11 Things to Do With Your Money in Financial Crisis, in Difficult Economic Time!
Protecting Your Financial Future 1. Hold More Cash in Reserve
As always, when things get nutty in the markets cash is king. A healthy cushion in bank CDs or money market funds will let you ride out the slump without having to sells assets at fire-sale prices. A cushion will also put you in position to invest when the downturn's bottom is in sight — and that could come sooner than you expect.
2. Spend Less, Find Something to Cut Eliminating expenses is the surest route to building a cash safety net. There are many costs you can easily hack away at in your home — dry cleaning bills, dinners out, domestic help. Yet you may be able to save even more, and painlessly, by paying closer attention to the fees you pay for financial services. Switch to a low-fee stock index fund. Make sure you've got overdraft protection on your checking account and aren't needlessly ringing up fees by using another bank's ATMs. Reassess your life insurance needs.
3. Pay Down Debt; Interest rates are killer It may seem like an overwhelming task, so do it by focusing on one piece at a time. Start by paying off your credit card with the smallest balance. You'll feel empowered once you've cleaned that slate. Then move to the card with the highest interest rate, and then onto consumer loans with variable rates. Where will you get the money? If you get a raise, or pay off a car or student loan or become free from some other regular expense don't spend the difference — dedicate it to debt reduction.
4. Make Sure Your Money is Safe Money crisis: US FINANCIAL SYSTEM IN TROUBLE, BAIL-OUT PACKAGE. Americans react. What are you doing with your money in the wake of the financial crisis? HERE ARE THE SAFEST PLACES WHERE YOU CAN PUT YOUR MONEY AND HAVE PEACE OF MIND!
The federal government recently raised the amount of deposits per person per institution that it will guarantee to $250,000 from $100,000. But it had been discussing a limitless guarantee. So don't be confused. More important, this is a temporary bump in coverage that may last only through the end of 2009. So if you consolidate deposits in a single institution you may have to reverse the process in little more than a year. To keep things simple just play by the old rules — keep no more than $100,000 in any one institution, at least until it becomes clear that the higher limit will be made permanent. There have been no changes to government guarantees regarding securities held in a brokerage account. The limit is $100,000 of coverage on cash deposits and up to $500,000 on other securities like stocks and bonds. Note: the government does not guarantee against investment losses; only that the securities you own will be returned to you at prevailing market prices should your broker fail.
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Obama looks to Lincoln for inspiration President-elect Barack Obama makes no secret of his admiration for the 16th president of the United States. Abraham Lincoln's Gettysburg Address is the inspiration for Obama's inaugural theme, organizers say. Today's whistlestop-like train trip follows that taken by Lincoln. And Obama will use the Lincoln Bible for his inauguration.
Bank bailout: Get ready for next phase Economy is getting worse and banks' books are still weighed down with junk. Washington is looking at new solutions that sound familiar
FDIC encourages banks to lend more Government broadens Temporary Liquidity Guarantee Program to guarantee secured bank debt until 2019, hoping to encourage new lending.
Federal banking regulators are considering a plan to dramatically expand a lesser-known bailout program that provides government guarantees to hundreds of billions of dollars of corporate debt.
The Federal Deposit Insurance Corp. will likely change its so-called Temporary Liquidity Guarantee Program later this month, by extending the maximum maturity of its payment guarantee on new "covered" bonds issued by banks to 10 years from three years.
Covered bonds are issued by banks, backed by collateral, like a mortgage or a consumer loan, that exists on the bank's balance sheet. It is different than an asset-backed security, which does not require banks to actually own the asset they use to back the debt issuance. The bonds are popular in Europe, but have only been offered on a limited basis in the United States.
Under the new extension, the program would cover secured debt issued from January 2009 until June 30, 2010.
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The Emergency Economic Stabilization Act of 2008 (EESA) was signed into law on October 3, 2008, during a time of tremendous financial upheaval and economic uncertainty.
The Troubled Assets Relief Program (TARP) was established under the EESA with the specific goal of stabilizing the United States financial system and preventing a systemic collapse. Treasury has established several programs under the TARP to stabilize the financial system and has now created the Financial Stability Program to further stabilize the financial system, restore the flow of credit to consumers and businesses and tackle the foreclosure crisis to keep millions of Americans in their homes.
The Capital Purchase Program (CPP) is a voluntary program in which the U.S.
Government, through the Department of Treasury, invests in preferred equity securities issued by qualified financial institutions. Participation is reserved for viable institutions that are recommended by their federal banking regulator. Treasury’s intent is to provide immediate capital to stabilize the financial and banking system, and to support the economy. It is vital that lending be available to families and businesses that need access to credit, to pay for college or to invest and create jobs. A necessary precursor to lending and economic recovery is a stable, healthy financial system
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What Is Sovereign Debt? Is Sovereign Debt the New Subprime?
