Terms of Use

General
  • AAA Rating: The best credit rating that can be given to a corporation’s bonds, effectively indicating that the risk of default is negligible.
  • Amortization: A non cash charge to income intended to allocate the cost of intangible assets, such as good will or patent rights, over the period of their usefulness.
  • Assets: Things that have earning power or some other value to their owner.Fixed assets (also known as long-term assets) are things that have a useful life of more than one year, for example buildings and machinery; there are also intangible fixed assets, like the good reputation of a company or brand.Current assets are the things that can easily be turned into cash and are expected to be sold or used up in the near future.
  • Balance of trade: 1. Part of the current account of the balance of payments, which is the system governments use to keep track of monetary transactions with the rest of the world. The trade account is the difference between exports and imports of goods and services. The other part, called the income account, records earnings on public and private investments.  Because the US imports vastly more than it exports, it runs a huge trade deficit. It varies, but is typically around $65 billion a month or close to $800 billion annually. That figure represents the dollars being accumulated in foreign central banks after the companies from which we import convert dollar payments to their local currencies. 2. The difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than is imported; a negative balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and services balance; especiialy in the UK. The trade balance is identical to the difference between a country’s output and it’s domestic demand.
  • Basis Point: One hundred basis points make up a percentage point, so an interest rate cut of 25 basis points might take the rate, for example, from 3% to 2.75%.
  • Bear Market: In a bear market, prices are falling and investors, anticipating losses, tend to sell. This can create a self-sustaining downward spiral.
  • Beta: A stock’s volatility relative to the overall market
  • Black-Scholes Option Model: A pricing formula developed to place fair value on options.
  • Bond: A debt obligation that requires the payment of a specified sum at maturity and that usually requires periodic interest payments. A bond may be junior or senior to other bonds issued by the corporation. It may be subordinated to other debt obligations of a company.  It may be a secured bond (backed by collateral) or an unsecured bond, usually referred to as debenture. A bond can be convertible into other securities…
  • Book Value: Reflects the historical value of a company’s assets less all of the company’s liabilities. Tangible or hard book value excludes the carrying value of a company’s intangible assets, such as patents and goodwill.
  • Budget Deficit or Surplus: The federal budget deficit (or surplus) is the difference between what the government spends and takes in during a given fiscal year, essentially the difference between tax revenues and expenditures. Budget deficits are financed by either issuing government securities, in which case they add to the national debt, or by being monetized, meaning the Federal Reserve adds money to the economy, thereby creating inflation.
  • Bull Market: A bull market is one in which prices are generally rising and investor confidence is high.
  • Capital Spending:  The purchase (or improvement) of fixed assets, such as plant and equipment.  Capital expenditures are generally depreciated over their useful life, while repairs are expensed in the year made.
  • Capital: The wealth – cash or other assets – used to fuel the creation of more wealth. Within companies, often characterised as working capital or fixed capital.
  • Capitulation: Used of the stock markets, the point when a flurry of panic selling induces a bottoming out of prices.
  • Capital Structure: The make-up of a company’s debt and equity. A debt to equity ratio is one measure used to determine whether a company has a secure or risky capital structure.
  • Carry Trade: Typically, the borrowing of currency with a low interest rate, converting it into currency with a high interest rate and then lending it. One common carry trade currency is the yen, as traders seek to benefit from Japan’s low interest rates. The element of risk is in the fluctuations in the currency market.
  • Cash Flow: Usually the term cashflow is used to refer to a company’s cash earnings, consiting of net income plus non-cash charges.
  • Free Cash Flow: Also called “owner’s earnings”, this is the cash that can be taken out of the business. It takes into account a company’s capital spending requiremes, refers to net income plus depreciation and amortization less capital spending.
  • Central Bank: The government institution responsible for the monetary system of a country, such as the Federal Reserve System in the United States, or group of countries, such as the European Central Bank (ECB). A central bank’s function include issuance of currency, the administration of monetary policy, the holding of deposits representing the reserves of other banks, and the administration of functions designed to facilitate the conduct of business.
  • Chapter 11: The term for bankruptcy protection in the US. It postpones a company’s obligations to its creditors, giving it time to reorganise its debts or sell parts of the business, for example.
