Archive for November, 2012

Wednesday, November 28th, 2012

Terms Reached on Greek Bailout

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Finance ministers from the European Union and the International Monetary Fund (IMF) have reached a deal on the terms of the Greek bailout.

According to a recent article in the New York Times, the parties reached a deal that strikes a compromise on Greece and will help avoid bankruptcy.  The main negotiations revolved around the differences between countries that were owed money by Greece and those that weren't.  The countries that are owed money (such as Germany and the Netherlands) were opposed to plans that forgave some of the debt owed by Greece.

Experts agree that, almost regardless of the terms, the deal is good because it increases certainty in the area.  “The decisions will certainly reduce the uncertainty and strengthen confidence in Europe and Greece,” Mario Draghi, said president of the European Central Bank.

The financial debacle in Greece really reached a new level back in June, when creditors froze nearly $170 billion USD in aid after determining that Greece failed to meet the conditions of its second bailout.  Ever since then, “Greece has fully delivered its part of the agreement, so we expect our partners to deliver their part, too,” said Yannis Stournaras, Greek Finance minister.

The Greek debt is now estimated at a staggering 175 percent of Gross Domestic Product, or GDP.  Part of the most recent financial plan is to have Greece’s debt substantially lower than 110 percent of GDP by 2022.

GDP is a monetary value for all the goods and services produced in a country over a given time span.  If a country is spending more than its GDP, it will run into a deficit.

In Greece’s case, a lot of the talks were focused around how quickly the struggling country would be able to grow its economy.  In order to better manage its debt situation, Greece needs to “grow its economy, lure investors, pay down its towering debt and return to the markets to borrow money once aid programs expire later this decade.”

For Greece to hit these goals, it is going to have to keep its social problems under control- which have been highlighted during the financial crisis.  The social problems are expected to get more severe if the countries unemployment continues to climb.

The agreement reached will cause some more money to be shifted to Greece.  This is not an easy plan to sell to several of the countries that were part of the deal.  This is true, “particularly [in] Germany, where transferring more wealth to the poorer-performing economies of Southern Europe is politically risky, particularly as Chancellor Angela Merkel prepares for a re-election fight next year.”

At least for now, however, political concerns have been set aside and Greece has a path towards financial stability.

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Wednesday, November 21st, 2012

The Economy Gives Thanks

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Thanksgiving was initially declared a national holiday in 1863 by Abraham Lincoln, and was celebrated on the last Thursday of November.

Fast forward to today: the United States celebrates Thanksgiving on the fourth, though not necessarily the last, Thursday of November.

How did this change come about? We can thank Mr. Economy.

The change took place during President Franklin Delano Roosevelt's time in office; a time that saw the country in a deep economic depression. The man credited with talking President Roosevelt into changing Thanksgiving from the last Thursday of November to the fourth Thursday was Fred Lazarus, Jr.

Fred Lazarus, Jr. was the founder of Federated Department Stores (FDS), which most of us know now as Macy's. Lazarus was concerned that a late Thanksgiving would give customers fewer dates to shop for Christmas presents at FDS and other department stores.

In both 1933 and 1939, Thanksgiving fell on November 30th, and because most consumers did not start Christmas shopping until after Thanksgiving, businesses were worried about losing more money.

So, in 1939, President Roosevelt proclaimed Thanksgiving would be the fourth Thursday of November. This shifted the holiday to November 23rd instead of November 30th, causing some chaos throughout the country.

Big businesses were pleased but smaller businesses were not, fearing they would lose more money to big businesses. Calendar makers were out of luck with every calendar they had pre-printed for the coming years. Schools had to shift their schedules to adjust the days off.

The chaos caused some states to defy the Presidential Proclamation and continue to celebrate Thanksgiving on the last Thursday of the month. This in turn caused more problems as some families living in different states did not get off work or school on the same day of the year.

This lack of unity led to Congress passing a law on December 26, 1941 stating that Thanksgiving Day would be celebrated on the fourth Thursday of November every year, therefore, extending the Christmas shopping season in years with five Thursdays in November.

This change has been linked to the birth of "Black Friday", which has become the biggest shopping day of the year. Fred Lazarus, Jr. was likely very thankful for the official change in dates because afterwards, "Black Friday" became FDS's most profitable day, nationally.

Historically, department stores all over the nation, including Macy's, sponsored Thanksgiving Day parades, using them to advertise for "Black Friday" and the Christmas rush.

Over the years, "Black Friday" has led to "Cyber Black Friday" and "Cyber Monday" which refer to the increase in online shopping sales.

