From “Assets” to “Quantitative Easing,” there’s a lot of jargon thrown around out there in the finance world. So MarketSnacks serves up simple definitions and explanations of key terminology that are easier to remember than a bland encyclopedia entry.
Assets – “Bling, Benjamins, and Beemers”
Whenever we try to explain assets, we think of one thing – rap videos. That s**t is packed full of assets. An asset is anything owned that provides some form of value. More specifically, fixed assets have worth for more than a year (like factories or machines or an Escalade), current assets are cash or can be quickly converted to cash in less than a year (like stacks of Benjamins) and intangible assets have non-material value (like a company’s image, brand or street rep). In banking loans, stocks and bonds, though not physical objects, are considered assets too, because they represent value when you get paid back. All you have to keep in mind is your ride, your rims and your rocks/cash money – assets, assets and assets. Back to top
Austerity Measures – “Cut ‘Em Off”
Here at MarketSnacks, we like a good steak – but we’re always trying to maintain a healthy figure. Post-holiday fig-pudding-binge, we spend January cutting back, maybe even drop the daily 4pm protein shake out of our busy schedule; and just like people, so do governments that have been overspending. Instead of dieting though, financially-bloated countries pursue “austerity measures” by either increasing the revenues they bring in (by taxing) or decreasing the amount of money they spend (by cutting state programs, like military or education budgets) in order to reduce their deficits. Most recently, countries in Europe highlighted austerity policies by slashing unnecessary government expenditures after taking on massive amounts of debt over the years that they simply couldn’t pay off, leading to the European debt crisis. Citizens who have benefited from extra government spending are the ones who usually get the short end of this stick, as you’ve probably seen Greek protestors in 2011 rise up against unpopular welfare cuts that were part of austerity packages. Whether you’re reading the word “austerity” in a SAT question or facing “austerity” policies in your home country, in either situation, this is not a term you want to be dealing with. Back to top
Ben Bernanke – “the Watchful Guardian of the American Economy”
Another all nighter tryin’ to get it done
Barely make it home with the morning sun
Baby mother thinking that you on some other s**t
Oh what a job this is.
– Devin the Dude
And oh, what a job it is for Ben Bernanke, the Chairman of the Federal Reserve Bank of the United States. Commonly referred to as the Rick Ross of the Recession, the post-Greenspan Gandoff, or the next in line as the spokesman for Just for Men hair products, Bernanke is the watchful guardian of the American economy. He’s in charge of the Fed’s policy aimed at the two Fed mandates: 1) keep unemployment down and 2) protect the value of the US dollar by keeping inflation down. Whether that’s changing interest rates, initiating stimulus measures or cooling down the economy by lowering the supply of cash out there, his job is a stressful one indeed. The Harvard educated “Bearded Genius” was appointed by George W. in 2006 and reappointed by Obama in 2009. The current Prez credited Bernanke for helping prevent another Great Depression during the financial crisis of 2008. Investors watch his semi-annual state of the economy address to congress as well as periodic minutes from FOMC meetings for any signs of economy shifting news. If Benji tells the people that there will be no additional stimulus to support the economy, investors get angry, but the mighty chrome-dome stands strong and doesn’t liken to criticism. It’s said that during his chats with congress, one can hear the ghosts of the NYSE whispering, “Fear the Beard, fear the beard, FEAR THE BEARD!” Back to top
Blue Chip Stocks – “Get ‘Em, Keep ‘Em”
Whether you’re an avid fan of CSI: Las Vegas, stuck watching ESPN6 in the middle of the day or simply enjoy wearing sunglasses indoors, you don’t have to spend your Tuesday evenings on the red-eye Chinatown bus up to Foxwoods to know the basics of the Black Jack table. When poker players exchange their cash for chips of varying amounts, the blue chips are the ones with the highest value. So borrowing the term from the gambling industry (not the best PR move, but no worries), in finance “blue chip” similarly applies to the most well-known and financially stable companies who trade their stock on exchanges. Unlike more volatile smaller companies that can be greatly affected by the ups-and-downs of the market, blue chip companies are sought after by investors because their high-level products and services help them steadily grow over time. Valuable blue chips in your pockets is nice (having literal casino blue chips in your pockets is not that bad either, and in certain situations, arguably more fun). Back to top
Bonds – “Sticking to the Bunny Slope”