  • Collateralised Debt Obligations (CDOs): A collateralised debt obligation is a financial structure that groups individual loans, bonds or assets in a portfolio, which can then be traded. In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of some assets has fallen, the value of many CDOs have also been reduced.
  • Commercial Paper: Unsecured, short-term loans issued by companies. The funds are typically used for working capital, rather than fixed assets such as a new building.
  • Commodities:  Products that, in their basic form, are all the same so it makes little difference from whom you buy them. That means that they have a market price. You would be unlikely to pay more for iron ore from a particular mine, for example.
  • Contrarian: An investor who is willing to think and act differently from the crowd
  • Credit Crunch: The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had. This in turn resulted in more expensive loans and mortgages for ordinary people.
  • Credit Default Swap: A swap designed to transfer credit risk, in effect a form of financial insurance. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a default on a loan. Currency peg A commitment by a government to maintain its currency at a fixed value in relation to another currency. Typically this is done by the government buying its own currency to force the value up, or selling its own currency to lower the value. One example of a peg was the fixing of the exchange rate of the Chinese yuan against the dollar.
  • Current Account: The difference between a nation’s export goods and services and its imports of goods and services, if all financial transfers and investments and the like are ignored. A counry is said to have a current account deficit if it is importing more than it exports. Current account = Balance of Trade + Net factor income from abroad + Net unilateral transfers from abroad. The current account balance is one of two major metrics of the nature of a country’s foreign trade (the other being net capital outflow).
  • Default: Failure to make interst or principal payments on a debt obligation as they come due. Also, default refers to the violation of certain loan covenants, e.g., failure to achieve minimum targets of earnings or assets mandated by the lending agreement or bond indenture.
  • Deflation: Contraction of the supply of money and credit in an economy relative to the total amount of goods and services, resulting in a decrease in the general level of prices. Distinguished from disinflation, which is a reduction in the rate of inflation.
  • Depreciation: A non cash charge to income intended to allocate the cost of fixed assets, such as plant and equipment, over it’s useful life
  • Derivative: A contract whose value is based on the performance of another underlying financial asset, index, or investment. Derivatives afford leverage and are used in hedging strategies. They are available based on the performance of assets, interest rates, currency exchange rates, and various domestic foreign indexes.
  • Dividends: A payment by a company to its shareholders, usually linked to its profits.
  • Economic Cycle: Fluctuations in economic activity that occur in any developed market economy. In practice, economic cycles are divided into two main categories: booms and recessions. The NBER defines economic cycles based on expansion or contraction.
  • Efficient Market Theory: A theory suggesting that stocks are efficiently priced and that all publicly available information and future expectations for a stock are reflected in its current price. In its strongest form, this theory proposes that a monkey throwing darts is as likely to outperform the market as a professional.
  • Equity: In a business, equity is how much all of the shares put together are worth. In a house, your equity is the amount your house is worth minus the amount of mortgage debt that is outstanding on it.
  • Face Value: THe stated value of a bond, note or mortgage as it appears on the face of the instrument or cirtificate. A debt instrument is usually redeemed for its face value at maturity. A debt instrument may trade above or below its face value.
  • Fiduciary: The person or organization responsible for the proper investing of money entrusted to it for the benefit of a beneficiary.
  • Fiscal Year: A continuous twelve-month period used by a business as its accounting period. A company’s fiscal year may correspond with a calendar year, but many business have different fiscal-year ends.
  • Futures: A futures contract is an agreement to buy or sell a commodity at a predetermined date and price. It could be used to hedge or to speculate on the price of the commodity.
  • Futures contract: An agreement to buy or sell a specific amount of a commodity, currency, or financial instrument at a particular price on a stipulated future date.
  • Gross Domestic Product (GDP): The sum total of the monetary value of all final goods and services bought and sold within the United States borders in a given year.
  • Hedge Fund: A largely unregulated pool on investment funds restricted to high net worth investors that aims to make money by identifying investments likely to rise and likely to fall and taking both long and short positions.
  • Hedging: Making an investment to reduce the risk of price fluctuations to the value of an asset. For example, if you owned a stock and then sold a futures contract agreeing to sell your stock on a particular date at a set price. A fall in price would not harm you – but nor would you benefit from any rise
  • Hyperinflation: Inflation that is rapid and out of control. Some sources define it as prices rising 100 percent or more annually, but there is no standard measurement. The operative idea is that there is zero confidence in purchasing power.
