stock.
The option purchaser's risk on the option is limited to the premium paid; the option seller's risk on the option is potentially unlimited.
A call option is valuable to the extent that the exercise price is below the market value of the underlying stock at the time you choose to exercise the option by buying shares. The time value of the option is the potential that the share price will rise over time and eventually exceed the option exercise price.
Employee stock options may be tax-qualified incentive stock options (ISOs) or nonqualified stock options (NSOs). If shares acquired through an ISO are held for at least one year following exercise and are not disposed of until at least two years after the option is granted, the difference between the option price and the sale price is taxed as a long-term gain. If you don't meet the one-year holding-period requirement, the transaction is considered a disqualifying disposition and your gains are taxed as ordinary income.
Before implementing an investment strategy using options or before entering into any equity arrangements with an employer, consult your tax advisor.

Checklist
Check the current share prices of the stocks associated with your stock options.
Confirm that you've met holding-period requirements before using employee stock options in order to qualify for more favorable tax treatment.
Conduct a comprehensive investment portfolio review to make sure that your options are part of a well-diversified overall asset allocation.
Consider meeting with a tax advisor or financial professional to understand how your options could affect your tax and investment strategies.

http://finance.yahoo.com/how-to-guide/career-work/12827;_ylt=Apv84a87_jfeohFOdDH4hya7YWsA#c1

One Billion Dollars

It is really impossible for someone to burn through even one billion dollars.

That is the equivalent of spending $25,000 per hour for ten years.

Investing that amount in T-Bills (1-2%) would guarantee you about $60-120k/day in living expenses.

What that means is that every hour you sleep, relax, shave, poop, or somehow fail to spend money, you delay running out of your $1B.


http://tpmmuckraker.talkingpointsmemo.com/2008/12/almost_since_the_news_broke.php

Let's hope we never see another one like it.

How Not to Ruin Your Life

Lessons from a Very Bad Year
by Ben Stein
Posted on Monday, December 22, 2008, 12:00AM

At last, this horrible year is almost behind us. Let's hope we never see another one like it.
If someone had told me that the market -- adjusted for inflation -- would be down by more than it was in the Great Depression while most Americans still basically had high prosperity, I wouldn't have believed it possible. It goes to show what stupendously bad Treasury stewardship can do.
If someone had told me Treasury and the Fed would allow the fourth- or fifth-biggest investment bank in America to fail, I would've scoffed. But they did it, and we got a stock market crash, a severe recession, and national fear as the result. The night Paulson and Bernanke let Lehman fail was the night they drove old American investors down.

Theoretical Failings
Meanwhile, we look to the future. And we try to learn from the past. What have we learned?
1. Efficient market theory is extremely limited as a market predictor in times like these. Efficient market theory says that at any given moment, the market price of all stocks reflects all that is known about them -- the price at any given moment is the best estimate of future price.
This is true as far as it goes. And, again, in most times, it goes very far. But in times when what is not known lurks below the waterline like the bottom of an iceberg, dwarfing what lies above and can be seen, efficient market theory is not only limited in effectiveness but downright dangerous.
It turned out that what lay waiting unknown to most of us -- and to the market -- was a wild miscalculation about the true liabilities associated with credit in this country. The true liability on subprime included staggering amounts of derivatives, a high multiple of subprime itself. Ditto for credit card debt, and now, as we're seeing, ditto for commercial mortgage debt.
Not only was that debt questionable, but players had added super-sized bets so big that the markets simply couldn't adjust to them without a serious correction.

Mr. Market Gets It Wrong
So efficient market theory is sunk. The problem is that we have nothing else to replace it except the predictions of many different analysts. Some are right and some are wrong, and they're usually not even close to being as helpful as Mr. Market.
But as my pal Jim Grant notes in his masterful new book, "Mr. Market Miscalculates: The Bubble Years and Beyond," the market is far from infallible and can lead the investor to disaster. Efficient market theory is highly fallible, but it may still be better than anything else.

