Government Shutdown T - 7 hours

As mentioned in previous posts, the American government is facing huge problems. First, there is the increasing national debt ($16.7 trillion USD) which is now more then America's GDP ($15.7 trillion USD). Next, there is Bernanke's aggressive Quantitive Easing program tapering, which will slow the economy's growth, and possibly increase the unemployment rate. Lastly, and most importantly, there is the Fiscal Policy lockdown issue.

The American Government's 2012-2013 Fiscal Year is supposed to end at midnight on September 30th, 2013. The 2013-2014 Fiscal Year is supposed to start 12:01AM on October 1st, 2013. It is currently 5PM on September 30th (out of 30 days), and Congress has still not adopted/approved a 2013-2014 Fiscal Year plan. In less then 7 hours, the new Fiscal Year will begin, and the government will not have the money to pay for its expenses, because it has not come up with a plan.

The only good thing that comes out of this government shut down is the possibility that I have no school tomorrow. Edit: I still have school tomorrow. Princeton High School, and most public schools receive a majority of their funding from the state and local government, so the Federal government shutting down will have no immediate effect. The same applies for state funded institutions/colleges, they will not feel the immediate effect of a Federal government shut down, but they will feel it in the long term.

The Reason for the shut-down: The House Republicans are not willing to sign/agree to any budget plan unless it includes a delay or defunding of ObamaCare. Obviously, the Democrats are not okay with that; they are firm believers of ObamaCare. In a previous post, I talked about why Republicans didn't like ObamaCare. The Republicans, who have a majority in the House of Representatives, recently passed two Amendments to the Senate regarding delaying ObamaCare funding/decisions until next year. The Democrat controlled Senate tabled those Amendments, causing both Houses to go back to Square 1.

ObamaCare attempts to make Health Care affordable for everyone, and guarantee everyone health care from the American Federal Government, regardless of illness, prior condition, and wealth. Perspicuously, this is a massive spending plan for a government that is already laden with debt. The American government owes more then $16.8 trillion, and its GDP is only $15.7 trillion. The government owes more money then it trades/makes in a year, so approving a plan that increases its spending is a bad idea.
 If the government continues to spend more money, ie. with ObamaCare, it will have no choice but to raise taxes and the cost of health care for the wealthy and healthy in order to negate some of those costs. Combine that with a still weak economy, and an unemployment rate of over 7% (healthy is 2-5%), and our government is in trouble. Then, on top of that, there is fear of the economy recessing because Bernanke plans to begin tapering off his Quantitive Easing program in a couple months, which will cause an increase in interest rates. Bernanke's aggressive QE program calls for the Federal Reserve to buy $85 billion in US Treasuries and US Bonds every month, in order to keep interest rates low. Low interest rates encourage businesses to borrow money, and expand their business, through the hiring of new workers, and the creation of new stores/products. Low interest rates also encourage consumers to borrow more money so that they can spend more money, fueling the economy. Low interest rates encourage consumers and businesses to borrow money, because it is cheaper to borrow. If the interest rates rise too soon, people might not spend as much as they used to spend, because now it is more expensive to borrow. If people don't spend as much, companies don't make as much revenue, and have to reduce their costs by firing workers in order to remain profitable. As a result, the unemployment rate rises, the dependence on federal aid increases (Unemployment Benefits, Food Stamps), and the number of people who pay taxes decreases.

Stocks have been on a steady decrease for the past week and a half due to fears of the government shut down. The Dow, S&P 500, and Nasdaq have erased most of their gains from the previous month of trading.