  • Indexing: An investment strategy that seeks to emulate the returns of a particular market index by purchasing most or all of the securities in that index
  • Inflation: Expansion of the supply of money or credit in an economy relative to the total amount of goods and services, resulting in an increase in the general level of prices.
  • Insiders: The directors, officers, and key employees of a company.
  • Institutional Investors: Organizations that trade large volumes of other people’s money; these include pension funds, banks, mututal funds, insurance companies, college endowment funds, and union funds
  • Interest Rate: The cost of borrowing money. Among many industries affected by fluctuations in interest rates, real estate and banking are perhaps the most directly impacted. When interest rates increase, borrowing becomes more expensive, dampening consumer demand for mortgages and other loan products. The Federal Reserve Bank of the United States affects both short term and long term interest rates by manipluationg money supply through open market operations or changing reserve requirements for banks. The former involves purchasing large columes of government securities, in order to increase money supply (driving interest rates down) or selling large quantities of government securities in order to increase money supply (driving interest rates up). When inflation is too high or increasing too rapidly, the Fed may raise rates in order to slow the economy. COnversly when the economy is doing poorly the Fed may cut rates in order to promote stronger growth.
  • Leverage: 1. Financial leverage refers to the amount of debt a company has relative to its equity. A leveraged company will have a have a high debt/equity ration. The use of financial leverage can lead to high shareholder returns if a company can earn substantially more on the borrowed money that the cost of borrowing. A leveraged investment is one where the investor borrows money to purchase an investment, or where the investor buys the right to purchase at a later date a relatively large asset for a relatively small amount of money, as in the purchase of an option or warrant. (2)Leveraging, or gearing, means using debt to supplement investment. The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses.
  • Deleveraging means reducing the amount you are borrowing.
  • Leveraged Buyout: The acquisition of a company using primarily borrowed funds; the acquired company’s assets and earnings power are used as the primary basis for the borrowings. You can effectively buy stock in a publicly-traded leveraged buyout by investing in stub stocks, leveraged spinoffs, and an occasional merger security.
  • Liquidity: The liquidity of something is how easy it is to convert it into cash. Your current account, for example, is more liquid than your house. If you needed to sell your house quickly to pay bills you would have drop the price substantially to get a sale. Also, the ability to buy and sell large volume of a stock or other security without unduly influencing the security’s price.
  • Margin Debt: Borrowing using the value of securities as collateral. Under Regulation T, an individual can borrow up to 50% of the market value of qualified stock holding.
  • Margin of Safety: The cushion between the price of an asset and its estimated value. Buying securities at a steep discount to their “indicated or appraised” value was the central investment concept outlined by Benjamin Graham
  • Market to Market: Recording the value of an asset on a daily basis according to current market prices. So for a futures contract, what it would be worth if realised today rather than at the specified future date. Also marked-to-market.
  • Market Capitalization: The value of a corporation determined by multiplying its stock price by the numer of its shares. Total capitalization would be equal to the sum of a company’s market capitalization plus the value of it oustanding debt
  • Money Markets: Global markets dealing in borrowing and lending on a short-term basis
  • Monetary Policy:  1. Decisions by the Federal Reserve to expand or contract the supply of money or credit. Monetary policy is implemented through actions of the Federal Open Market Committee (FOMC) of the Federal Reserve. The FOMC’s principal tool is the target federal funds rate, which is the rate banks charge each other for overnight loans to meet reserve requirements and which influences general interest rate levels. The Fed effectively sets the feeral funds rate by expanding or contracting the money supply through its open market operations, that is, its purchase or sale of Treasury securities in the open market. 2. The process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. It rests on the relationship between the rates of interest and the total supply of money.
  • Monetize: To finance with printed money (i.e., by expanding the supply of money or credit)
  • Money Supply: The total stock of money in the economy, primarily represented by currency in circulation and funds in checking and savings accounts, money market mutual funds, and other forms of near money. The Federal Reserve classifies money supply in three groups designated M1, M2, M3, ranging from the narrowest definition of liquidity to the broadest.