Bonds can be issued by a government, a company and other types of organizations. Investors are able to make profit based on the bond’s yield; which is decided by the interest rate paid on the bond divided by the bond’s market price. Companies issue bonds in order to raise capital instead of selling shares or getting a bank loan. Bonds are considered to be a safer and lower-risk investment than stocks. Think in terms of skiing: you have the decision to take the black diamond (stocks) and risk the embarrassment of a wipe-out or you can stick to the bunny slope (bonds) and ski down the mountain easily. The reason being that bonds issued by the government (despite all their financial woes) and even Fortune 500 companies are unlikely to default because of their high financial standing. However, be careful when it comes to high-yielding bonds because many companies can portray themselves as bunny slopes but turn out to be double black diamonds. Back to top
Bull/Bear Markets – “The Beasts of the Street”
Ah yes, you’ve seen them on cufflinks, steakhouse logos and they’re even the preferred back tat of most wall street traders – the bull/bear symbols of the two most fundamental ying-and-yang market trends: up….and down. A “bull,” or “bullish,” market is one in which prices are rising, confidence is high and expectations are positive, characterized by a lot of buying. On the other hand, in a “bear,” or “bearish,” market, there is a decline in prices and pessimism sets in, as investors are more aggressively selling than buying. Both “bull” and “bear” are flung around liberally as nouns, adverbs and adjectives for every aspect of the market – you can be a bull, a stock can be a bull, you can be bullish, the market can be bullish or everyone can be acting bullishly. For all you Discovery channel fanatics out there, it’s commonly accepted that the terms come from how bulls throw their horns upward into the air, while bears bat their paws downward toward the ground. Back to top
Capital – “Capital Rules Everything Around Me”
The Capital city? The Capitol Building? The Washington Caps? Almost. Capital with an a has little to do with Washington, D.C., unless you’re talking about the amount that Alexander Ovechkin makes a year. ($9,000,000 or 287,415,000 Russian Rubles…) Capital refers to the structures and equipment used to produce goods and services. Essentially, capital = cash, cash money, C.R.E.A.M. get the money, dolla dolla bills y’all. Firms use capital to produce the goods and services that make them money. A firm’s capital is the amount of financial assets or the worth of those financial assets. Say Wu-Tang Financial purchases a lumber company. The capital in the transaction would include the factories, machinery and equipment used as well as the cash. You often hear about a firm (or a country) tapping the capital markets, which means they are issuing stock or debt in return for cash to run their business (or country). Capital is a very general term which can be used in a variety of ways, so just remember, capital: Capital Rules Everything Around Me.Back to top
Central Banks – “Paid the Big Bucks for Half-Time Adjustments”
Sit back and picture Gene Hackman in the 1986 classic “Hoosiers,” our favorite feature film in the all-popular Indiana high school basketball playoffs genre. If a country’s economy we’re a sport, then its central bank is the economy’s coach – and we think Gene’s dry-cleaned vest, flawless cloth tie and veteran receding hairline best embody the confident, shepherd-like role of central banks. As head coach, the central bank supervises a nation’s monetary policy, it’s game-time strategy for the amount and use of money available. By adjusting interest rates (the cost of borrowing money), the central bank determines whether it’s easier or harder for other banks to lend money, as if it were squeakily scribbling X’s and O’s on the board. It even oversees countries’ commercial banks like players on a team, lending them money (take that, NCAA) or imposing financial regulations that they have to abide by, along the lines of away-game curfews. The world’s three most active and important central banks to know are the US’ Federal Reserve (“The Fed”), the European Union’s European Central Bank (“The ECB”) and China’s People’s Bank of China. Pat Reilly, Mike Ditka and Bill Belicheck, respectively (minus the sweatshirt/eternal smugness). Back to top
Commodities – “All Beans Are Created Equal”
Few terms in finance sound as unnecessarily complex as “commodity.” The gasoline you put in your car? A commodity. The grains in your cereal at breakfast? A commodity. Even the gold in the extra large ruby-encrusted chain that you threw on this morning right after breakfast – commodity. A commodity is an object that is essentially the exact same, with minimal variation, no matter who produced it. Saudi oil is not much different from Venezuelan oil, and neither is Iowa grain versus Ohio crops, or African and South American gold. Since such similar items can so easily be exchanged, they are traded in special “commodities markets” throughout the world. So if you find something in its most basic form, then it’s probably a commodity. Back to top
Corporate Bankruptcy – “Where’s my money, man?”
