From The TimesApril 15, 2009
Survivors of crisis find a silver lining
David Wighton: Business editor's commentary
For a moment, it looked just like the good old days. Goldman Sachs' profits soar way above forecasts to $1.8billion in the first quarter as it plans for a 20 per cent pay rise for staff. Crisis, what crisis?
Except, of course, the crisis has had a big impact on Goldman. It is just that the impact on Goldman - and rivals such as Barclays Capital - has not been all bad.
The reason that Goldman's huge fixed income, currency and commodities arm generated record revenues of $6.56 billion was not that its customers did record business, although volumes were healthy enough.
It was because half of its competitors have blown themselves up and many of the others are wandering around in a daze. As a result, customers are having to pay up to get trades done.
The spread between the buying and selling prices for everything from sterling to silver has widened dramatically, fattening up Goldman's margins a treat.
These trading profits absorbed continued losses in credit products, including about $800 million before hedges on commercial mortgage loans and securities.
Elsewhere things were not so pretty. Equities trading, the advisory businesses and asset management were all down and there were further losses from property and other investments.
The returns to shareholders have been diluted by the big increase in Goldman's capital, which is now being expanded by another $5billion, which may be used to pay off the $10 billion owed to the US Government.
But Goldman still managed to generate a return on equity of 14 per cent.
The speed with which the underlying business of the surviving investment banks seems to be bouncing back must make companies in other stricken sectors look on with incredulity.
Boston Consulting Group has constructed a “bull” case that has global investment banking net revenues before writedowns reaching $374billion next year.
That is 15 per cent higher than the record level of 2007. Even its “bear” case of $258billion is not far off the level of 2006. Returns will not be as high, because of lower leverage, but then the cake will be shared out between fewer mouths.
The Goldman figures looked particularly encouraging for Barclays.
Thanks partly to its rescue of Lehman Brothers' US business last year, Barclays Capital is strong in all those areas where Goldman reported good results - particularly debt, currencies and commodities - and smaller in those areas that struggled.
London investors took note and Barclays shares jumped another 10per cent to 195.5p yesterday, four times their low in January.
A lot could still go wrong. But the history of previous banking crises shows that the survivors not only live but live well. Those that double up at the bottom, like Barclays, can live very well indeed.
http://www.timesonline.co.uk/tol/comment/columnists/article6094574.ece
Related Links
Another 'triumph' for the PPI industry
And if it can happen in Singapore...
Wednesday 15 April 2009
Intel claims PC market has 'bottomed out'
From Times Online
April 15, 2009
Intel claims PC market has 'bottomed out'
Alexi Mostrous
Intel claimed today that the downturn in the personal computer sector had bottomed out, even as its shares slid nearly 6 per cent after economic uncertainty prevented it from offering financial forecasts for the rest of 2009.
The chip-making giant said that personal computer sales hit a trough in the first quarter but there was still too much market and economic turbulence to allow a precise projection for the second quarter.
However, Paul Otellini, president and chief executive of Intel, said: “We believe PC sales bottomed out during the first quarter and the industry is returning to normal seasonal patterns.” Stacy Smith, Intel's chief financial officer, added: “I believe the worst is now behind us.”
Intel reported a net profit in the three months ending March 28 of $647 million (£436 million) down 55 per cent from $1.44 billion, a year ago but above analysts' expectations.
Although earnings per share were more than three times the average Wall Street forecast, they were helped by a drastically lower effective tax rate of one per cent in the quarter, versus internal expectations of 27 per cent, analysts said.
Intel said its revenues in the first quarter of 2009 had slumped to $7.1 billion or 26 per cent lower than a year before, as chip demand hit a low point. Operating income was down 68 per cent at $670 million compared to the same period the year before.
Shares of the chip giant, a bellwether for the market and the global PC industry, fell during after-hours trading to $15.20 from a close of $16.01. Before yesterday, Intel stock had leapt 32 per cent from a 2009 low point of $12.01.
Gross margins at the company came to 45.6 per cent in the first quarter, compared to 53.1 per cent in the fourth quarter of 2008 but higher than analysts’ expectations.
“I would have liked to see higher gross margin guidance,” Edward Jones analyst Bill Kreher told Reuters. “The stock has had heck of a run in recent weeks, so it may be time for a breather here given that visibility does remain limited.”
Intel executives said that the timing of the eventual recovery was uncertain. “The company is currently planning for revenue [in Q2] approximately flat to the first quarter,” the company said.
Intel admitted that the “current uncertainty in global economic conditions makes it particularly difficult to predict product demand.”
In a statement, Intel also identified possible effects of the credit crisis on its business, including “insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products, customer insolvencies; counterparty failures negatively impacting our treasury operations and increased expense or inability to obtain short term financing of Intel’s operations.”
Intel, which controls 80 per cent of the microprocessor market and is larger than rival Advanced Micro Devices, is a barometer of overall IT industry health.
The corporation had put out successive revenue warnings since late 2008 and cautioned it would be shutting or scaling down plants across Asia and the US and trimming jobs. On Tuesday, executives said the company had rid itself of 1,400 employees since the fourth quarter.
Speaking of the personal computer sector in general, Nathan Brookwood, a research fellow at Insight 64, said: “Things are no longer looking completely dark. There is light at the end of the tunnel. It would be even better if people were feeling good enough about it that they could put stakes in the ground ... (with) a revenue estimate.”
http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article6096192.ece
April 15, 2009
Intel claims PC market has 'bottomed out'
Alexi Mostrous
Intel claimed today that the downturn in the personal computer sector had bottomed out, even as its shares slid nearly 6 per cent after economic uncertainty prevented it from offering financial forecasts for the rest of 2009.
The chip-making giant said that personal computer sales hit a trough in the first quarter but there was still too much market and economic turbulence to allow a precise projection for the second quarter.
However, Paul Otellini, president and chief executive of Intel, said: “We believe PC sales bottomed out during the first quarter and the industry is returning to normal seasonal patterns.” Stacy Smith, Intel's chief financial officer, added: “I believe the worst is now behind us.”
Intel reported a net profit in the three months ending March 28 of $647 million (£436 million) down 55 per cent from $1.44 billion, a year ago but above analysts' expectations.
Although earnings per share were more than three times the average Wall Street forecast, they were helped by a drastically lower effective tax rate of one per cent in the quarter, versus internal expectations of 27 per cent, analysts said.
Intel said its revenues in the first quarter of 2009 had slumped to $7.1 billion or 26 per cent lower than a year before, as chip demand hit a low point. Operating income was down 68 per cent at $670 million compared to the same period the year before.
Shares of the chip giant, a bellwether for the market and the global PC industry, fell during after-hours trading to $15.20 from a close of $16.01. Before yesterday, Intel stock had leapt 32 per cent from a 2009 low point of $12.01.
Gross margins at the company came to 45.6 per cent in the first quarter, compared to 53.1 per cent in the fourth quarter of 2008 but higher than analysts’ expectations.
“I would have liked to see higher gross margin guidance,” Edward Jones analyst Bill Kreher told Reuters. “The stock has had heck of a run in recent weeks, so it may be time for a breather here given that visibility does remain limited.”
Intel executives said that the timing of the eventual recovery was uncertain. “The company is currently planning for revenue [in Q2] approximately flat to the first quarter,” the company said.
Intel admitted that the “current uncertainty in global economic conditions makes it particularly difficult to predict product demand.”
In a statement, Intel also identified possible effects of the credit crisis on its business, including “insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products, customer insolvencies; counterparty failures negatively impacting our treasury operations and increased expense or inability to obtain short term financing of Intel’s operations.”
Intel, which controls 80 per cent of the microprocessor market and is larger than rival Advanced Micro Devices, is a barometer of overall IT industry health.
The corporation had put out successive revenue warnings since late 2008 and cautioned it would be shutting or scaling down plants across Asia and the US and trimming jobs. On Tuesday, executives said the company had rid itself of 1,400 employees since the fourth quarter.
Speaking of the personal computer sector in general, Nathan Brookwood, a research fellow at Insight 64, said: “Things are no longer looking completely dark. There is light at the end of the tunnel. It would be even better if people were feeling good enough about it that they could put stakes in the ground ... (with) a revenue estimate.”
http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article6096192.ece
Singapore devalues currency after GDP plunge
From The TimesApril 15, 2009
Singapore devalues currency after GDP plunge
Leo Lewis
Singapore’s central bank effectively devalued the city state’s currency yesterday as its Government warned that the global economic crisis would bring the worst economic plunge on record.
Singapore’s unprecedented contraction between January and March was described by analysts as “horrendous”. First-quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.
But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. Previous forecasts of a 5 per cent contraction were revised to one of between 6 per cent and 9 per cent. It was the third time forecasts have been adjusted in the past five months.
Economists rushed to recalculate their outlooks for Singapore and what one told The Times were the “diminishing prospects of an early recovery”.
The Trade Ministry said that recent, tentative signs of stability in, for example, the US housing market, did not yet amount to clear signs of a turnaround. The Monetary Authority of Singapore (MAS) — the central bank — said that “considerable downside risks to growth remain”. That was one of the reasons the MAS gave for easing monetary policy for only the second time since 2003.
The Singapore dollar moves within a trade-weighted band, which is set by the MAS. Moving the entire band lower, as the central bank did yesterday, leads to the currency undergoing an instant devaluation.
Singapore’s dollar advanced as much as 1.2 per cent to S$1.4965 against the US dollar, the strongest level in two months, after the MAS recentered the trading band. It said it does not plan to seek either appreciation or depreciation.
http://business.timesonline.co.uk/tol/business/economics/article6094207.ece
Related Links
Singapore faces devastating exodus of foreigners
Asian central banks step in as turbulence hits
Singapore devalues currency after GDP plunge
Leo Lewis
Singapore’s central bank effectively devalued the city state’s currency yesterday as its Government warned that the global economic crisis would bring the worst economic plunge on record.
Singapore’s unprecedented contraction between January and March was described by analysts as “horrendous”. First-quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.
But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. Previous forecasts of a 5 per cent contraction were revised to one of between 6 per cent and 9 per cent. It was the third time forecasts have been adjusted in the past five months.
Economists rushed to recalculate their outlooks for Singapore and what one told The Times were the “diminishing prospects of an early recovery”.
The Trade Ministry said that recent, tentative signs of stability in, for example, the US housing market, did not yet amount to clear signs of a turnaround. The Monetary Authority of Singapore (MAS) — the central bank — said that “considerable downside risks to growth remain”. That was one of the reasons the MAS gave for easing monetary policy for only the second time since 2003.
The Singapore dollar moves within a trade-weighted band, which is set by the MAS. Moving the entire band lower, as the central bank did yesterday, leads to the currency undergoing an instant devaluation.
Singapore’s dollar advanced as much as 1.2 per cent to S$1.4965 against the US dollar, the strongest level in two months, after the MAS recentered the trading band. It said it does not plan to seek either appreciation or depreciation.
http://business.timesonline.co.uk/tol/business/economics/article6094207.ece
Related Links
Singapore faces devastating exodus of foreigners
Asian central banks step in as turbulence hits
Tuesday 14 April 2009
Buffett queried on 'buy and hold' on CNBC
"Buy and hold" strategy. Is this strategy dead?
In a recent CNBC interview, Warren Buffett was asked by a sender of email regarding buy and hold strategy. His reply was a short one. This strategy works for certain selected stocks. He added other strategies can be profitable for some too.
My comments:
Stock selection is of course very important. This can be achieved through applying the right investing knowledge, diligent study of the company and hard work.
Over the short-term, you will probably be right (positive returns) 50% of the time. However, over the long-term, you are more likely to be right most of the time.
Be sure to ride the winners, add more to the winners for big gains. If one has made a mistake, cut the losers early to keep the losses small.
In my experience, long term buy and hold investing has been rewarding. It has been safe (safety of principal) and has also generated good return for the given reward/risk ratio.
Always buy the stock at a bargain (margin of safety). This minimises the downside risk and provides potentially a higher return.
In a recent CNBC interview, Warren Buffett was asked by a sender of email regarding buy and hold strategy. His reply was a short one. This strategy works for certain selected stocks. He added other strategies can be profitable for some too.
My comments:
Stock selection is of course very important. This can be achieved through applying the right investing knowledge, diligent study of the company and hard work.
Over the short-term, you will probably be right (positive returns) 50% of the time. However, over the long-term, you are more likely to be right most of the time.
Be sure to ride the winners, add more to the winners for big gains. If one has made a mistake, cut the losers early to keep the losses small.
In my experience, long term buy and hold investing has been rewarding. It has been safe (safety of principal) and has also generated good return for the given reward/risk ratio.
Always buy the stock at a bargain (margin of safety). This minimises the downside risk and provides potentially a higher return.
The Worst Move You Could Make Now
The Worst Move You Could Make Now
By Dan Caplinger April 13, 2009 Comments (0)
Tough times have forced many people to take desperate measures. Unfortunately, some of the changes people are making to their portfolios won't do anything but cause them more heartbreak in the long run.
With many pundits proclaiming the death of buy-and-hold investing, day trading and other short-term investing strategies are on the rise. Having become immensely popular during the tech boom of the late 1990s, day trading has sent many investors to the poorhouse whenever the stocks that traders use stop performing well.
Tired of losing
Given the complete collapse in confidence in the financial system, it's no surprise that investors are taking matters into their own hands. When stocks move smoothly up over time, slow and steady gains generally make most investors happy. But when you no longer believe that simply dumping money into an index fund will earn you profits over time, you may well be at a loss to figure out what to do.
That's why day trading can be so attractive. If you pick the right stocks -- especially low-priced beaten-down shares like Citigroup (NYSE: C), General Electric (NYSE: GE), and Ford (NYSE: F) -- you can see plenty of potential benefits: With these companies in the news all the time, their prices move radically over short periods.
Low share prices let you pick up more shares for your money, accentuating the feeling that you're accomplishing something with your actions.
In an economy where many have lost their jobs, grabbing a quick profit from a day trade can be your only source of income.
But even if Wall Street's shenanigans have convinced you that the overall stock market is rigged, trying to beat the Street at its own game isn't the answer. Fortunately, there's a better way.
What's the better way?
Long-term investing strategies give you simple rules to follow in good times and bad. But to use them correctly, you have to be willing not to panic during bear markets, and add money even when your gut tells you it's the worst move you could make.
That's a big problem for many people. It's hard to invest when you know you could endure losses for months or even years at a time. But rather than going all the way to the other extreme by day trading, why not instead look for stocks that can thrive in today's market environment?
With thousands of stocks to choose from, you can be virtually assured of finding some with promising prospects. More importantly, though, when you understand why you own shares of a company, it's easier to be patient and wait for a great business model to prove itself.
For instance, consider e-commerce giant Amazon.com (Nasdaq: AMZN). When its shares fell to single digits during the tech bust, day traders lost fortunes. But those who believed that the company would eventually become the dominant force in Internet retail didn't settle for nicking a penny or two off share gains -- they saw their fortunes rise more than 13-fold in the ensuing years.
Take a stand
Which stocks belong in your portfolio? It depends on your financial situation, risk tolerance, and comfort level with investing, as well as your take on what the future likely holds.
If you're convinced the recession is just getting started, then a dividend-paying recession-proof consumer stock like Kimberly-Clark (NYSE: KMB) looks awfully attractive. On the other hand, if you're comfortable taking risks and see the economy booming back in short order, then beaten-down oil and gas stocks like Chesapeake Energy (NYSE: CHK) or ConocoPhillips (NYSE: COP) could recover in a hurry.
The key, though, is to take ownership of your investments. Rather than day trading, where all the odds are stacked against you, the best way to beat Wall Street at its own game is to learn how to play it better. By learning how to find market-crushing stocks, you'll avoid the mistakes that will inevitably bring day traders even more losses.
For more on making the most from your investments, read about:
The greatest company in the history of the world.
Wall Street's 10 favorite stocks.
Warren Buffett's biggest mistake.
Fool contributor Dan Caplinger makes plenty of mistakes, but does his best to avoid the big ones. He owns shares of Chesapeake Energy and General Electric. Kimberly-Clark is a Motley Fool Income Investor selection. Chesapeake Energy is a Motley Fool Inside Value pick.
http://www.fool.com/investing/general/2009/04/13/the-worst-move-you-could-make-now.aspx
By Dan Caplinger April 13, 2009 Comments (0)
Tough times have forced many people to take desperate measures. Unfortunately, some of the changes people are making to their portfolios won't do anything but cause them more heartbreak in the long run.
With many pundits proclaiming the death of buy-and-hold investing, day trading and other short-term investing strategies are on the rise. Having become immensely popular during the tech boom of the late 1990s, day trading has sent many investors to the poorhouse whenever the stocks that traders use stop performing well.
Tired of losing
Given the complete collapse in confidence in the financial system, it's no surprise that investors are taking matters into their own hands. When stocks move smoothly up over time, slow and steady gains generally make most investors happy. But when you no longer believe that simply dumping money into an index fund will earn you profits over time, you may well be at a loss to figure out what to do.
That's why day trading can be so attractive. If you pick the right stocks -- especially low-priced beaten-down shares like Citigroup (NYSE: C), General Electric (NYSE: GE), and Ford (NYSE: F) -- you can see plenty of potential benefits: With these companies in the news all the time, their prices move radically over short periods.
Low share prices let you pick up more shares for your money, accentuating the feeling that you're accomplishing something with your actions.
In an economy where many have lost their jobs, grabbing a quick profit from a day trade can be your only source of income.
But even if Wall Street's shenanigans have convinced you that the overall stock market is rigged, trying to beat the Street at its own game isn't the answer. Fortunately, there's a better way.
What's the better way?
Long-term investing strategies give you simple rules to follow in good times and bad. But to use them correctly, you have to be willing not to panic during bear markets, and add money even when your gut tells you it's the worst move you could make.
That's a big problem for many people. It's hard to invest when you know you could endure losses for months or even years at a time. But rather than going all the way to the other extreme by day trading, why not instead look for stocks that can thrive in today's market environment?
With thousands of stocks to choose from, you can be virtually assured of finding some with promising prospects. More importantly, though, when you understand why you own shares of a company, it's easier to be patient and wait for a great business model to prove itself.
For instance, consider e-commerce giant Amazon.com (Nasdaq: AMZN). When its shares fell to single digits during the tech bust, day traders lost fortunes. But those who believed that the company would eventually become the dominant force in Internet retail didn't settle for nicking a penny or two off share gains -- they saw their fortunes rise more than 13-fold in the ensuing years.
Take a stand
Which stocks belong in your portfolio? It depends on your financial situation, risk tolerance, and comfort level with investing, as well as your take on what the future likely holds.
If you're convinced the recession is just getting started, then a dividend-paying recession-proof consumer stock like Kimberly-Clark (NYSE: KMB) looks awfully attractive. On the other hand, if you're comfortable taking risks and see the economy booming back in short order, then beaten-down oil and gas stocks like Chesapeake Energy (NYSE: CHK) or ConocoPhillips (NYSE: COP) could recover in a hurry.
The key, though, is to take ownership of your investments. Rather than day trading, where all the odds are stacked against you, the best way to beat Wall Street at its own game is to learn how to play it better. By learning how to find market-crushing stocks, you'll avoid the mistakes that will inevitably bring day traders even more losses.
For more on making the most from your investments, read about:
The greatest company in the history of the world.
Wall Street's 10 favorite stocks.
Warren Buffett's biggest mistake.
Fool contributor Dan Caplinger makes plenty of mistakes, but does his best to avoid the big ones. He owns shares of Chesapeake Energy and General Electric. Kimberly-Clark is a Motley Fool Income Investor selection. Chesapeake Energy is a Motley Fool Inside Value pick.
http://www.fool.com/investing/general/2009/04/13/the-worst-move-you-could-make-now.aspx
The ABCs of Screwball Economics
The ABCs of Screwball Economics
By Alyce Lomax April 13, 2009 Comments (2)
We've had TARP (and the return of the TARP), we've had TALF, now we've got the PPIP. Our government's interventions into the economy have come hand in hand with a great propensity for acronyms that are becoming less clever all the time. (I mean, come on, PPIP?)
I've got some great acronyms for what I think these are going to do for our economic situation, but most are not appropriate for our family-friendly site. Here's one that makes it through: SNAFU. Or how about ROFLMAO, if you've got a gallows sense of humor. I still see little possibility that the government's actions are going to help our economic situation in the least.
IPS (It's the price, stupid)
The new PPIP basically fails to admit what more and more people have been arguing, and that is that the major banks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) don't have liquidity problems, but rather solvency problems.
There is toxic garbage on their books (and continued lack of transparency on them). The prevailing idea that it's acceptable to price these assets at fantasy levels sounds absurd to me, but the banks want to price these assets at unrealistic levels, and the recent loosening of mark-to-market rules pretty much tells you what you need to know -- somebody wants the fantasy to continue. (Even worse, some are wondering if the banks are just going to sell the assets to one another, with government help.)
The real marketplace wants to price those toxic assets, as low-down and nasty as those prices may be, and doesn't want to pay artificially inflated prices. (Meanwhile, why would we want the government to subsidize purchase of these assets at artificially high prices anyway?). Suffice it to say, it doesn't follow that prices should be whatever these companies decide they should be and the government should support that.
IDS (It's the debt, stupid)
The government's programs have been geared toward stimulating lending again. But here's the thing that's been driving me crazy for ages: There's a heck of a lot of indebtedness in our system already; it's part of the problem, and that goes for corporations, consumers, and our government itself.
Of course, the government wants to kick up lending again. Our past economic growth was based on an artificial daisy chain fed into by bubbly asset prices, low interest rates, and the inevitable loads and loads of debt being taken on. Of course, this has to correct because if you really think about it, it's been utterly unsustainable, but nobody wants to take the inevitable medicine. The smart consumers and companies that didn't dig themselves into massive debt holes probably don't want to borrow right now. So, who's left?
Consumers were melting the MasterCard (NYSE: MA) and Visa (NYSE: V) cards buying up Coach (NYSE: COH) handbags and Tiffany baubles, or flat-screen TVs or Sirius XM (Nasdaq: SIRI) radios. Unfortunately, we can now gather that a heck of a lot of their spending wasn't based on real income, but rather subsidized by debt or taking equity out of their bubbly priced homes. Now many consumers are busted broke, with slashed credit lines, defaulted loans, and lost jobs. Should they borrow more?
Meanwhile, many corporations loaded up on debt, too. I remember thinking it was weird for companies to take on debt to say, pay dividends or buy back shares (much less to finance their operations). Back then, it made sense to just about everybody, and everybody was doing it. But now? It's pretty clear that many companies weren't concerned about a rainy day coming, a day when it might become difficult for them to service that debt. Well, it's come. Should they borrow more?
IES (It's the economy, stupid)
It's morally reprehensible that the government should expect already overly indebted consumers to keep on borrowing to reinflate our deflating economy. Some of us are concerned that our economy has been an accident waiting to happen, given the fact that consumer spending represents 70% -- the lion's share -- of GDP. The emphasis on services and the financial industry's love for pushing pieces of paper around has put us in a precarious position indeed, as has the emphasis on debtor spending to make our economic world go round.
Meanwhile, it looks like my fears of a zombie apocalypse economy are coming to pass. Throwing good money after bad not only robs taxpayers, but it also robs healthy companies of capital as the zombies are kept alive. Propping up losers means that soon, all we'll have are losers, and an awfully big bill to pay.
BBIAF, with more bad acronyms
There are many arguments emanating from many different schools of thought about what to do. I've always thought that the government should stay out of this so we could have a difficult, but likely shorter lived, correction, clear out the artificial excess, and get to work on moving back to an economy with real innovation and truly healthy businesses -- all the while leaving bubbly fakery behind.
I know many people don't agree with my point of view, but it seems like more and more people from many different economic camps are starting to come around to the idea that the fixes from government intervention from both the previous administration and the current one are simply helping politically connected bankers and doing little to actually fix what ails the real economy. The word "oligarchy" seems to be cropping up an awful lot, in fact.
Let's hope that the next acronym program won't be one that denotes being completely out of luck, but after endless government interventions that don't seem to help and seem more likely to hurt, it's starting to feel like that's our destiny. Let's hope not.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
http://www.fool.com/investing/general/2009/04/13/the-abcs-of-screwball-economics.aspx
By Alyce Lomax April 13, 2009 Comments (2)
We've had TARP (and the return of the TARP), we've had TALF, now we've got the PPIP. Our government's interventions into the economy have come hand in hand with a great propensity for acronyms that are becoming less clever all the time. (I mean, come on, PPIP?)
I've got some great acronyms for what I think these are going to do for our economic situation, but most are not appropriate for our family-friendly site. Here's one that makes it through: SNAFU. Or how about ROFLMAO, if you've got a gallows sense of humor. I still see little possibility that the government's actions are going to help our economic situation in the least.
IPS (It's the price, stupid)
The new PPIP basically fails to admit what more and more people have been arguing, and that is that the major banks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) don't have liquidity problems, but rather solvency problems.
There is toxic garbage on their books (and continued lack of transparency on them). The prevailing idea that it's acceptable to price these assets at fantasy levels sounds absurd to me, but the banks want to price these assets at unrealistic levels, and the recent loosening of mark-to-market rules pretty much tells you what you need to know -- somebody wants the fantasy to continue. (Even worse, some are wondering if the banks are just going to sell the assets to one another, with government help.)
The real marketplace wants to price those toxic assets, as low-down and nasty as those prices may be, and doesn't want to pay artificially inflated prices. (Meanwhile, why would we want the government to subsidize purchase of these assets at artificially high prices anyway?). Suffice it to say, it doesn't follow that prices should be whatever these companies decide they should be and the government should support that.
IDS (It's the debt, stupid)
The government's programs have been geared toward stimulating lending again. But here's the thing that's been driving me crazy for ages: There's a heck of a lot of indebtedness in our system already; it's part of the problem, and that goes for corporations, consumers, and our government itself.
Of course, the government wants to kick up lending again. Our past economic growth was based on an artificial daisy chain fed into by bubbly asset prices, low interest rates, and the inevitable loads and loads of debt being taken on. Of course, this has to correct because if you really think about it, it's been utterly unsustainable, but nobody wants to take the inevitable medicine. The smart consumers and companies that didn't dig themselves into massive debt holes probably don't want to borrow right now. So, who's left?
Consumers were melting the MasterCard (NYSE: MA) and Visa (NYSE: V) cards buying up Coach (NYSE: COH) handbags and Tiffany baubles, or flat-screen TVs or Sirius XM (Nasdaq: SIRI) radios. Unfortunately, we can now gather that a heck of a lot of their spending wasn't based on real income, but rather subsidized by debt or taking equity out of their bubbly priced homes. Now many consumers are busted broke, with slashed credit lines, defaulted loans, and lost jobs. Should they borrow more?
Meanwhile, many corporations loaded up on debt, too. I remember thinking it was weird for companies to take on debt to say, pay dividends or buy back shares (much less to finance their operations). Back then, it made sense to just about everybody, and everybody was doing it. But now? It's pretty clear that many companies weren't concerned about a rainy day coming, a day when it might become difficult for them to service that debt. Well, it's come. Should they borrow more?
IES (It's the economy, stupid)
It's morally reprehensible that the government should expect already overly indebted consumers to keep on borrowing to reinflate our deflating economy. Some of us are concerned that our economy has been an accident waiting to happen, given the fact that consumer spending represents 70% -- the lion's share -- of GDP. The emphasis on services and the financial industry's love for pushing pieces of paper around has put us in a precarious position indeed, as has the emphasis on debtor spending to make our economic world go round.
Meanwhile, it looks like my fears of a zombie apocalypse economy are coming to pass. Throwing good money after bad not only robs taxpayers, but it also robs healthy companies of capital as the zombies are kept alive. Propping up losers means that soon, all we'll have are losers, and an awfully big bill to pay.
BBIAF, with more bad acronyms
There are many arguments emanating from many different schools of thought about what to do. I've always thought that the government should stay out of this so we could have a difficult, but likely shorter lived, correction, clear out the artificial excess, and get to work on moving back to an economy with real innovation and truly healthy businesses -- all the while leaving bubbly fakery behind.
I know many people don't agree with my point of view, but it seems like more and more people from many different economic camps are starting to come around to the idea that the fixes from government intervention from both the previous administration and the current one are simply helping politically connected bankers and doing little to actually fix what ails the real economy. The word "oligarchy" seems to be cropping up an awful lot, in fact.
Let's hope that the next acronym program won't be one that denotes being completely out of luck, but after endless government interventions that don't seem to help and seem more likely to hurt, it's starting to feel like that's our destiny. Let's hope not.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
http://www.fool.com/investing/general/2009/04/13/the-abcs-of-screwball-economics.aspx
Saturday 11 April 2009
Market Strategies Review Notes I (January 2009)
AVERAGING DOWN
Averaging Down: Good Idea Or Big Mistake?
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
THRIVING IN EVERY MARKET
MR. MARKET
SUITABLE SECURITIES AT SUITABLE PRICES
PAYING RESPECT TO THE MARKET
TIMING VERSUS PRICING
BELIEVING A BULL MARKET
THE PAUSE AT THE TOP OF THE ROLLER COASTER
MAKING FRIENDS WITH A BEAR
BARGAINS AT THE BOTTOM
SIGNS AT THE BOTTOM
BUYING TIME
IF YOU ABSOLUTELY MUST PLAY THE HORSES
BALANCE SHEET VALUE: ASSETS AT WORK
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
INCOME STATEMENT VALUE
Income Statement Value: The Earnings Payoff
Adjustments in Current Earnings figure
Avoid Pro Forma financial figures
Avoid Extrapolated Future Earnings Growth figures
Estimating Growth in Value Investing
Franchise Value
GROWTH'S VALUE
GROWTH'S VALUE (illustrations)
CASH FLOW STATEMENT VALUE
Cash Flow Statement Value
Discounted Cash Flow valuation method
Hazards of the Future and Limitations of DCF
UNDERSTANDING DISCOUNT RATES
Understanding Discount Rates
Risk-free rate
Traditional Method: Discount rate or WACC (I)
Traditional Method: Discount rate or WACC (II)
Modern Portfolio Theory
Portfolio Theory: Market Risk Premiums
Portfolio Theory: Beta
Is the market efficient, always?
Discount Rate Determinations: Summary
STOCK MARKET PRICES
Stock Market Prices
Market metrics P/E and Intrinsic value
Rational Thinking about Irrational Pricing
The Anxiety of Selling
Control Value of Majority Interest
10 TENETS OF VALUE INVESTING
MR. MARKET PRINCIPLE
BUSINESS ANALYST PRINCIPLE
REASONABLE PRICE PRINCIPLE
PATSY PRINCIPLE
CIRCLE OF COMPETENCE PRINCIPLE ****
MOAT PRINCIPLE
MARGIN OF SAFETY PRINCIPLE ****
IN-LAW PRINCIPLE
ELITISM PRINCIPLE
OWNER PRINCIPLE
SUBSETS OF RISKS:
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk
Also read:
My Investment Philosophy and Strategy
****Investment Philosophy, Strategy and various Valuation Methods
Averaging Down: Good Idea Or Big Mistake?
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
THRIVING IN EVERY MARKET
MR. MARKET
SUITABLE SECURITIES AT SUITABLE PRICES
PAYING RESPECT TO THE MARKET
TIMING VERSUS PRICING
BELIEVING A BULL MARKET
THE PAUSE AT THE TOP OF THE ROLLER COASTER
MAKING FRIENDS WITH A BEAR
BARGAINS AT THE BOTTOM
SIGNS AT THE BOTTOM
BUYING TIME
IF YOU ABSOLUTELY MUST PLAY THE HORSES
BALANCE SHEET VALUE: ASSETS AT WORK
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
INCOME STATEMENT VALUE
Income Statement Value: The Earnings Payoff
Adjustments in Current Earnings figure
Avoid Pro Forma financial figures
Avoid Extrapolated Future Earnings Growth figures
Estimating Growth in Value Investing
Franchise Value
GROWTH'S VALUE
GROWTH'S VALUE (illustrations)
CASH FLOW STATEMENT VALUE
Cash Flow Statement Value
Discounted Cash Flow valuation method
Hazards of the Future and Limitations of DCF
UNDERSTANDING DISCOUNT RATES
Understanding Discount Rates
Risk-free rate
Traditional Method: Discount rate or WACC (I)
Traditional Method: Discount rate or WACC (II)
Modern Portfolio Theory
Portfolio Theory: Market Risk Premiums
Portfolio Theory: Beta
Is the market efficient, always?
Discount Rate Determinations: Summary
STOCK MARKET PRICES
Stock Market Prices
Market metrics P/E and Intrinsic value
Rational Thinking about Irrational Pricing
The Anxiety of Selling
Control Value of Majority Interest
10 TENETS OF VALUE INVESTING
MR. MARKET PRINCIPLE
BUSINESS ANALYST PRINCIPLE
REASONABLE PRICE PRINCIPLE
PATSY PRINCIPLE
CIRCLE OF COMPETENCE PRINCIPLE ****
MOAT PRINCIPLE
MARGIN OF SAFETY PRINCIPLE ****
IN-LAW PRINCIPLE
ELITISM PRINCIPLE
OWNER PRINCIPLE
SUBSETS OF RISKS:
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk
Also read:
My Investment Philosophy and Strategy
****Investment Philosophy, Strategy and various Valuation Methods
Derivatives trading crackdown begins
Derivatives trading crackdown begins
Banks start talks on bringing order to chaotic derivatives market for credit default swaps
Elena Moya guardian.co.uk,
Tuesday 7 April 2009 16.30 BST Article history
An attempt to bring order to the chaotic, multibillion-pound world of credit derivatives began in London today with moves to standardise contracts in the market.
Banks last year traded about $54tn of credit default swaps (CDSs), contracts that protect investors against the default of a bond or loan, but the global financial crisis triggered the collapse of the market, bringing down AIG, the world's biggest insurer.
The G20 summit in London last week made it a priority to bring order to the market and today specialists from banks including UBS and Morgan Stanley agreed to trade standardised contracts, as well as organise committees that would oversee cases where there was a default.
"The proposed changes provide a means to guarantee greater unanimity of results across positions, add more openness and transparency to the process, and give formal representation to members of the buy-side community," said Markit, a leading provider of data on CDSs.
The London-based firm has also started to publish CDS pricing data on its website. Apart from CDSs on specific corporate loans or bonds, the public can also see the price investors pay to protect themselves against debt issued by sovereign countries such as Britain or the US. The riskier a country is perceived to be, the more expensive its insurance.
"Regulators are very keen to see this being put into place," said David Austin, a director at Markit.
As the unsupervised market grew after 2000, the number of CDSs issued rose well above the number of loans or bonds outstanding, as any bank could issue these insurance products and receive hefty fees for them.
AIG issued large amounts of CDSs on products that contained sub-prime mortgages, and could not honour the payments when they defaulted. It was like selling insurance on a car to five people, even if only one owned the car. If the car crashed, five people claimed the insurance. AIG is now partially nationalised.
With so many CDSs linked to a particular loan or bond, creditors queue to receive payments but some will not be paid because there are more contracts than real lenders. With corporate defaults expected to soar, a better way of dealing with payments after a default is needed.
Standard contracts are seen as a first step towards a central clearing house – a place where all banks contribute collateral to be used as a lifeline in case a bank or institution collapses. At present, banks trade with each other, not through a central house.
The G20 said last week it would push for the creation of centralised clearing houses as a way of improving market confidence. US and European governments are spending billions of pounds to insure the banks' worst assets, or to buy them from their books, in order to restore inter-bank lending and kick-start the economy.
http://www.guardian.co.uk/global/2009/apr/07/derivatives-trading-crackdown
Banks start talks on bringing order to chaotic derivatives market for credit default swaps
Elena Moya guardian.co.uk,
Tuesday 7 April 2009 16.30 BST Article history
An attempt to bring order to the chaotic, multibillion-pound world of credit derivatives began in London today with moves to standardise contracts in the market.
Banks last year traded about $54tn of credit default swaps (CDSs), contracts that protect investors against the default of a bond or loan, but the global financial crisis triggered the collapse of the market, bringing down AIG, the world's biggest insurer.
The G20 summit in London last week made it a priority to bring order to the market and today specialists from banks including UBS and Morgan Stanley agreed to trade standardised contracts, as well as organise committees that would oversee cases where there was a default.
"The proposed changes provide a means to guarantee greater unanimity of results across positions, add more openness and transparency to the process, and give formal representation to members of the buy-side community," said Markit, a leading provider of data on CDSs.
The London-based firm has also started to publish CDS pricing data on its website. Apart from CDSs on specific corporate loans or bonds, the public can also see the price investors pay to protect themselves against debt issued by sovereign countries such as Britain or the US. The riskier a country is perceived to be, the more expensive its insurance.
"Regulators are very keen to see this being put into place," said David Austin, a director at Markit.
As the unsupervised market grew after 2000, the number of CDSs issued rose well above the number of loans or bonds outstanding, as any bank could issue these insurance products and receive hefty fees for them.
AIG issued large amounts of CDSs on products that contained sub-prime mortgages, and could not honour the payments when they defaulted. It was like selling insurance on a car to five people, even if only one owned the car. If the car crashed, five people claimed the insurance. AIG is now partially nationalised.
With so many CDSs linked to a particular loan or bond, creditors queue to receive payments but some will not be paid because there are more contracts than real lenders. With corporate defaults expected to soar, a better way of dealing with payments after a default is needed.
Standard contracts are seen as a first step towards a central clearing house – a place where all banks contribute collateral to be used as a lifeline in case a bank or institution collapses. At present, banks trade with each other, not through a central house.
The G20 said last week it would push for the creation of centralised clearing houses as a way of improving market confidence. US and European governments are spending billions of pounds to insure the banks' worst assets, or to buy them from their books, in order to restore inter-bank lending and kick-start the economy.
http://www.guardian.co.uk/global/2009/apr/07/derivatives-trading-crackdown
Which shares for income?
Which shares for income?
The yield on BT of 19pc sounds good, but remember the adage "if it looks too good to be true, it probably is.
By Gavin Oldham
Last Updated: 6:47PM BST 10 Apr 2009
With the equity market close to a six-year low and with equity yields at historically high levels compared with gilts, the temptation is there for investors to switch into shares: not only in the hunt for income but also factoring in that one day the equity market will recover.
The challenge is, however, to find those rewards without shouldering too much risk; because whereas cash savings can face risk of default, it is in equities that you face investment risk.
Related Articles
Other inflation hedges
Is silver the new gold?
US fund manager declares war on UK trackers
Inflation: how to protect your portfolio
Deflation: How to protect your portfolio
Investors 'ready to return to stock market'
However, it is also worth remembering that since 1900 high-yielding shares have outperformed the stock market as a whole, 85pc of the time over 10-year periods. They've also outperformed the market since September 2008, when the markets really went into freefall.
As an example of the relationship between risk and yield, let's compare two blue chips with apparent dividend attractions: BP and BT.
This week, the yield on BT is 19pc net of basic-rate tax. Sounds good, but remember the adage "if it looks too good to be true, it probably is". Every analyst in the City expects BT to cut its dividend next time around. Investors should be cautious of above-average share yields: the market is telling you "the higher the yield the higher the risk".
BP has a yield of 9pc. Recently, there has been speculation that the low oil price may force the company to cut the dividend. This has proved unfounded, as BP's management has said the dividend will be maintained this year and it will try to maintain it into 2010, even if the oil price stays at current levels. So here we have some medium-term visibility and potential for capital growth if the oil price rises over the medium term.
When considering an investment for yield, note the dividend cover; this is how many times the profits cover the dividend and is an indicator of whether a company will be able to pay future dividends at the current rate or higher. It is calculated by dividing the net earnings per share by the net dividend per share.
For example, if a company has earnings per share of 5p and it pays out a dividend of 2.5p, the dividend cover will be 5/2.5 = 2. The higher the cover, the better the chance of maintaining the dividend if profits fall. However, a lower figure may be acceptable if the group's profits are relatively stable.
So a good portfolio of equity income shares would feature mainstream companies with good dividend cover and a relatively recession-proof business (such as energy), plus a good helping of the FTSE 100 iShare – a form of exchange traded fund (ETF) marketed by Barclays – to provide some extra diversification, and to provide the opportunity to take advantage of market volatility.
Such a portfolio might include BP, yielding 9pc with 2.6 times dividend cover; GlaxoSmithKline, yielding 5.5pc with 1.6 times cover; National Grid, yielding 6.5pc with 2 times cover; Scottish & Southern, yielding 5.7pc (1.7); Shell, yielding 4.2pc (3.5); Vodafone, yielding 6pc (1.8) plus the FTSE iShare yielding 5.1pc with no cover calculation available.
An investment of £12,000 could therefore give you about £710 income over a full year, an overall yield of 5.9pc.
These equity shares could provide a relatively stable source of income combined with the potential for capital growth. There is, of course, a risk of further setbacks in the markets that could take your investment value lower, but with blue-chip companies like these it's a relatively low-risk portfolio as equities go.
Keep in touch with the companies you've invested in: if you hold the shares in an Isa or a broker's nominee, opt in for shareholder communications direct from the company. It's your right to be kept informed and it shouldn't cost you extra.
Your holding in the FTSE 100 iShare may provide the opportunity to do some tactical purchases or sales. Rather than buying the whole holding at once, you could invest in £1,000 steps as the market falls back, then set a limit at, say, 10pc up on your purchase price to sell as the market strengthens.
This way you can take advantage of short-term volatility to improve the return on the portfolio as a whole. Finally, if you're a taxpayer make sure you use your Isa allowance to minimise your income tax bill.
Gavin Oldham is chief executive of the Share Centre
http://www.telegraph.co.uk/finance/personalfinance/investing/5131421/Which-shares-for-income.html
The yield on BT of 19pc sounds good, but remember the adage "if it looks too good to be true, it probably is.
By Gavin Oldham
Last Updated: 6:47PM BST 10 Apr 2009
With the equity market close to a six-year low and with equity yields at historically high levels compared with gilts, the temptation is there for investors to switch into shares: not only in the hunt for income but also factoring in that one day the equity market will recover.
The challenge is, however, to find those rewards without shouldering too much risk; because whereas cash savings can face risk of default, it is in equities that you face investment risk.
Related Articles
Other inflation hedges
Is silver the new gold?
US fund manager declares war on UK trackers
Inflation: how to protect your portfolio
Deflation: How to protect your portfolio
Investors 'ready to return to stock market'
However, it is also worth remembering that since 1900 high-yielding shares have outperformed the stock market as a whole, 85pc of the time over 10-year periods. They've also outperformed the market since September 2008, when the markets really went into freefall.
As an example of the relationship between risk and yield, let's compare two blue chips with apparent dividend attractions: BP and BT.
This week, the yield on BT is 19pc net of basic-rate tax. Sounds good, but remember the adage "if it looks too good to be true, it probably is". Every analyst in the City expects BT to cut its dividend next time around. Investors should be cautious of above-average share yields: the market is telling you "the higher the yield the higher the risk".
BP has a yield of 9pc. Recently, there has been speculation that the low oil price may force the company to cut the dividend. This has proved unfounded, as BP's management has said the dividend will be maintained this year and it will try to maintain it into 2010, even if the oil price stays at current levels. So here we have some medium-term visibility and potential for capital growth if the oil price rises over the medium term.
When considering an investment for yield, note the dividend cover; this is how many times the profits cover the dividend and is an indicator of whether a company will be able to pay future dividends at the current rate or higher. It is calculated by dividing the net earnings per share by the net dividend per share.
For example, if a company has earnings per share of 5p and it pays out a dividend of 2.5p, the dividend cover will be 5/2.5 = 2. The higher the cover, the better the chance of maintaining the dividend if profits fall. However, a lower figure may be acceptable if the group's profits are relatively stable.
So a good portfolio of equity income shares would feature mainstream companies with good dividend cover and a relatively recession-proof business (such as energy), plus a good helping of the FTSE 100 iShare – a form of exchange traded fund (ETF) marketed by Barclays – to provide some extra diversification, and to provide the opportunity to take advantage of market volatility.
Such a portfolio might include BP, yielding 9pc with 2.6 times dividend cover; GlaxoSmithKline, yielding 5.5pc with 1.6 times cover; National Grid, yielding 6.5pc with 2 times cover; Scottish & Southern, yielding 5.7pc (1.7); Shell, yielding 4.2pc (3.5); Vodafone, yielding 6pc (1.8) plus the FTSE iShare yielding 5.1pc with no cover calculation available.
An investment of £12,000 could therefore give you about £710 income over a full year, an overall yield of 5.9pc.
These equity shares could provide a relatively stable source of income combined with the potential for capital growth. There is, of course, a risk of further setbacks in the markets that could take your investment value lower, but with blue-chip companies like these it's a relatively low-risk portfolio as equities go.
Keep in touch with the companies you've invested in: if you hold the shares in an Isa or a broker's nominee, opt in for shareholder communications direct from the company. It's your right to be kept informed and it shouldn't cost you extra.
Your holding in the FTSE 100 iShare may provide the opportunity to do some tactical purchases or sales. Rather than buying the whole holding at once, you could invest in £1,000 steps as the market falls back, then set a limit at, say, 10pc up on your purchase price to sell as the market strengthens.
This way you can take advantage of short-term volatility to improve the return on the portfolio as a whole. Finally, if you're a taxpayer make sure you use your Isa allowance to minimise your income tax bill.
Gavin Oldham is chief executive of the Share Centre
http://www.telegraph.co.uk/finance/personalfinance/investing/5131421/Which-shares-for-income.html
How and Why Do Companies Pay Dividends?
How and Why Do Companies Pay Dividends?
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Look anywhere on the web and you're bound to find information on how dividends affect stockholders: the information ranges from a consideration of steady flows of income, to the proverbial "widows and orphans", and to the many different tax benefits that dividend-paying companies provide. An important part missing in many of these discussions is the purpose of dividends and why they are used by some companies and not by others. Before we begin describing the various policies that companies use to determine how much to pay their investors, let's look at different arguments for and against dividends policies. (Read more about widows and orphans in Widow And Orphan Stocks: Do They Still Exist?)
Arguments Against Dividends
First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.
The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock.
According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets. (Keep reading about capital gains in Tax Effects On Capital Gains.)
Arguments For Dividends
In opposition to these two arguments is the idea that a high dividend payout is important for investors because dividends provide certainty about the company's financial well-being; dividends are also attractive for investors looking to secure current income. In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security.
Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends. (For more, see Dividends Still Look Good After All These Years.)
Dividend-Paying Methods
Now, should the company decide to follow either the high or low dividend method, it would use one of three main approaches: residual, stability, or a hybrid compromise between the two.
Residual
Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met.
For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).
Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.
Stability
The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income.
Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively. In either instance, companies following this policy are always attempting to share earnings with shareholders rather than searching for projects in which to invest excess cash.
Hybrid
The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends. As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained. On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.
Conclusion
If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.To read more on this subject, see Dividend Facts You May Not Know.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://investopedia.com/articles/03/011703.asp?partner=basics4bb
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Look anywhere on the web and you're bound to find information on how dividends affect stockholders: the information ranges from a consideration of steady flows of income, to the proverbial "widows and orphans", and to the many different tax benefits that dividend-paying companies provide. An important part missing in many of these discussions is the purpose of dividends and why they are used by some companies and not by others. Before we begin describing the various policies that companies use to determine how much to pay their investors, let's look at different arguments for and against dividends policies. (Read more about widows and orphans in Widow And Orphan Stocks: Do They Still Exist?)
Arguments Against Dividends
First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.
The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock.
According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets. (Keep reading about capital gains in Tax Effects On Capital Gains.)
Arguments For Dividends
In opposition to these two arguments is the idea that a high dividend payout is important for investors because dividends provide certainty about the company's financial well-being; dividends are also attractive for investors looking to secure current income. In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security.
Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends. (For more, see Dividends Still Look Good After All These Years.)
Dividend-Paying Methods
Now, should the company decide to follow either the high or low dividend method, it would use one of three main approaches: residual, stability, or a hybrid compromise between the two.
Residual
Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met.
For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).
Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.
Stability
The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income.
Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively. In either instance, companies following this policy are always attempting to share earnings with shareholders rather than searching for projects in which to invest excess cash.
Hybrid
The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends. As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained. On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.
Conclusion
If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.To read more on this subject, see Dividend Facts You May Not Know.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://investopedia.com/articles/03/011703.asp?partner=basics4bb
How Low Can The Market Go?*
How Low Can The Market Go?*
Henry Blodget
Henry Blodget
Mar. 5, 2009, 4:49 PM59
*UPDATE: After today's 4% drop, the S&P 500 is now at 680, an 11.85 P/E.
EARLIER: On days like today, it helps to look at the silver lining. Here it is: The farther stocks fall, the cheaper they get--and the higher the expected long-term return becomes. Unfortunately, that doesn't mean we don't have a long way to go on the downside.
There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.* After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X. We're still in the middle of the last one.
The most recent bubble peak, 2000, was by far the most extreme we have ever experienced. In 2000, the S&P 500 by prof. Shiller's measure exceeded 40X (it had never before exceeded 30X). With the S&P 500 hitting 700 today, the PE has now fallen back to 12X. (See chart above.)
Three major bubbles are not enough historical precedent to confidently conclude where the S&P 500 will bottom this time around, but it seems reasonable to conclude that the trough will be in line with--or below--the preceeding lows (Given that we just had the highest peak in history by a mile, it doesn't seem absurd to think that we might be headed for the lowest trough in history by a mile.)
So where are we now?
Based on Professor Shiller's latest numbers, we're at about a 12X P/E. (Prof. Shiller's last update was at 805 on the S&P 500, which produced a 14X P/E. Plugging in today's 700 on the same earnings number, we get about a 12X P/E). The 12X PE compares favorably to the long-term arithmetic average of 16X, but it's still way above the historical troughs of 5X-8X.
So where would the S&P bottom if we hit the previous trough PE lows? It depends how we get there.
If the stock market stops falling and earnings eventually begin to grow again, we would be close to the bottom: The market could simply move sideways for 5-10 years while earnings growth gradually reduced the PE to the 5X-8X range. This is what happened in the 1970s.
Alternatively, the market could just keep dropping, as it did in the early 1930s.
Using Professor Shiller's latest earnings data, here's where the numbers would fall out if the market just kept dropping and 10-year average earnings didn't grow from today's level:
P/E S&P 500 Level
*UPDATE: After today's 4% drop, the S&P 500 is now at 680, an 11.85 P/E.
EARLIER: On days like today, it helps to look at the silver lining. Here it is: The farther stocks fall, the cheaper they get--and the higher the expected long-term return becomes. Unfortunately, that doesn't mean we don't have a long way to go on the downside.
There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.* After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X. We're still in the middle of the last one.
The most recent bubble peak, 2000, was by far the most extreme we have ever experienced. In 2000, the S&P 500 by prof. Shiller's measure exceeded 40X (it had never before exceeded 30X). With the S&P 500 hitting 700 today, the PE has now fallen back to 12X. (See chart above.)
Three major bubbles are not enough historical precedent to confidently conclude where the S&P 500 will bottom this time around, but it seems reasonable to conclude that the trough will be in line with--or below--the preceeding lows (Given that we just had the highest peak in history by a mile, it doesn't seem absurd to think that we might be headed for the lowest trough in history by a mile.)
So where are we now?
Based on Professor Shiller's latest numbers, we're at about a 12X P/E. (Prof. Shiller's last update was at 805 on the S&P 500, which produced a 14X P/E. Plugging in today's 700 on the same earnings number, we get about a 12X P/E). The 12X PE compares favorably to the long-term arithmetic average of 16X, but it's still way above the historical troughs of 5X-8X.
So where would the S&P bottom if we hit the previous trough PE lows? It depends how we get there.
If the stock market stops falling and earnings eventually begin to grow again, we would be close to the bottom: The market could simply move sideways for 5-10 years while earnings growth gradually reduced the PE to the 5X-8X range. This is what happened in the 1970s.
Alternatively, the market could just keep dropping, as it did in the early 1930s.
Using Professor Shiller's latest earnings data, here's where the numbers would fall out if the market just kept dropping and 10-year average earnings didn't grow from today's level:
P/E S&P 500 Level
10X 575
8X 460 (highest previous trough low)
7X 400 (average previous trough low)
6X 350
5X 300 (lowest previous trough low)
In short, if the S&P fell straight to the high-end of its previous trough range (8X PE, or 460), it would fall another 35% from today's level (700)
If the S&P fell straight to the low-end of its previous trough range (5X PE, or 300), it would fall another 55+% from today's level.
Here's hoping we don't set a new low on the downside.
--------------------------------------------------------------------------------
* Shiller's "cyclically adjusted" PE takes an average of 10 years of S&P 500 earnings instead of using a single year's. Why? Because the business cycle makes single-year earnings misleading. In boom times, profit margins are high, and P/Es look artificially low (and stocks look misleadingly cheap). In busts, profit margins collapse, and P/Es look artificially high (and stocks look misleadingly expensive--as is the case this year). Shiller's cyclically-adjusted PE mutes the effect of the business cycle and, therefore, provides a much more informative and predictive PE ratio.
Here's a link to Professor Shiller's site, where you can download an Excel spreadsheet with all of the S&P 500 data >
Today's Bear Market Now Not As Bad As The Great Crash!
Today's Bear Market Now Not As Bad As The Great Crash!
Henry BlodgetApr. 6, 2009, 6:17 AM7
We are happy to report, via Doug Short, that today's bear market is no longer as bad as the Great Crash, as measured by depth-of-decline-over-time. Thanks to the rally of the past month, we've crawled back above the Great Crash trendline.
Henry BlodgetApr. 6, 2009, 6:17 AM7
We are happy to report, via Doug Short, that today's bear market is no longer as bad as the Great Crash, as measured by depth-of-decline-over-time. Thanks to the rally of the past month, we've crawled back above the Great Crash trendline.
It's worth noting, however, that the rip-roaring bull market of the past month does bear an unnerving resemblance to a similar pattern in 1931...before the last leg of the Great Crash took the DOW from down 50% to down 89%.
Visit dshort.com for an interactive version of this chart, as well as a bunch of other cool charts and analyses >
Is the Stock Market Cheap?
In times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of Q4 is something that has never happened before in the history of the S&P Composite.
The P/E10 Ratio
Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, which we'll call the P/E10. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the P/E10 to a wider audience of investors.
April 3, 2009 revised April 6th
An old-fashioned way to answer this question is to look at the historic Price-to-Earnings (P/E) ratio using reported earnings (as opposed to earnings estimates).
The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest earnings are posted on the earnings page in a linked Excel file (see column D). More...
140 Years Of Bull And Bear Markets
140 Years Of Bull And Bear Markets
Henry BlodgetApr. 6, 2009, 3:25 PM
Doug Short has created a nice snapshot of 140 years of market history. It's a logarithmic chart, so it shows the impact of percentage rather than absolute price moves, and prices have been adjusted for inflation. Note that the chart is price-only: It does not include the impact of dividends.
Key points:
Bull and bear markets have always been with us (duh)
The market spends about half the time above trend and half below trend (duh)
The market has been above trend for about 20 years (ruh roh)
The trough-to-peak 18-year bull market that peaked in 2000 (+666%) was the biggest in history by a mile (ruh roh)
In the 5-year bull market in the middle of the Great Depression (1932-1937), the S&P jumped 266% (five years is a long time--don't want to miss that)
20 years after the 1929 peak, the S&P traded at half its 1929 value (ruh roh)
Doug short has more thoughts at dshort.com >
See Also:
Today's Bear Market Is No Longer Worse Than The Great Crash!
Henry BlodgetApr. 6, 2009, 3:25 PM
Doug Short has created a nice snapshot of 140 years of market history. It's a logarithmic chart, so it shows the impact of percentage rather than absolute price moves, and prices have been adjusted for inflation. Note that the chart is price-only: It does not include the impact of dividends.
Key points:
Bull and bear markets have always been with us (duh)
The market spends about half the time above trend and half below trend (duh)
The market has been above trend for about 20 years (ruh roh)
The trough-to-peak 18-year bull market that peaked in 2000 (+666%) was the biggest in history by a mile (ruh roh)
In the 5-year bull market in the middle of the Great Depression (1932-1937), the S&P jumped 266% (five years is a long time--don't want to miss that)
20 years after the 1929 peak, the S&P traded at half its 1929 value (ruh roh)
Doug short has more thoughts at dshort.com >See Also:
Today's Bear Market Is No Longer Worse Than The Great Crash!
How Bear Markets End
Posted April 7, 2009 05:15 PM (EST)
How Bear Markets End
Doug Short has taken a detailed look at the 10 bear markets and bear-market-recoveries since 1950. You can click through a slideshow showing each of these periods in detail here >
Importantly, Doug's charts do not include the horrific bear market of 1929-1932, which puts all of the post-war ones to shame. To get a more detailed sense of how that one "bottomed," click through to the last slide, which overlays our current bear market on top of the three nastiest ones in the last century.
Some key points:
* The 10 bear markets since 1950 have bottomed down 20% to 57% (the low in the current cycle) off the peak. The current bear is by far the worst since the Great Crash, which bottomed down 89%.
* The bear phases of these markets lasted from 3 - 30 months (we're currently in month 17). The drop from 1929-1932 was also about 30 months.
* Most of these markets offered some sort of "retest" of the low. Importantly, however, some did not. (As always, beware confident "technical" analysts)
* As this additional chart shows, the S&P is now trading about in-line with its long-term price trend after 15 years of trading above it. So even if we have put in the bear-market bottom, it is likely that the S&P will eventually trade below trend for a considerable period of time.
See Also: 140 Years Of Bull And Bear Markets
Friday 10 April 2009
How to Start a Business with No Money
Posted April 8, 2009 04:35 PM (EST)
How to Start a Business with No Money
Is it possible to start a business with little or no money? Absolutely. In fact, back in 2004 that's exactly what I did. I launched World 50, investing only $400.00, and that was to buy stationary to print invoices.
This was good news for me, because I had no money. Zilch, nada, goose egg, the bagel. And I quickly discovered that investors don't want to invest in you anyway until the model is proven, and then take everything for their investment. Bad idea, particularly if you don't have a track record.
I learned that with the right approach, starting a business with no money is not only possible; it results in a better company. Here are some tips:
1) Live off your current job as long as possible. There is no reason you cannot explore and experiment through your entire first year of launching a new business while holding down another full time job. The first year is about ideation, about coming up with bad ideas and letting other people explain to you why they are bad, and how they can be better. You can nurture and grow the idea, and also build the initial wave of enthusiasm with prospective customers and employees all while moonlighting.
Got fired? Even better. After the first few weeks of a job search, no one can spend 50+ hours a week focused entirely on finding employment. Think Jack Nicholson in The Shining. Use your non-search time to gestate and spin-up a new idea. It's healthy, and may really lead to something. This is what happened to me.
2) Let your customers fund your working capital. This is key, although it is not possible for every business model. Developing, testing and manufacturing many products requires significant capital up front. But for a service business, it is much easier. My company sold annual subscription memberships to executives. The fees were required to be paid up front, but our costs were not incurred until months later. With no salary (living on a couple months of severance) and no immediate expenses, we quickly built up a bank account of $300k and rising.
Even if your idea does require making a product, it can be launched inexpensively. My good friend, Sara Blakely, started the amazingly successful company Spanx with less than five thousand dollars. She researched and wrote most of the patent on her own (using attorneys for the clean up), then begged and borrowed to find a plant to make her prototype. From there, she lined up orders, and the cash flow equation fell into place.
3) Outsource your sales department. You can't afford to hire (or commit to) high-ticket sales people. Find companies who already have a relationship with your target customers, and rope them in. World 50 sold to the highest level executives in world, and I had a small problem - I didn't personally know a single one! But I was able to talk Accenture, Bain, Omnicom, WPP and others into making all the introductions for me - all I had to do was close the sale.
In fact, these partner companies quickly became so excited about my new business that they donated all of our branding work, technology development and PR - and each actually paid me $50,000 for the right to do so! Now that may be hard to replicate, but if you can find ways to get your partners excited, you can get them to contribute.
4) You don't need to give away equity. Many people I have spoken with think that if you don't have cash, then the only way to launch is to give away lots of equity - to partners, to employees, to initial customers. Not so. I seriously considered giving our first customers and partners equity in the company to get them to participate. But as it turned out...they didn't want it! Customers could easily sign up and write me a check, it was a simple transaction - but if they received even one share of equity, it went to their legal department - and good luck wading through that mess. As for my service provider partners? They just wanted to participate in what my company was doing, and NOT have any brand liability in case I screwed things up. Take the high rode. I kept 100% of the equity.
***
In the end, launching a company with no money will force you to
1) build a better model which has sustainable cash flow right out of the gate - one of the most important things,
2) truly engage your partners - you are unlikely to succeed without them (money or not), and
3) retain control! You need to steer the ship, not your partners or customers, and certainly not your external investors ("Hey Rick, it's been 3.5 years - time to sell!").
The bottom line is this: If you can't earn the interest and attention of customers, partners and employees, you WON'T be able to buy it. And if you can, then why pay for it?
This post was originally published at RickSmith.me
How to Start a Business with No Money
Is it possible to start a business with little or no money? Absolutely. In fact, back in 2004 that's exactly what I did. I launched World 50, investing only $400.00, and that was to buy stationary to print invoices.
This was good news for me, because I had no money. Zilch, nada, goose egg, the bagel. And I quickly discovered that investors don't want to invest in you anyway until the model is proven, and then take everything for their investment. Bad idea, particularly if you don't have a track record.
I learned that with the right approach, starting a business with no money is not only possible; it results in a better company. Here are some tips:
1) Live off your current job as long as possible. There is no reason you cannot explore and experiment through your entire first year of launching a new business while holding down another full time job. The first year is about ideation, about coming up with bad ideas and letting other people explain to you why they are bad, and how they can be better. You can nurture and grow the idea, and also build the initial wave of enthusiasm with prospective customers and employees all while moonlighting.
Got fired? Even better. After the first few weeks of a job search, no one can spend 50+ hours a week focused entirely on finding employment. Think Jack Nicholson in The Shining. Use your non-search time to gestate and spin-up a new idea. It's healthy, and may really lead to something. This is what happened to me.
2) Let your customers fund your working capital. This is key, although it is not possible for every business model. Developing, testing and manufacturing many products requires significant capital up front. But for a service business, it is much easier. My company sold annual subscription memberships to executives. The fees were required to be paid up front, but our costs were not incurred until months later. With no salary (living on a couple months of severance) and no immediate expenses, we quickly built up a bank account of $300k and rising.
Even if your idea does require making a product, it can be launched inexpensively. My good friend, Sara Blakely, started the amazingly successful company Spanx with less than five thousand dollars. She researched and wrote most of the patent on her own (using attorneys for the clean up), then begged and borrowed to find a plant to make her prototype. From there, she lined up orders, and the cash flow equation fell into place.
3) Outsource your sales department. You can't afford to hire (or commit to) high-ticket sales people. Find companies who already have a relationship with your target customers, and rope them in. World 50 sold to the highest level executives in world, and I had a small problem - I didn't personally know a single one! But I was able to talk Accenture, Bain, Omnicom, WPP and others into making all the introductions for me - all I had to do was close the sale.
In fact, these partner companies quickly became so excited about my new business that they donated all of our branding work, technology development and PR - and each actually paid me $50,000 for the right to do so! Now that may be hard to replicate, but if you can find ways to get your partners excited, you can get them to contribute.
4) You don't need to give away equity. Many people I have spoken with think that if you don't have cash, then the only way to launch is to give away lots of equity - to partners, to employees, to initial customers. Not so. I seriously considered giving our first customers and partners equity in the company to get them to participate. But as it turned out...they didn't want it! Customers could easily sign up and write me a check, it was a simple transaction - but if they received even one share of equity, it went to their legal department - and good luck wading through that mess. As for my service provider partners? They just wanted to participate in what my company was doing, and NOT have any brand liability in case I screwed things up. Take the high rode. I kept 100% of the equity.
***
In the end, launching a company with no money will force you to
1) build a better model which has sustainable cash flow right out of the gate - one of the most important things,
2) truly engage your partners - you are unlikely to succeed without them (money or not), and
3) retain control! You need to steer the ship, not your partners or customers, and certainly not your external investors ("Hey Rick, it's been 3.5 years - time to sell!").
The bottom line is this: If you can't earn the interest and attention of customers, partners and employees, you WON'T be able to buy it. And if you can, then why pay for it?
This post was originally published at RickSmith.me
Comparing Recessions: Chart
10.4.2009
Comparing Recessions: Chart
Earning season is in high gear, so it is a good time to take a look at the earning performance of the S&P 500.
This chart from Standard & Poors, pointed out by Chart Of The Day, gives some perspective.
The graph compares the earnings performance of the current recession, shown in the solid red line, to that of the 2001 recession in the dashed gold line, and the earnings performance from 1936 through 2006, shown as the dashed blue line.
As today's chart illustrates, the current decline in earnings is several orders of magnitude greater than the average decline during a recession. The current decline is also more severe than what was the most severe earnings decline on record - the decline that began in 2001 (gold dashed line).
Why not start a Trust Fund for your child?
From Times Online
February 20, 2008
The beginner's guide to Child Trust Funds
James Charles
Child Trust Funds (CTFs) were introduced by the Government in 2005 to encourage parents to save for their children's future About three million children now have funds.
Children gain access to the pot of cash in a CTF only when they turn 18, but nobody else, including parents, can access the money before that point. The interest earned by savings in a CTF are tax-free.
Who is eligible?
Any child born after September 1, 2002, who qualifies for child benefit, is eligible for a CTF. Children born after the introduction of CTFs in April 2005 are enrolled automatically. The Government sends parents a £250 voucher to open a fund and they can invest this in either a savings account or one that invests in stocks and shares (see below for information on the types of funds available).
How to save
Background
The beginner's guide to Child Trust Funds
National Savings & Investments explained
How to budget
Background
The beginner's guide to current accounts
How to reclaim bank charges
Bonds explained
Related Links
Those who save make best use of child funds
Labour caves in over charges for child trust funds
Families on income support are given a total of £500.
When children reach the age of seven they are sent a further £250 or £500 by the Government.
The Government will open a stakeholder Child Trust Fund automatically if a child's parents fail to do so within 12 months of the voucher being issued.
Parents of children born between September 2002 and April 2005 should apply for their children retrospectively. For more information, or if you have not received the voucher, call the Child Trust Fund helpline on 0845 3021470 or textphone on 0845 3667870.
Who can contribute?
Parents and relatives are encouraged to make regular contributions to the trust fund, although they can do so whenever they choose.
The maximum that can be paid into an account is £100 a month, or £1,200 a year. Government contributions do not count towards this limit.
The average amount that parents deposit each month is £23, according to figures from Revenue & Customs. Other research, by Nationwide Building Society, found that 60 per cent of CTF accounts received no additional contributions at all.
What are the benefits?
The idea is that the nest egg should grow in value over time. When children have access to the cash at the age of 18, they can then use it to pay for university, a deposit on a house or anything else they choose.
You can find out how big a fund will be when a child reaches the age of 18 by using a Child Trust Fund calculator.
The three options
There is a huge range of different CTFs available, particularly if you go online. It seems that everyone from Asda to Legal & General offer CTFs of some description. Indeed, there are many funds catering for niche markets, such as ethical or shariah compliant funds.
There are three main types of fund.
Savings accounts:
A savings account is the most secure option and mirrors the deposit accounts available on the high street, though the rates are usually a little better. There are also no tax liabilities.
Stakeholders:
Most experts recommend opting for a stakeholder equity fund, as these take advantage of stock market growth and are likely to produce a greater return than cash-only acccounts over the longer term. Your cash is invested in the stock market but is managed by your fund provider. Parents have a limited choice of the types of funds in which the money is invested.
The Government has made sure that the level of risk is small. When a child reaches the age of 13 the money will be moved to safer, cash-based accounts.
The Government has also capped the annual management charge on stakeholder CTFs at 1.5 per cent.
Stocks and shares:
The final option is a purely stock market-based option. This is the riskiest form of investment and allows for the greatest degree of investment freedom. Parents should remember that the management fees on these investments are not capped in the same way as stakeholder CTFs.
Over the long term it is likely that the return on stock market investments will be greater than cash investments, but parents should be aware that the value of the CTF can go down as well as up, although this is unlikely.
Five news stories
Labour caves in over charges for child trust funds
The 3Rs: reading, writing and interest rates
One in four parents ignore CTF
Teenagers urge curbs on spending CTF money
Parents spoilt for choice
Five features
Child funds grow up
The best places for your child trust funds
Make your child a millionaire
Parents’ alternatives to a child trust fund
Gifts that are not just for Christmas
Five websites
Child Trust Fund
HM Revenue and Customs
Direct.gov.uk - Parents Guide
Money Extra
Stakeholder Saving
February 20, 2008
The beginner's guide to Child Trust Funds
James Charles
Child Trust Funds (CTFs) were introduced by the Government in 2005 to encourage parents to save for their children's future About three million children now have funds.
Children gain access to the pot of cash in a CTF only when they turn 18, but nobody else, including parents, can access the money before that point. The interest earned by savings in a CTF are tax-free.
Who is eligible?
Any child born after September 1, 2002, who qualifies for child benefit, is eligible for a CTF. Children born after the introduction of CTFs in April 2005 are enrolled automatically. The Government sends parents a £250 voucher to open a fund and they can invest this in either a savings account or one that invests in stocks and shares (see below for information on the types of funds available).
How to save
Background
The beginner's guide to Child Trust Funds
National Savings & Investments explained
How to budget
Background
The beginner's guide to current accounts
How to reclaim bank charges
Bonds explained
Related Links
Those who save make best use of child funds
Labour caves in over charges for child trust funds
Families on income support are given a total of £500.
When children reach the age of seven they are sent a further £250 or £500 by the Government.
The Government will open a stakeholder Child Trust Fund automatically if a child's parents fail to do so within 12 months of the voucher being issued.
Parents of children born between September 2002 and April 2005 should apply for their children retrospectively. For more information, or if you have not received the voucher, call the Child Trust Fund helpline on 0845 3021470 or textphone on 0845 3667870.
Who can contribute?
Parents and relatives are encouraged to make regular contributions to the trust fund, although they can do so whenever they choose.
The maximum that can be paid into an account is £100 a month, or £1,200 a year. Government contributions do not count towards this limit.
The average amount that parents deposit each month is £23, according to figures from Revenue & Customs. Other research, by Nationwide Building Society, found that 60 per cent of CTF accounts received no additional contributions at all.
What are the benefits?
The idea is that the nest egg should grow in value over time. When children have access to the cash at the age of 18, they can then use it to pay for university, a deposit on a house or anything else they choose.
You can find out how big a fund will be when a child reaches the age of 18 by using a Child Trust Fund calculator.
The three options
There is a huge range of different CTFs available, particularly if you go online. It seems that everyone from Asda to Legal & General offer CTFs of some description. Indeed, there are many funds catering for niche markets, such as ethical or shariah compliant funds.
There are three main types of fund.
Savings accounts:
A savings account is the most secure option and mirrors the deposit accounts available on the high street, though the rates are usually a little better. There are also no tax liabilities.
Stakeholders:
Most experts recommend opting for a stakeholder equity fund, as these take advantage of stock market growth and are likely to produce a greater return than cash-only acccounts over the longer term. Your cash is invested in the stock market but is managed by your fund provider. Parents have a limited choice of the types of funds in which the money is invested.
The Government has made sure that the level of risk is small. When a child reaches the age of 13 the money will be moved to safer, cash-based accounts.
The Government has also capped the annual management charge on stakeholder CTFs at 1.5 per cent.
Stocks and shares:
The final option is a purely stock market-based option. This is the riskiest form of investment and allows for the greatest degree of investment freedom. Parents should remember that the management fees on these investments are not capped in the same way as stakeholder CTFs.
Over the long term it is likely that the return on stock market investments will be greater than cash investments, but parents should be aware that the value of the CTF can go down as well as up, although this is unlikely.
Five news stories
Labour caves in over charges for child trust funds
The 3Rs: reading, writing and interest rates
One in four parents ignore CTF
Teenagers urge curbs on spending CTF money
Parents spoilt for choice
Five features
Child funds grow up
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Wells Fargo Gives Wall Street a Reason to Run
Wells Fargo Gives Wall Street a Reason to Run
By JACK HEALY and ERIC DASH
Published: April 9, 2009
Stock markets surged higher on Thursday after Wells Fargo, the nation’s largest consumer bank, said that it expected to report record profit for the first three months of the year, kindling hopes that financial companies may finally be closing the book on quarter after quarter of wrenching losses.
As financial stocks soared, the Dow Jones industrial average rose 225 points as trading near a close, crossing above 8,000 points. The broader Standard & Poor’s 500-stock index was 3.5 percent higher, increasing the gains of a bear-market rally that has lifted stocks more than 20 percent since it began one month ago. The technology-heavy Nasdaq rose 3.4 percent.
Just three months ago, Wells Fargo announced that it had lost $2.55 billion as the economy foundered and the bank absorbed billions of losses from the acquisition of the Wachovia Corporation. But a statement on Thursday, Wells Fargo said it expected to report $3 billion in profit for the first quarter of 2009, far exceeding Wall Street’s expectations, and said it was issuing mortgages at a fast clip.
Investors took the statement from Wells Fargo, whose shares gained 20 percent, as another harbinger that the tattered economy may be bottoming out.
Other major banks like Citigroup, JPMorgan Chase and Bank of America, which reported billions in losses last quarter, have said that they expected to be profitable this year, and wisps of less-bad data from the housing market, manufacturers and consumer surveys are giving rattled investors new hopes that a bottom is in sight.
But experts warn that corporate losses are simply radiating outward from financial firms to other corners of the economy, and they say the economy’s thin green shoots and bear-market gains could turn to dust if rising unemployment forces deeper, unexpected contractions in consumer spending and corporate profits.
Analysts expect that earnings for companies in the S.&P. 500 fell 37 percent in the first months of the year, and they say many of the losses will be borne by retailers, energy companies and businesses that make products like chemicals and building materials.
“What you’re now seeing is the nonfinancial segment really start to tail off,” said Nicholas Bohnsack, sector strategist at Strategas Research Partners.
Oil prices settled at $52.05 a barrel in New York trading, up $2.67.
In Asia, Japan’s Nikkei rose 3.7 percent after Japan announced its biggest-ever economic stimulus plan, a $154 billion package of subsidies and tax breaks that aims to stem a deepening recession in the world’s second-largest economy.
In Europe, the FTSE 100 in London gained 1.4 percent, the DAX index in Frankfurt rose 3 percent, and CAC-40 in Paris rose 1.8 percent.
http://www.nytimes.com/2009/04/10/business/10markets.html?_r=1&hpw
Thursday 9 April 2009
Could the IMF run out of money?
Bailing Out the Bailers
Could the IMF run out of money?
By Karim Bardeesy Posted Wednesday, October 29, 2008 - 6:21pm
Who’s your bailout daddy? Well, if you’re Ukraine, Iceland, Hungary, Belarus, and Pakistan right now, it’s the International Monetary Fund. New loan commitments made by the IMF in the last two weeks already exceed $30 billion; requests for billions more could be forthcoming. Which raises a troubling question: Could the IMF run out of cash?
Unlikely, but the IMF may have seen its financial heyday. It was created during the 1944 Bretton Woods conference to help manage the international monetary system and accumulated healthy reserves of currency after World War II. It continues to be funded by “quotas” charged to each member country largely based on the size of its economy. The quotas are a one-time charge, though. If the IMF needs more money, it has to go back to its member countries, and they’re in tough shape right now. The most powerful among them—the United States and the European Union—are shoveling money out the door to deal with their own problems, creating new debt to buy bank shares.
That said, right now the fund is flush and the balance sheet is strong. It now has the equivalent of $201 billion available to be lent out. (It calls this its “one-year forward commitment capacity.”) Before the meltdown, there was “only” around $18 billion in debt outstanding, half from Turkey and the remainder from poorer African, Caribbean, and Central Asian countries.
There’s gold, too. The IMF owns, at last reckoning, more than $9 billion worth of the stuff (but an 85 percent supermajority of its membership is required to sell or buy any of it). The IMF can also borrow more money from wealthy member countries, with up to $53 billion extra available through two supplementary agreements if need be. And flailing countries can turn elsewhere for financing; the United States gave cash and loan guarantees worth $20 billion directly to Mexico in 1995.
In emergency situations, when a country is having trouble paying back loans that are due imminently, a SWAT team will go to the supplicating country to figure out what policies and how much short-term financing are needed. The IMF doesn’t quite carry the Domino’s half-hour guarantee, but it claims to be able to have a decision back to you in as little as 48 hours after its board receives a report on the situation. Only the hardiest currencies, like yen and U.S. dollars, are lent out (although a few Botswanan pulas might be out on offer).
The aid doesn’t come for free. There are loan repayments—the IMF actually takes a cut on every deal, lending out to needy countries at a higher interest rate than it pays back to “donor” countries. Plus, the IMF might insist that the receiving country commit to cutting domestic food subsidies or reduce its budget deficit—“structural adjustment” policies that formed part of the “Washington consensus” in the 1980s and 1990s and which still inspire anti-globalization types to pull out their black balaclavas. The IMF remembers the bitter taste those policies left with local populations and has pledged “fewer and more targeted” conditions this time around (and on Wednesday agreed to waive austerity measures in emerging economies). But if a country stalls in its reforms, the IMF can stop the flow of cash—a pretty big stick when, say, Turkey is sitting at its kitchen table with bills to pay.
While there may be a lot of money tucked away that countries can use to bail one another out, recent events have put the IMF in a tough spot, both financially and politically. Like any other multinational agency, the IMF is only as good as its member countries. If a big country, say, South Korea, feels the heat from international lenders, the IMF could be looking at a $50 billion or $100 billion request. After the Asian financial crises of the mid-1990s, the IMF’s forward commitment capacity fell as low as 20 billion “Special Drawing Rights” (an IMF unit then equivalent to around $27 billion); it tripled only after the IMF increased the quota it charged member countries by 45 percent. Will there be political will to supplement the IMF in the coming weeks? Or will a new fund, topped up by new currency reserves, be necessary, as Gordon Brown has mused? In the “New Bretton Woods” era, the IMF might not go under, but it may get left behind.
Explainer thanks Massachusetts Institute of Technology professor and former IMF chief economist Simon Johnson, co-founder of baselinescenario.com and Yoshiko Kamata and Bill Murray of the International Monetary Fund.
http://www.thebigmoney.com/articles/explainer/2008/10/29/bailing-out-bailers
Could the IMF run out of money?
By Karim Bardeesy Posted Wednesday, October 29, 2008 - 6:21pm
Who’s your bailout daddy? Well, if you’re Ukraine, Iceland, Hungary, Belarus, and Pakistan right now, it’s the International Monetary Fund. New loan commitments made by the IMF in the last two weeks already exceed $30 billion; requests for billions more could be forthcoming. Which raises a troubling question: Could the IMF run out of cash?
Unlikely, but the IMF may have seen its financial heyday. It was created during the 1944 Bretton Woods conference to help manage the international monetary system and accumulated healthy reserves of currency after World War II. It continues to be funded by “quotas” charged to each member country largely based on the size of its economy. The quotas are a one-time charge, though. If the IMF needs more money, it has to go back to its member countries, and they’re in tough shape right now. The most powerful among them—the United States and the European Union—are shoveling money out the door to deal with their own problems, creating new debt to buy bank shares.
That said, right now the fund is flush and the balance sheet is strong. It now has the equivalent of $201 billion available to be lent out. (It calls this its “one-year forward commitment capacity.”) Before the meltdown, there was “only” around $18 billion in debt outstanding, half from Turkey and the remainder from poorer African, Caribbean, and Central Asian countries.
There’s gold, too. The IMF owns, at last reckoning, more than $9 billion worth of the stuff (but an 85 percent supermajority of its membership is required to sell or buy any of it). The IMF can also borrow more money from wealthy member countries, with up to $53 billion extra available through two supplementary agreements if need be. And flailing countries can turn elsewhere for financing; the United States gave cash and loan guarantees worth $20 billion directly to Mexico in 1995.
In emergency situations, when a country is having trouble paying back loans that are due imminently, a SWAT team will go to the supplicating country to figure out what policies and how much short-term financing are needed. The IMF doesn’t quite carry the Domino’s half-hour guarantee, but it claims to be able to have a decision back to you in as little as 48 hours after its board receives a report on the situation. Only the hardiest currencies, like yen and U.S. dollars, are lent out (although a few Botswanan pulas might be out on offer).
The aid doesn’t come for free. There are loan repayments—the IMF actually takes a cut on every deal, lending out to needy countries at a higher interest rate than it pays back to “donor” countries. Plus, the IMF might insist that the receiving country commit to cutting domestic food subsidies or reduce its budget deficit—“structural adjustment” policies that formed part of the “Washington consensus” in the 1980s and 1990s and which still inspire anti-globalization types to pull out their black balaclavas. The IMF remembers the bitter taste those policies left with local populations and has pledged “fewer and more targeted” conditions this time around (and on Wednesday agreed to waive austerity measures in emerging economies). But if a country stalls in its reforms, the IMF can stop the flow of cash—a pretty big stick when, say, Turkey is sitting at its kitchen table with bills to pay.
While there may be a lot of money tucked away that countries can use to bail one another out, recent events have put the IMF in a tough spot, both financially and politically. Like any other multinational agency, the IMF is only as good as its member countries. If a big country, say, South Korea, feels the heat from international lenders, the IMF could be looking at a $50 billion or $100 billion request. After the Asian financial crises of the mid-1990s, the IMF’s forward commitment capacity fell as low as 20 billion “Special Drawing Rights” (an IMF unit then equivalent to around $27 billion); it tripled only after the IMF increased the quota it charged member countries by 45 percent. Will there be political will to supplement the IMF in the coming weeks? Or will a new fund, topped up by new currency reserves, be necessary, as Gordon Brown has mused? In the “New Bretton Woods” era, the IMF might not go under, but it may get left behind.
Explainer thanks Massachusetts Institute of Technology professor and former IMF chief economist Simon Johnson, co-founder of baselinescenario.com and Yoshiko Kamata and Bill Murray of the International Monetary Fund.
http://www.thebigmoney.com/articles/explainer/2008/10/29/bailing-out-bailers
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