Goldman Sachs argues that the government shut down might be a good thing. The American government is scheduled to hit its debt ceiling (again, last time it hit debt ceiling was last year) in a few weeks, and Goldman feels this shut down will be like a wake up call to Congress to begin working on increasing the debt ceiling now, a few weeks before the government is expected to hit it. Maybe Congress will pass a 2013-2014 Fiscal Year plan, and a debt ceiling extension at the same time. Goldman also sees that the Republican party will be more likely to act now, because if the government shuts down, and a poll goes out, "everyone knows the GOP will be blamed". This also allows some interpretation, since Republicans in Congress refuse to pass any fiscal bill that does not include defunding ObamaCare, and when the government shuts down, it will make the Republican party look bad. Senatorial elections are coming up soon, and this would be a big gain for the Democratic party, because everyone would blame the Republicans for the federal government shut-down. Lastly, Goldman believes the government shut down might be a good wake up call to all the politicians and voters. It will wake the politicians up and encourage them to actually get some work done, and it might make voters choose better politicians.
Recent polls of the American government show that many Americans have little to no faith in Congress. The polls showed the same results last year, when Congress did not pass anything to lower the pre-Bush tax levels, until 3 hours before the new, higher taxes were supposed to go into effect(8PM on Dec. 31, 2012).

The biggest issue with the American government shut down would be the decrease in GDP. Economists and analysts estimate that for every week the government is shut down, the American GDP decreases by more then 0.16 points.
There is no further analysis that can really be made on this situation. The result just comes down to a matter of principles. Should all Americans have access to health insurance and health care so that no American dies because they can't afford/access treatment? Or should the government just focus on decreasing the unemployment rate so that people can actually have jobs to help pay for their medical care?

Moving back to the debt ceiling, there is less chance of America hitting the debt ceiling, because President Obama can give an Executive Order to increase the debt ceiling, since default would be imminent. The Executive Order ability comes from former President Bill Clinton who used it during his Presidency. Clinton stated just last year that Obama would (and should) raise the debt ceiling by invoking the 14th Amendment (with the Executive Order) rather then dealing with House Republicans. Potomac Research believes that Obama will probably use the Executive Order closer to the debt ceiling date, and face Supreme Court hearings about his Order, rather then deal with House Republicans.


In unrelated news, Iran has begun talking with American diplomats/officials about possibly lifting America's sanction on Iranian oil. Iran's economy is primarily based upon the export of oil. The US began sanctioning Iranian oil and other Iranian products because they suspected Iran was trying to build its own nuclear weapons, which would threaten America's safety. Other countries followed America's sanctions, and soon Iran was barely exporting any oil. If the sanctions are lifted on Iranian oil, there will be a sudden influx of a supply of oil, which would cause oil prices everywhere to drop. 

BlackBerry (BBRY) Analysis

During my free time, I invest in stocks, usually keeping positions for a couple of days to a couple of months. Because I have less time to research stocks now (during the school year), I keep my positions for many months. I'm a fundamentalist investor, so my long term investing strategy during the school year usually works out. 
Every now and then, I plan to post some of my fundamental analysis on different companies. 
Today's analysis is on BlackBerry. I first did the fundamental analysis on BlackBerry when I bought the stock a couple months ago, but I feel I should re-analyze the company after recent market events.

BBRY:  History and Background information
BlackBerry is a phone company that makes its revenue by selling mobile phones to consumers and businesses. BlackBerry also produces its own mobile Operating System that it runs on its mobile phones. Currently, BlackBerry's main market is with businesses as consumers have lost interest in BlackBerry phones. BlackBerry is popular with businesses because of its secure operating system, and restrictions on what the phone holder can do. Businesses like providing their high-level employees with BlackBerry phones because they know the phones are secure, and won't allow unauthorized people to access the phone's files (ex. emails, presentations, etc.). Additionally, BlackBerry phones give the IT department of the company superlative power over the phone; the IT department can dictate exactly what the employee can use the phone for, so that the phone is not misused. 

