After reading Jessica M’s post on dividends I disagree with how beneficial they are, and with the current economic crisis companies should shy away toward declaring dividends. Wikipedia criticizes that money that goes toward dividends should be reinvested into the company instead. Also, the company will have more capital on hand when they need it to fund future projects, if needed.
Also dividend income could be subject to double taxation, where you could be possibly be taxed for more than what was declared in the dividend. So the investor could possibly see no gains from dividend income, due to taxes. Sometimes dividends are so small that, that it costs more for the company to send the check, than what the dividend was worth. The larger the dividend the bigger the cost for the company.
Callwriter argues that dividends in a bear market are good because stock prices won’t reach ridiculous values. I disagree with this because the company may not be able to afford to pay every time it thinks the price of its stock is too high. A company shouldn’t focus so much on its stock price. Instead is should it should focus on R&D and future investment opportunities.
Since paying dividends decreases a stocks value, a company loses value through the payment of dividends.
Callwriter states, not paying a reasonable dividend can actually result in harm to shareholders. Hoarding cash can lead to excessive executive compensation, poor management, and employing assets in unproductive ways. One study found that the more cash a company keeps, the more likely it will overpay for acquisitions. Dividend-paying companies tend to be more efficient in their use of capital than similar companies that do not pay dividends and are less likely to engage in funny accounting.
Links:
http://rmi4350jmorse.blogspot.com/
http://en.wikipedia.org/wiki/Dividend
http://www.callwriter.com/newsletter/dividend-basics.htm
Monday, April 20, 2009
Is the smallest choice the smartest choice?
With astronomical fuel prices, auto manufactures are complying with consumer demands by introducing more fuel-efficient cars. The car looks like it has nothing bare essentials, with no trunk or front engine space. Although the car may have passed crash tests at low speeds, crashes at highway speeds could be more deadly than in a mid size automobile.
Crash videos online show the smart car going up against a mid size vehicle. After seeing the results of the crash I would not even want to step foot in a Smartcar. The car was tossed off the hood of the on coming vehicle. It looked like the Smartcar had shattered, while the other car had insignificant damage to the engine only. Since the Smartcar has no hood, there is little protection in a head on crash, or any crash what so ever.
In order to avoid substantial future losses due to lawsuits and loss of income, the smart car needs to have above average safety features. These features need to protect passengers where most cars would not. Thus, consumers would feel the value of driving a smaller car and not have to worry about their safety. If Diemler Benz were to not meet these standards, then consumers would shy away from buying the Smartcar.
Smart cars are popular in Europe, where there are many narrow streets. In contrast this is not the case in American suburban/rural cities, since the roadways are completely different. More traveling is done on highways, and if you are trusting the safety of a small compact car to protect you in a crash thing again. There comes a fine line between getting better fuel economy and passenger safety, and the Smartcar in my opinion is well below this line. Until further improvements in technology (hybrids/electric), that we can have better fuel economy and still maintain the same level, if not better, of safety.
Links:
http://auto.howstuffworks.com/smart-car.htm
http://www.spike.com/video/crash-test-shows/3151924
Crash videos online show the smart car going up against a mid size vehicle. After seeing the results of the crash I would not even want to step foot in a Smartcar. The car was tossed off the hood of the on coming vehicle. It looked like the Smartcar had shattered, while the other car had insignificant damage to the engine only. Since the Smartcar has no hood, there is little protection in a head on crash, or any crash what so ever.
In order to avoid substantial future losses due to lawsuits and loss of income, the smart car needs to have above average safety features. These features need to protect passengers where most cars would not. Thus, consumers would feel the value of driving a smaller car and not have to worry about their safety. If Diemler Benz were to not meet these standards, then consumers would shy away from buying the Smartcar.
Smart cars are popular in Europe, where there are many narrow streets. In contrast this is not the case in American suburban/rural cities, since the roadways are completely different. More traveling is done on highways, and if you are trusting the safety of a small compact car to protect you in a crash thing again. There comes a fine line between getting better fuel economy and passenger safety, and the Smartcar in my opinion is well below this line. Until further improvements in technology (hybrids/electric), that we can have better fuel economy and still maintain the same level, if not better, of safety.
Links:
http://auto.howstuffworks.com/smart-car.htm
http://www.spike.com/video/crash-test-shows/3151924
Monday, April 13, 2009
Critique: Universal Currency
In Unique’s blog about universal currency she states many reasons why there should not be one. I agree with her position, because part of a countries identity is its currency. This is how countries gain reputation among others, by having a strong currency. Also, having different currencies promotes nationalism. For years the US dollar has been a reliable currency, and is commonly used in international markets due to confidence of the government’s ability to back up the USD.
That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.
Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).
Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.
Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.
According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.
Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.
Links:
http://uniquebl0gs.blogspot.com/
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358
http://en.wikipedia.org/wiki/Forex
That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.
Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).
Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.
Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.
According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.
Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.