Is Sovereign Debt the New Subprime?
That’s a question many on Wall Street are asking as 2009 comes to a close. Just as many subprime borrowers were unable to make their mortgage payments in 2007 and 2008, investors now fear certain nations will be unable to pay their debts in the year ahead.
Rising mortgage defaults and credit card delinquencies put many banks on the brink of bankruptcy in 2008, sending the global economy into a tailspin. But sovereign debt defaults are potentially even more catastrophic as they can lead to geopolitical instability, societal unrest and even war. And there will also be economic ramifications for investors worldwide, putting America’s (and the globe’s) fragile recovery at great risk.
To varying degrees, Greece, Spain, Ukraine, Austria, Latvia, Mexico are just a handful of the nations viewed at risk of defaulting. Meanwhile, Dubai only just avoided a similar fate thanks to a $10 billion bailout from their oil-rich neighbor Abu Dhabi.
So, who else out there could rattle our constantly more interconnected world? Here's a look at where the trouble spots could be:
What Is Sovereign Debt?
Now that we’ve (hopefully) got your attention, here are some definitions for those unfamiliar with the subject:
“Sovereign debt” refers to the debt of nations. Just as the U.S. issues Treasuries backed by the “full faith and credit” of the government, other nations sell bonds in order to raise money to pay for programs ranging from armies to public healthcare.
A “default” refers to a nation’s inability (or refusal) to repay its debt. Whether a homeowner sends “jingle mail” (home keys via post) because a lost job makes mortgage payments impossible or because a drop in home values makes paying the mortgage uneconomical, the effect on the bank is the same: they lent money and now they’re not getting it back.
The same goes for investors who’ve purchased sovereign debts. This is critical because nations’ debt is often viewed as safer than corporate debt since countries have the ability to raise taxes and increase tariffs in order to raise money to pay their debts.
But “safer” is not the same as “safe” and certainly not guaranteed. There are risks in owning nations’ or sovereign debt, as with any stock. Defaults by Argentina in 2002 and Russia in 1998 are just recent examples in the long history of sovereign debt defaults going back to the Spanish empire in the 1600s.
High Debt-to-GNP Ratio
Since 1970, nearly half of sovereign defaults have occurred in nations debt-to-GNP (gross national product) ratios of 60% or more. This makes sense: As a country’s debts start to approach the size of its total economy (or GNP), it gets harder to make the payments, just like a individual whose debts start to eat up all (or most) of their salary.
Countries like the U.S. and U.K. have triple-A ratings, meaning they are considered the strongest in terms of the ability to repay their debt. (The ratings from top to bottom are based on the alphabet, AAA being the best to CCC meaning the financial world doubts your ability to pay the money back.)
However, some experts worry about those pristine ratings being in jeopardy as Anglo-Saxon nations continue to accumulate massive amounts of debt to pay for spending, and to take on the recession.
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PREFERRED STOCK Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument. Preferreds are senior (i.e., higher ranking) to common stock, but are subordinate to bonds.[1]
Preferred stock usually carries no voting rights,[2] but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation. Preferred stock may have a convertibility feature into common stock. Terms of the preferred stock are stated in a "Certificate of Designation".
Similar to bonds, preferred stocks are rated by the major credit rating companies. The rating for preferreds is generally lower since preferred dividends do not carry the same guarantees as interest payments from bonds and they are junior to all creditors.[3]
What is the difference between preferred stock and common stock?
First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.
Second, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals.
This is not necessarily the case for common stock, as the company's board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically don't fluctuate as often as a company's common stock and can sometimes be classified as a fixed-income security. Adding to this fixed-income personality is the fact that the dividends are typically guaranteed, meaning that if the company does miss one, it will be required to pay it before any future dividends are paid on either stock.
{IMF} International Monetary Fund
The International Monetary Fund (IMF) is an intergovernmental organization that oversees the global financial system by taking part in the macroeconomic policies of its established members, in particular those with an impact on exchange rate and the balance of payments.
The organization's stated objectives are to stabilize international exchange rates and facilitate development through the influence of neoliberal economic policies [1] in other countries as a condition of loans, debt relief, and aid.[2] It also offers loans with varying levels of conditionality, mainly to poorer countries. Its headquarters is in Washington, D.C. The IMF’s relatively high influence in world affairs and development has drawn heavy criticism from some sources.[3][4]
The International Monetary Fund was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement,[5] with a goal to stabilize exchange rates and assist the reconstruction of the world’s international payment system.
Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first created because it helped the world stabilize the economic system.