  • Mortgage-back Securities: These are securities made up of mortgage debt or a collection of mortgages. Banks repackage debt from a number of mortgages which can be traded. Selling mortgages off frees up funds to lend to more homeowners. See securities
  • National Debt: The sum total of government borrowings, which is to say the accumulated total of all past budget deficits net of the occasional budget surplus. The national debt is represented by (short-term) Treasury bills, (Intermediate-term) Treasury Notes, and (long-term) Treasury bonds held by individuals, businesses, governments, and other creditors and backed by the full faith and credit of the U.S. government. It excludes unfunded debt, such as obligations of government trust funds like Social Security and Medicare, or contingent liabilities, such as student loan guarantees. The national debt in late 2006 was $8,5 trillion, which represents over 60% of GDP. Put in recent historical perspective, the national debt peaked at 120 percent of GDP in 1946 for World War TT-related reasons, then steadily declined to a post Great-Depression low of 32,5% of GDP in 1981. It ended 2006 at a 47 year high.
  • Nationalization: The act of bringing an industry or assets like land and property under state control.
  • Negative Equity: Refers to a situation in which the value of your house is below the amount of the mortgage that still has to be paid off.
  • Nonmarket Risk: The portion of a stock’s rise that is not related to teh movement of the market. If you own five to eight stock in your portfolio (varied industries), you don’t have to worry much about this
  • Options: The right to buy or sell a security at a specific price for a specified period of time. Listed stock options trade in the form of contracts. One contract represents the right to buy or sell 100 shares of a stock. A call option allows the holder to call away (or buy) 100 shares of a stock at a fixed price on or before a specified date. A put option allows the holder to “put” (or sell) 100 shares of a stock at a fixed price on or before the specified date. An incentive stock option differs from a listed option; the former term refers to an option granted by a company to its executives as a form of incentive payment.
  • Preferred Stock: A class of capital stock of a corporation that pays dividiends at a specified rate and has preferred status over common stock in the paymen to of dividends and upon liquidation. A company’s preferred-stock obligations are junior to a company’s debt obligation.
  • Preference Shares: A class of shares that usually do not offer voting rights, but do offer a superior type of dividend, paid ahead of dividends to ordinary shareholders. Preference shareholders often also have superior status in the event of a liquidation
  • Prime Rate: A term used primarily in North America to describe the standard lending rate of banks to most customers. The prime rate is usually the same across all banks, and higher rates are often described as “x percentage points above prime”.
  • Printing Money: Although the term literally refers to the actual printing and engraving of physical currency, it is more commonly used in an informal sense to mean actions by the government to expand the supply of money and credit in the economy.
  • Pro Forma Financial Statemnt: A hypothetical example of what a blance sheet, income statement, or other financial statement would have looked like if a particular event had already taken place.
  • Proxy Statment: A document containing certain information required by the SEC to be provided to shareholders before they vote on major company matters. For example, a proxy statemy is distributed to shareholders before directors are elected and before a merger is completed.
  • Public Finance: A field of economics concerned with paying for collective governmental activities, and with the administration and design of those activities.
  • Quantitative Easing: Central banks flood the economy with money by printing new notes, in order to increase the supply of money. The idea is to add more money into the system to avert deflation and encourage banks/people to borrow and spend. One of the dangers of this tactic is hyperinflation.
  • Recapitalisaiton: To inject fresh money into a firm, thus reducing the debts of a company. For example, when a government intervenes to recapitalise a bank, it might give cash in exchange for some form of guarantee, such as a stake in the company. Taxpayers can then benefit if the bank
  • Reserve Currency: Status given to the U.S. dollar by the Bretton Woods agreements of 1944 that made it the currency used by other governments and institutions to settle their foreign exchange accounts and to transact trade in certain vital commodities, such as oil and gold. Because other countries accumulate dollar reserves to facilitate transactions, the country enjoying reserve currency status is exempt from the free market forces that would otherwise force the adjustment of trade imbalances.
  • Rights Issue: When a public company issues new shares to raise cash. The company might do this for a number or reasons – because it is running short of cash, or because it wants to make an expensive investment. By putting more shares on the market, a company dilutes the value of its existing shares.
  • Risk Arbitrage: The purchase of a stock in a company that is subject to an announced takeover, sometimes accompanied by the sale of stock in the proposed acuirer.
  • Securitisation: Turning something into a security. For example, taking the debt from a number of mortgages and combining them to make a financial product which can then be traded. Banks who buy these securities receive income when the original home-buyers make their mortgage payments.
