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About a month ago, I wrote a post about the best dividend paying stocks in the market at the time. The date for that post was June 16th, 2008. Since then, it can be seen that all of these stocks performed poorly during a period where the DJIA only dropped 5.9%. While that is a fairly large drop, most of these high dividend paying stocks have fallen by much more over this time period.

Take a look at the spreadsheet below to see how these companies have fared over the last month. Use the -5.9% to benchmark against the market.

In this spreadsheet, you will notice that GLS (Genesis Lease Limited) has been the only one with a price increase during this period, but this is only due to a recent run up in price over the past few days. Otherwise, this stock has been in decline ever since its high of $28.35 in June of 2007. The only other company to beat the Dow was CMO (Capstead Mortgage Company).

One other interesting thing of note is that the dividend yield increased on all companies except for the ones that cut them completely. The reason for this is because of the decrease in price. As the price drops, the project dividend yield increases as the price drops. It is easy to see that the dividend has risen on the majority of these stocks, but at the cost of the stock price

Financial Markets, Stock Recommendations dividend, price, Stocks, yield

An article at Marketwatch.com written by Moming Zhou states that Biofuels are to blame for the increase in the cost of food prices world wide. At least that is the argument at the UN food summit in Rome anyway. On the surface this would make a lot of sense given the typical supply and demand theory that we all know and love.

As more and more people are born onto this earth, there becomes a greater and greater demand for food. If food production cannot keep up with demand because some of it is going towards the production of biofuels, then prices will naturally rise. “The U.N. said poor nations are expected to pay 40% more this year to feed their people than they did a year ago, and about 860 million people will be left without adequate food this year.” Statistics show that the usage of food for crops is not headed for a slowdown any time soon. According to the US Department of Agriculture, “corn for ethanol production is expected to reach 4 billion bushels next year, up more than 30% from this year and accounting for nearly 40% of domestic corn consumption.”

Can this massive run up in prices be fully attributed to the production of biofuels though? Major biofuel producing countries like the United States and Brazil don’t necessarily agree. The US admits that “biofuels are to account for a portion of the food-price inflation,” but “the driving factor is energy and increased consumption.” This seems to make sense because of the farming methods that we use. Large tractors and combines surely can’t be very fuel efficient. Given the price of energy these days it is easy to see why prices are rising. Brazil produces ethanol from sugarcane. Brazil also makes a valid argument for why they as well are not to be blamed. Brazilian President Luis Inacio Lula da Silva argues that “sugarcane isn’t a food staple and the sugarcane crop for ethanol production only accounts for 1% of the country’s arable land.”

You can read the entirety of this article here.

Economic News, Financial Markets biofuels, Brazil, ethanol, food prices, US

When I was at the gym this evening I saw a story on the TV about a proposed “Gas Tax Holiday” for the summer driving season. Since I was too far away to read the subtitles I looked into it a bit once I got home. I found a nice article written by Nick Timiraos of the Wall Street Journal.

In the article titled “Will Voters Accept Obama’s Gas Plea?” we learn that Senator John McCain has proposed an elimination of the Federal Gas Tax from Memorial Day to Labor day. This would eliminate the 18.4 cent per gallon tax on unleaded fuel. Senator Hillary Clinton also supports this proposal. Senator Obama decided to take the rational approach and oppose this “holiday.”

The article suggests that Obama’s choice to oppose this tax relief act should put him in a “politically treacherous position.” The main reason for him being in troubled waters is because US consumers are fed up with high gas prices. The fact that he opposed a reduction in the price of gas could cause many people who were going to vote for him to vote for someone else.

This image was linked from opentravelinfo.com.

Politically, this move by McCain and Clinton is genius. At an average price of $3.60/gallon, the discount only amounts to a little over 5%. In reality that isn’t much to brag about, but the average person doesn’t look at it this way. To put this in simpler terms, in order for someone to save $100 in gas during this time period they would have to consume 543 gallons of fuel. At an average rate of 20 mpg, one would have to drive 10,860 miles over this three month span. If you annualized this mileage, it would be a pace of 43,440 miles for the year! Most leases penalize you if you drive over 36,000 miles over the course of three years!

