Risk-free rate

VALUE INVESTING APPROACH TO RISK AND RATES

The “risk-free rate” can be estimated by reference to U.S. government securities, loans investors make to the U.S. Treasury.

The U.S. Treasury is seen as the purest credit risk in the world, committed to paying its debts when due without fail. Hence, yields on U.S. Treasury debt are considered the benchmark for valuing all other assets, including corporate debt and equities.

Corporate debt bears greater risk than U.S. Treasury debt. In corporate bankruptcy, debt is paid before common stock, so the common stock of a company carrying debt bears a greater risk than that debt.

Selecting a risk-free rate requires judgment based on various factors. Such factors include:

• bond maturity,
• reference date or time frame, and
• reference source.

Possible sources include the rate disclose in the company’s own public filings. This is a non-arbitrary choice, reflecting the rate the company uses for its internal purposes and considered sufficiently material to disclose in its public filings.

Other customs include using 30-year bonds to reflect the long-term character of the investment in a corporation.

When valuing a business as a going concern, following the daily, weekly, or monthly movements in the U.S. Treasury market introduces distorting valuation volatility into the exercise. Business value does not move in tandem with daily or even monthly fluctuations in Treasury rates. Avoiding the sensitivity to short-term fluctuations in treasury rates can be done by averaging rates over the preceding year or so.

To the risk-free is added an amount reflecting risks associated with a particular investment. This produces the discount rate to apply to determine the present value of an asset. For a business with debt and equity in its capital structure, this is commonly called the weighted average cost of capital (WACC).


Also read:

1. Understanding Discount Rates
2. Risk-free rate
3. Traditional Method: Discount rate or WACC (I)
4. Traditional Method: Discount rate or WACC (II)
5. Modern Portfolio Theory
6. Portfolio Theory: Market Risk Premiums
7. Portfolio Theory: Beta
8. Is the market efficient, always?
9. Discount Rate Determinations: Summary

Understanding Discount Rates

Discount Rates

Choosing an appropriate discount rate (or cost of capital) is necessary to determine present value, whether measured by current earnings or a more elaborate discounted cash flow model.

The discount rate must reflect

• the time value of money and
• the specific risks associated with te individual company.

Equity is riskier than debt, so the discount rate for a given company will be some increment above the prevailing rates at which any debt it has outstanding are being discounted. The challenge is determining how much greater.

Conceptually, think of the discount rate as the rate of return a prudent investor would require for allocating capital to the subject company

A high-risk venture would warrant a proportionately high discount rate; a sure thing, a rate probably equal to the time value of money.

The surest investments in contemporary investing are U.S. government securities. These furnish the risk-free rate.

Appropriate discount rates for most corporate equity will take U.S. government securities as the starting point and add an additional element.

Considered below are two alternative conceptual approaches to thinking about and settling upon an appropriate discount rate,

• one traditional and
• one from modern finance theory.

Also read:

1. Understanding Discount Rates
2. Risk-free rate
3. Traditional Method: Discount rate or WACC (I)
4. Traditional Method: Discount rate or WACC (II)
5. Modern Portfolio Theory
6. Portfolio Theory: Market Risk Premiums
7. Portfolio Theory: Beta
8. Is the market efficient, always?
9. Discount Rate Determinations: Summary

Cash Flow Statement Value

Also read:

1. Cash Flow Statement Value
2. Discounted Cash Flow valuation method
3. Hazards of the Future and Limitations of DCF

Hazards of the Future and Limitations of DCF

Hazards of the future and limitations of DCF

The process of estimation and discounting is intended to recognize the hazards of the future by incorporating into the cash flow estimates the onslaughts of:

• competition,
• technology,
• patent expiration,
• deregulation,
• globalization, and
• other upheaval.

This entails close examination of factors such as sales, margins, and cap-ex.

Likewise, the discount rate is intended to capture the effects on capital costs of:

• long-term financing markets,
• lender appetites for the company’s securities, and all such underlying risks.

But all these variables are by definition unknown, uncertain, and difficult to quantify. In the math, moreover, tiny differences in the assumptions drive substantial differences in resulting valuations.

