The Financial Times

Hello everyone! My name is Anthony Cruz and I am a business student at the University of Washington, Bothell. My area of focus in the field of business is finance. I have been fortunate enough to learn some key financial and investment concepts during the course of my education at UWB. In this blog, I would like to interpret and share with you some of the most intriguing articles and news stories about finance and general market trend information.

Thursday, July 13, 2006

Unemployement Creeping up?

According to an article by Marcy Gordon on Yahoo!Finance, "the number of people filing new claims for unemployment benefits jumped last week, apparently reflecting the spring slowdown in the economy. The Labor Department said Thursday applications for jobless benefits totaled 332,000 last week, an increase of 19,000 from the previous week that exceeded market expectations. Economists had forecast a rise of 7,000."

What does this mean? As reoprted by the Labor Department, several recent indicators have provided evidence that the economy slowed in the spring under the impact of surging gasoline prices, rising interest rates and a cooling housing market. The slowing economy, soaring oil prices and interest rate jitters have soured Wall Street. As discussed in my prior blog stocks plummeted for a second straight session, with the Dow Jones industrial average dropping almost 167 points on Thursday July 13, 2006 for a two-day loss of 288.


Intel Laying-off Managers


Microchip giant Intel Corp. (www.intel.com), acknowledging that its management structure had become bloated, said it is laying off 1,000 managers as a result of a previously announced internal study to improve efficiency. The cuts are said to effect all levels of management at all locations.

According to an article on the Wall Street Journal (www.wsj.com), Intel, of Santa Clara, Calif., has been grappling with shrinking profit margins due to stiffer competition from Advanced Micro Devices Inc. (AMD). Additionally, Intel is also suffering from slowing growth in sales of the personal computer that use its chips. Paul Otellini, its chief executive officer, in late April announced plans for a top-to-bottom review of the company's operations, which has already produced actions that include plans to sell some operations that produce communication chips.

By cutting the number of managers the company hopes to not only reduce cost but improve efficiency. The concensus amongst analysts seems to be that the cuts will be good for the company in the long run, some even predict that there will be more significant cuts in the near future at Intel.

As an investor, it is hard to come to a quick conclusion about how these cuts are going to effect Intel's long-term performance. Cost cutting is generally favored on Wall Street, but Intel, a high-tech company which heavily relies on human capital for innovation and growth, is a different culprit. However, based on Intel's strong market share and solid historic performance, I predict that the cost cuts will help the company become more effiecient, and therefore, maintain its competetive presence in the market. From there, they should be able to continue doing what they do best--dominate the world of microprocessors.





Source: The Wall Street Journal (www.wsj.com)

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Bank of Japan Raising Borrowing Rates to 0.25%


The Bank of Japan is widely expected to nudge up the rate banks charge each other for overnight loans, a benchmark lending rate, to 0.25% from zero, where rates have stood for five years. As a result of this news, Investment Banks are scrambling to gear up for a boost in the issuance of bonds by corporations rushing to take advantage of the still low (at 0.25%) interest rates.

The Bank of Japan deliberately kept interest rates extremely low for years, in an attempt to use cheap credit to boost an economy that many worried might never recover and to fend off deflationary pressures. Now, Japan's economy is posting solid growth of about 3% and prices have begun to rise. Many economists expect the Bank of Japan to lift the overnight lending rate to 0.5% by year end.

The Bank of Japan operates in similar fashion to the Federal Reserve which monitors its monetary policy in the US by raising or lowering key interest rate targets in accordance to their goals of taking money out-of or pumping money into the economy.

As discussed in my earlier blog "The World is Out of Balance", this raise in key interest rates, however modest, may inturn impact the cost of borrowing from banks around the world. Due to its unusually low interest rates of at-or-near 0%, Japan has been a haven for multi-nationals and large banks looking to borrow cheap money. These firms use the funds to finance their own operations or to lend out the money at a margin to consumers through credit cards, mortgages and other forms of consumer loans. Therefore, a rise in the key borrowing rate may trigger a pinching effect on the spreads (margins) of the banks and companies who need to borrow money. In order to keep their spreads or margins intact the banks will have to pass on the rise in the cost of borrowing to the end consumers, i.e. You & Me!