World Bank The World Bank is an international financial institution that provides loans[2] to developing countries for capital programmes. The World Bank's official goal is the reduction of poverty. By law,[which?] all of its decisions must be guided by a commitment to promote foreign investment, international trade and facilitate capital investment.[3]
Central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on printing the national currency, which usually serves as the nation's legal tender.[1][2] Examples include the Bank of England, the European Central Bank (ECB), the Federal Reserve of the United States, and the People's Bank of China.[3]
The primary function of a central bank is to provide the nation's money supply, but more active duties include controlling interest rates (i.e., price fixing), and acting as a lender of last resort to the banking sector during times of financial crisis (e.g., bailouts). It may also have supervisory powers, intended to prevent banks and other financial institutions from reckless or fraudulent behaviour. Central banks in most developed nations are independent in that they operate under rules designed to render them free from political interference.
Inter-American Development Bank The Inter-American Development Bank (IADB or IDB or BID) is the largest source of development financing for Latin America and the Caribbean.[1] Established in 1959, the IDB supports Latin American and Caribbean economic development, social development and regional integration by lending to governments and government agencies, including State corporations.
At the First Pan-American Conference in 1890, the idea of a development institution for Latin America was first suggested during the earliest efforts to create an inter-American system. The IDB became a reality under an initiative proposed by President Juscelino Kubitshek of Brazil. The Bank was formally created on April 8, 1959, when the Organization of American States drafted the Articles of Agreement establishing the Inter-American Development Bank.[2]
Eurozone
What Does Eurozone Mean? A geographic and economic region that consists of all the European Union countries that have fully incorporated the euro as their national currency.
The eurozone is one of the largest economic regions in the world and its currency, the euro, is considered one of the most liquid when compared to others. This region's currency continues to develop over time and is taking a more prominent position in the reserves of many central banks.
Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control.
Though there is no common representation, governance or fiscal policy for the currency union, some co-operation does take place through the Euro Group, which makes political decisions regarding the eurozone and the euro. The Euro Group is composed of the finance ministers of eurozone states, however in emergencies, national leaders also form the Euro Group.
Since the late-2000s financial crisis, the eurozone has established and used provisions for granting emergency loans to member states in return for the enactment of economic reforms. The eurozone has also enacted some limited fiscal integration, for example in peer review of each other's national budgets. The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be agreed for eurozone reform.
On occasion the eurozone is taken to include non-EU members who use the euro as their official currency.
EuromarketWhat Does Euromarket Mean?
The market that includes all of the European Union member countries - many of which use the same currency, the euro. All tariffs between Euromarket member countries have been abolished, and import duties from all non-member countries have been fixed for all of the member countries. The Euromarket also has one central bank for all of the member countries, the European Central Bank (ECB).
The Euromarket is a large single market comprised of all member countries, allowing for more efficient trade and the centralization of monetary policy through the ECB. The Euromarket is considered a major finance source for international trade, through the money market or eurocurrency, eurocredit and eurobonds.
Commodity A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market.[1] A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. Examples are petroleum and copper.[2]
The price of copper is universal, and fluctuates daily based on global supply and demand. Stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.
In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets.
Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.
There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.
Microeconomics What Does Microeconomics Mean? The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households.
It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (
Microeconomics Microeconomics (from Greek prefix micro- meaning "small" + "economics") is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources.[1] Typically, it applies to markets where goods or services are being bought and sold.
Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.[2][3]
This is in contrast to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment."[2] Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy
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The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. -------- The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different, as well as the way they are traded, though many market participants are active in both
Futures contract.. What are futures contracts?
Futures contract. In finance, a futures contract (more colloquially, futures) is a standardized forward contract which can be easily traded between parties other than the two initial parties to the contract.
The parties initially agree to buy and sell an asset for a price agreed upon today (the forward price) with delivery and payment occurring at a future point, the delivery date.
Futures contract. In finance, a futures contract (more colloquially, futures) is a standardized forward contract which can be easily traded between parties other than the two initial parties to the contract.
The parties initially agree to buy and sell an asset for a price agreed upon today (the forward price) with delivery and payment occurring at a future point, the delivery date. Because it is a function of an underlying asset, a futures contract is a derivative product.
Contracts are negotiated at futures exchanges, which act as a marketplace between buyers and sellers. The buyer of a contract is said to be long position holder, and the selling party is said to be short position holder.
As both parties risk their counter-party walking away if the price goes against them, the contract may involve both parties lodging a margin of the value of the contract with a mutually trusted third party
Coverred Warrants, What are covered warrants? In finance a covered warrant is a type of warrant that has been issued without an accompanying bond or equity.