Bye-Bye, Buy and Hold?
Another lesson to be drawn from this year:
2. Buy and hold as a strategy is very questionable, as my pal Robert Lobban says. It's worked in the past, but in times of severe market stress it just doesn't work. We've now gone 10 years -- many of which were banner years for profits -- without a gain in the broad indices. In some areas, such as REITs and commodities and energy and autos, the losses have been breathtaking.
But trading doesn't work well for most investors either. Even for the best hedge fund geniuses (and actually I don't consider them geniuses at all), trading has often been a catastrophe in the last 15 months.
So, what's the solution? Ben Graham, a real genius who mentored Warren Buffett, concluded near the end of his life that stocks were simply too risky and investors should only be in Treasury bonds.
My pal, Phil DeMuth, along with many others, has long said that investors should have half in bonds. He's right, but even bonds, except for Treasuries, have been whacked this year. But his approach is definitely the right one. Ray Lucia, a super-smart investment guru, says you should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement. This turns out to be a simply brilliant suggestion. Ray has a lot of them.
What we're left with is maybe that buy and hold is far from perfect, but if we have enough cash to get us through the bad times we might yet see it work. If not, one hardly knows what to suggest.

Historical Ignorance
The final lesson from 2008:
3. We can't count on the people who rule us to have learned a darned thing from past history. "Those who do not know the past are condemned to repeat it," said the famous Harvard philosopher George Santayana.
Of course, that's a cliche by now and has been for decades. But it is true of Henry Paulson, our pitiful Secretary of the Treasury and, very, very sadly, of Ben Bernanke, our Fed chairman.
Paulson is simply an ignorant, bullying fraud. I never expected much from him. But Bernanke is a scholar, or so I thought, and should've known better than to destroy confidence by allowing Lehman to fail. That was a mistake that no real student of the Great Depression, as Bernanke is, should've made. I would never have thought it could happen, but it did.
It makes me wonder what other mistakes and foolishness our rulers have in mind, and it scares me plenty.

Only Human
In the meantime, please don't blame yourself for your losses. We all make mistakes, yours truly especially. My hat is off to those like Doug Kass who saw it all coming. My hat is not off to those who claimed afterward to have seen it coming. I have met so many people who tell me they sold out in October 2007 that I think I must be the only person left in this country with any stock. (That would make me by far the richest man on the planet, and I guarantee that I'm not.)
We're just human beings with human failings. Efficient market theory fooled us. Buy and hold fooled us. Trust in government fooled us. My own failings fooled me. Something else will fool us next time. As my grandmother used to say when her children made a mistake, "Don't worry, you'll do it again." If we learn even a little from what's happened, we're far ahead of Henry Paulson.
In that spirit, have a Merry Christmas, Happy Hanukkah, and Happy New Year.

http://finance.yahoo.com/expert/article/yourlife/130751;_ylt=AgwC136V7Ufr00HLQkr3Mku7YWsA

Buying low, selling lower!

Kerkorian sells off Ford shares at deep loss


Reuters – Billionaire investor Kirk Kerkorian leaves the Roybal Federal Building in Los Angeles August 20, 2008. …