Among the largest component of resulting value in this model is the value assigned to the horizon (the perpetuity piece beyond the 5- or 10-year mark). Its derivation is a function of assumed growth rate and assumed cost of capital. At estimates of 5 percent and 10 percent, as noted, the multiple is 20; tweak these and enormous ranges emerge.

Even so, the discounted cash flow valuation model is the most widespread model in contemporary valuation.

• Some value investors use it, at least in part.
• Others eschew it entirely.

Both groups look instead to assets and earnings measures deemed more reliable than cash flows to come to grips with valuation.


Also read:

1. Cash Flow Statement Value
2. Discounted Cash Flow valuation method
3. Hazards of the Future and Limitations of DCF

Discounted Cash Flow valuation method

Discounted Cash Flow valuation method

Despite these points about cash flows, the most popular contemporary approach to valuation emphasizes cash flows pure and simple. Called discounted cash flow (DCF) analysis, the method also presents a number of choices an analyst must make.

EBIT and EBITDA: Cash flows can be measured in alternative ways. Chief examples are operating income (earnings before interest and taxes, called EBIT) and operating income plus the noncash expenses of depreciation and amortization (called EBITDA). Devotees of discounted cash flow valuation analysis rarely use accounting-driven metrics such as operating income.

DCF valuation for a medium-term period, typically 5 to 10 years.

Once cash flows are defined using one of these metrics, the discounted cash flow valuation method estimates them for a medium-term period, typically 5 to 10 years.

The estimate entails examining a range of performance variables that drive cash flows, chiefly sales levels, profit margins, and required reinvestment in the business through capital expenditures (cap-ex).

With cash flows projected, the method discounts each year’s estimate by a discount rate intended to reflect the subject company’s cost of capital during the period.

Each year’s discounted result is added to all others to produce a preliminary valuation of the 5- or 10- year period.

DCF valuation for period beyond the medium term, to yield the perpetuity amount.

For cash flows beyond the medium term, an additional step estimates the further cash expected in perpetuity, at a constant growing rate. This is typically done by estimating the final year’s cash flows and multiplying it by some figure to yield the perpetuity amount.

The figure is determined by the relationship between the assumed growth rate and the relevant cost of capital at that horizon period.

It is equal to 1 divided by the difference between these rates – so with a cost of capital of 10 percent and a growth rate of 5 percent, the multiplier is 20 determined by 1/ (10 percent – 5 percent).

Overview

The requisite math is elegant, easy, superficially scientific and seemingly objective. The raw data is estimated, just as easily, but substantially artistic and actually subjective. Underscore the heroics:

• cash flows estimated for 5 or 10 years,
• cash flows in perpetuity,
• discount rates going out 10 years plus, and
• a growth rate on top of that in perpetuity.

Also read:

1. Cash Flow Statement Value
2. Discounted Cash Flow valuation method
3. Hazards of the Future and Limitations of DCF

Cash Flow Statement Value

Cash flow based valuation techniques (DCF analysis): High Subjectivity

The reason value investing emphasizes the balance sheet and income statement is that to resort solely to the cash flow statement can be deceptively simple.

Cash flows alone disguise important metrics. Cash is not exactly the bottom line. True, cash flows drive value, but some portion of cash flows will be needed to reinvest in capital resources necessary to sustain business production and results.

Thus to arrive at a cash flow figure by adjusting net income for noncash expenditures is only a partial step. Step two is to further adjust that figure by probable future cash commitments to capital expenditures.

Step 1: Adjust earnings for noncash charges
Suppose a company generates net income of $1 million. Part of the expenses recorded to generate the $1 million consisted of net noncash charges of $200,000. Cash flow is thus $1.2 million. That is step one.

Step 2: Free cash flows
Then this figure must be adjusted to reflect the amount the company will need to disburse in cash to maintain its property, plant and equipment at levels sufficient to sustain business productivity. Suppose this figure is either $0.1 million or $0.3 million. Adjusted, cash flows are now either $0.9 million or $1.1 million. This is the bottom line figure, and may be called free cash flows. (Buffett calls it owner earnings to designate that these are the free flows of results allocable to the common stock.)

Too often analysts fail to take this additional step of adjusting for the probable costs of required reinvestment. It would be more accurate for these analysts simply to stick with the net income figure. After all, the noncash charges to earnings that produce the net income figures are at least, in part, intended as a proxy to estimate such required reinvestment.

