Revenue Rise with Online Loans

Free cash flow numbers are not available for all companies

admin — Tue, 06 Mar 2012 12:30:38 +0000

Yet, free cash flow numbers are not available for all companies. European firms, for example, historically have published only profit figures. Therefore, we also look at EBIT and EBITDA figures. Of these two the latter is preferred because it deducts cash that is needed to maintain the operations. Specifically, on the macro level we use pre-tax profits with inventory adjustment and capital consumption adjustment, and add net interest payments to end up with an aggregate measure of EBITDA. The ratio of debt to EBITDAbehaves similar to the debt to cash flow metric, albeit it is considerably more volatile. Part of this volatility is induced by the degrees of freedom related to the accounting of depreciations and amortizations.

To forecast profits, one should look at margins and the macroeconomic prospects for growth. Popular proxies for profit margins are the difference between annual percentage changes in the GDP deflator and unit labor costs, and Merrill Lynch’s corporate misery index.

Correlation between credit spreads and future economic activity

admin — Tue, 06 Mar 2012 12:29:20 +0000

So far, we have identified a close correlation between credit spreads and future economic activity. When the economy is growing, usually each sector benefits from that growth. In the labor sector, economic growth typically leads to falling unemployment and rising wages. Historically, the corporate sector has benefited particularly during economic expansions. Not only did corporate profits grow in those periods, but also they increased faster than national income. This is reflected by a rising share of national income that usually goes to the bottom-line of the corporate sector during economic expansions. In other words, corporate profitability rises. In recessions, conversely, the labor sector as well as the corporate sector suffers. The problems of the corporate sector become evident by a declining ratio of profits to GDP. Hence, corporate profitability and thus the companies’ abilities to generate cash flows to service their liabilities are highly cyclical. The cyclical nature of corporate profits and cash flows explains variations in corporate bond spreads extremely well. In our view the most objective measure for the ability of companies to service their liabilities is free cash flow. As a proxy for the overall free cash flow that is generated in the US corporate sector, the flow of funds statistics provides a measure that is known as internal funds.

The nominal level of debt

admin — Tue, 06 Mar 2012 12:27:53 +0000

Generally, in growing economies the nominal level of debt rises over the years. This is mostly because of inflation and a steady growth in balance sheets. The long-term upward trend has accelerated sharply since 1980, coinciding with the sustained fall in short- and long-term interest rates and inflation rates. Since then, the steadily falling level of interest rates has allowed companies to take on significantly higher levels of debt than before. Despite record debt levels, interest payments have remained manageable.

To gain a better insight in the debt burden, we have graphed the level of credit market instruments outstanding relative to the GDP of the nonfinancial corporate sector. The second line shows the level of indebtedness in real terms, that is, after adjustment for the price deflator of the nonfinancial corporate sector. Both measures exhibit a cyclical pattern that is overlaid by a long-term uptrend. Usually indebtedness rises in the first stage of a recession and is cut back consequently at the end of each recession and the following years, reflecting the companies’ efforts to restructure their businesses and clean up their balance sheets. In the later years of an expansion top-line growth usually slows and companies tend to increase their leverage to boost return on equity and to finance future growth, for example, through acquisitions.

The performance of corporate credit

admin — Tue, 06 Mar 2012 12:25:46 +0000

Having discussed some of the most influential economy-wide factors for the performance of corporate bonds, we will now examine specific indicators for the state of the US corporate sector. Traditional metrics of leverage focus on the debt-to-equity ratio. The rationale behind this is that a company’s assets are funded by a combination of debt and equity. Since the value of a company’s debt remains relatively stable over time, the debt-toequity ratio is extremely sensitive to fluctuations in the market value of equity in the short to medium term. High equity valuations, for example, lead to a significant underestimation of leverage. Using historical cost for equities can help to mitigate this problem. Yet, the issuance of new equity at inflated valuation levels still distorts the metric.

The role of employment in credit

admin — Tue, 06 Mar 2012 12:24:31 +0000

For decades economists have analyzed the behavior of various economic indicators during the business cycle. Employment is commonly seen as one of the lagging indicators for the state of the economy. However, there is a leading indicator for the labor sector that coincides with changes in credit spreads. For example, for most of the time since 1968 there has been a close relationship between credit spreads and the index of help-wanted advertising.

Falling demand for work force usually coincides with widening credit spreads, indicating falling profits in the corporate sector. Cost-cutting and restructuring measures are typically undertaken in this phase of the economic cycle. So far, we have examined the impact of several of the most closely watched indicators for the overall state of the economy on corporate bond spreads. Arguably, only monetary policy and market indicators like the slope of the yield curve are true leading indicators for the performance of credit markets. When the GDP figures are published, the credit markets usually have anticipated what the outcome will be. Accordingly, employment is not only a lagging indicator for economic performance, but also at best a coinciding indicator for credit spreads.

Money Market Funds

admin — Tue, 06 Mar 2012 12:23:47 +0000

Money market funds are not government guaranteed. Betrayal is a slight risk with money market funds. In rare instances, the dollar value gets broken. Money market funds are a collection of the highest-rated, 90-day, commercial debt and government paper. By law, money market funds must have 95 percent of their assets in top-rated debt. Still, defaults occur. The highest-rated companies can suddenly fall apart. Enron is a recent example. When the bankruptcy of a 90-day debt issuer threatens the dollar value of money market accounts, fund sponsors routinely add cash from their own pockets to cover the loss. A large fund sponsor sells stocks, bonds, mutual funds, and other lucrative securities. The cost in bad publicity from a money market fund loss would be immense. Though you may feel threatened by the bankruptcy of a 90-day debt issuer that the value of your money market funds will decline, there is little chance it will take place.