Source: The Wall Street Journal (www.wsj.com)

Stock Market Tumbles Amid Rising Crude Oil Prices

Headline of the Day on the Wall Steet Journal July 13, 2006:
"Oil Prices Jump $1.75 to $76.70, a new record, as the conflict between Israel and Hezbollah militants took a turn for the worse. Israel bombed an airport in Beirut in South Lebanon in retaliation for earlier attacks by Hezbollah, which responded by shooting rockets at the Israeli port city of Haifa."

The Dow Jones Industrial Average closed 166.89 points down on Thursday July 13, 2006 amid growing tention and treat of full scale conflict in the Middle East. In response to these hightened geo-political tensions crude oil prices jumped to a record high price of $76.90 a barrell before closing 20 cents below that level at the end of the day. As has been the case in the past, the US stock market moved in the opposite direction to the steep rise in oil prices. The prospect of widening tension in the oil-rich region sent investors fleeing stocks.

The primary explanation for this inverse relationship between the stock indexes and sudden steep movements in crude oil prices has to do with concerns over higher energy prices taking a bite out of the profit margins for American industry and also depressing consumer spending power.

Notes: The Standard & Poor's 500-stock index fell 16.32, or 1.3%, to 1242.28, and the Nasdaq Composite Index declined by 36.13, or 1.7%, to 2054.11.

Wednesday, July 12, 2006

The World is out of balance!!!


Don't worry, I am not refering to the tilt or the mass of the planet when I say that the world is imbalanced. Rather, I am referring to the increasing trade and economic imbalances in regards to spending and savings trends around the globe. According to Mr. Ernesto Zedillo (source: Forbes), "the world economy continues to look strong despite recent hiccups in international capital markets and the recalcitrance of high oil prices."

He goes on to mention that the world output (global GDP so to speak) will grow around 5%, with record low inflation worldwide. Good news right? Well, not so fast!

According to Zedillo's article, and several other analyst predictions, economists are increasingly worried about the possibility of a serious economic setback, if not this year then sometime in the not-so-distant future. The culprit at the root of the worry is what Zedillo describes as bouts of insomnia and divided opinions about a dismal situation called "global imbalance."

In our ever increasing global economic and political environment it is conceptually, and practically, feasible for economic circumstances, whether growth or distress, to spread quickly across increasingly interdependent global markets. A domino effect in the face of economic distress stemming from one region or from one economy of the world corrupting the strength of markets worldwide is an imminent economic possibiity. In fact, a similar domino effect was felt in the Asian Economic Crisis during the 1990's.

To complicate matters more, the global economy is more specialized and more interdependent across international borders than ever before. If present trends hold, the US current deficit--which reflects the country's excess of expenditure over income--could reach $900 billion in 2006 (source: Forbes), or 6.8% of GDP. How is this overspending being financed?

It's being financed by the equally unprecedented surpluses being run by other economies, most of which are in the Asia Pacific Region--led by China and Japan. This global imbalance of comsumption and cheap external financing is a reason for concern for many US analysts and economists. Current global economic conditions are credited greatly for fueling this imbalance. Higher productivity in the US has given Americans both a revaluation of their assets and an expectation for higher future income. This in-turn encourages increased spending beyond current means.

At the same time, higher productivity in the US, and reluctance of some major European countries to reform their economies, had made the American economy a more attractive dumping bed of foreigners to invest thier current account surpluses.

Hopefully you can guage from these trends that the global economy is very circular and potentially very fragile. So the next time you decide to purchase that luxury item produced in China, or Chile, or Canada on credit, think about who is really lending you the money to buy on credit. Will you be able to make your credit card payments if the economy suddenly slowed and you lost your job? How much of a savings buffer do you think you'll need to keep your car, your house or apartment, pay for utilities and other essentials, and also cover you current credit card balance if you were out of a job for six months?

Rise of alternative fuel and their viability.


Oil prices have climed sevenfold and natural gas prices have tripled since 1999 (source: Forbes), pushing chemical companies and agricultural processors to look to corn, vegetable oil and other raw materials as potential sources of energy.