DETROIT (Reuters) – Billionaire investor Kirk Kerkorian has sold off all of his remaining shares of Ford Motor Co, completing a retreat from a high-profile stake in the No. 2 U.S. automaker that cost him hundreds of millions of dollars.
A spokeswoman for Kerkorian's investment firm, Tracinda Corp, said that the firm's remaining Ford shares had been sold. A spokesman for Ford had no comment on the development.
Tracinda, which briefly ranked as Ford's largest outside investor, said in a regulatory filing in October that it had begun working with bankers to sell the 133.5 million shares of the No. 2 U.S. automaker it still held at that time.
It was not immediately clear when Tracinda had completed those remaining sales of Ford stock over the past two months.
The pullout from Ford by Kerkorian caps a two-year period during which the activist investor took a run at all three Detroit-based car companies as they struggled to restructure.
Kerkorian, 91, previously held a nearly 10 percent stake in General Motors Corp and made a failed bid for Chrysler LLC last year.
Since October, he has been cutting his losses on a $1 billion investment in Ford that had lost most of its value.
It was not immediately clear how deep Kerkorian's losses on the Ford investment were. But even if Tracinda sold all its remaining shares at the recent high for Ford stock, the firm would have been facing a loss of some $475 million based on its average acquisition cost for the shares.
If the firm had sold out at the bottom of the market for Ford stock in November, it would have lost more than $800 million.
Kerkorian surprised analysts and investors in April when he began buying Ford shares and spent more than $1 billion to take a stake in the automaker at an average price per share of $7.10.
At the peak of his investment, Kerkorian held a 6.5 percent stake in Ford. In June, he had also offered to support the automaker's turnaround efforts with an infusion of additional capital.
Ford has been widely considered to be the best-positioned of the three Detroit automakers at a time when all three have been hit hard by declining sales and tight credit.
When GM and Chrysler negotiated $17.4 billion of emergency loans from the U.S. government earlier this month, Ford held back, saying it expected to be able to weather the downturn on its own.
But conditions across the auto industry have taken a dramatic turn for the worse since September when credit suddenly tightened for both car shoppers and dealers.
In late October, Tracinda began selling Ford shares at $2.43, representing a loss of almost 66 percent from what the fund paid on average.
Since then, Ford's shares have traded between a low of $1.02 in November and a high of $3.54 earlier this month.
Ford shares closed down 3 percent on Monday to end the New York trading day at $2.22.
The Ford family holds slightly less than 3 percent of the automaker's shares but controls 40 percent of the voting power through a separate class of shares.
Kerkorian's offer of additional capital for Ford had been seen as an endorsement of the company's strategy and management under Chief Executive Alan Mulally.
But Kerkorian's record as an activist investor had also raised questions earlier this year about whether his investment could be a threat to the Ford family's continued control of the automaker.
(Reporting by Kevin Krolicki; editing by Phil Berlowitz and Matthew Lewis).

http://news.yahoo.com/s/nm/20081229/bs_nm/us_ford_kerkorian

What are you doing with your money?

Fear Index

What are you doing with your money?

1. I'm buying stocks while they are cheap.
2. I'm staying put in the market for the long-term.
3. I'm taking some money out of stocks. I don't want to risk everything.
4. I'm selling all stocks and moving to CDs.
5. I'm in a panic. Where's the nearest mattress?

http://finances.about.com/

Best Moves in a Bad Economy

What Type of Financial Adviser do You Need?

What Type of Financial Adviser do You Need?
Part Two of Series
By Ken Little, About.com

See More About:
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Do you need the services of a professional financial adviser? Many people find that having a professional look at their total financial picture and bring it in focus is a valuable service.
As I discussed in part one of this two-part series, people often turn to financial advisers when they don’t have the time, energy or talent to manage a complex financial life.
If you think the services of a professional sound like something you could use, the next question becomes which type of adviser do you pick.
Generally, who can classify financial advisers two ways:
How they are compensated
Professional designations

How they are Compensated

There are three basic ways you compensate financial advisers for their work. Each of the three methods has some good points and some weaknesses. In the end, you should choose the adviser you feel will do the best job for you and worry less about the method of compensation. The compensation methods are:

Fee Only
The fee-only adviser develops a comprehensive plan that lays out how you can reach your financial goals. However, it leaves the actual execution of the plan to you. The adviser doesn’t sell any products or services other than the plan itself.
The strong points of fee-only financial advisers are:
Comprehensive plan – Fee-only advisers usually produce the most comprehensive plan since this is their sole product.
Objective recommendations – Since the fee-only advisers make no money off sales of any products, their recommendations are not driven by potential commissions.
Customer interaction – Fee-only advisers are more likely to spend time educating customers on various aspects of the plan since it will be up to the customer to execute the plan.
The weak points of fee-only financial advisers are:
Cost – Fee-only advisers charge more than other types of advisers since they do not take any other form of compensation.
Execution – Some customers find they are not much better off with a plan in their hand if they have to perform the execution also.
Updating – As things change, the plan needs updating, which may involve additional costs.