Because money market funds do not have FDIC or other insurance, there have been rare cases of fraud where investor money was stolen. Money market funds pay higher interest than most FDIC-insured products. Consider whether or not this higher interest is worth taking a very small risk. The risks of fraud are small, but any risk may be outside your comfort zon.

Short term Securities

admin — Tue, 06 Mar 2012 12:22:35 +0000

Ideally, during the time you own short-term securities you will have only a sense of confidence that your dollar is always worth a dollar and your interest, however small, is always accumulating. When this confidence is threatened, expect powerful emotions including a sense of betrayal and a loss of faith. When the dollar value of the principal is threatened, savers take to the streets and to the polls to preserve that value. The FSLIC (Federal Savings and Loan Insurance Corporation) and the FDIC (Federal Deposit Insurance Corporation) guaranteed savings and loan (S&L) and bank savings instruments for up to $100,000. The savings and loan crisis of the early 1990s created a scare that these guarantees would not be honored; failed banks and S&Ls might redeem CDs and savings accounts at less than face value. In the 1980s, the S&L industry made contributions to politicians in order to secure deregulation of the industry. Thereafter, they were able to invest federally insured funds in risky enterprises. When the enterprises failed and the S&Ls were unable to pay back federally insured depositors, the indebted politicians began to argue that the federal guarantees should not be honored. Savers should have evaluated the trustworthiness of banks and S&Ls before they saved with them. Emotions became extreme.Politicians were booted out of office; Charles Keating and other bank officers were prosecuted for criminal offenses; and the guarantee to savings was retained. From this, money market fund sponsors learned that the principal value of the fund could not fluctuate even in the worst economic crisis or savers would only place money in federally insured products.

Savings accounts, CDs, and money market funds

admin — Tue, 06 Mar 2012 12:21:07 +0000

Though savings trigger intense emotions, trigger events for the intense emotions are rare. In addition, the number of emotions triggered by savings accounts, CDs, and money market funds is small. Short-term savings investments are sold as security. If you need predictability, these are the investments for you. One dollar invested here should always be worth $1, never 99 cents.

The purchase of CDs and money market funds can lead to some confusion and complexity. CDs have different interest rates and different maturities.

Unpredictable forces including the Federal Reserve, the economy, and inflation determine the interest rate on CDs, money market funds, and savings accounts.

Money market funds compete based on different interest rates, and interest rates fluctuate daily. Professional money managers who charge varying expenses run money market funds. At times, the fund sponsor, as a promotional gimmick, defers these expenses. There are also several types of money market funds, such as treasury funds, municipal funds, and commercial paper funds. However, compared to most investments, the purchase of short-term securities is relatively simple.

Decide what you expect from your loan

admin — Mon, 05 Mar 2012 13:17:31 +0000

Northwest Airlines and KLM decided what they wanted from each other and used the term alliance to describe their relationship. They structured their partnership as an interdependent relationship— that is, maintaining two separate corporate identities but acting as a single company in the eyes of their customers, allowing them to:

Code-share, which gives them the ability to book reservations on each other’s flights using a single reservation system and flight numerics
Share ticket check-in and baggage-loading facilities
Share catering services
Share warehouse capabilities
Purchase materials jointly, reducing cost through volume
Market jointly and cross-sell into each other’s territory

This principle of maintaining interdependence is more difficult to envision when the companies working together are in different fields. When a partnership involves two different businesses, each partner’s needs and capacities must be spelled out. McDonald’s founder Ray Kroc was famous for partnering with the suppliers for his growing business. His business was selling fast food to millions of consumers, building restaurants, and investing in real estate. Even though he could have bought out the entire operations of many of his suppliers, he didn’t. He wanted to maintain partnerships, believing that people who owned their own business were more productive. He went so far as to insist on paying a fair price to his suppliers rather than squeezing them for bargain-rate concessions, which he could have done.

Interest and currency markets affect a loan

admin — Mon, 05 Mar 2012 13:16:00 +0000

I once worked with a telecommunications company whose mission included the goal “to maximize our stock portfolio.” The leadership decided this meant they should partner with a financial institution in order to manage their portfolio more efficiently. What they needed was a partner to help them—an investment bank—but what they did was acquire a bank and attempt to run it themselves. The company tried to run the bank the same way it ran its telephone operations—and the bank’s operations suffered. The leadership could not adjust to the fast pace of decision making required in financial institutions.
Interest and currency markets can change almost hourly. The telecommunications firm, used to a slower pace due to regulatory bureaucracy, just couldn’t make decisions fast enough. More important, its mission of maximizing its portfolio was distorted by the idea that it should manage this function itself.
After spending millions of dollars purchasing the bank and subsidizing its operations, the company sold it at a loss of many more millions of dollars. Because this was not a true partnership, it failed. Taking over is not partnering; it’s simply a conquest. The structure of the partnership should preserve both partners’ ability to contribute to the other. If your partner loses independence or can’t maintain a separate identity, your partnership ceases to exist.