Like a normal warrant, it allows the holder to buy or sell a specific amount of equities, currency, or other financial instruments from the issuer at a specified price at a predetermined date.
Unlike normal warrants, they are usually issued by financial institutions instead of share-issuing companies and are listed as fully trada… ------ A covered warrant gives the holder the right, but not the obligation, to buy ("call" warrant) or to sell ("put" warrant) an underlying asset at a specified price (the "strike" or "exercise" price) by a predetermined date. The price paid for this right is the "premium" and with covered warrants you cannot lose more than this initial premium paid.
They are limited liability instruments so there are no further payments or margin calls required to maintain a covered warrant position.
Covered warrants offer a flexible alternative to private investors who seek to gain the leverage benefits of derivatives, but who wish to limit their risk.
When the issuer sells a warrant to an investor, they typically "cover" (or hedge) their exposure by buying the underlying instrument in the market. Covered warrants have an average life of 6 to 12 months, although some have maturities of several years.
Derrivative: What is derrivative? What are the three main types of derrivatives?
Derivative.. The derivative of a function of a real variable measures the sensitivity to change of a quantity (a function value or dependent variable) which is determined by another quantity (the independent variable). Derivatives are a fundamental tool of calculus.
Derivatives market The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives
Derrivative: What is derrivative? What are the three main types of derrivatives?
There are actually only two main types of derivatives: option-based and forward-based. Either type can be traded on a recognized exchange or OTC (Over The Counter). The exchanges are public and provide for standardized, liquid contracts whereas the OTC market is private and allows for much more customization of the individual contracts between parties.
Option Based Derivatives
Option-based derivatives represent the right, but not the obligation, to engage in a transaction within a set period of time. In other words, an option is exactly that: an option.
Just because you own an option does not mean you have to make a transaction – rather it is the ability to make a certain transaction if you so desire. Options normally have an upfront cost associated with them known as the “premium” for the contract.
They are known as options whether they are traded on an exchange or Over-The-Counter. An example would be a Call or Put option – a Call option represents the right (but not the obligation) to buy a stock for a set price for a certain period of time.
A Put option represents the right (but not the obligation) to sell a security at a certain price for a given period of time.
Forward-Based Derivatives
Forwards represent the obligation to make a transaction at a set point in time in the future. Once you enter into a forward-based contract, you are obligated to make the transaction (unless both parties agree to cancel or otherwise modify the agreement which is rare). Unlike an option, there is no up-front cost to entering into a forward-based derivative contract.
When a forward contract is traded on a recognized exchange, it is referred to as a “futures contract” or “futures” for short. Examples of futures include commodities, interest rates, currencies, and stock market indices.
When a forward based derivative is traded OTC (Over-The-Counter) it can be referred to as a “forward agreement” or a “forward”. Two specific types of OTC forwards are forwards based on exchange rates, known as “foreign exchange agreements” and forwards based on interest rates, known as “forward rate agreements”.
Another example of a special OTC forward-agreement is the “swap”. Specifically, a swap allows for the swapping of regular cash-flows based on a pre-determined formula.
It can be viewed as a number of periodic forward agreements packaged into one agreement as well. A specific type of swap used can be between a bond fund manager and an equity fund manager.
They can swap the performance with each other and in effect the equity manager could say that he is running a tax-efficient bond mandate for his investors (as is the case in a capital yield class or managed yield fund where the investor receives fixed-income type risk and returns with the distributions treated as capital gains).
A specific example would be the Mackenzie Sentinel Canadian Managed Yield Class – click here to see the fund profile and then scroll down to the Major Holdings to see that it owns stocks and yet provides fixed-income like returns. (Note the profile explains they use “options” which is not correct, they use “swaps” which are a type of forward-based derivative.)
A Third Main Type of Derivative – CFDs
CFDs – or “Contracts For Differences” are a little different from the above mentioned derivatives. The main difference is that a CFD has no expiration date. CFDs are OTC products and you normally buy and sell them through a CFD provider and are cash-settled as opposed to physically-settled which means you never have to own the underlying investment which can be a commodity, stock market index, individual stocks, currencies, etc.
They are normally offered with significant leverage built in to the tune of 100:1 with some CFD providers. 100:1 means that your returns are magnified 100 fold, not 100% – you really need to think twice about playing the CFD markets.
So there you have a very basic primer on the basic types of derivatives out there. One thing in common is that all derivative products basically can magnify risk and returns TREMENDOUSLY.
There are however, many different strategies for the application of derivatives – some of which are very conservative strategies and others are “if I get this wrong I’m going to commit suicide” risky. Make sure to seek the counsel of a qualified financial advisor before engaging in derivative investments.
Over time, I will write in more detail on some of these specific derivatives and some derivative strategies.
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