Fee and Commission or Percentage of Assets
The second method of compensation of financial advisers includes a fee and commissions. The fee, which is usually substantially less than what a fee-only adviser would charge covers the cost of building the plan and commissions cover the cost of execution.
A variation on this compensation plan involves an annual fee based on a percentage of assets in your accounts. The fee compensates the adviser for monitoring your investments and making recommendations.
The strong points of fee plus commission advisers are:
Plan development – The fee plus adviser develops a plan for the customer that lays out suggested strategies for reaching the customer’s goals.
Execution – Because the fee plus adviser receives compensation from executing the plan, the adviser is there to execute the plan.
Multiple products – The fee plus adviser often sells or has access to multiple products such as insurance in addition to investments, so much of they can do much of execution.
The weak points of fee plus commission adviser are:
Objectivity – There is always the question of how objective the advice will be when it results in a commission for the financial adviser.
House products – Fee plus advisers may push house products (certain mutual funds or life insurance products, for example), which may not be the best choice for your particular situation.
High-price products – There is a danger the fee-plus adviser will pick products for your plan that pay higher commissions over other equally good, but lower commissioned products.

Commission Only
The third method of compensation is commission only. The financial adviser receives their only compensation from products they sell you.
I think you can see the inherent problem with this arrangement – it is in the adviser best interest to sell you something. A person who works on a commission only basis is a salesperson.
However, this is not to say that you can’t work with someone on this basis. It will depend on the individual and your relationship.

Who is a Financial Adviser?
In many states there are no strict regulations regarding the terms “financial adviser” or “financial planner,” meaning anyone can print up business cards using those terms. However, several professional designations are protected.
The top designations you should look for are:
Certified Financial Planner (CFP) – This is the top of the line in terms of professional designations. Before an adviser can carry this designation, they must complete three years of work in financial planning, take a course of study and pass a comprehensive set of examinations. They must also meet certain ethical and educational standards.
Chartered Financial Consultants (ChFC) – Take courses of study on personal finance and pass exams.
Certified Public Accountant (CPA) – CPAs must pass exams on accounting and tax preparation to win the designation. However, you want CPA who has also been awarded the designation Personal Finance Specialist.
Other designations and some explanations of financial planning terms can be found at this site on financial credentials.

Conclusion
If you decide to use a professional financial adviser, the most important considerations are the person’s integrity and your relationship.
Method of compensation and other factors are secondary to establishing a level of trust that will allow you to work with the adviser in confidence.

http://stocks.about.com/od/findingabroker/a/Finadvis121404.htm

Do You Need a Financial Adviser?

Do You Need a Financial Adviser?
Part One of Series
By Ken Little, About.com

See More About:
financial advisor
allocate resources
estate planning
retirement planning
financial goals