“Obama has been positioning himself as a candidate who can win by telling voters hard truths rather than offering easy political solutions.” The easy political solution is to cut taxes for a short while to make consumers happy. In the end, a Gas Tax Holiday may be even more detrimental to the price of gasoline. In advertisements to Indiana and North Carolina voters, Obama makes the lack of savings crystal clear to voters. “You’re going to save about $25, $30, or half a tank of gas.” Although this doesn’t quite seem right, don’t forget to take my $100 in savings equation into consideration and then do the math. The savings are few and far between.

The only problem with Obama’s claim is that the average voter will likely think that they are saving a lot at the pump each time, but in the end this will not be the case entirely. When the price goes down by the amount of the tax, people will start to believe that gas has become much cheaper to them. As they think this, they will be more inclined to purchase even more gas. If the supply of gasoline is held at a constant rate and demand increases, then prices will naturally rise in order to reach equilibrium. This rise in price should offset whatever savings the consumer felt that they had saved from the lower prices.

One major option to reduce the amount of gas consumed each day is to increase gas taxes. The increase in taxes will raise the prices, and will cause demand to be reduced. Of course, no politician could ever run on the platform of increasing the gas tax by exorbitant amounts. That would eliminate any chance whatsoever of being elected.

In my opinion, something must be done to help wean the US off of our gasoline addiction. I believe that higher gas taxes, and/or increased toll roads would help promote more awareness on the issue. The funds from these taxes would be used to fund more mass transit options rather than improving existing roadways.

It should be interesting to see how the public reacts about Obama going the opposite direction on such a delicate issue such as this. A poll found in the New York Times shows just how the nation feels about gas taxes. It is obvious that Americans think wallet first, environment second.

Financial Markets, Personal Finance, Savings clinton, gas prices, gas tax, gas tax holiday, mccain, obama

Investors seem to be optimistic about Jones Soda this week after the company released that they would be announcing earnings earlier than usual for the most recent quarter. Their announcement will come tomorrow May 1st, 2008. According to BusinessWire.com, you can listen to the earnings report at either jonessoda.com or earnings.com.

One must go back to last quarter to understand why this earlier earnings release is so important. The earnings announcement for last quarter was given almost as late as possible, and it was delayed a few times along the way as well. I guess maybe Jones was attempting to rerun the numbers a few more times because the couldn’t believe that they could have possibly lost $39 million dollars for the quarter. Analysts were expecting the company to only lose a few million dollars (-$.03/share). The company also admitted that they would not be profitable again until sometime in 2009.

This early announcement may indicate that the company had a better than expected quarter. The announcement of the early reports sent shares of JSDA up over 13% for the day yesterday. In early trading this morning they were up over 3%. I imagine that the stock will end up neutral for the day in anticipation for the announcement tomorrow. The announcement will occur at 4:30 Eastern Time, so any major reactions to the news will have to wait for Friday.

Based on the early announcement, I am predicting better than expected earnings, but based on what I have seen from Jones in stores shows that they still have a ways to go. I think that the new management is on the fast track to turn the company around. I like their long-term outlook.

PS: I currently own shares of JSDA and have owned them on and off over the past year or two.

Financial Markets, Stocks earnings release, jones soda, jsda, quarterly report

Do you ever have those arguments where you know you are right, but it is not worth arguing your point because either the person is too hard-headed to admit they are wrong, or the concept is so far beyond their knowledge they won’t understand? A situation like this occurred to me today in the lunchroom. We were having a discussion on the price of gas. Gas prices in Seattle are much higher than in the rest of the country. Currently a gallon of regular costs about $3.51 a gallon.

A co-worker was discussing how he used to have a diesel car that got around 50 miles to the gallon and now drives a different car that gets only 35 MPG. He also talked about an SUV he had that got around 14 MPG. He started to go off about how he loved his SUV so much and didn’t care that it got such poor mileage and would be happy to pay even $5.00/gallon because it was worth it to drive that car.

Here comes the good part now. He then started to lecture the whole table that gas prices have been rising because demand has been dropping because of the higher prices. He claimed that when demand for gas dropped, stations would raise their prices so that they could increase their margins so that they can make the same amount of profit on less gas. Part of this is true. If a station increased prices while their costs remained the same, their margin would increase. If gallons purchased decreased by more than the increase in price, then the gas station will be losing money by taking this tactic.