BlackBerry used to be very popular among consumers in the early to late 2000s, until the first iPhone and Android phones were released. BlackBerry did not release any developer APIs or add more games/ apps to its relatively simple mobile operating system, while iOS and Android, had public APIs that allowed 3rd parties to create apps. This resulted in thousands of developers making tens of thousands of apps, covering a wide spectrum of applications(games, finances, social media, fitness, etc). Within a couple of years, BlackBerry's market share halved, and then halved again; no consumer wanted a boring BlackBerry phone with a big physical keyboard that only had a couple of apps when they could get an iPhone with tens of thousands of apps, a music library, and a movie library. 
BlackBerry still did not adapt to the changing market, just like Abercrombie and Fitch did not adjust to the recession in 2009 by lowering their prices, and BlackBerry's stock took a severe hit. BBRY fell from a high of $142 in 2009 to $18 in 2012. Ok, you argue, so what if BlackBerry's stock price fell $100+, the stock market crashed in 2009, and many other company's prices fell that much. But, BlackBerry, unlike most other companies whose stock price took a sudden hit, kept on decreaing, and decreasing. For the past two years, the stock price has been decreasing until it began fluctuating in the $10 - $15 range, while the Nasdaq 500 increased by over 100%, and its technology stock sector increased by over 50%. 
In summation, BlackBerry's stock price is at an all time low where it seems to have found support in the $10 range. This might be a good spot to begin acquiring positions in the company (more on that later).

Why BlackBerry is at an all time low this year
Earlier this year, there was a lot of hype about BlackBerry's new product line that would save the company. BlackBerry knew it was failing, and invested a lot of money into designing some new phones that they hoped would bring back its market share. BlackBerry even released an app for BlackBerry devices, iOS devices, and Android devices that allowed free group chat, similar to WhatsApp. Unfortunately for BlackBerry, two events obliterated any bulls that felt the company could make a rebound because of its new product line. The first was leakage of its new product line about a week before it was scheduled to be displayed at a conference. This caused the company to not get any pre-release hype, and actually caused a massive sell off. The second, more fatal event, was a previewing of Android Version 18 (Kit Kat). 
Kit Kat enabled the Android phone to have two separate accounts/virtual machines, one for private/personal use, and the other for work/secure use. Because the two accounts were separate, the chances of a virus that the user accidentally downloads on their personal account, will not be able to access the work account. This announced Android's official entry into the competition with BlackBerry to get the business market.  Additionally, there was a larger variety of Android phones then BlackBerry phones, which attracted more consumers and businesses to Android. Android had phones with small screens, medium screens, large screens, tablet sized screens, and phones with large touch screens and physical QWERTY keyboards. BlackBerry only has six main phones, four of them are small phones with physical keyboards and super small screens, and two phones with no physical keyboard and a large screen. BlackBerry's small screens with small keyboards restricted the main population that would buy them, older people (age > 30) would not be like the small screen and tiny keys (hard to use), while people under 30 would rather have a big touch screen phone. To further weaken BlackBerry's product line was the fact that the phones had no features that the iPhone and Samsung Galaxy SIV did not have; it only had 16 GB internal storage, 4" touch screen, and 4G LTE.  

A common trend among employees who work in businesses where they are given BlackBerry phones is to have two phones, one BlackBerry (for work), and an Android or iOS phone for family. There are two reasons for this. 1. Most employees did not like the BlackBerry phone, the keyboard was small, the apps weren't good, and browsing the Internet was a pain. The second reason was that BlackBerry phones could not be used as normal phones; people couldn't put their huge iTunes library onto the phones, or they couldn't play Temple Run while waiting for their bus.
Android just eliminated that need for two different phones with their mobile KitKat operating system. With one Android phone, you could have a work account which the IT department controls, and contains secure work information, while you could simultaneously have a family/social account which was used for leisure. Plus, there was a wide variety of Android phones that users could choose from, primarily from Samsung and HTC, who both release new phones every half year. 