Buy high and sell low. To borrow an old retail saying, “you can’t make a profit on volume” trading stocks that way.
Some investors find that they don’t have the time, energy or talent to research and identify stocks for their portfolio, much less manage their money effectively. Their needs go beyond the scope of a stock broker - they may need the services of a qualified financial adviser.
In this two-part series, I’ll look at what a financial adviser can do for you and discuss the different types of financial advisers and how they work with you. This article covers what benefits you can expect from a financial adviser.
A good financial adviser will work with you to develop a game plan that fits your financial circumstances and tailors a plan to accomplish your goals.
Some people find that they are more comfortable doing their “own thing” and don’t want to spend the money a good adviser may cost.
On the other hand, many people gladly turn over the details of developing a financial plan to an expert.
What Financial Advisers Do
Most financial advisers want to look at your whole financial picture – all your income and liabilities. They want a complete picture of where you are financially so they can draw a map from where you are to where you want to go. Here are some of the benefits of using a financial adviser:
The Big Picture – A financial adviser will develop a comprehensive profile of your financial status. This profile will identify areas of strengths and weakness.
An Unemotional Assessment – The financial adviser will give you an unemotional assessment of what needs to be done. Money is an emotional topic for many people, which often leads to bad decisions.
Allocate Resources – It is likely you have competing priorities, such as sending the kids to college while building a retirement fund. A financial adviser can help you allocate resources so both goals receive the appropriate share of dollars.
Minimize Taxes – Most investment decisions carry some type of short or long-term tax implication. Your adviser can help you shape your investments in a manner that keeps taxes to a minimum and more of your dollars invested.
Estate Planning – Careful planning will help ensure that your estate passes to loved ones in a manner that protects as much of its value as possible. In broad terms, your adviser will cover these areas. More specifically, your adviser will focus on these areas:
Retirement accounts such as 401(k)s, IRAs, and so on
Insurance including medical, life, disability, liability
Educational goals for how many children at what ages
Taxes both personal and business if self employed or own a business
Other financial goals such as second home, buy a business, retire early
The Plan
Depending of the type of financial adviser you use, you will get some form of financial plan that details the findings of the adviser and provides a blueprint to reach your goals.
The plan may include options to reach your goals that involve different levels of commitment on your part (read that dollars).
Conclusion
In the second part of this series, I’ll look at how different financial advisers execute their plans and how much their services cost.
Financial advisers come in variety of flavors, each with their strong points. The second part of this series examines how these financial advisers differ in execution and compensation.

Understanding Bear Markets

Understanding Bear Markets
What they are, how they work, and what they mean for your investments

Last year, I wrote an article called "Understanding a Bear Market". The first sentence read, "If you've only begun investing in the past few years, you aren't aware of what a bear market is." Unfortunately, that isn't the case anymore. In the past few months, Wall Street has reeled, stumbled, picked up speed, fallen on its side, and gone in circles. Professional and average investors alike have no idea where the market is headed, but everyone seems to have an opinion.
In light of the recent events on Wall Street, here's an update to that article.

What is a bear market and what causes them?

By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market. This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation [i.e., stocks were way too expensive and needed to fall to more reasonable levels]. Investors who are scared by these lower earnings or lofty valuations sell their stock - causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well... and the vicious cycle begins.
One of the best examples of such an unfriendly market is the 1970's, when stocks went sideways for well over a decade. Experiences such as these are generally what scare would-be investors away from investing [which, ironically, keeps the bear market alive... since there are no buyers purchasing investments, the selling continues.]

How do they affect my investments?

Generally, a bear market will cause the securities you already own to become undervalued. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: What you already own is worth less [according to the market.]

This leads to two fundamental truths:
1.) A bear market is only bad if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friend of the long-term investor.
In other words, if you invest with the intent to hold your investments for years down the road, a bear market is a great opportunity to buy. [It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?]

So what do I do with my money in a bear market?

The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused Gillette's stock price to fall 30%, people are still going to buy razors. The basics of the business haven't changed.
This proves the third fundamental truth of the market:
3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.
When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store... load up on it while you can, because before long, the prices will go back up to normal levels.

Copyright © 2002 Joshua Kennon

http://beginnersinvest.about.com/library/weekly/n031701.htm

Bull and Bear Stock Markets Two Sides of Same Coin

Bull and Bear Stock Markets Two Sides of Same Coin
By Ken Little, About.com

Bull and bear stock markets are two sides of the same coin.
Long-time investors know that bear markets are setting up the next bull market.
They also know that bull markets don’t run forever.
The longest running bull market ever was from 1990 – 2000.

Bull or Bear Market
It is impossible to know when a bull or bear market is officially over except through the 20-20 vision of history.
All bull and bear markets will exhibit periods that look like reversals, but are just momentary before the bull or bear regains control.
We now know that the bull market ended in March 2000, but at that moment, it wasn’t clear the party was over.
The three-year bear market that followed was pushed by the tragedy of 9/11 and a recession.