Sometimes, you just can’t repay the money you owe. Instead of offering up your first-born or getting a back alley pipe beatdown in Atlantic City after a cold streak, our judicial system has developed a much more civilized approach. Bankruptcy is a legal proceeding for a company or person (debtor) that cannot repay their debts to whoever it has borrowed money from (the creditor). During the corporate bankruptcy process, everything the debtor owns (all its assets) are valued and then a court oversees how to use those amounts to pay back the creditors as much as possible, while sometimes allowing the down-on-their-luck company to survive. There are several types of filings within the bankruptcy code depending on the type and severity of the indebtedness, most commonly Chapter 7 (selling assets to raise money), Chapter 11 (reorganizing the entire company), or Chapter 13 (restructuring the amount of debt that has to be paid) are filed. What’s so awesome about the bankruptcy concept is the balance it creates in the short run for a business – it’s essentially a “new beginning” for the debtor, but also gives the creditor an opportunity to regain much of what it’s owed. However, bankruptcy negatively affects the debtor’s credit, so in the long run, it will cost much more to borrow. And former creditors probably won’t be knocking to lend. Back to top
Credit Ratings Agencies – “An Apple on Their Desk Won’t Help”
Like a TA staring down your latest final exam, ratings agencies assess the financial health and credibility of a company or government. Since Wal-Mart borrows money to build a new store or France to make more wine, a ratings agency would simply judge their ability to pay back those loans (or bonds) using academic-inspired letter grades. The three most relevant ratings agencies are Standard & Poor’s (S&P), Moody’s and Fitch and their grades range from AAA (highest quality) to D (“Weekend at Bernies, Part 2*” quality). A successful, financially stable corporation like General Electric is more reliable and therefore more likely to get an ”A.” Your brother’s start-up, “this-will-be-huge-dude-trust-me,” retro-wooden lacrosse stick operation, borrowing endless cash out of your parents’ garage, is the kind of questionable mess that would be dropped with a “C.” Back to top
*While we found this movie pleasant, it apparently was not received well by the Academy
Dividends – “A shareholders slice of the profit pie”
Isn’t it nice over the holidays when your grandmother sends you a five dollar bill slipped inside the same hallmark card that every single one of your cousins and second-cousins got? Well public companies hold themselves to a strikingly similar standard. Dividends are payments made by a company from its profits, to shareholders, at fixed intervals throughout the year. Dividends, usually only a few cents each, are a benefit of owning stock because they are a form of income received from each share – so the more shares you’ve got, the more cash you’ll receive. Because of their reliability, dividend-paying stocks are preferred by more conservative investors. Like your grandmother. Who kindly passed some of it on to you. Back to top
Dow Jones Industrial Average – “The Heavyweights”
If indices are like thermometers, giving you a single measured reading of what’s going on in the market as a whole, then the Dow is the all-popular Super Thermometer. It’s the nation’s ultimate, world-renowned, NASA-engineered, Arctic and Sahara tested, Cold War Arms Race-produced masterpiece that all other thermometers are now based on, talk about and wish they were. Created over 100 years ago, the Dow Jones Industrial Average (DJIA, “the Dow,” or “el Dow” in parts of Los Angeles) is simply an average of the performance of 30 of the most well-known, diverse stocks on the legendary New York Stock Exchange, including IBM, Exxon, Microsoft and Coca-Cola. Instead of dollars, the Dow is reported in points which is just the result of a complex “weighted” method for calculating the average. The Dow in fact is such a big deal (again, we cannot emphasize enough how good our Super Thermometer analogy is) that when people ask “what’s the market doing” or respond “the market’s up,” they’re actually referring to where the Dow is and how it’s behaving. Jealous? Back to top
Emerging Markets – “Growing More Than Just Peach-Fuzz”