  • Security: Essentially, a contract that can be assigned a value and traded. It could be a stock, bond or mortgage debt, for example.
  • Short Selling: Selling an asset, such as a stock or futures contract, that is borrowed and not owned at its current market price in anticipation that the market will fall and it can be purchased at a lower price, netting a profit after the borrowed stock is returned. The actual purchase of the asset by the short seller is called short covering. A situation where numerous short sellers engage in short covering at the same time, creating upward pressure on the asset price, is called a short squeeze. A short selling is said to have a short position in the asset involved as distinguished from having a long position or being long, which would indicate the asset is owned
  • Short Sale: The sale of a borrowed security with the hope that that security will decline before it has to be repurcahsed – and returned to its owner.
  • Stock Split: A pro rata increase in the number of oustanding shares of a corporation’s stock without any change in the equity or market value of the compay. A 3-for-1 split of a $30 stock with 3,000,00 shares outstanding should result in a company with 9,000,000 shares oustanding and a $10 stock. The split, by itself, does not effect the market value of the company.
  • Sub-prime Mortgages: These carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems or who have low or unpredictable incomes.
  • Swap: An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate and one in another country has a lower floating interest rate, an interest rate swap could be mutually beneficial.
  • Time value of money: Represents the interest one might earn on a payment received today, if held, earning interest, until that future date. Different types include: present value, present value of annuity, present value of perpetuity, future value, future value of annuity.
  • Toxic Debts: Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is now unlikely that it will be repaid.
  • Underwriter: An investment banking firm that sells a new issue of securities to the public; the underwriter can work alone or with an underwriting group or syndicate.
  • Volatility: The size and frequency of price fluctuations.
  • Warrants: A security that entitles the holder to buy stock in a company for a specified price and period of time. Usually longer term than options.
  • Write-Down: Reducing the book value of an asset to reflect a fall in its market value. For example, the write-down of a company’s value after a big fall in share prices.
  • Yield Curve: The ralation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency. Investing for a period of time t gives a yield Y(t). The function Y is called the yield curve
  • Yield Spread: The difference in the rate of return in two different investments. If Bond A earns a return of 10% and Bond B 7%, the yield spread would be three percentage points.

Economic Indicators

In this section, we will cover only the indicators most sensitive to stocks. The top 5 indicators are used by the NBER to define recessions. When all are declining, the US is in a recession; when all are rising, the US is expansion.

  • GDP: This is one of the most important indicators of all, and is released quarterly. The gross domestic product (GDP) is a basic measure of an economy’s economic performance, is the market value of all final goods and services made within the borders of a nation in a year. The source is the BEA and the report is released at the end of the quarter (3 month period). Link
  • Industrial Production and Capacity Utilization: A very important indicator which often has an effect on the market. It is a measure of the change in production of the nation’s factories, mines and utilities. Also includes a measure of their industrial capacity and how much of it is being used (commonly known as capacity utilization). The level of industrial production divided by teh level of industrial capacity equals the capacity utilization rate. The headline numbers are the percent change in production from the prior moth and the capacity utilization rate. The source is the Federal Reserve and the resport is released in the middle of the following month, around the 15th. Link
  • Retail/Wholesale Survey: The first report of the month on consumer spending; capable of big surprises. Consumer spending makes up 70% of all economic activity in the US, and retail sales account for around 1/3rd of that. If consumers can keep cash registers ringing, it is a sign of overall economic growth and prosperity. Retails sales has some shortcoming though; it represents only spending on goods, such as those found at department stores, gas stations, and food service providers such as restaurants. The report tells us nothing about what’s being spent on services such as air travel, dental care, insurance etc. Also, retail sales is measured only in nominal dollars, which means that no adjustment is made for inflation. It is computed using surveys sent out randomly to 5000 large and small retailers around the country. The government receives a certain percentage back and releases an advanced report. Another 8000 retailers are surveyed a few days later, and a revised report is released, usually four weeks later. The source is the Bureau of the Census, Department of Commerce. The report is released about two weeks after the month ends. Link
  • Real Earnings: This indicator represents real income. Data on average weekly earnings are collected from the payroll reports of private nonfar establishments. Earnings of both full-time and part-time workers hodling production or nonsupervisory jobs are included. Real average weekly earnings are calculated by adjusting earnings in current dollars for changes in the CPI-W. The data is one of the indicators used by the NBER to determine the entry and exit from a recession. The source is the Bureau of Labor Statistics. It is released mid-month. Link