Bottom of Market
CNN pointed out that the Dow bottomed out at 776 in October of 2002.
From that point, the market has gone on to record heights.
Long the way, there have been some significant dips, but followed by a continuation of strong upward pressure.
This is all easy to see now, but when you are gasping for air as your portfolio value plummets, it’s not so easy to step back for perspective.
In the end, good companies have a better chance of weathering storms the sweep the market and the economy.

Necessary Bears
Bear markets perform the necessary service of deflating values and sweeping the market clean of stocks that are weak and riding on fads alone.
Your faith in solid fundamentals will usually pay off over time, but even a great company’s stock can get banged around in a tough market.
The lesson here is that stocks, as illustrated by the Dow, are good long-term investments, but dangerous short-term bets.

Comment: According to Suze Orman, we are in a secular bear market starting from the year 2000. She opines this will last 15 years. In between 2000 and 2015, there will be the occasional cyclical bull market lasting a few months to a few years.

See More About:
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How to Start Trading Stocks
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Don't be too Conservative with Stocks in Retirement
Avoiding Pump and Dump Scams
How Much Help do You Need from Your Broker?
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http://stocks.about.com/od/understandingstocks/a/1009bull.htm

The Sin in Doing Good Deeds

Fred R. Conrad/The New York Times
Nicholas D. Kristof


Op-Ed Columnist
The Sin in Doing Good Deeds



new_york_times:http://www.nytimes.com/2008/12/25/opinion/25kristof.html
if (acm.cc) acm.cc.write();

By NICHOLAS D. KRISTOF
Published: December 24, 2008
Here’s a question for the holiday season: If a businessman rakes in a hefty profit while doing good works, is that charity or greed? Do we applaud or hiss?
A new book, “Uncharitable,” seethes with indignation at public expectations that charities be prudent, nonprofit and saintly. The author, Dan Pallotta, argues that those expectations make them less effective, and he has a point.
Mr. Pallotta’s frustration is intertwined with his own history as the inventor of fund-raisers like AIDSRides and Breast Cancer 3-Days — events that, he says, netted $305 million over nine years for unrestricted use by charities. In the aid world, that’s a breathtaking sum.
But Mr. Pallotta’s company wasn’t a charity, but rather a for-profit company that created charitable events. Critics railed at his $394,500 salary — low for a corporate chief executive, but stratospheric in the aid world — and at the millions of dollars spent on advertising and marketing and other expenses.
“Shame on Pallotta,” declared one critic at the time, accusing him of “greed and unabashed profiteering.” In the aftermath of a wave of criticism, his company collapsed.
One breast cancer charity that parted ways with Mr. Pallotta began producing its own fund-raising walks, but the net sum raised by those walks for breast cancer research plummeted from $71 million to $11 million, he says.
Mr. Pallotta argues powerfully that the aid world is stunted because groups are discouraged from using such standard business tools as advertising, risk-taking, competitive salaries and profits to lure capital.
“We allow people to make huge profits doing any number of things that will hurt the poor, but we want to crucify anyone who wants to make money helping them,” Mr. Pallotta says. “Want to make a million selling violent video games to kids? Go for it. Want to make a million helping cure kids of cancer? You’re labeled a parasite.”
I confess to ambivalence. I deeply admire the other kind of aid workers, those whose passion for their work is evident by the fact that they’ve gone broke doing it. I’m filled with awe when I go to a place like Darfur and see unpaid or underpaid aid workers in groups like Doctors Without Borders, risking their lives to patch up the victims of genocide.
I also worry that if aid groups paid executives as lavishly as Citigroup, they would be managed as badly as Citigroup.
Yet there’s a broad recognition in much of the aid community that a major rethink is necessary, that groups would be more effective if they borrowed more tools from the business world, and that there is too much “gotcha” scrutiny on overhead rather than on what they actually accomplish. It’s notable that leaders of Oxfam and Save the Children have publicly endorsed the book, and it’s certainly becoming more socially acceptable to note that businesses can also play a powerful role in fighting poverty.
“Howard Schultz has done more for coffee-growing regions of Africa than anybody I can think of,” Michael Fairbanks, a development expert, said of the chief executive of Starbucks. By helping countries improve their coffee-growing practices and brand their coffees, Starbucks has probably helped impoverished African coffee farmers more than any aid group has.
Mr. Fairbanks himself demonstrates that a businessman can do good even as he does well. Rwanda’s president, Paul Kagame, hired Mr. Fairbanks’s consulting company and paid it millions of dollars between 2000 and 2007.
In turn, Mr. Fairbanks helped Rwanda market its coffee, tea and gorillas. Rwandan coffee now retails for up to $55 a pound in Manhattan, wages in the Rwandan coffee sector have soared up to eight-fold, and zillionaires stumble through the Rwandan jungle to admire the wildlife. President Kagame thanked Mr. Fairbanks by granting him Rwandan citizenship.
There are lots of saintly aid workers in Rwanda, including the heroic Dr. Paul Farmer of Partners in Health, and they do extraordinary work. But sometimes, so do the suits. Isaac Durojaiye, a Nigerian businessman, is an example of the way the line is beginning to blur between businesses and charities. He runs a for-profit franchise business that provides fee-for-use public toilets in Nigeria. When he started, there was one public toilet in Nigeria for every 200,000 people, but by charging, he has been able to provide basic sanitation to far more people than any aid group.
In the war on poverty, there is room for all kinds of organizations. Mr. Pallotta may be right that by frowning on aid groups that pay high salaries, advertise extensively and even turn a profit, we end up hurting the world’s neediest.
“People continue to die as a result,” he says bluntly. “This we call morality.”