In this globalized world dominated by powerhouse economies like the United States, Germany and Japan, emerging market countries are the new guys showing up to the party. Emerging markets are not as mature and established, but are in transition from third world to developed economies and show significant potential for growth as they go. To paraphrase Britney Spears, they’re not quite girls, but not yet women. The BRICS (Brazil, Russia, India, China and South Africa), an acronym coined in a 2001 Goldman Sachs analyst report, are the most well-known of these nations. Brazil feeds off its depth of natural resources while China builds off its vast manufacturing sectors, for instance, as the BRICS prove they can grow some facial hair. Back to top
Eurozone – “Get in the zone”
Like you, naturally the first image that comes to mind for us when we hear “eurozone” is an Epcot gift shop jammed with lederhosen and cigarettes (we’ve heard that that particular word-association is fairly typical). However, back in reality, the eurozone is simply the geographic group of 17 countries in the European Union that share the Euro as their economy’s national currency in this monetary union (not all members of the EU, like Sweden or Czech Republic, use the euro). The eurozone is one of the largest economic regions in the world and its financial policies are controlled by its central bank, creatively known as the European Central Bank (ECB). Back to top
Federal Reserve Reports – “The Nation’s Economic Report Card”
Were you ever worried about your grades getting sent home after each semester and avoided eye contact with your parents for a week? For the whole next semester? Well the central bank of the US, the Federal Reserve (“The Fed”), has to release our country’s economic report card for the world to see…and do it throughout the year. The most well known report, the “Beige Book,” is an accumulation of current economic and business data from all eight of the country’s Federal Reserve districts. The color-conscious Fed also releases a “Blue Book” which offers monetary policy information and a “Green Book” that estimates the growth of the economy. Traders keep their eyes out for theses news releases and make decisions based on this critical information. Back to top
Gross Domestic Product – “How much can your economy bench?”
Think about everything America spends money on. Whether it’s your roommate buying a Big Mac, your cousin paying for his new haircut, or the federal government buying a new fighter jet, when dollars are spent on American products, that’s US GDP baby – a measurement of all goods and services purchased in a country, and every dollar spent is a dollar received as income. This includes a foreigner buying an American made Ford Mustang, but not your mother paying top dollar for imported wine from Bordeaux. All of these purchases are counted up and thrown into a big pool that tells us how big the economy and how much money the country earned. GDP is calculated every 3 months and you can bet that traders are sitting at their computers like hawks on announcement day ready to buy if the number beats expectations and sell if the number disappoints. GDP is so important because the size of the economy is the amount of income that a nation has, and that means your paycheck. If GDP is growing (which it does on average of 2-3% per year for the last 100 years or so) then we have more income and we’re better off. If it’s contracting then we’re all in trouble because we have less money to spend. And if we get two straight quarters of contraction, that’s called a recession and that same trader has probably been laid off because our country is in deep trouble. Back to top
Remember when you could go see a light-hearted romantic comedy at the movie theater and grab a bag of popcorn without having to take out a short-term loan to pay for it all? Well the jump from $12 to $25 for a ticket and an empty-calorie concession isn’t (only) you getting ripped off – it’s the result of the divisive economic phenomenon affectionately known as inflation. Inflation is the rate at which the average price of basic goods and services rises over time. As those prices increase with inflation, the consumer’s (you, us and all our friends’) purchasing power drops since each dollar will buy less of that same good or service. So if the inflation rate is 3%, then your $2 Kit-Kat will cost $2.06 in a year’s time. One of the roles of central banks is to prevent too much inflation or deflation because of its critical impact on the value of money, by controlling how much money is available. However, most central banks, like our Federal Reserve, aim to keep the inflation rate at about 2% so that it can increase roughly along with growth of the economy. So enjoy Imax now while you don’t have to get a second job to do so. Back to top