BlackBerry's job of increasing its revenue is not easy. First, BlackBerry needs to come up with a unique product and software that Android, iOS, and Windows 8 do not have. Then, BlackBerry needs to increase the number of apps it has available. BlackBerry needs to create such a good product that it will want to make consumers, who are comfortable with their iOS and Android devices that they've used for years, want to switch over to Blackberry. 

There is hope. The bullish part.

So, now we've established that BlackBerry is a company that is somewhat doomed to fail. Its only revenue source, the sale of its phone line, has turned out to be a disaster as neither consumers nor businesses like the phones very much, they don't bring any new features/technology to the market, and there is a new adversary, Android.

But, that is the American market. BlackBerry can begin investing in emerging markets. Although the majority of wealthy Indians in India have been 'Androided' or 'iOSed', BlackBerry can still create a cheap product for the low income Indians. Then, its main competition will only be Nokia, and Nokia is not nearly as advanced as BlackBerry is, in terms of phone specifications/features, and software integration. But, it's not just India. Latin America and South America are two whole markets that have not been taken over by Android, iOS, Nokia, or Windows 8.
BlackBerry currently has $2.6 billion in cash, and is debt free, which means it is free to invest that money into international markets to increase its revenue. And that's why I believed BlackBerry would be a good buy.
Looking at BlackBerry's income statement, and the current price of its shares, I concluded that BlackBerry was at a support level around the $9 range, and (1). would not plummet much further below $9, (2). possibly be bought out/taken over. BlackBerry's income statement shows revenue decreasing from $20 billion in 2011 to $19 billion in 2012, to $11 billion in 2013, while the profits decreased from $8 billion in 2011 to $3 billion in 2013. So, in March 2013, when BlackBerry announced its earnings, the stock did a dive, but found support in that $9 range. Only the longs and bulls held on to BlackBerry's shares, and if they didn't sell when the company's revenue dropped $5 billion in two years, that showed they were willing to endure much more for the company.
I predicted BlackBerry might be bought out because it was still a very valuable company, with over $13 billion in assets (and only $3.7 billion in liabilities), and it came with a copious, robust patent portfolio. BlackBerry has also never been hacked, unlike iOS (jailbreak), Android (rooting), and Windows 8 (viruses). Each of those patents, with a life of 12+ years, are worth hundreds of thousands, if not millions of dollars. Both the patents and the net assets add to the value of Blackberry. One of the main problems with BlackBerry now is that it needs to go private, in order to save itself in the long run. This happens to some publicly traded companies, like Dell. The publicly traded company has shares bought by Wall Street banks, and those Wall Street Bankers just want to see immediate profits quarter after quarter for a bit, before selling the stock and finding a new one. This means the company has to focus on spending its money on a short-term revenue increase, instead of spending money on making more money long term. Because the Wall Street shareholders own so much of a company (ie. Dell) the CEO has his hands tied, and is forced to work on short term profits, because the long term profit plans will be vetoed by Wall Street.
I had the idea of an investment in BlackBerry a couple months ago after Dell announced it wanted to go private. Dell, like BlackBerry, was a major technology company in the early 2000s, and it too failed to adapt to the different market needs. Apple, Lenovo, and HP quickly became more popular then Dell, and Dell's market valuation plummeted. Dell too decided to go private in order to focus on a long term revenue increasing strategy that the short term Wall Street investors would veto. Dell's shares shot up when the company announced the plans, which is exactly what I hoped would happen with BlackBerry. Currently, Fairfax consortiums offered to buy BlackBerry out at $9 per share, which is lower then I would have liked, but I bought in at $7, so I won't complain. There are still 5 weeks left in the plan where another company can bid on BlackBerry. I strongly believe that Fairfax would have offered to buy BlackBerry for $11 or more if BlackBerry had not announced the massive loss that blind sided investors a couple days ago. BlackBerry gave a warning to investors that it was expecting a $965 million loss, and was firing 4,500 people (most of the company). This of course caused stock prices to tumble, but the market later adjusted for the overreaction. 