I invite you to comment on this column on my blog, On the Ground. Please also join me on Facebook, watch my YouTube videos and follow me on Twitter.

A Money Story

A Money Story
Finally, I want to share a story told by Sister Maria Jose Hobday, a Franciscan nun and author who has written and lectured internationally for 30 years on Native American spirituality, prayer, and simplicity. In the 1930s, her family was living on the edge of poverty:
"One Saturday evening I was working late on my homework. I was in the living room, my brothers were outside with their friends, and my parents were in the kitchen, discussing our financial situation. It was very quiet, and I found myself more and more following the kitchen conversation rather than attending to my homework. Mama and Daddy were talking about what had to be paid for during the week, and there was very little money -- a few dollars.
"As I listened, I became more and more anxious, realizing there was not enough to go around. They spoke of school needs, of fuel bills, of food. Suddenly the conversation stopped, and my mother came into the room where I was studying. She put the money -- a couple of bills and a handful of change -- on the desk. ‘Here,' she said, ‘go find two or three of your brothers and run to the drugstore before it closes. Use this money to buy strawberry ice cream.' I was astonished! I was a smart little girl, I knew we needed this money for essentials. So I objected. ‘What? We have to use this to pay bills, Mama, to buy school things. We can't spend this on ice cream!' Then I added, ‘I'm going to ask Daddy.' So I went to my father, telling him what Mother had asked me to do. Daddy looked at me for a moment, then threw back his head and laughed. ‘You mother is right, honey,' he said. ‘When we get this worried and upset about a few dollars, we are better off having nothing at all. We can't solve all the problems, so maybe we should celebrate instead. Do as your mother says.'
"So I collected my brothers and went to the drugstore. In those days, you could get a lot of ice cream for a few dollars, and we came home with our arms full of packages. My mother had set the table, made fresh coffee, put out what cookies we had and invited the neighbors. It was a great party! I do not remember what happened concerning other needs, but I remember the freedom and fun of that evening. I thought about that evening many times, and came to realize that spending a little money for pleasure was not irresponsible. It was a matter of survival of the spirit. The bills must have been paid; we made it through the weeks and months that followed. I learned my parents were not going to allow money to dominate them. I learned something of the value of money, of its use. I saw that of itself it was not important but that my attitude toward it affected my own spirit, could reduce me to powerlessness or give me power of soul."
Wishing you power of soul in abundance in the New Year.

http://finance.yahoo.com/expert/article/moneyhappy/131034;_ylt=AvjGsuP3u0cFDXOeOmx8biS7YWsA