Initial Public Offering (IPO) – “Cha Ching…The Black Friday For Stock Markets”
An IPO is when shares of a private company are sold for the first time in the public markets to raise capital (money) for the company. This happens when a company has grown large and prominent enough to attract significant interest from investors, think about Google’s largest ever IPO in 2004, everyone wanted a piece of the Google pie. Don’t remember this? Google it. It transfers the ownership from one small group of people to a large group of shareholders who bought stock in the IPO. “Going Public” is considered a success for the company and a major payday for the owners. It raises a ton of capital for the company and allows the original owners to sell their shares to the public and buy that beach house they have always dreamt of. Back to top
Investment Banking – “Raising Money For a Cause”
The first time you heard of investment banking it was probably when your cousin couldn’t make it to a long 4th of July weekend because he was in the office crushing excel sheets, so you asked your parents how that was possible since he was keg-standing his way through college but a mere two months earlier. The answer was investment banking (IB). When you push aside the long hours and big bonuses that crowd the image of investment banking, its fundamental role of helping companies raise capital (money) becomes clear. Investment banks serve as the middleman (or middlewoman) between companies that want to generate money and investors looking for a return. Investment banks either issue equity in a public offering (stocks, a share of ownership in a company) or sell debt (bonds that the company will eventually pay the holder back for, with interest). Through this process called underwriting, investment banks value the company, determine the price of its new stock or bonds and then help place them with investors, taking a small cut from the sale as their profit. Back to top
Keynesian Economics – “The John Lennon of Econ”
Consider John Maynard Keynes the John Lennon of economics. Both Brits took America by storm with their revolutionary takes on things that Americans thought they had figured out pretty well. But as much as the Beatles might have changed music, perhaps Keynes changed economic thought more so, given the degree to which his policies are in place to this day. Keynes’ theory was based on the premise that economies inevitably go through extended cycles of growth and decline, or economic “booms and busts” He insisted that, so as to keep things in order despite these erratic phases, the government take an active role in the economy—a notion that contrasted directly with the prevailing philosophy, laissez-faire (i.e., “Don’t you dare touch the economy, government.”). For this purpose, the government is armed with two powerful weapons: monetary policy (central bank controlling a nation’s money supply and interest rates) and fiscal policy (government using taxes and spending to spur the economy). Keynes really didn’t trust the general public to be financially-savvy, but he did believe that as long as the government holds the reins, it should do a decent job of navigating- windy as the Abbey Road may be.
The next time you really need some cash immediately (don’t worry, we’re not asking why), are you going to sell your Ford stock or your Ford car? Liquidity is the relative term for how quickly anything can be converted into cash. The more easily it can be bought or sold without affecting the price, then the more liquid – the harder it is and the greater the amount of price fluctuation, the more illiquid. And an asset becomes liquid as it is increasingly traded because there are more buyers and sellers ready to exchange it. But back to our example – the stock, which can be sold with a click of a button because of all the bidders out there ready to pay the stock market price, is more liquid than the actual vehicle, which would require a newspaper ad for someone who needs that exact type of car, a couple awkward test drives with strangers and then a price to be agonizingly negotiated over hundreds of dollars, before the sweet, cold, hard cash is in your hand (again, we’re not asking any questions here). You’ll hear liquidity thrown around a lot in a bunch of contexts: A company that “liquidates,” goes through “liquidation” or is becoming “liquid” is selling all of its assets in order to raise cash to pay back its debts. Back to top
Market Capitalization - “How much is it for a Big Mac, some fries, and every other McDonald’s in the world?”