The National Debt Crisis

It's been almost nine months since we've heard any news about the looming National Debt Crisis and the Debt Ceiling. Around this time last year, news outlets were just beginning to report that the Federal Government's National Debt was approaching the Debt Ceiling. Today, the National Debt is at $16,400,000,000,000 ($16.4 trillion) while the US GDP is at $15.8 trillion. Essentially, America owes more then it trades/makes in a whole year.

Why this is a problem: The American government's debt has been increasing steadily for the past decade. Now, the government owes more money then it gets in a year (it owes more then its GDP). This is a problem because the American government now needs to borrow more money in order to pay off its existing debt. In addition, taxes are still relatively low, and government stimulus/spending is at a high in order to help the American economy grow. Because the government needs to pay off its substantial debt, the government reduces its spendings in different areas which would actually help the economy; the government might fire thousands of workers, or reduce unemployment benefits and infrastructure projects. The government will then proceed to increase taxes in order to increase revenue, which would cause an increase the interest rate. Adding on to those woes is the decrease in domestic investment; foreign investors will see that America owes more money then it currently trades in a year and realize that it might not be a very safe investment because in all actuality, it could default. Additionally, the American government will have to reduce the yield on its bonds because it can not afford to pay more in interest to its debt holders. As a result, foreign and American investors might look else where for a financial instrument that offers a higher rate of return. With less people buying bonds, the US Government needs to find another way to raise revenue in order to pay off its existing debt, which would likely come from a higher tax increase.

How this whole debt cycle works: The American government needs money in order to operate and keep America healthy. The American government needs money to invest in maintaining/creating infrastructure, in keeping the country and its interests safe (both abroad and domestically), and to pay the millions of workers it employs. The government gets a lot of the revenue it needs to pay off those costs through taxes, but sometimes taxes aren't enough, and the government needs to borrow. So, the government sells bonds and treasuries (US Bonds and US Treasuries) to investors. When investors buy the bonds, they are actually giving money to the US Government, and the US Government is promising to pay them an annual yield, and then the value of the bond once it expires (ex. two year bonds).
When President George Bush came into office, the American economy was still in a recession from the 2000 "Internet" stock market crash. In order to help the economy recover, Bush lowered the interest rates, so it became cheaper for people and corporations to borrow and spend money which would fuel the economy. But, the economy did not recover at a fast enough pace, so in 2003, Bush enacted a capital gains tax reduction. Bush lowered the tax on capital gains (returns on investments) from 39.6% (20% tax + dividends) to 15% to encourage people to invest their money in the stock market, because now the rate of return was a lot higher since investors did not have to lose as much of their profits to taxes. Companies would then use that money to expand their business by hiring new workers.

In addition, the Bush administration eliminated many taxes, including some on scholarships. The economy did recover with all of those tax breaks, but the national deficit continued to increase. The Iraqi war which Bush started began in the early 2000s, contributed hugely to the national deficit increase; some Economists estimate that the government spent more then $1 billion per day to keep the troops and their equipment in Iraq. Furthermore, the Bush administration created the Department of Homeland Security, increased the size of the military by hundreds of thousands of soldiers, and made DARPA to invest hundreds of millions of dollars in colleges/universities to research military technology advancements.
To sum it up, the American government under the Bush administration was spending hundreds of billions more per year then it was making, because of the lowered tax rates/eliminations, and the increase in the government's spending. The tax breaks were signed in to effect for the next 10 years, so for the next 10 years the American government continued to spend way more then it made. As a result, it had to borrow a lot more too. The recession in 2009 occurred because American consumers and businesses were borrowing way more then they had, just like the American government. As a result, the American government had to spend more through federal bank bailouts ("too-big-to-fail banks"), and Quantitive Easing programs. In addition, the government had to keep interest rates low so that businesses and consumers could afford to borrow more in order to spend more (help put money back in the economy). Bush was not the only one who contributed to the increase in national debt, under the Obama administration, federal government spending increased by nearly 50% for his MediCare, MedicAid, Social Security and unemployment benefit increases.
The end result is that the government is now in a cycle of borrowing more money to pay off the money it has already borrowed, while attempting to keep interest and tax rates low, and having the government not increase the amount it spends per year.