In this example, the bookkeeping allocation of noncash charges of $0.2 million may be as reasonable an estimate of required cash reinvestment as the separate estimates of either $0.1 million or $0.3 million. But zeroing in on this figure is a crucial value investing exercise.

Also read:

1. Cash Flow Statement Value
2. Discounted Cash Flow valuation method
3. Hazards of the Future and Limitations of DCF

Income Statement Value

Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

GROWTH'S VALUE (illustrations)

Take an example drawn from Bruce Greenwald’s detailed book on value investing.
Suppose that earnings are $32. An analyst determines it would cost $20 to grow earnings by 10 percent forever. So you can have either:
· $32 forever with no growth, or,
· $12 ($32 - $20) growing at 10 percent forever.
Which is better, no growth or growth?
It depends on the cost of capital.

Use the following standard valuation formula:
V = D1 / (k-g)
This formula is a variation on the V = D/k when discussing current earnings, giving effect to same rate of growth designated by g.

Illustrations:
k=cost of capital=20%, 16% or 14%
g=growth=0% or 10%

Scenario 1: $32 forever with no growth
k=20%, 16% or 14% and g=0%
V=32/(0.20 – 0)= $160
V=32/(0.16 – 0)=$200
V=32/(0.14 – 0)= $229

Scenario 2: $12 ($32 - $20) growing at 10 percent forever.
k=20%, 16% or 14% and g=10%
V=12/(0.20 – 0.10)= $120
V=12/(0.16 – 0.10)=$200
V=12/(0.14 – 0.10)= $300

Note:

1. The higher the cost of capital, the lower is the return on capital (valuation) and vice versa.
   
2. With a 20-percent cost of capital, $32 forever with no growth ($160) is better than $12 growing at 10 percent forever ($120). Thus, growth subtracts value when the cost of capital exceeds the return on capital.
   
3. With a 16-percent cost of capital, $32 forever with no growth ($200) is the same as that of $12 growing at 10 percent forever ($200). Growth is neutral to value when the cost of capital equals the return on capital.
   
4. With a 14-percent cost of capital, $12 growing at 10 percent forever ($300) is better than $32 forever with no growth ($229). Thus, growth adds value when the return on capital exceeds the cost of capital.
   

This illustration proves the powerful insight:

When capital costs equal capital returns, growth neither adds nor subtracts value, no matter how much or how little growth there is. The reason is intuitive: If an investor putting in new capital charges the same rate that capital generates, then there is no additional return available to prior investors.

To come full circle, growth is not free.

1. If a company can attract capital at a cost lower than returns it generates, growth adds value.
2. If it attracts capital at a cost higher than what it generates, growth subtracts value.
3. If the cost of capital is the same as the return on capital, growth is neutral to value.

The only businesses in the first category are those possessing franchise characteristics. The only way to capture returns on capital greater than the cost of capital is to keep competitors out. If competitors can get in, capital costs and returns will soon converge upon each other (or worse, capital costs will exceed capital returns).

Before turning to examining cash-flow based valuation techniques, note two crucial points:
(1) Assets drive earnings and cash flows, and
(2) Assets are analytically more important than either.

As to point (1):

• for most businesses, asset value exceeds earnings value;
• businesses whose earnings value exceeds asset value possess franchise characteristics. This implies the ability to sustain high returns on equity (high earnings relatives to net assets).
  

As to point (2),

• data reliability varies.
• Balance sheet data tend to be most reliable for valuation exercises, then income statement data concerning current earnings.
• Properly estimated cash flows are probably less than earnings, though many contemporary analysts draw the opposite conclusion by ignoring important noncash charges to income such as depreciation.

Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

GROWTH'S VALUE

GROWTH’S VALUE

Growth is not free.

Its price is the cost of capital necessary to support it.

Growth adds value only when the return on capital exceeds the cost of capital.

When capital costs equal capital returns, growth neither adds nor subtracts value, no matter how much or how little growth there is. The reason is intuitive: If an investor putting in new capital charges the same rate that capital generates, then there is no additional return available to prior investors.