Ever wonder what the value of 2 all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun really is? Us neither. But did you ever wonder what the value of the entire Big Mac empire was worth? No need to count the inventory of each McDonald’s across the world or every penny in the registers. There’s a simple equation to figure out the dollar value of a company using two ingredients. This value’s called the Market Capitalization (“Market Cap”) – here it goes:
Number of outstanding shares X stock price = Market Cap
Since each share represents an equal ownership stake in the company (hence “equity” as another word for “common stock”), the combined value of all those shares is the value of the whole company. If Mark McGwire wants to buy McDonald’s and become Emperor Big Mac, he needs to pay at least the Market Cap by offering each shareholder the price of their stock (which for the Golden Arches reached $90 billion in 2012). Wall Street classifies companies just like McDonald’s arranges its greasy French fries by size. Companies worth over $10 Billion dollars are referred to as large-cap (Super-size), $2-10 billion is mid-cap (“regular”), and <$2 billion is small-cap (“Kid’s meal”). Large-Cap companies are typically mature companies with slower growth (lower potential reward but less risky) while smaller cap companies could be younger, stocks primed for growth (higher potential reward, but riskier). But there are always exceptions to the rules. Apple is the biggest company in the world with a market cap over $600 billion, but some think it could hit $1 trillion in the next year. Back to top
Mergers and Acquisitions – “If You Like it Than You Should Have Put a Ring on It”
Bragelina, Kimye, TomKat… Billary? When we think of mergers and acquisitions, or M&A, we think of one thing: celebrity super couple nicknames. The same way that a power duo can combine forces and create a single headline dominating entity, a company can flirt with another and eventually do the same (they prefer to be on Forbes rather than Star Magazine). M&A simply refers to the consolidation between two companies. A merger occurs when two companies get married and combine companies: Exxon-Mobil, Sirius/XM, Disney-Pixar. An acquisition is when one company purchases another but the one doing the buying (the parent company) keeps the name. Some successful mergers include Google buying YouTube, Microsoft purchasing Skype and AT&T scooping up Cingular. Companies merge for “synergies”, i.e. cost savings since the two companies can share resources and cut costs when there is duplication. Kanye and Kimmy Kardashian each have publicists, but Kimye can use just one è cost savings synergies. That’s the name of the game, and think of M&A investment bankers as wedding planners, they’re getting huge fees to make the dream of Kimye come true. Back to top
New York Stock Exchange – “The Place To Be”
Squeeze behind the velvet rope, have your ID ready and awkwardly fist bump the massive bouncer at the door to shamelessly pretend you’re buddies – because the New York Stock Exchange (NYSE) is pretty much the high-end club where everything goes down (and not just because it’s in downtown Manhattan). Since its founding on Wall Street in 1792, the NYSE has been where the majority of the fanciest, sexiest and simply biggest companies across the world have come to list their shares to be traded. And in order to stay in the NYSE, you better look fine; the exchange’s house rules require companies to meet particular standards, like a minimum share price or a contractual commitment to its shareholder’s rights, in order to get in….and stay in. Although more than half of the stocks on the NYSE trade electronically, the famous “floor” of traders shouting stock orders at each other from the 9:30am opening to the 4:00pm close is the place to be. And just as you shouldn’t in real life, none of them wear fedoras. Back to top
Options – “Simple Badass Contracts”
Sit down and take a breath of fresh air. Options may seem as exotic as the extras in the Lord of the Rings trilogy, but they’re simpler than every financial thriller ever has made them out to be – they are a type of derivative, a financial product whose value is derived from something else, like a stock or bond. Each option is a contract that gives the buyer (the right but not the obligation) to trade a security at an agreed-upon price (known as the “strike price”) before a specific day (known as the “exercise date”). Investors can buy or sell option contracts, just like stocks or bonds, depending on how they think prices will move. If the option is to buy shares, then it’s a “call” and if it’s to sell shares, then it’s a “put.”