Fortunately there are a few rules of economics that will prevail in a dense city environment such as Seattle. One of the main and most basic economic principles is the law of supply and demand. For instance, if you have a large supply and little demand you can generally conclude one of two things. The first could be that people just don’t want the product. With gas that is not the case since it is a necessity. The other could be that the price is just too high for people to want it. The other important principle is perfect knowledge of market prices. Sometimes stores will buy too much of a certain item. They notice that it is not selling very quickly and need to make room for a new shipment of the latest product. If they can’t get the old item sold, there will be no room for the new item. This is why stores often put items on sale. They have typically bought too much of the good because they anticipated more demand for it, and need to clear out the current inventory for new ones.

Another important economic principle is that all market participants have perfect knowledge of the market prices. This is especially true with gas stations. When a consumer sees two or three stations near each other, they can quickly gather all the price data and make a rational choice of what station will provide them with the best product for the money. If three stations are all near each other, they will tend to all have the same prices so that the consumer will just pick whichever one is the easiest to get to. When companies compete for attractive prices, they lower prices instead of raising them. If Shell is priced at $3.45/gallon and Chevron is priced at $3.51/gallon, people are going to go to Shell all day long because it gives them the best price. The Chevron will not gain by this increase because they will not have any customers. It we assume all consumers make rational decisions, we can assume that all consumers will choose to fill up at Shell.

In order for a station to raise prices in order to improve margins, all satations would have to be in on this pricing scheme in order for it to work. Remember, prices changes demand, and demand changes prices. This endless balancing act will continue until the product supplied is equal to the product demanded.

Financial Markets, Personal Finance demand, economics, gas prices, gasoline, seattle, supply, supply and demand

A recent article from Reuters states that “the U.S. Federal Reserve is expected to slash interest rates by as much as a whole percentage point at its policy meeting on Tuesday.” Currently this rate is at 3% and the cut would lower it down to 2%. This is yet another bold move by the federal reserve in an attempt to prevent a recession in the U.S. economy. Since September, “the Fed has cut overnight rates by 2.25 percentage points.”

If Bernanke goes ahead with this 1% cut that is rumored, he is not giving himself a whole lot of wiggle room for later. Once the rate is down to zero, he can’t exactly go into the negative numbers. If I were him I would have taken a more gradual step-down approach instead of these large cuts. Personally I believe that large cuts and hikes tend to scare the markets. People like to be able to predict the future. Remember when Greenspan had his usual .25% hike every meeting? The markets loved that. They knew exactly what was going to happen each time there was a meeting. There were not a whole lot of surprises. It seems like now every time there is a Fed meeting there is a large speculation over what is going to happen. I don’t think that this is a good thing for the health of the market.

This photo was obtained from the following site

Consumers can feel the effects of Bernanke’s cuts though. I had a money market account with VirtualBank that was paying 4.65% no more than 6 months ago. Now it is paying only 3%. CD rates at the credit union that I work at have dropped steadily as well. If I remember, a CD was about 5.05% only about five months ago. Now I believe it is paying 3.65%. Every day I hear grumblings from the CD savers who rely on CD rates as a main source of their income. Many complain that if rates continue to drop they will not have the interest income that they need to sustain their lifestyle.

If this cut were to be 1% as predicted, it would be the “biggest rate cut since 1982.” If anyone remembers correctly, 1982 was a time of rampant inflation and economic uncertainty. Hopefully we will not end up in the same boat. According to the article, “the Fed is expected to announce its decision around 2:15 p.m. EDT.” This will be right in the middle of the trading day. I predict that the cut will go through as predicted. I also predict that the markets will be down tomorrow, as people are starting to lose faith that rate cuts are a viable solution to our current economic dilemma.

Fed, Financial Markets bernanke, Fed, federal reserve, inflation, rate cut, recession

Gas prices continue to rise across the country. Here in Seattle, a gallon of regular costs $3.51 at the local Shell station. Seems crazy to think that about a year ago the price was about a dollar less. We have a few factors that are contributing to this rapid increase in price.

First of all is the obvious. Refining capacities can only go so high, and the demand for oil continues to rise each day. Using the classic model of supply and demand it is very easy to see why prices have risen. If we put more fuel efficient cars out on the roads we would theoretically demand less gas because we would be using less of it. I think that when people have vehicles that get better mileage they will drive more. They will use the better mileage as an excuse to drive more and make more unnecessary trips, causing them to demand exactly the same amount of fuel.