Therefore:

1. If a company can attract capital at a cost lower than returns it generates, growth adds value.
   
2. If it attracts capital at a cost higher than what it generates, growth subtracts value.
   
3. If the cost of capital is the same as the return on capital, growth is neutral to value.

The only businesses in the first category are those possessing franchise characteristics. The only way to capture returns on capital greater than the cost of capital is to keep competitors out.

If competitors can get in, capital costs and returns will soon converge upon each other (or worse, capital costs will exceed capital returns).

To come full circle, growth is not free.


Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

Franchise Value

FRANCHISE VALUE

Franchise businesses are those boasting
· barriers to entry and
· other competitive advantages
that make it too costly for new entrants to join.

1. Strong brands can help, so long as competitors cannot match them.
Examples include at least for some period of time those products bearing names synonymous with the goods, such as Coke, Kleenex, Hoover (in its days), Harley-Davidson (to some extent), and others.

2. Techniques producing franchise value include
· patents,
· exclusive licenses,
· know-how, and
· secret formulae.
· Generally high fixed-costs of entry also help.

3. Common elements of franchise businesses include
· high costs to consumers of switching away from the target’s own product in favor of products sold by competitors,
· high costs to consumers of seeking out such alternatives, and
· habits commanding consumer loyalty.

4. Foes of the franchise power are constraints competitors can evade. Examples are
· a unionized labor force,
· burden-some distribution arrangements, or
· limitations on an entity’s adaptability in the face of change.


Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

Estimating Growth in Value Investing

Estimating Growth in Value Investing
Avoid using valuation based on growth estimates

Another reason for pure value investing’s aversion to valuation based on growth estimates is that growth’s potential value can be ascertained using other accounting tools not requiring estimates.

This involves comparing valuation estimates using earnings with those using assets.

Three possibilities arise: The valuations are the same or one or the other is higher.

1. Earnings value = Asset value
When they are the same, growth bears no value as just noted.

2. Asset value > Earnings value
When asset value exceeds earnings value, managers are deploying assets sub-optimally, either due to ineptitude or excess industry capacity. No value resides there.

3. Earnings value > Asset value
When earnings value exceeds asset value, it is due to competitive advantages or barriers to entry, and these clues indicate potential value in growth. This indicates a company possessing franchise value. One measure of that value is the excess of earnings value over asset value. It is captured in the expression return on equity. This economic goodwill makes companies value investor candidates.


Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

Avoid Extrapolated Future Earnings Growth figures

Avoid assumptions about extrapolated growth in future earnings
Assumptions about growth in future earnings extrapolated from current or past earnings are unreliable for a valuation exercise.

Also suspect for pure value investors are assumptions about growth in future earnings extrapolated from current or past earnings.

Unlike extreme devotees of growth investing, value investors consider current earnings – adjusted as described – to be the best estimate of sustainable future cash flows.

A key reason to deny estimated and unknown earnings growth is that absent sustainable competitive advantages or barriers to competitor entry, growth lacks value.

If new entrants can join a company’s industry as equal competitors, the effect drives a company’s returns to just equal their costs – no upside is sustainable so growth adds nothing.

Growing a business measured in sales requires growing the business measured in assets. Growing assets requires capital, which also poses a cost. Facing competitive entrants, the process goes nowhere (except remotely due to luck and temporarily – benefits value investors do not pay for).


Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

Avoid Pro Forma financial figures

Avoid Pro forma financial figures
Pro forma financial figures are unreliable for a valuation exercise

Value investing eschews pro forma financial figures.

These are pictures of performance based on making various assumptions other than those applied in preparing actual financial statements.

While useful for certain exercises such as depicting how a newly merged company would have looked if the merger had occurred some years earlier, they do not represent useful valuation resources in other contexts.

Pro forma figures are the least reliable data in financial reporting and are invariably unreliable for a valuation exercise.


Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

Adjustments in Current Earnings figure

Adjusting current earnings figure

Valuation based on current earnings is equal to current earnings divided by the company’s current cost of capital.

V = E/k
E = Earnings.
k = The cost of capital.

Apart from estimating the cost of equity capital, earnings-based valuation relies on some accounting judgments to confirm the integrity of current earnings.

The exercise may call for adjustments in the reported figures to render the current earnings figure the best estimate of the company’s sustainable long-term cash flows.