Fast forward to 2012. The Bush Tax Cuts were scheduled to expire on Jan 1st of 2013. If those tax cuts expired, Americans would go from paying 10 - 20% in taxes to 30+% in taxes, a huge increase. If American consumers and businesses had to lose that much more in taxes, they would not have as much money to spend, which means they might be thrifty with their money, and choose to save it instead of spending it. In 2012, the economy had not fully recovered from the 2009 depression, unemployment rate was still high, PMI/consumer spending was still low, and real estate prices were still low. If the tax break had gone into effect, almost everyone would stop spending their money, and choose to save it in the bank. If consumers stopped spending money, businesses would stop making money, and would need to cut down on expenses; first by not hiring new workers, then by firing existing workers. If existing workers are being fired, they need to rely on the government for Food Stamps/Unemployed Benefits, and they will not have any money to spend. Even though the higher tax rate would initially decrease the national debt, over time, it would actually increase the national debt. If consumers stop spending money, the government loses sales tax. If businesses make less revenue because consumers are spending money and not saving it, the government loses revenue taxes. When the businesses have to fire workers, the workers don't have to pay income taxes, and the government loses the income rate tax.

In October of 2012, there was actually a mini-crisis; the US Federal Government had a national debt of over $16 trillion, which Congress had made the debt ceiling. As a result, many government facilities closed down because the government literally did not have the money to pay the employees who ran the facilities. Congress was decently quick to increase the debt ceiling, and actually postpone the debt ceiling to October 1st of 2013.

But Congress, of course, was unable to come up with a solution for the sudden tax increase that would occur on Jan 1st, 2013 if they did not do anything. Because many media outlets began reporting the tax increase for December in September, and because the American people had little faith in Congress (CNN poll reports less then 20% of Americans felt satisfied with Congress), Americans saved more of their money then they normally would have. This caused a problem because the fall and Christmas season are the two times of year when people spend the most money. As a result, Black Friday was a disaster, and company profits/revenues barely made it to the black. On December 31st, 2012, at around 9PM, Congress came up with a solution to slightly increase taxes, and decide how much higher the taxes should be at a later date (pretty last minute, right?).

October 1st marks the beginning of a new fiscal year for the American government. A fiscal year where the budget has not yet been approved by Congress or the President, a fiscal year where the debt ceiling has not yet been determined. In a New York Times Opinion Editorial, Paul Krugman identifies the Republican party as the source of the problem. Krugman states that the Republican party is literally holding Americans hostage until Obama lowers the tax rate and dismantles the health reform that he has made the signature achievement of his Presidency. Congresses's Republican radicals are holding Americans hostage by refusing to sign the 2014 Fiscal Year Budget by September 31st, 2013 which is the latest it can be signed; the Fiscal Year budget goes into effect on October 1st, 2013. If the fiscal budget is not approved, the Federal government can not spend any money, which would ruin the American economy, and then the international economy.

Congress has approved a bill that funds the federal government $986 billion until December 15th, to avoid a total government shut down. Currently, Congress is still trying to reach a resolution on how much to cut spending in MediCare, MedicAid, and Social Security, while deciding whether to pass ObamaCare. It looks like the Republicans have succeeded in cutting off funding for ObamaCare by using some tricks in their parliamentary toolbox, which makes ObamaCare need 60+ Senate votes to pass, more then a simple majority, and the Republicans have control of the Senate.

