Showing posts with label Investment Management. Show all posts
Showing posts with label Investment Management. Show all posts
Signs of An Economic Recovery
I am a Money Magnet! We are Money Magnets!
Have you ever wondered how analysts determine whether the economy is doing good or not? I bet you have. Those who are investing in the stock market most especially. It is a known fact that the stock market follows the economic outlook. But sometimes it could all be just based on the sentiments of the investors. So what factors do persuade these investors? If we were to just look at the GDP (Gross Domestic Product) as we learned in Economics, then the factors to look at would be Consumption, Gross Investments, Government Spending, Exports, and Imports. Understanding the economy however, is not that easy. It is both a science and an art. There are other factors that affect investor sentiments. To help us all Money Magnets, here's an article I found from investopedia.com. Enjoy!
The 6 Signs of an Economic Recovery
- Employment It is difficult to talk about an economy in recovery if people are not getting back to work. There are such things as "jobless recoveries", where there is enough economic activity to get businesses moving again, but not enough to stimulate hiring.
In most other cases, however, investors are right to correlate an improving economy with people getting back to work. The reported unemployment rate, then, is often given a great deal of weight by observers. Keep in mind, though, that unemployment data is not always reliable in the early stages of a recovery - the quirks of the statistical method's use exclude those who have abandoned the search for work, but when a recovery seems plausible, some of these people resume their search and count once again among the unemployed.
Non-farm payroll is another valuable measure - it gives a somewhat clearer sense of how many people companies are hiring. Along with the number of people added (or subtracted) from payrolls, investors can see where these workers are going and where wages are trending.
Along with metrics like unemployment and non-farm payrolls, investors can also follow the lesser-known ASA Staffing Index. This index measures activity in the temporary staffing industry; often when employers seek to add workers, they add temporary workers first so as to avoid the commitments and expenses of adding full-time employees ahead of a confirmation that business has improved. As such, a climbing ASA Staffing Index can signal that a recovery is underway.
- Consumer Spending For better or worse, the U.S. economy is driven by consumer spending. Consequently, it is difficult to imagine a recovery that does not include rebounding consumer spending. Longer term, consumers may realize that they should save more and spend less, but that sort of restructuring does not occur overnight. Look for consumers opening their wallets as a sign of a recovery. (For further reading on economic indicators, check out our Economic Indicators Tutorial.)
- Consumer Sentiment Perhaps it is a testament to the power of positive thinking, but sentiment indicators like the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index do seem to correlate with reality more often than not. These surveys ask people how they feel about the economy in near-term and their own individual or family prospects.
Ultimately, sentiment is somewhat of a self-fulfilling prophecy; if there is a constant drumbeat of how bad things are, people often become more conservative in their spending habits. Lower spending will then more or less make the economic soft patch happen. When people are more optimistic, though, they are more likely to spend money, start or expand small businesses, and otherwise act in ways that are good for economic growth.
- Business Indicators How consumers feel about the economy is all well and good, but it has to be matched by optimism and expansion in the business community. The Purchasing Managers' Index (PMI) surveys whether businesses are seeing new orders, higher production levels, timely deliveries from suppliers and increasing inventories and employment, all areas where a recovery will show itself.
Inventories, however, are harder to correlate as many businesses will look to run down inventories before committing to an expansion of production. This choppiness is often an issue in early economic recoveries as businesses do not want to miss the turn in the economy (and let their rivals capture share), but they do not want to overextend themselves either. - Bank Lending While public companies are not entirely dependent upon banks to grow their businesses, most small non-public businesses are. Without banksunderwriting new loans, small businesses do not grow, and without that growth it is difficult to see higher employment and a stable recovery.
The Federal Reserve provides regular information on bank lending activity, and investors can perhaps also look to the new Thomson Reuters/PayNet Small Business Lending Index to see whether small businesses are seeking (and getting) the funds to expand their businesses. (To find out more about the actions of the Federal Reserve, check out our Federal Reserve Tutorial.)