Distortion caused by one-time charges
Among justifications for adjusting current earnings is the distortion caused by one-time charges. Companies sometimes bury bad news affecting multiple years into a single charge and dismiss the result as a nonrecurring episode. Adjusting for this practice requires reallocating the one-time charge across multiple periods and adjusting the current year’s earnings accordingly.

Distortion caused by noncash charges
Other justifications for adjusting current earnings are accounting allocations for noncash charges such as depreciation and amortization. These are intended to serve as a proxy for how close a company’s capital assets are drawing to the ends of their useful lives and must be replaced. It is common for the required reinvestment in such capital assets to exceed the amount allocated in the accounting.

Distortion caused by aberrant current year earnings
Current earnings may also be adjusted to the extent that the current year is an aberration for substantive economic reasons. If the year is a cyclical down year for the company, an upward adjustment based on earnings of prior years is indicated; if at a boom in the corporate or industrial business cycle, the reverse would be true.


Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

Income Statement Value: The Earnings Payoff

Income Statement Value: The Earnings Payoff

Successful asset leveraging shows up in the income statement.

The income statement reports revenues less expenses and depicts an important measure of business performance. This is not a picture of cash flows because GAAP uses accrual, not a cash method of reporting.

In accrual accounting, economic activity is recorded according to the relationship between revenue and expense, rather than the timing of cash inflows or outflows. This is not an idiosyncrasy of accounting tradition, but a reflection of accounting’s goal of measuring and allocating business events that reflect economic reality. Those accruals capturing noncash costs of doing business reflect that cash will be absorbed in the future.

Pure value investors (Graham and Dodd) believe that current earnings (adjusted) are the most reliable indicator of a company’s sustainable long-term cash flows.

Adding a further constraint, pure value investors believe that the most reliable way to use current earnings as a valuation metric is to assume they will be constant in the future at current rates – not grow according to estimates.

The math is easy.

Valuation based on current earnings is equal to current earnings divided by the company’s current cost of capital.

That is,

V = E/k.

E = Earnings are earnings.
k = The cost of capital. (This is the company’s weighted average cost of debt and cost of equity. The former can be calculated simply; the latter still requires some estimating).

The virtues of this approach are simplicity and reliability:

• Characteristic of simplicity is that investors need not bother with growth rates because no growth is assumed.
• Both data points are known or can be reliably estimated.

Also read:

1. Income Statement Value: The Earnings Payoff
2. Adjustments in Current Earnings figure
3. Avoid Pro Forma financial figures
4. Avoid Extrapolated Future Earnings Growth figures
5. Estimating Growth in Value Investing
6. Franchise Value
7. GROWTH'S VALUE
8. GROWTH'S VALUE (illustrations)

How long will it take to become a millionaire?

How long will it take to become a millionaire?

(Comment: Make a $1,000 per day for 1000 days. 1000 x 1000 = 1 million)

The movie Slumdog Millionaire will reignite our dreams to become super-rich but the reality is that few of us will be one question away from winning the quiz Who Wants to be a Millionaire?. If you had to save, how long would it take you to save £1m?

By Paul Farrow Last Updated: 4:59PM GMT 09 Jan 2009

How long will it take to become a millionaire? Photo: BBC
Go on, admit it. You have dreamed that one day you will become a millionaire. More than two-thirds of the 23m people who have bought National Savings & Investments' Premium Bonds have done so in the hope of becoming a millionaire.
However, the odds are stacked against you and the chances of winning the Premium Bond jackpot are 1.6m to one if you have £1,000 worth of bonds.
Tens of thousands play the National Lottery each week in the hoping of becoming a millionaire. Most of us only win a tenner every now and then by matching three numbers. Matching six numbers is an entirely different ball game. With six numbers drawn at random from the set of integers between 1 and 49, the jackpot odds are 1 in 13,983,816 – or approximately 1 in 14m.
Del Boy Trotter from TV's Only Fools and Horses always dreamed of becoming a millionaire. But the odds are also firmly stacked against you finding an antique watch worth £1m in your garage – as Del Boy did to finally fulfil his lifelong dream.
For most of us, all we can do is graft away and put what money we have going spare by to build up a tidy nest egg. You are likely to be far short of a £1m – but just in case you are interested, our new calculator will show you how much you will need and how long it will take for various rates of return.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/4209254/How-long-will-it-take-to-become-a-millionaire.html

Millionaire calculator

http://www.telegraph.co.uk/finance/personalfinance/4209223/millionaire-calculator.html

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Harsh economic realities await the Obama team

Harsh economic realities await the Obama team
The realisation is growing that Barack Obama may already have made a terrible mistake – before he's even entered the White House.