Links:
http://uniquebl0gs.blogspot.com/
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358
http://en.wikipedia.org/wiki/Forex
GM recalling 1.5 million cars over fire fears
Just when you thought it couldn’t get worse for GM, it continues. While browsing through cnn.com I came across this article stating that GM is recalling 1.5 million cars due to the possibility of engine fires. They may be doing this to avoid future lawsuits, but this could impact GM’s future image, sales, and profitability. However, they are doing the right thing by telling and warning the public of the possibility of engine fires, to avoid the backlash of more serious negative effects.
The recall covers certain mid and full size sedans under GM’s Chevy, Buick, Oldsmobile, and Pontiac brands. This recall shouldn’t affect most consumers, since they have converted to driving gas guzzling SUV’s. One of the engine parts was leaking oil, and was dripping on to another part, which gets very hot and spark a potential fire.
The vehicles involved are:• 1997-2003 Buick Regals.• 1998-2003 Chevrolet Luminas, Monte Carlos and Impalas.• 1998-1999 Oldsmobile Intrigues.• 1997-2003 Pontiac Grand Prix.
Although this is a minor defect in the performance of their engines, GM is taking the initiative by fixing this problem as it has arisen. Hopefully the public will see this action as GM taking corporate responsibility for their actions, and in return buy GM cars. Consumers may feel that if GM finds a problem with their product line, they will do everything to correct the problem.
Links:http://www.cnn.com/2009/US/04/13/gm.recall/index.html
The recall covers certain mid and full size sedans under GM’s Chevy, Buick, Oldsmobile, and Pontiac brands. This recall shouldn’t affect most consumers, since they have converted to driving gas guzzling SUV’s. One of the engine parts was leaking oil, and was dripping on to another part, which gets very hot and spark a potential fire.
The vehicles involved are:• 1997-2003 Buick Regals.• 1998-2003 Chevrolet Luminas, Monte Carlos and Impalas.• 1998-1999 Oldsmobile Intrigues.• 1997-2003 Pontiac Grand Prix.
Although this is a minor defect in the performance of their engines, GM is taking the initiative by fixing this problem as it has arisen. Hopefully the public will see this action as GM taking corporate responsibility for their actions, and in return buy GM cars. Consumers may feel that if GM finds a problem with their product line, they will do everything to correct the problem.
Links:http://www.cnn.com/2009/US/04/13/gm.recall/index.html
Sunday, April 5, 2009
Critique: Reserves what, how, why?
In Jessica M’s blog about reserves she assesses the importance it is to firms to keep them. Some companies may hold reserves for an individual policy, but in most cases they hold reserves for the group they have pooled. Section 1303 of NY’s Insurance Law requires that insurers maintain reserves for the payment of losses or claims and expenses, incurred on or prior to the statement date, whether reported or unreported. The concept of reserves is basically putting the money you need in a bank account, to fund future expected claims or losses. Insurers generally have to estimate how much they need to hold in reserves, and over time the reserve becomes large enough to fund a policyholder’s loss when incurred.
Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t
tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid
I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.
This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.
Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm
personal experience
http://en.wikipedia.org/wiki/Actuarial_reserves
Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t
tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid
I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.
This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.
Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm
personal experience
http://en.wikipedia.org/wiki/Actuarial_reserves
CEO’s compensation
Perhaps one contributing factor to the dismal economy is the decisions that top CEO’s make, and the compensation they receive. CNN states, “as the economy melted down, so did CEO compensation.” The average compensation for 200 chief executives at America’s largest public companies fell 5.1% to $10.8 million. This was the first time in five years that CEO compensation shrank.
So why don’t risk managers (shareholders) say that enough is enough, and limit the compensation given to CEO’s. By having so much money tied up into one person, it limits the flexibility of a firm. If you have invested so much money into one person, you expect above average returns from that investment. I feel that companies have continually overvalued CEO’s and are now paying the price for it. Just look at where AIG and all of these investment banks stand now.
If shareholders decided to compensate CEO’s significantly less, it could use this money to compensate lower level workers. This could increase worker productivity, and create more value to the firm than just one person. Thus, workers feel more tied to the firm and create a slower turnover in employees. Is there justification to complain in a pay cut when you are making millions of dollars. One extreme example would be the CEO of McDonalds making $13.4 million in 2006, while you have thousands of people working at minimum wage.
Links:
http://money.cnn.com/2009/04/05/news/top_ceo_pay/index.htm?postversion=2009040514
http://www.networkworld.com/news/2009/033009-sprint-ceo-pay.html
http://www.usatoday.com/money/economy/2007-04-10-3656879995_x.htm
So why don’t risk managers (shareholders) say that enough is enough, and limit the compensation given to CEO’s. By having so much money tied up into one person, it limits the flexibility of a firm. If you have invested so much money into one person, you expect above average returns from that investment. I feel that companies have continually overvalued CEO’s and are now paying the price for it. Just look at where AIG and all of these investment banks stand now.
If shareholders decided to compensate CEO’s significantly less, it could use this money to compensate lower level workers. This could increase worker productivity, and create more value to the firm than just one person. Thus, workers feel more tied to the firm and create a slower turnover in employees. Is there justification to complain in a pay cut when you are making millions of dollars. One extreme example would be the CEO of McDonalds making $13.4 million in 2006, while you have thousands of people working at minimum wage.
Links:
http://money.cnn.com/2009/04/05/news/top_ceo_pay/index.htm?postversion=2009040514
http://www.networkworld.com/news/2009/033009-sprint-ceo-pay.html
http://www.usatoday.com/money/economy/2007-04-10-3656879995_x.htm
Monday, March 30, 2009
Critique: does an improving stock market mean an improving economy?
In Jessica M.’s blog does an improving stock market mean an improving economy, she argues that a variety of factors contributed to the current state of the economy. Some of which were AIG, Ben Bernanke, and rising unemployment. I agree with her, with the following paragraphs.
Reuters states that there are some encouraging signs in the credit markets, and that U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll. Also, 130 million Americans will receive tax rebates, which will be more money that the government doesn’t receive, and could further increase the national debt and inflation. Furthermore, why are we so anxious to lend money back out when job market is unstable, and it could create the same problem we are currently in. Why do we want to put money back in the hands that couldn’t pay their past debt. Some of the home buyers are those that lost their home because they couldn’t afford the mortgage. We can now say that we live in a country where debt is encouraged, and when worst comes to worst you just write it off. We give money back to people who can’t manage it in the first place, and they take on so much debt that it eventually consumes them.
Also, the Chicago Fed president expects the economy to recover in the second half of this year. This may sound good, but nothing is set in stone. After all, who would have predicted that the economy would just plummet like it has, when it just seemed to keep increasing in value.
Some things take time to fix, and the stock market didn’t get the way it is overnight. Some of the top economic and financial people are trying to work on how to fix this problem, and are still baffled on what to do. Ben Bernanke isn’t the only one where it got the economy to where it is, and where is Allan Greenspan when you need him. Some of Greenspan’s policies could have contributed this turmoil.
In an age of get rich quick schemes, scams, and identity theft it is fair to say that greed is what motivates these criminals, and greed is what ultimately caused the huge collapse in the stock market. Greed is what have caused investors to lose it all, and what has motivated the desire for instantaneous returns in a short period of time. Just look at Bernie Madoff, how he took money from new investors/clients and paid returns to previous clients with their money.
Ethical business management states that greed has harmed the economy, and it started a long time ago. It began in the nineties with a stock market scheme to make money called “day trading.” Thousands speculated to gamble for quick one day profits. Thousands lost everything. Some also took on too much risk, fueled by greed, and made make or break trades.
Links:
http://www.reuters.com/article/ousiv/idUSBOM20597220080424
http://www.forbes.com/feeds/afx/2008/05/12/afx4996768.html
http://ethical-business-management.suite101.com/article.cfm/an_economic_crisis_bank_failures
Reuters states that there are some encouraging signs in the credit markets, and that U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll. Also, 130 million Americans will receive tax rebates, which will be more money that the government doesn’t receive, and could further increase the national debt and inflation. Furthermore, why are we so anxious to lend money back out when job market is unstable, and it could create the same problem we are currently in. Why do we want to put money back in the hands that couldn’t pay their past debt. Some of the home buyers are those that lost their home because they couldn’t afford the mortgage. We can now say that we live in a country where debt is encouraged, and when worst comes to worst you just write it off. We give money back to people who can’t manage it in the first place, and they take on so much debt that it eventually consumes them.
Also, the Chicago Fed president expects the economy to recover in the second half of this year. This may sound good, but nothing is set in stone. After all, who would have predicted that the economy would just plummet like it has, when it just seemed to keep increasing in value.
Some things take time to fix, and the stock market didn’t get the way it is overnight. Some of the top economic and financial people are trying to work on how to fix this problem, and are still baffled on what to do. Ben Bernanke isn’t the only one where it got the economy to where it is, and where is Allan Greenspan when you need him. Some of Greenspan’s policies could have contributed this turmoil.
In an age of get rich quick schemes, scams, and identity theft it is fair to say that greed is what motivates these criminals, and greed is what ultimately caused the huge collapse in the stock market. Greed is what have caused investors to lose it all, and what has motivated the desire for instantaneous returns in a short period of time. Just look at Bernie Madoff, how he took money from new investors/clients and paid returns to previous clients with their money.
Ethical business management states that greed has harmed the economy, and it started a long time ago. It began in the nineties with a stock market scheme to make money called “day trading.” Thousands speculated to gamble for quick one day profits. Thousands lost everything. Some also took on too much risk, fueled by greed, and made make or break trades.
Links:
http://www.reuters.com/article/ousiv/idUSBOM20597220080424
http://www.forbes.com/feeds/afx/2008/05/12/afx4996768.html
http://ethical-business-management.suite101.com/article.cfm/an_economic_crisis_bank_failures
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