The second main reason that gas prices have risen is because the dollar has decreased in value in comparison to other world currencies. Think about it for a minute. Most of the gas that we consume we import from other countries. When we buy foreign oil, we must convert our currency into theirs to make the transaction. If we assume that the price of oil remains constant in a foreign currency, and our currency is losing strength to the foreign one, it is easy to see why the price of oil would greatly increase for us.

Imagine that in 2007 $1 was worth $5 in a foreign currency. If a barrel of oil cost $100 in the foreign currency, it would cost us $20 USD to buy the barrel. Suddenly in 2008 our $1 is only worth $4 in the foreign currency. That same barrel of oil still costs $100 though. Because of the change in the exchange rate, it now costs us $25 to buy that same barrel although the price in the foreign country has remained the same.

It is interesting to see how supply and demand are not the only controlling factors on the price of gas in the United States.

Currency, Financial Markets Currency, exchange rate, foreign oil, gas, gas prices

Not all companies that trade on the NYSE or NASDAQ are American companies. Some are actually headquartered in a foreign country. Consider the company Cemex (CX) for example. Their company is headquartered out of Mexico. A good portion of their business will be conducted in Mexico, and therefore their payments will be made to them in pesos, the Mexican currency. When they do business outside of Mexico, they will likely be paid in the other country’s currency, which will later have to be converted to pesos.

The main issue with currency risk occurs when a company has to create financial reports for their shareholders. When a foreign company like Cemex creates a financial report for US investors, they list all of their earnings and expenses in US funds, although they are really in Mexican funds. Americans can made better comparisons from one company to the other when everything is in the same currency. The main issue here is that the exchange rate is not always going to be the same. This will create some discrepancies in the financial report that the company gives.

Imagine that in FY 2006, Cemex had total net income of $10 billion pesos. At the time that they reported, the exchange rate was 10 pesos per dollar. This means that on the Annual report to US shareholders, Cemex would report a net income of $1 billion dollars. Now, imagine that in FY 2007, Cemex has a total net income of $11 billion pesos (a 10% increase), but the exchange rate at the end of FY 2007 is 12 pesos per dollar. For FY 2007, Cemex would report a total net income of $.916 billion (a 8.4% decrease). To the Mexican investor Cemex had a great year, but to the American investor the year was a disappointment.

Not everyone invests in foreign companies, but if you are looking into one you should definitely take this into consideration. You could be in for a bit of a surprise if you don’t.

Currency, Financial Markets, Stocks annual report, Currency, dollar, exchange rate, financial report, peso

Anyone who has taken a course in economics knows about the theory of normal and inferior goods. For those new to this theory, here is how it works. People tend to be drawn to consuming higher quality items in times of economic prosperity. Consumers have an abundance of money, and therefore have more money to spend on higher quality items. These items are known as normal goods. In times of economic recession, consumers shift their spending habits towards more cheaply priced items in order to  save money. These cheaper items are called inferior goods.

Food can be used as a great example to show the difference between normal and inferior goods. Suppose a person has a good job and are making a lot of money. They could buy normal goods like steak and seafood for dinner every night because they have the means to do so. Suddenly the economy takes a turn for the worse and they get laid off and are forced to take a minimum wage job to make ends meet for the time being. With a lower income they won’t have as much money to spend on normal goods such as steak and seafood. In order to conserve money they will switch to eating inferior goods like hamburger meat and hot dogs.

In the economy, companies that produce normal goods like steak and seafood will see their revenues decrease because less and less people can afford to purchase them. Companies that produce inferior goods like hamburger meat and hot dogs will see their revenues increase because now more people are forced to buy these products.

In times of recession, like we are currently reported to be heading into, companies producing inferior goods can stand to prosper from this economic environment. In honor of this current economic downturn, I am going to be reviewing some companies over the next few months that are generally considered to be producers of inferior goods. These companies could stand to gain in value while the rest of the market is dropping.