Biofuel Benefits
Ethanol, a gasoline additive primarily used to power cars, is made from the starch in corn. Biodiesel is made from vegetable oils that come from soybeans and other oilseeds, and power diesel engines in cars, trucks, railroad locomotives, and even farm machinery.

According to researchers, Biofuels are good for the environment because they come from renewable sources of energy such as crops, which also remove some of the carbon dioxide from the atmosphere. Additionally, they help reduce reliance on foreign oil, supporting energy security.

From an economic perspective, Biofuels give an economic boost to farmers by providing a vital value-added market for corn and oilseeds. However, critics argue that the extraction of Biofuels from crops and vegetation does more economic harm than good. According to several sources, the production and development of technology to extract Biofuels is highly subsidized by the government. Therefore, the true cost of developing the technology and creating the fuel actually includes a significant invisible burden on taxpayers.

Additioanally, the current technology to produce Biofuels actually requires the use of traditional fuels to convert corn starch or other things into useable fuel. Furthermore, the environmental sustainability factor of Biofuels is questionable simply because production at an impactful level will require large amounts of dedicated farmland and other resources such as water and fertilizers. The potential for over-cultivation of the land and exhaustion of readily available fresh water are some of the major concerns about large scale production and use of Biofuels.

In my opinion, Biofuels are not the complete answer to the growing global crunch for energy. Alternatives such as Hybrid cars and Hydrogen Fuel Cell technology is more viable and sustainable in the long run--considering that 60% of the fuel in the use is used to power cars, busses, trucks and other modes of transportation. However, Biofuels may be a short term option for powerplants, factories and even farm machinery since it is unlikely that Hybrid or Fuel Cell technologies will be highly commercializable in these sectors.

"Moving Forward" to a Hybrid Toyota Camry.


Toyota Motor Corporation is introducing an all-new Camry Hybrid for the 2007 model year. The Camry will be only the second conventional Toyota model line (the first was the Highlander SUV) to make the transition into adopting the famed Hybrid Synergy Drive (HSD) into some of its cars. HSD, popularized by the Toyota Prius (and celebrities like Cameron Diaz) and acclamated for its revolutionary technology will soon be found on one of the most popular sedans in American automotive history.

Honda Motor Corporation, one of Toyota's primary rivals, pioneered the hybrid technology in production cars when they introduced the Honda Insight in the late 90's. They later made the hybrid option available in their most popular conventional cars like the Civic and the Accord. However, the Hybrid Synergy Drive (HSD) technology developed by Toyota has become the best selling and the most efficient hybrid technology on the market due to its balance between power, efficiency, and reliability.

The HSD technology on the new Camry will combine a highly efficient, gasoline-powered engine with a self-charging electric motor. These two powerplants work side-by-side, linked by a tiny computer that continously monitors road and driving conditions to achieve the precise mix of engine and motor to generate optimum performance and fuel economy. Meaning the car will use much less gas, which will lead to fewer emissions-70% fewer to be exact.

Additionally, the hybrid will be filled with features such as Plasmacluster and an MP3-ready audio system to make the car even more appleaing to the masses.

So what does this mean for Toyota? Well, the world's second largest car manufacturer (still behind by GM) is going to get an enourmous shot in the arm with the introduction of the 2007 Camry Hybrid. Look for the company's stock to react to increasing demand for fuel efficient cars. This new model will help Toyota sustain its dominance in the Hybrid car market and should therefore help them mainatin, if not gain, market share overall in the global automotive market. The future of Toyota looks brighter than ever. And that is good news for those who wish to invest in a foreign market ETF of Toyota.

Welcome to The Financial Times!

Thank you for visiting my blog! My purpose behind establishing this blog is to bring forth some relevant topics for discussion in the area of global business, finance and economics. I will present my interpretations on the subjectmatter derived from contemporary business issues around the globe. Please keep in mind that the material being discussed on my blogs will consist of summaries and analysis of articles and news presented in highly credible information sources such as the Wall Street Journal and Forbes magazine, to name a few.

By reading this blog I hope you will feel more informed and knowledgeable about global business trends, as well as financial and economic outlooks being discussed by financial experts.