Let’s take calls – if an investor, for instance, is not a fan of Time Warner Company’s (TWX) Lord of the Rings, he may sell call options of his TWX because he thinks the price will fall and remain below the exercise price. If the price fails to rise above the exercise price, the call will never be used and he earns quick money from the sale of the call. The call buyer, on the other hand, has the opposite opinion of TWX stock – a fourth epic movie will cause the price to rise and he/she wants the ability to buy TWX at the (lower) strike price. If TWX rises above the exercise price, then the call buyer can purchase the stock at the cheaper exercise price and realize a profit. Sophisticated traders use options in a variety of ways; to make bets on stocks (speculate), or to protect their investments from a downturn in the price (hedge). The key to remember is that you pay a small amount to have the option to purchase or sell a certain stock, at a certain price, before a certain time. Back to top
This ironic acronym refers to the European countries of Portugal, Ireland, Italy, Greece, and Spain. Like all governments, these PIIGS need to sell bonds to investors to finance their operations and expenditures. However, these countries have pulled Europe into their current sovereign debt crisis because their ability to repay their enormous debt levels has been questioned. What started with a Greek bailout over a year ago has spilled over across borders to affect all the countries of the Eurozone. Back to top
Quantitative easing: “Oil and Massage Table Included”
At a glance, it looks more like a term you’d see posted at a spa – “aromatherapy treatment, deep tissue and…quantitative easing.” However, quantitative easing (“QE”) is actually a monetary policy used by central banks during difficult economic periods to increase the money supply and reduce interest rates to support more lending. By purchasing bonds and other assets from banks, this drives up the price of assets, which lowers interest rates. The idea is that the commercial banks will then take the new money paid to them by the Fed and lend it out to people and businesses at low interest rates. These new loans will stimulate the economy and generate business. The only concern economists have is that adding too much money can make the currency less valuable, an effect called inflation. So quantitative easing is actually like the government is in fact massaging the economy. When the Fed whips out the ol’ “QE” lotion and oil, it’s simply the government’s effort to turn on the smooth, saxophone-oozing mood music and de-stress the beat-down economy so it can wake up rejuvenated. Back to top
Quarterly Earnings Reports – “The CEO’s Chance to Boast (or Blame)”
It’s not rocket science guys – how did a company perform over the last three months? Was there a profit? Then we get to listen to the CEO describe how her ingenious plan has worked. A loss? The CEO will make excuses and blame the company’s underperformance on the poor tastes of the American consumer (“Sadly the American consumer is just not ready to appreciate the ‘Snuggie’ in public”). Earnings reports are important to the markets because we learn whether a company is doing better or worse than expected. Companies like Bloomberg poll lots of different analysts to ask what they expect the earnings (profit) to be. If the results are better than the consensus, then traders buy more and drive up the price of the company’s stock since the company is more valuable than the market was reflecting, and vice versa. Back to top
Securities – “The Sock’em Boppers and Easy-Bake Ovens for Investors”
Remember that feeling you got when you first walked into a Toys R’ Us and you sprinted through the aisles begging your mom for those Sock’em Boppers or an Easy-Bake Oven? Well think of securities as the toys investors love to buy and sell on Wall Street and around the world everyday. A security is any sort of financial instrument from stock in a company to a government bond or a treasury bill. Any financial instrument that can be owned, bought, and sold interchangeably between investors is a security.