By Liam Halligan Last Updated: 6:00PM GMT 10 Jan 2009
Five weeks ago, this column raised questions about several members of the incoming President's then newly-unveiled economics team. Weren't they among those history would likely judge as most responsible for causing this crisis? That observation was lost was lost at the time amid the cacophony of praise as mainstream commentators gushed over Obama's "star-studded" line-up.
But since then, among bloggers and others with the "audacity" to think for themselves, the notion that Obama's economics team could become a political liability has started to gain real momentum.
The point at issue is the Glass-Steagall Act – passed in 1933, in response to the Wall Street crash. Named after the two Democrat senators who sponsored it, Glass-Steagall prevented commercial banks – which take deposits from ordinary households and firms – from engaging in high-risk speculative activities undertaken by investment banks.
Or at least it did until 1999 when, after millions of dollars of political donations from Wall Street, it was repealed by President Clinton.
That repeal, more than any other single factor, unleashed the forces that culminated in this financial crisis. Investment banks took over commercial banks using their retail deposit base, on which there was an implicit government guarantee for risky speculative trading – not least in opaque derivatives.
Wall Street's example, in turn, led to the scrapping of similar regulations in financial centres elsewhere. And we all know what happened next.
One of the main proponents of scrapping Glass-Steagall was Clinton's Treasury Secretary Larry Summers. Removing this crucial banking firewall, he proclaimed at the time, would "better enable American companies to compete in the new economy".
All the repeal achieved, though, was to allow Wall Street firms to engage in recklessly risky behaviour while growing "too big to fail" – sparking today's grotesque taxpayer-funded bail-outs, to say nothing of the freezing-up of interbank markets, blocking of worldwide credit channels and the resulting global slump. Despite his key role in enacting this historic blunder, Summers is to be Obama's chief economic advisor.
Last week, in yet another soft-focus newspaper profile of Summers, one of his academic friends claimed that "when the facts change, Larry changes his mind". Well, Larry, the facts on Glass-Steagall have changed. You and your buddies goofed. So when are you going to reinstate the safeguards upon which the stability of global banking depends?

http://www.telegraph.co.uk/finance/comment/liamhalligan/4213828/Harsh-economic-realities-await-the-Obama-team.html


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Merrill Lynch says rich turning to gold bars for safety

Merrill Lynch says rich turning to gold bars for safety
Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

By Ambrose Evans-PritchardLast Updated: 10:32AM GMT 09 Jan 2009

Rich investors are spurning gold exchange traded funds in favour of krugerrands.
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.
"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.
Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.
The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.
He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."
Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided.
He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro. I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4177766/Merrill-Lynch-says-rich-turning-to-gold-bars-for-safety.html

Also read:

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Balance Sheet Value: Summary

Balance Sheet Value: Summary

The figures resulting from analyzing the balance sheet remain baselines.

The company is worth at least the net of its total assets less total liabilities.

Whether it is worth a premium depends on its ability to leverage the asset base through competitive advantages that result in barriers to entry that keep competitors out.

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Subtracting liabilities in asset valuation

Subtracting liabilities

The liabilities of a going concern, taken at face value, are subtracted from assessment in the reproduction cost method of valuation.

Judgment is required for certain liability classes, however, such as for deferred tax liabilities or contingencies. A new entrant would not necessarily face such obligations. If not, they may be omitted.

Debt, however, should be subtracted, either at its carrying amount or its market value, whichever is higher.

Analysing the balance sheet includes assessing the level of liabilities and determining whether all liabilities are properly recorded.

It is also prudent to examine the relationship between recorded depreciation over time and capital reinvestment levels. The former is a proxy for the latter; as a proxy, it must be tested to determine whether actual reinvestment needs are more or less than recorded depreciation expenses.


Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary