Archive for category economy
Move from loan dependence to independence
Posted by admin in credit, credit cards, economy, effective budgeting, equity on March 16th, 2010
Reaching the Commit stage is the gold medal of partnering— when “me” becomes “we.” As you link your success to each other’s well-being, you move from independence to interdependence.While this goal is sometimes attained in our personal relations, it is elusive for most business partnerships. This doesn’t mean it can’t happen, but long-term partnerships are rare. Businesses change, marketplace realities evolve, and alliances shift market forces in different directions. Achieving this level of partnership ensures that as long as the partnership provides mutual benefits and trust exists, abundance will flow.
The partnership becomes institutionalized when there is formal commitment to it. In our personal lives, people have weddings or other commitment ceremonies to publicly acknowledge their partnerships. Aside from the ritual, which is important, they send a message to the outside world that “we are in this together.” A business example is United Airlines, which ran a series of advertisements featuring their employees, who had just signed an employee ownership contract with management. The message was obvious: Since they were now owner-employees, their customers could expect service as if it were coming from the company leaders—because it was! In an extremely competitive marketplace, this is a powerful message.
Changes in credit quality
Posted by admin in Financial Advice, bonds, business, communication, consulting, economy, expenditures on October 22nd, 2009
With regard to the above-mentioned problems, rating migrations seem to be a more reliable indicator of changes in credit quality than default rates. Given that the risks of downgrade as well as default vary over time, the question is whether credit spreads compensate investors adequately.
Since the sample for the calculation of rating transition matrices is much broader than for default rates, they are less likely to be biased by changes of the rating agencies’ universe. To measure changes of credit quality over time, the ratings drift, that is the number of upgrades minus the number of downgrades, as a proportion of the total number of entities rated, can be a valuable indicator. A sample of high-quality issuers, however, will tend to have more downgrades than upgrades, and vice versa. Hence, variations of the ratings drift partly reflect changes in average credit quality over time.
As one would expect, credit spreads tend to rise when the ratio of upgrades to downgrades becomes worse.
The question, however, is, whether the credit spreads widen enough to compensate investors sufficiently for the deterioration of average credit quality that is reflected by a falling ratings drift. While predicting the direction of spread changes may help to make money on a mark-to-market basis, it is not adequate for buy-and-hold investors. They have to estimate the magnitude of the spread widening that corresponds to an observed deterioration of credit quality. Hence, the focus is purely on credit risk, while credit spreads also incorporate liquidity premia, and are influenced by technical factors and market sentiment.
The correlation between credit spreads and the business cycle
Posted by admin in bonds, business, credit, credit cards, economy, finances, payday loans on October 21st, 2009
Fama and Chen examine the correlation between credit spreads and the business cycle. They find empirical evidence that corporate bond spreads are good predictors of future economic growth. Based on empirical data from 1933 to 1997, a recent study by Koopman and Lucas (2003) reveals two different types of cycles. On the one hand, there is a cycle with a frequency of about 6 years, where a positive correlation between credit spreads and default rates, and a negative correlation between spreads and economic growth can be observed. On the other hand, a second cycle with a duration of about 11 years shows a positive link between spreads and business failures, and a negative correlation between GDP growth and both spreads and default rates. However, constraining the analysis on the post Second World War era no significant correlations between credit spreads, default rates and the business cycle could be found.
Do you have any business owning stocks?
Posted by admin in Companies, communication, economy, fixed costs on August 28th, 2009
At the micro level, a stock is an ownership interest in a business. The earnings from the business belong to the stockholders. Theoretically, the employees of the business, including top management, work for the stockholders.
In practice, the employees are self-interested. Every employee, from the CEO to the janitorial crew, wants as large a piece of the earnings as possible, leaving as little for you as can be justified. You may have emotional difficulty with this built-in conflict of interest.
Elaborate schemes are routinely employed to siphon off your interests. In the old days, two-thirds of profits were paid out as dividends, giving you direct control of a large portion of earnings. Today, dividends are cut or eliminated so employees can use profits as they see fit. Fewer than half of today’s stocks pay any dividends at all. Every year the number of dividend payers declines. Even those that pay dividends pay only token amounts. Instead, employees grant themselves raises and bonuses without consulting shareholders. Insider boards of directors grant themselves profit-sharing plans, stock, and stock options, all to your deficit. Board remuneration committees offer excessive pay for executives in exchange for excessive pay for themselves.
The few profits that are left are often squandered on ill-advised acquisitions and other schemes. Hundreds of examples could be cited including the recent debacles at Enron, Lucent, Rite Aid, Millennium, Color Tile, Dow Chemical, Sunbeam, Trump Hotels & Casinos, Reliance Groups, and many Internet, tech, and telecom firms that crashed in 2000-2001.
Basics of accounting – part 2
Posted by admin in Financial Advice, economy, equity, expenditures, financial growth on August 3rd, 2009
Why do accountants use the double-entry system? Well, we could explain how the system is based logically on the principle of duality, because all activities with any economic significance have two aspects—resources and uses, work and reward, loss and gain. Or we could simply point out that recording every transaction twice dramatically reduces the chance of error. The bottom line is that the system works, although it occasionally seems to defy common sense. Don’t expect to understand it all completely now. Our discussion of the general ledger and subledgers should help make more sense of debits and credits.
The most common structure for financial documents, based on the need to distinguish between debits and credits, is the T account diagram. The left side of the T represents debits and the right side of the T represents credits. In the accounting process, a figure is recorded as a debit (left side) or as a credit (right side) depending on how the transaction affects that particular account.