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Tuesday, November 20th, 2012

Hostess, Maker of Twinkies, Bankrupt

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Many reporters are enjoying their puns about the “expiration of Twinkies,” but one thing no one is happy about are the thousands of jobs and lives wrapped up in the bankruptcy of Hostess.

When a brand as iconic as Hostess, makers of Twinkies, Ding Dongs and Wonder Bread, files for bankruptcy and around 18,000 employees are to be laid off people start to wonder why?  What caused this company to go under.

According to a recent report by NBC, Hostess CEO Gregory F. Rayburn is blaming a union strike.

“We deeply regret the necessity of today’s decision, but we do not have the financial resources to weather an extended nationwide strike,” Rayburn said while announcing the decision to file bankruptcy. “Hostess Brands will move promptly to lay off most of its 18,500 member workforce and focus on selling its assets to the highest bidders.”

Hostess had apparently already reached a contract agreement with the International Brotherhood of Teamsters (the largest of the unions working with Hostess), but failed to secure a contract with the second-biggest union, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM).

The contract offered to BCTGM reportedly cut both wages and benefits.  A release from BCTGM stated that:

“Despite Greg Rayburn’s insulting and disingenuous statements of the last several months, the truth is that Hostess workers and the union have absolutely no responsibility for the failure of this company.  That responsibility rests squarely on the shoulders of the company’s decision makers.”

This is the second time that Hostess has filed for Chapter 11 protection in the last ten years.  Both times, the company will be citing the increasing costs of pension and medical care for employees.  The company has argued that it should be let out of its agreements with workers, and that workers should concede to take less than they were promised to help the company.

While there is no buyer set to take Hostess in its entirety, most experts believe that the most well known brands will be purchased.  You probably shouldn’t waste your time standing in line for the last Twinkie, as it will most likely be bought and run by a different company.

With the unions and the CEO putting the blame squarely on each other, it seems more likely that both parties played a part in the demise of Hostess.

A recent article on MSNBC's website points out that the company is well known, even iconic, but has not evolved with the modern market place.

In that article, Timothy Ramey, an analyst at D.A. Davidson & Co., was interviewed about what has happened at Hostess.  Ramey is one of the experts who does not believe that even the more well known brands from Hostess will survive.  He was quoted as saying:

“It’s iconic, but in the same way that the great Studebakers are iconic.  I’d be surprised if the Twinkies brand isn’t gone for good.”

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Tuesday, November 20th, 2012

Greece Entices Hedge Funds

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Greece recently voted to approve a budget which allows the European Union to continue with its multi-billion dollar bail-out of the economically struggling country. As a result, many investors, including hedge funds, are being tempted to invest in the country’s bonds at potentially bargain rates.

A recent article by Reuters highlights Dromeus Capital, a company which specializes in emerging markets, in its decision to bet on Greece.

According to the report, “Dromeus Capital… has launched a fund to bet on the country by buying government debt and bonds and shares of companies it believes will best weather a recession that has cut the [Greek] economy by a fifth.”

This could indicate that investors are viewing Greece as at the bottom of the plunge. Since the start of the financial crisis, stock prices in Greece have dropped more than 80 percent, which puts prices lower than they were in 1993.  Companies are being valued around five times their earnings, as opposed to 16 times their earnings across the rest of Europe.

The Greek government voted and approved, albeit barely, an austerity package which was a requirement to avoid bankruptcy.

While Dromeus Capital is interested in buying up the low priced bonds, it is still engaging in a cautious investment plan.

Achilles Risvas, chief executive of Dromeus, said that, “You shouldn't get too carried away with it, but progress is being made towards deregulation of the economy, towards privatization and towards cost cutting within the public sector.”

While a cautious plan has been laid out, Dromeus is still reported to invest 200 million euros in Greek markets. This is apparently due to liquidity constraints. And while the firm has not disclosed how much money it has raised towards its 200 million euro goal, it has stated that it is close. The main investors in Dromeus’ bidding to invest more heavily in Greece are asset managers, private banks and family offices.

If Greece is to succeed in its attempts to bounce back and avoid bankruptcy, it is going to need the help of investing firms like Dromeus.  And while 200 million euros may sound like a lot, when the country is battling many billions of dollars, it is going to need a lot more than Dromeus.

Regardless of who or where investments come from, the whole region should be pulling for Greece to emerge from its financial disaster stronger than before.  Because of the interconnectedness of the world economies, what is happening in Greece will have much larger ramifications.