Examples of securities:
- Common stock
- Corporate bonds
- Government bonds
- Mortgage-backed securities
- Mutual fund shares
- Exchange traded funds (ETFs)
- …etc
Every few years new exciting and flashy securities come along and light up investors’ eyes like a new rumble pack on an N64 controller. But sometimes they go out of style, or become so complex and risky they need a product recall. They may lack proper inspection of their inner-workings by government agencies like the SEC and FINRA, and then affirmed as safe or risk free by credit agencies like S&P or Moody’s. This was the case in late 2008, as many poisonous mortgage-backed securities (securities made up of thousands of home loans and mortgages) were given AAA ratings by credit agencies and not thoroughly inspected by the regulatory committees, leading to a disastrous product. Similar to playing Halo 2 on a faulty Xbox for 30 straight hours, trading with faulty securities for a decade eventually burned investors. Back to top
Standard & Poor’s 500 index (S&P 500) - “The Pound-for-Pound Stock Market Champ”
If the Dow Jones Industrial Average can be described as the Super Thermometer used to gauge the performance of the market’s heavyweight stocks, consider the S&P 500 its pound-for-pound equivalent. The “S&P 500” tracks 500 stocks (ranging from powerhouses like Apple to relative featherweights like Zimmer Holdings), which, given the much larger sample, is a broad and more comprehensive representation of the market as a whole. While the Dow uses a price-weighted average to chart the performance of 30 flagship companies, the S&P employs a market value-weighted approach, that quite frankly, makes more sense — Unlike with the Dow, larger companies have a larger effect on the the S&P 500 index (depending on their market capitalization). The S&P Index Committee aims to reflect the wide spectrum of active industries in the US economy with this collection – want to see who’s in the club? Check it out straight from S&P. Back to top
Stock Market Indices – “Want To Know The Market? Check the Index”
Whenever a professor hands back tests, a lot of students seem to be eagerly more concerned about “what the average was” instead of their own personal grade because it offers a good point for comparison (we assume this is why you overhear medical students justify “acing” organic bio with a 72% – the average was probably somewhere in the mid-40s). Similarly, an index is a benchmark that indicates how the market is doing. However, instead of averaging out the performance of all the companies on an exchange, it is simply a snapshot of just a few of them. Some indices are broad, like the S&P 500 (telling us how the market as a whole did by including 500 representative companies) and some are more specific, as with the Morgan Stanley Biotech Index (which shows how this smaller section of the market did). Either way the index is your measuring tape….do keep it handy. Back to top
Troika – “Savior of Europe“
Yes – you should pronounce it like it’s a ’90s Ukrainian Bond villain. Because at first glance it sounds like some trendy new imported vodka that’s on a killer marketing spree since the term has been in the headlines so much recently. However despite the word’s Slavic roots, Troika is actually the three-part economic committee that includes the European Commission, the European Central Bank and the International Monetary Fund, who are overseeing the European debt crisis. The powerful group is a lender of last resort, using their massive assets to fund the struggling European nations that need to borrow money to prevent bankruptcy. Back to top
The US Department of Justice – “The First Avenger of the Economy”
If Ben Bernanke is the Dark Knight and watchful guardian of the economy, then the Department of Justice is Captain America. The Department of Justice, also known as the Keeper of Competition, the Destroyer of Industrial Dominance, or the Piercer of Price-Fixing, bears the duty of protecting the founding principles of American capitalism. The “DOJ” enforces competition with a red, white and blue shield made of bulletproof alloy. The promotion of fair and free competition is enforced by preventing companies from becoming so large that they dominate an industry. If a business reaches “monopolistic” level, it could potentially raise prices higher and hurt consumers’ wallets (because there are no competitors to offer lower prices). Price competition is vital for Americans to get great products at good prices. Without it, Goliath companies will get lazy and charge unduly prices. But fear not, for the DOJ is equipped with Antitrust Laws that dismantle any monopolistic foe that emerges. If two companies seek to merge and the DOJ has even a slight Spidey-sense that they may fix prices, it shuts the deal down in one fell swoop. The DOJ – a symbol of competition, equality, and…justice. Back to top
Weekly Jobless Claims – “Your Reliable Thursday Morning Econ Data”
Looking for that certain special econ data announcement to brighten up the tail end of your work week? Behold: “Weekly jobless claims” is an official government report revealing how many new people have filed for state unemployment benefits in the previous week, a proxy for how many people got laid off. It’s released every Thursday at 8:30 AM EST like clockwork by the US Department of Labor and has the potential to move markets because it’s a leading indicator of the direction of the economy. Overall, an increase in weekly jobless claims signals a weakening labor market, while a decrease signals improvement. Economists focus on whether the total number of Americans seeking unemployment claims remains below the 400,000 mark- considered the threshold for a healthy, growing economy. Despite the weekly attention, jobless claims are considered the baby brother to the government’s other major announcement, the mega, monthly Labor Department Employment Report, which covers the previous month’s non-farm unemployment rate. MarketSnacks will always have you covered for both. Back to top
© 2012 MarketSnacks
Hmm is anyone else having problems with the pictures on this blog loading?
I’m trying to figure out if its a problem on my end or if it’s the blog.
Any feed-back would be greatly appreciated.
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