- Shipping Activity Shipping activity is a bit harder to read than other indicators, but the basic idea is straightforward - since most people buy things that come from "someplace else", overall economic activity is correlated with the movement of goods across the continent. Notable indexes here include the Cass Freight Index and the American Trucking Association's Truck Tonnage Index. (This index can provide insight into economic growth and production, but it has its critics. To learn more, see The Baltic Dry Index: Evaluating An Economic Recovery.)
None of these indicators are foolproof, or even all that useful in isolation. Every economic cycle is a little different than prior cycles, so investors should be careful about automatically applying old rules to new data. There is a certain amount of common sense that should guide investors. Economic growth means certain things - namely increasing production, increasing consumption (or savings), increasing employment, and increasing activity in areas like construction and transportation. By keeping a careful eye on whether businesses are preparing for growth, whether consumers feel comfortable about spending, and whether money and goods are moving through the economy, investors can get a sense of whether the next recovery is real.
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Bank Deposit Insurance raised to 500,000
April 29, 2009. President Gloria Macapagal-Arroyo has signed amendments that will increase the insurance coverage for bank deposits by 100 percent. The insurance for bank deposits to be provided by the PDIC will be raised from PhP 250,000 to Php 500,000.
The amendment was done in order to strengthen the confidence in the Philippines' banking system. In order to encourage the people to keep their money in the banks and protect them during this global recession.
However, in a report from the Philippine Daily Inquirer, it also states that the amendment also "grants the deposit insurer which deposits should be insured and which should be not." Which begs the question, 'Which deposits are insured?' Are all our bank deposits insured by default or does it have to be approved by the PDIC first? If the deposit insurer (PDIC) can take away our bank deposit insurance anytime, somehow, I don't feel so secure anymore. I realize, of course, that they've added this to deter fraudulent schemes such as that of the Legacy Group. I think further explanations should be provided to add clarity to the subject. If the deposit insurance can only be taken away if fraudulent practice is proven to exist, then I guess that would be more acceptable. As to when this amendment will take into effect has not been announced yet. I checked the PDIC and still no news has been reported on the matter. (Haaay ... I miss Money Smarts already.)
I'll keep you guys updated on this matter once I have more news.
Time Value of Money related to CAP Education Plan Options
In a recent post from pinoymoneytalk.com, a member of the forum holding an education plan ECU-A from CAP (College Assurance Plan) was offered the following options for her plan:
Option 1: Tuition Fee Reimbursement
These options can actually be considered as an annuity or a series of payments that you would receive in regular intervals. Computing for the present value of this annuity using the Time value of money will allow you to compare the amounts as if you have them in your hands at this very moment.
The present value of an annuity is computed using the following formulas:
where PVA = Present Value of an Annuity
PMT = The payments received
PVIFA = Present Value interest Factor for an annuity
i or K = Interest rate
n = number of periods
Using these equations to the different options, assuming a 5% interest rate, we would actually get a present value of 153,717 for Option 1 (assuming the maximum amount of 19,759 is received) and a present value of 151,550 for Option 2. In order for the present values to be equal, Option 1's payments must equal to 19,480 pesos.
What does this mean?
This means that you only have a small margin of around 279 pesos (19759 - 19480) for both options to be equal in value. Therefore, if you're not sure how much the college tuition will be, I think it would be wiser to choose Option 2. This holds true specially if the beneficiary is not scheduled to enter college in the near future.
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An interest rate of 5% per annum is quite reasonable as investors can currently avail of time deposits at this rate. The higher the interest rate, the smaller the margin becomes. Let's say you can invest your money in an instrument earning 10% per annum, the margin would be lessened to 245 pesos.
-0-
Computation guidelines / data:
Option 1:
PMT = 19.759
i = 0.05 / 8
n = 8
PVIFA = 7.568
Option 2:
PMT = 7,778
i = 0.05 / 20
n = 20
PVIFA = 18.987
Option 1: Tuition Fee Reimbursement
- Maximum reimbursement per semester = P19,759
- Total receivable amount for 4 college years = P158,072
- Check release takes 1-2 months processing
- Check release every 3 months = P7,778
- Total of 20 payments for 5 years
- Total Receivable amount for 5 years = P155,560
These options can actually be considered as an annuity or a series of payments that you would receive in regular intervals. Computing for the present value of this annuity using the Time value of money will allow you to compare the amounts as if you have them in your hands at this very moment.
The present value of an annuity is computed using the following formulas:
where PVA = Present Value of an AnnuityPMT = The payments received
PVIFA = Present Value interest Factor for an annuity
i or K = Interest rate
n = number of periods
Using these equations to the different options, assuming a 5% interest rate, we would actually get a present value of 153,717 for Option 1 (assuming the maximum amount of 19,759 is received) and a present value of 151,550 for Option 2. In order for the present values to be equal, Option 1's payments must equal to 19,480 pesos.
What does this mean?
This means that you only have a small margin of around 279 pesos (19759 - 19480) for both options to be equal in value. Therefore, if you're not sure how much the college tuition will be, I think it would be wiser to choose Option 2. This holds true specially if the beneficiary is not scheduled to enter college in the near future.
-0-
An interest rate of 5% per annum is quite reasonable as investors can currently avail of time deposits at this rate. The higher the interest rate, the smaller the margin becomes. Let's say you can invest your money in an instrument earning 10% per annum, the margin would be lessened to 245 pesos.
-0-
Computation guidelines / data:
Option 1:
PMT = 19.759
i = 0.05 / 8
n = 8
PVIFA = 7.568
Option 2:
PMT = 7,778
i = 0.05 / 20
n = 20
PVIFA = 18.987
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Forex Investing
Investing in a foreign currency (Forex)
In class, while talking about investing in foreign currencies, our professor posed the question on when we should invest in foreign currencies. His answer really surprised me. Read on to find out what he said.
A large percentage of my financial portfolio is in U.S. dollars. I bought most of my dollars when it was selling at around 56 pesos to a dollar. That was around 4 to 5 years ago. If I were to sell my dollars now then I would incur a considerable loss as the dollar is selling at around 47 pesos only nowadays. Luckily, I still don't need to have them exchanged.
I was fortunate enough to be able to work in Japan for 4 years. Hence, I hold a considerable amount of Japanese Yen as well. At that time, the yen was trading at around 0.30 pesos to 1 yen. It rose to around 0.55 pesos in 2004 but went down to an average of 0.40 in the previous years. Right now, it is trading at around 0.52 pesos to a yen again. I'm taking the opportunity and unloading some of my yen as it might not rise to this level again in the years to come. Besides, Yen accounts do not earn interests (even when put in a time deposit) unlike U.S. dollar accounts.
In response to my professor's question I answered that you should invest in other currencies if your own currency is not that strong, meaning if your currency's value fluctuates a lot and the fluctuation amounts are big. Also, investing in strong currencies preserves the value of your money. Somehow, a strong currency guarantees the value of your money because in the long run, as long as that currency you invested in remains strong, it will always be worth something.
Later in the discussion, our professor then said that the most stable currency is the Swiss Francs.
However, our professor left us this advice on Forex trading, "Invest only in Forex if you can manipulate the market." He said that if you can't manipulate the market you still would lose some value in the long run. He then gave out the name George Soros, the man who was accussed of manipulating the Thai Baht which started the Asian Financial crisis.
What do you think? Do you agree with my professor's insights?
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Investment Management: Success Rate of Filipino Investors in the Stock market
Today was day 1 of my Investment Management class and our professor shared something very interesting. He gave us the percentages of the success rate of investments made by Filipinos (in the stock market). I don't know where he got his data or how accurate it is but trust me when I say he's not the type to make things up. He gave us the following figures:
- 90% of the investors lose money
- 7% of the investors break even
- 3% of the investors gain / make a profit
It was shocking to hear that 90% of the investors actually lose money! And only 3% actually gain from it! With these figures, one might say that investing in the stock market is not that much different from gambling. I wonder what possible reasons there are that brought this about. I hope to be able to figure these out and eventually be able to share these reasons with you.
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