Hopefully Risvas is right, and his investments through Dromeus (and many others like his) will help catapult the struggling country.  Until Greece regains its traction, the economy and livelihood of many will suffer.

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Thursday, November 15th, 2012

Suzuki to End Car Sales in U.S.

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In yet another story of a troubled auto company, Suzuki has announced that it is going to cease all car sales in the U.S., instead choosing to focus on motorcycle sales.

A recent article released by Reuters claims that Suzuki has announced its intention to file Chapter 11 bankruptcy.  The end of its U.S. car campaign ends a 27 year effort to work into the car market in the U.S.

The news is seen as a positive for Suzuki’s biggest U.S. competitors, Kia Motor and Nissan Motor.

These two car companies are the ones that Suzuki shoppers are most likely to view as comparable to the Japanese auto manufacturer.

“The bankruptcy could allow Japan’s No. 4 automaker to step away from its contractual responsibilities to the more than 200 dealers who maintain franchises, much as General Motors and Chrysler were able to drop dealerships in their 2009 bankruptcies.”

Last year the U.S. auto market was up 14 percent, yet Suzuki  experienced a 5 percent drop in its sales.  Suzuki ended the year selling just under 22,000 vehicles.

Suzuki as a whole isn’t filing for bankruptcy, just the U.S. subsidiary, American Suzuki.  This company is responsible for the sales of Suzuki products throughout the U.S.

“The Japanese parent company plans to buy the motorcycle, ATV and outboard engine operations out of bankruptcy and shift its auto business to serve existing vehicles on the road.  The new U.S. operating unit plans to keep the American Suzuki name.”

Another article in the L.A. Times interviewed experts who were not surprised by the filing.

“I don’t think it’s a big surprise given their lackluster sales performance of recent years.  They have [had] low margin, low-priced cars with small volume.  That’s far from the ideal combination,” said Jessica Caldwell, analyst for Edmunds.com.

Suzuki has never caught on as a main brand in the U.S.   Their cars, according to Caldwell, didn’t have enough volume to stay stable.  Only exotic or specialty cars are able to flourish with the low volume that Suzuki was selling.

Suzuki was best known for its economy styled cars, and not exactly the exotic or luxury lines that can afford to have less volume and higher prices (which allow for a greater profit margin).

It seems that nearly every car company has had some trouble in the U.S. over the past several years.  And while many of the domestic brands are starting to build their reputation back and gain strong sales figures, Suzuki will not join the group.

Suzuki will continue to sell its motorcycles and other more lucrative products in the U.S.  But unfortunately for anyone who is a fan of the Suzuki cars, there will be no more made for the U.S.

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Wednesday, November 14th, 2012

Sirius XM Sees Profits Grow

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Sirius XM, probably the most famous satellite radio company, is reporting a steady growth in subscribers, which have propelled the profits of the once nearly bankrupt company.

According to a recent article in the New York Times, Sirius will increase subscribers by 446,000 for the quarter. This will bring the total subscribers to 23.4 million and at least 1.8 million for the year. This has lead to an increase of 14 percent revenues from the company from where it was only one year ago.

This is an incredible success for the company that was on the verge of filing for bankruptcy in 2009.

In 2009, Liberty Media, controlled by John C. Malone, loaned the company over half a billion dollars ($530 million) and helped stave off an imminent bankruptcy filing. Ever since that investment, the company has been able to watch its profits steadily grow.

The stock has reflected the company’s success. Sirius’s stock has risen just over 60 percent in the last year. Sirius is currently trading at around $281 a share.

Sirius has gained media attention recently over the jabs at standard radio and internet radio companies, like Pandora Media.

“Those companies which can grow users and provide a good customer experience usually have the worst business models.  For them to fix this, they need to run a whole lot more commercials, and that means harming the customer’s experience. We at Sirius XM are thankful not to be in that difficult position.”

That quote was from Mel Karmazin, chief executive of Sirius XM Radio since 2004.

Sirius and Pandora have a similar business risk that they will have to deal with, music royalty rates. A panel of federal judges sets the rates at which these industries have to pay music royalties, which have a significant impact on the potential profit margins. Pandora has had relatively high rates, and is hoping to decrease its overall rates in order to be more competitive.

Karmazin is planning on stepping down on February 1, after more than 8 years in charge of Sirius.

Sirius faced considerable trouble under Karmazin in 2009, but that doesn't mean that the CEO was to blame.  Sirius relies heavily on car sales to continue to grow its customer base. When the auto industry took a hit, Sirius took a hit.

When people started buying new cars again, the numbers began to come back. Despite the struggles of many of the car companies, the overall sales of new cars in the U.S. is up by around 14 percent this year from last.

As these numbers continue to rise, we can expect to see a similar rise in the satellite radio industry as well.

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Friday, November 9th, 2012

Are You Financially Prepared?

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Hurricane Sandy caused havoc and devastation for millions of people in the US recently.  It has left many wondering if they would be financially prepared to handle such an emergency.  Times like this can be important points of reflections and preparation for future trouble.

In June, the Chicago Sun Times ran an article with important tips to build a financial emergency nest.

One of the first things to understand is that there is no secret trick, or “magic wand” as the article calls it, that will fill your bank account with money.

A good tip is to take a very small portion of each paycheck and set it aside in a traditional savings account.  It’s not the sexy thing to do any more, and it sure won’t earn you a lot of interest, but it is easily accessible and highly liquid funds.  You have the ability to dip into it when you need it, and the security of having it in the bank.

If you don’t think you have the discipline to save a portion of you income, you can have your employer withhold more from your income in your taxes.  It is essentially an interest free loan to the government, but you’ll get a nice surprise around tax season.

The main benefit to having the government withhold more of your income is to never be caught owing the IRS any money.  The biggest drawback is the frequency of the payout.  You only get it once a year, and you can’t easily dip into it when an emergency happens.  That being said, it does help you once a year, and you could use it as a great start to a savings account.

When it comes to savings, a little bit saved at regular intervals can really add up.  Don’t get overwhelmed with how long it will take to save up a reasonable sum.  Instead, focus on the little steps.  Even if you only put $10 a week aside, you’ll have over $500 at the end of a year.

And with an emergency fund, you (hopefully) won’t need to dip into it every year.  It doesn’t take much to see how minor contributions every week, without fail, for a couple years, can build up into a very respectable reserve that you can dip into when a crisis occurs.

Hurricane Sandy has affected many people, and millions will have to take some time off of work.  Wage earners will not be able to earn their money, and hopefully, if it happens to you, you can now be prepared.  An emergency fund doesn’t need to be your retirement nest egg, but if it can help get you through a tough time it has done its job.

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Thursday, November 8th, 2012

Chrysler Fiat CEO Wants Brands Unified by 2015

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Sergio Marchionne, CEO of both Fiat and Chrysler Group, said that he wants the two automakers unified by 2015.  In order to do this, Marchionne has said that he needs to sure up Fiat’s finances (which are being affected by the European economic crisis).

A recent article in Reuters is reporting that the CEO is emphasizing his goal to bring the two manufacturers together.

“The objective has always been to try and bring unification by 2014 or 2015,” Marchionne said last week. “I’d still like to see that done.”

Fiat currently owns 58.5 percent of Chrysler.  The Italian auto maker originally took a role in Chrysler in 2009 when the company filed for bankruptcy.  The stake for Fiat has risen considerably since then.  From only 20 percent in 2009 to 58.5 percent now.

Marchionne restated his commitment for total control during a meeting when he declared a plan to purchase the remaining 41.5 percent of Chrysler that Fiat does not own.

His new plan for acquiring the company involves a 3.3 percent purchase of Chrysler every six months by exercising an option that Fiat acquired during the 2009 bankruptcy.  This will allow Fiat to gain 16.58 and bring its total share to nearly 75 percent of the Michigan-based automaker.

There aren’t specific details on Marchionne’s plan to acquire the final 25 percent of the company.  As the shares that Fiat doesn’t own dwindle, the remaining shareholders may potentially have more leverage over the Italian auto company.

However, there are some tactics that Fiat would be able to employ, as a majority share holder of Chrysler, to help gain the remaining stocks at a reasonable rate.

What will happen when the two companies merge should be an interesting process.  There are already increasing commercials for Fiat, as the car company is attempting to make a larger footprint on the US auto industry.

The financing for the final push is a topic of interest as well.

“It is clear that given Fiat’s capital requirement and the availability of liquidity today,” said Marchionne. “It is highly unlikely that we would be able to finance a takeout of the minority stake in Chrysler, unless something extraordinary happens and we find liquidity through other means.”

Liquidity is a financial term used to describe the accessibility and mobility of assets.  Assets are most liquid in cash forms.  Real estate is an example of a non-liquid asset.  It is still valuable and added to the net worth of a person or company, but it is not easily accessible.  Liquidity is important when determining massive buyouts, such as the one that Marchionne is proposing.

Fiat will continue to work to increase its liquidity as it moves forward in its attempts to purchase the once bankruptcy auto company.

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Wednesday, November 7th, 2012

Financial Impact of Hurricane Sandy

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Hurricane Sandy devastated the Eastern portion of the United States last week.  Dozens were killed, millions were without power or displaced from their homes.  While the toll on life is the most important factor, many wonder what Sandy will do to the economy.

With millions of people stopped from work in a region that earns approximately $10 billion a day, the toll is set to be staggering.  A recent article in the Washington Post highlights what are expected to be the economic effects of this massive hurricane.

Not only does a major natural disaster like Sandy prevent people from going to work, it also prevents people from spending money.  With everyone locked inside or staying with friends, then nobody is going out to restaurants or the mall.  When businesses are closed, the people that spend their money there are no longer able to do so.

Justin Wolfers, economist at the University of Michigan, had this to say:

“[the negative impact of Sandy] is due to the fact that no one is working and no one is buying anything, when they otherwise might be… To the extent that work not done today is work that will be done next week, then this temporary blip will have no effect when we look across the quarter as a whole.”

So, assuming that people are merely delaying the work they would do, and money they would spend (as opposed to removing it from the economy), then Sandy shouldn't have as major an impact as it initially appeared.

There are negative impacts of the hurricane, but, surprisingly, there are also positive effects.

Remember everyone stocking up on supplies before the hurricane? Well those are things that people probably wouldn't have purchased in absence of the storm.  And even the destruction caused by the hurricane, “will yield even more spending re-paving roads, fixing downed electricity wires and rebuilding lost houses,” said Wolfers.

The temporary effect to the economy (which is fairly substantial) is expected to be roughly cancelled out by some of these boosts created by the storm.

“While natural disasters take a large initial toll on the economy, they usually generate some extra activity afterward.  We expect any lost output this week from Hurricane Sandy will be made up in subsequent weeks, minimizing the effects on fourth quarter GDP,” wrote Sweet of Moody’s Analytics in a research note.

Some sources in the article claim that even Hurricane Katrina, the most costly hurricane in U.S. history, may have potentially had a stimulating effect on the economy in the grand scheme (or the macro-economy).

While this analysis may seem puzzling to many, it seems that the economists are mostly in agreement.  With a little bit of luck, the economy will continue on, despite the devastating impact of Hurricane Sandy.

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Election Day is upon us and the issue of Disaster Relief Funds has quickly moved itself up the ladder after Superstorm Sandy swept across the eastern seaboard last week. Disaster Relief Funds are part of the Federal Emergency Management Agency, known as FEMA. Both presidential candidates have cut FEMA budgets in their 2013 budget proposals, but exactly how much is yet to be determined.

In President Obama’s 2013 budget proposal he has the FEMA budget cut by 3%, but the Disaster Relief Fund itself cut by 14%. Other things within the FEMA budget that he plans to cut budget on are Staff & Expenses, Emergency Food & Shelter and Radiological Emergency Preparedness.

The great thing about the FEMA budget is that it allows for carrying over unspent money from year to year. 2012 had a FEMA budget of $7.1 billion but actually had $7.8 billion this year due to a rollover from last year. That money is definitely coming in handy after Superstorm Sandy.

"We've been able to get over 1,000 FEMA officials in place, pre-positioned," the president said. "We've been able to get supplies, food, medicine, water, emergency generators, to ensure that hospitals and law enforcement offices are able to stay up and running as they are out there responding."

Mitt Romney’s 2013 budget proposal shows a 22% cut in non-defense discretionary spending, according to the Center on Budget & Policy Priorities. FEMA is included in non-defense discretionary spending, but Romney’s plan does not include where specifically those cuts will come from.

The media has been reporting for the past few months that Romney has vowed to not touch entitlements or defense, and still reduce federal spending to less than 20% of GDP. In order to do this, other budgets, including the FEMA budget, would have to be cut approximately 40%.

"Gov. Romney believes that states should be in charge of emergency management in responding to storms and other natural disasters in their jurisdictions," said Amanda Henneberg, spokeswoman for Romney’s campaign. "As the first responders, states are in the best position to aid affected individuals and communities, and to direct resources and assistance to where they are needed most. This includes help from the federal government and FEMA."

Romney's experience turning around struggling businesses, even leading some through the bankruptcy process, could give him a unique advantage managing the federal government's expenses should he turn victorious on election day.

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