  • Employment Situation Report: The most eagerly awaited news on the economy, which measures if jobs are being created and the situation of American workers. It has great economic and political significance for various reasons: the more workers there are and the more they earn, the more they can buy and propel the economy forward. The report is rich in detail about the job market and household earnings, both of which are drivers of economic growth. It is computed using the Household Survey and the Establishment Survey. The source is the Bureau of Labor Statistics, Department of Labour. The report is usually released the first Friday of every month. Link
  • Weekly Claims for Unemployment Insurance: Tracks new filing for unemployment insurance benefits. Analysts view this as a good coincident indicator, meaning it accurately reflects what is currently going on in the economy. It is computed by the State, which counts all first time filers for a given week. The source is the Employment and Training Administration, Department of Labour. The report is usually released Thursday each week. Link
  • ISM Manufacturing Survey: First monthly report on the economy with a focus on manufacturing. If there is a pickup in demand for manufactured produced, purchasing managers quickly respond by increasing orders for production material and other supplies. If manufacturing sales slow, these corporate buyers will cut back on industrial orders. Thus, buy virtue of their position, purchasing managers are in the forefront of monitoring activity in manufacturing. The timing of the report is also very important. It is computed using two surveys, one based on comments from purchasing managers in the manufacturing sector, the second deals with the service industry. Managers are asked about activity in fields such as: new orders, production, employment, supplier deliveries, inventories, customer’s inventories, commodity prices, backlog of orders and import and exports. The source is the Institute for Supply Management (ISM). The report is released the first business day after the reporting month. Link
  • Consumer Price Index: The most popular measure of price inflation in retail goods and services. In essence, it seeks to gauge the cost of living. But right away we run into a problem. The “cost of living” is just a theoretical concept because Americans do not all persue the same lifestyle. Thus, the best the CPI can do is measure the average change in retail price over time for a basket consisting of more than 200 categories of assorted goods and services.  There categories are divided into 8 different groups including: housing, transportation etc. It is important because inflation touches everyone. It determines how much consumers pay for goods and services, affects the cost of doing business, causes havoc with personal and corporate investments, and influences quality of life for retirees. A jump in CPI is not welcomed by investors. While revenues and perhaps even profits might jump in an inflationary environment, that kind of income is worth much less to shareholders who prefer to see earnings improve from greater sales volume, not price hikes. It gives the investor an illusion of success. CPI is computed by conducting interviews with about 23000 retail outlets and other businesses located in 87 urban areas. Prices are collected on 80000 items and services, including eyeglasses, hamburgers, cars, computers,  dental etc. You then compare prices with previous months to measure the effects of inflation. Notice that CPI only covers one consequence of inflation, and is most often a lagging indicator. The source is the Bureau of Labor Statistics, Department of Labor. The report is released the second or third week following the month being covered. Link
  • Producer Price Index: Measures the change in price paid by businesses. It looks at the changes in prices that manufacturers and wholesalers pay for goods during various stages of production. Any inflation here could eventually be transmitted to the retail level, because businesses are likely to pass on some of those higher costs to consumers. It is really a family of indexes, for each of the three progressive stages of production: crude goods, intermediate goods, and finished goods. A jump in PPI means higher inflation and higher production costs for sompanies, and this can erode profits and endanger dividends. While some stock investors argue that a little inflation is a good thing because it allows produces to charge more for goods, which bolsters revenues, there is a point beyong which inflation pressures do more harm then good. PPI is computed using questionnaires requesting prices on about 100000 different items from nearly 30000 firms around the country. A basket is formed of goods representing items at all stages of production. Stocks respond to PPI the same way as bonds. The source is the Bureau of Labor Statistics, Department of Labor. The report is released thwo or three weeks after the reporting month ends. Link