Financial Markets, Personal Finance, Stocks economics, inferior goods, normal goods, recession

After being in the toilet for the past six months or so, the banking sector is starting to show a little promise again. After months of watching banks write off bad debts, investors are starting to show some hope for our financial institutions. This newfound hope and optimism can’t be attributed to the vision of bank CEO’s. Bank executives just received a temporary bailout from their new best friend Ben Bernanke at the Federal Reserve. Although it is not the job of the Fed to bail out banks from their poor decisions, it is their responsibility to ensure that the economy keeps running smoothly. When thousands of banks around the country all follow each other’s lead like a bunch of lemmings and made poor loans we suddenly have a large problem on our hands. When banks start to do bad people worry. Just the other day an older gentleman came into our credit union and asked to liquidate his entire account into cash. It came out to about $64,000. He also insisted that each bill be marked with a counterfeit pen to ensure that he was getting real currency. Obviously these actions come from someone who has lived through the depression, but if you get enough people acting irrationally like this because they feel their money is in jeopardy, then suddenly the banks will start to face some real problems.

So what exactly are the responsibilities of the Federal Reserve you may ask?

Taken straight from the Federal Reserve’s Web Site:

“Today, the Federal Reserve’s responsibilities fall into four general areas:

• conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payments systems.”

If they don’t take care of the majority of the banks, then they are not taking care of their responsibilities. So what have they done exactly to take care of the banks? On January 22nd, 2008 they came out with a surprise announcement that they would be cutting the federal funds rate by 75 basis points (1% =100 basis points) from 4.25% to 3.5%. The federal funds rate is the rate that banks make overnight loans to each other. The market for loans and savings products typically follows the movement of the federal funds rate. Since they lowered the rates, this means that mortgage rates will drop and savings products like money market accounts and CDs will drop as well.

The Federal Reserve states that “while strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

Let’s examine what effects this rate cut will have.

Lower rates decrease the cost of borrowing funds. A borrower can save a ton of money by borrowing at 5% instead of 7%. This means that many businesses will take advantage of the lower rates to borrow money to expand their operations. With expanded operations, they will likely need more employees to run this new operation. This satisfies the Fed’s first responsibility of “pursuing full employment.”

Mortgage rate will drop and with that comes a wave of refinancing. Many people got in on the real estate boom with loans they didn’t fully understand and weren’t fully qualified for. You can blame both parties for this problem. Lenders should have fully explained the drawbacks of the loans they were putting people into. When borrowers low introductory payments reset to higher levels, many homeowners were shocked to find that their monthly mortgage payment had almost doubled. According to an article in the Boston Globe “a record $375 billion of subprime loans reset to higher payments in 2007 and another $340 billion will reset this year.” The lower rates could be able help qualified credit borrowers refinance their loans to a lower fixed payment that they might have a higher probability of affording. Another option that troubled borrowers may have is selling their home to pay off the mortgage and either move into a cheaper home or rent. According to the National Association of Realtors, “the median price of an existing single-family home dropped 1.8 percent in 2007.”  In many markets this figure is much lower, meaning that the sale of the home is not enough to cover the outstanding balance on the mortgage. This sad reality is what has led to the 75% increase in foreclosures in 2007.

Savings rates will drop. According to Bankrate.com, the national average for 1 year CDs is a measly 3.66%, down from last week’s 4.12% average. This has a very negative effect on those using CDs and other safe investment products for income. If inflation is at 3% you are hardly making any real gains in your net worth. You are just maintaining your purchasing power. When rates are low, savers tend to take their money out of CDs and money market accounts and put them into the stock market or mutual funds where they can make a better return. This could explain why the Dow Jones Industrial Average has increased from a low of 11,508.74 on January 22nd to a closing price of 12,480.30 on January 29th. That is an 8.4% return for one week. That sure beats 3.66% for an entire year!

The Fed also stated in their January 22nd announcement that “appreciable downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.” This statement is referring to the January 29th and 30th meetings that the Fed in having. In this meeting they will be deciding whether or not their 75 basis point rate cut was sufficient. We should be expecting an announcement sometime on the 30th. Bank stocks and the stock market in general should react inversely to the decision made by the Fed.

In conclusion, I think that the Fed will go ahead and cut rates another 25 basis points. If this cut is made it will probably be the last for a long time and should help to restore some faith and stability to the financial sector. I think a 25 basis point rate cut is necessary for the psychology and mindset of investors. It should be interesting to see how this all plays out over the coming months.

Fed, Financial Institutions, Financial Markets, Personal Finance, Savings banks, Fed, rates