  • Consumer Confidence Index: Examines how consumers feel about jobs, the economy, and spending. This is important because happy consumers are good for business. They are more likely to shop, travel, invest and keep the economy going. An unhappy and insecure consumer can derail economic activity. Thus, any sign of failing confidence can immediately set off alarms on Wall Street, as consumer expenditures account for 70% of GDP. It must be noted that, in the very short term, history has shown that the relationship between consumer confidence and spending si not a close one, even though it is perfectly intuitive to think so. Over the long term however, the relationship tends to strengthens, and six to nine month moving average of consumer confidence levels has proven to be a somewhat better indicator of future household outlays. CCI is computed using a survey of 5000 households nationwide every month (about half respond). The source is The Conference Board. The report is released the last tuesday of the month being survey. Link
  • Personal Income and Spending: Records the income Americans receive, how much they spend, and what they save. Consumer expenditures are the main driving force of sales, imports, factory output, business investments, and job growth in the US. But to be able to spend, people need a reliable stream of income. As long as personal income rises at a heathly clip, so will spending. If income growth turns sluggish, consumers will curb their shopping. The government breaks down personal income and spending into three major categories: personal income, expenditures and savings. Personal income (DPI) represents the money households receive before taxes. Personal Consumption Expenditures (PCE) is extremely important; consumption drives two-thirds of all economic activity in America. PCE highlights durable goods, nondurable goods, and services expenditure. Personal savings is what’s left after spending. Since 2005, personal savings in the US has been negative, which means that Americans are borrowing to fund their spending. In 1980, wages accounted from 80% of all spending, today they account for 50% (other sources include debt, rental income, proprietor’s income, other income). Personal Income Spending is computed by gathering data from various places including Social Security and the IRS. Higher personal income spending is viewed favorably in the stock market because they fuel more economic activity and fatten corporate profits. The source of the report is the Bureau of Economic Analysis (BEA), Department of Commerce. It is released four weeks after the end of the reported month. Link
  • Durable Goods Orders: A key indicator of future manufacturing activity. The Advance Report on Durable Goods is one of the statistics that provides solid  clues about what might occur in the future; it is about production that will take place in the months ahead. A jump in orders is a positive sign because it suggests that factories and employees will remain busy as they work to satisfy this demand from customers. By the same token, a persistent decline in orders must be viewed as a troubling omen that assembly lines might soon fall silent, leaving workers with less activity. In such a situation, manufacturers may have to shut down some plants etc. The report is volatile, which often has negative effects on the stock market. The Durable Goods Orders report is computed based on results obtained from 4200 manufacturers representing 89 industry categories. It is computed by the Census Bureau, Department of Commerce. It is released three or four weeks after the end of the reporting month. Link
  • Gross Domestic Product: The foremost report on America’s economic health, GDP measures how fast or slow the economy is growing.  This is the top line, it’s the final value of all goods and services produced in the U.S. It reflects the final value of all output in the U.S. economy, regardless of whether it was sold or placed in inventory.The government picks the final value of goods and services to compute GDP, they include: PCE, Gross private domestic investment, Net exports and Government consumption expenditures and gross investments. For equity markets, the key question is how the latest release affects the outlook for corporate profits. A healthy economy generates more business earnings, while a sluggish one depresses sales and income. It must be noted that if economic activity has been racing ahead of the 3,54% rate for several quarters, even shareholders start to get nervous about rising prices. GDP is computed using the product account, income account and current account. NIPA collects and assimilates economic data from thousands of government resources. The source is the Bureau of Economic Analysis, Commerce Department. The report is released in advance the final week of January, April, July and October. Two rounds of revisions follow, each a month apart. Link
  • Help-Wanted Advertising Index: A measure of newspaper ads with new job openings. It turns out to be a reasonable predictor of the economy’s direction. When classified ads for jobs increase, it signifies growing confidence in the business community about upcoming sales and profits. Should the number of ads for jobs shrink, it is an indication that companies are getting nervous about the future. It is computed by the Conference Board, a New York research group that surveys 51 leading newspapers from major US cities. The source is the Conference Board. The report is usually released the last Thursday of the month, and covers the previous month. Link

Ratios

  • P/E ratio: The price of a stock divided by its earnings per share; this measure (sometimes referred to as a multiple of earnings) tell you at what multiple a stock is priced relative to its earnings. A stock trading at $10 per share that earns $1 is trading at a P/E of 10 (the reverse of the P/E ration – or E/P ration- is know as the earnings yield. This the same stock that has earnings of $1 and a price of $10 would have an earnings yield of 10%)

Note: The preceding definitions were collected from the following sources:


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