ObamaCare/Obama Administration Policies: The Obama administration wants to make health care available to everyone at low cost. This is obviously going to be a very, very expensive plan, as providing health insurance for everyone (the poor, those with severe pre-existing conditions, etc) can become very expensive.
Previously, Americans had the option of buying healthcare from private insurance companies, or from the government. Having private insurance companies meant that there would be competition to decrease prices. On the other side, using Game Theory, insurance companies could match the prices with their competitors, or increase their prices, making it more expensive for consumers with pre-existing conditions to buy. In addition, private insurance was a lot more exclusive/picky in getting new clients, many people with severe preexisting conditions were not given insurance plans, or their plans were very expensive. Government provided insurance meant that it would be overall cheap and available to everyone (including those with pre-existing conditions). The only problem with government provided health insurance is that it requires the government to spend a lot more money, which means the government needs to increase taxes. Steven Cruz at Forbes Magazine points out that it is actually the healthy, middle age male and female who end up paying the most for insurance in order to subsidize the older, poorer Americans in bad health.  Obama's policies tax pharmaceutical companies more, and force them to sell their drugs at a cheaper price; in someways, giving them a double whammy, they have to sell their product for less money, and pay more of their revenue in taxes. 

Future Prediction: Stock Market Crash

Today, I bring you bearish news for the stock market. I am predicting a stock market crash in which the S&P 500 drops to 1500, the DJIA drops to 13,600, and gold rises to $1800 by March, 2014. The S&P 500 is currently at 1722, so a drop to 1500 would be an approximately 13% drop. The DJIA, currently at 15636 will drop  11% to 14000. Gold will increase from today's close at $1394 to $1812, a 30% increase. Although my numbers might be off, I am predicting a (minor) recession in the near future.

Here's why:
Stock Market: Stocks have been on a huge rally for the past 5 years. The stock market is at an all time high, and has been at an all time high for the past year and a half. Basic technical analysis/theory supports the saying "Whatever goes up, must come down". As stock prices keep on increasing, it becomes too expensive for many investors to buy new stock, or hold on to existing shares. Goaded on by financial advisors and analysts, Main Street and Wall Street investors take out loans in order to buy new shares (margin trading), because they see how profitable the stock market has become (it's been going higher and higher for the past two years), and want to get in on the profit before the market crashes. Essentially, investors are attempting to 'time the market', trying to squeeze the last bits of profit out of the market while it is still profitable, which is never a good idea. Once the Federal Reserve sees the unemployment rate drop (the Reserve is controlled by 'doves'), they will begin the tapering of their aggressive Quantitive Easing plan. Doves are primarily concerned with lowering the unemployment rate, and Bernanke has set a target rate in the 6%s (currently at 7.3%). The Reserve will most likely lower it's $85 billion per month plan of buying US Treasuries and Bonds to $60 billion, which will indubitably increase the interest rates. The increase in interest rates means it becomes more expensive to borrow money, so companies and consumers will stop borrowing and stop spending money, and instead start saving money. As a result, companies will make less revenue. Since companies are making less money, and interest rates are increasing, they need to begin saving money and start cutting back on current expenses by firing workers. A decrease in revenue, and massive layoffs at companies tell investors that the company is no longer profitable. If a company is no longer profitable, investors will stop investing in that company, and choose to invest in another company or financial instrument that offers higher yields. In addition, the increase in unemployment means people have less money to spend, and have an increased need to rely on government funded programs, like Welfare and Unemployment Benefits.
Many professional investors will foreshadow the decrease in revenue of companies as soon as the Federal Reserve announces their plan to taper off the QE causing an increase in interest rates. Those professional investors will then proceed to sell their stocks, and invest in gold or other commodities, which yield better returns then stocks at times of crisis. Once professional investors begin selling, everyone one else begins selling, and selling, and selling. Everyone else begins selling because if the professionals are selling, there is a reason for their selling, probably because there are better returns elsewhere. Others begin selling because they are wise and realize that it is better to leave now with some profits then wait longer and risk losing more or gaining more. The biggest group that sells is those who borrowed money (traded on margin). The investors who traded on margin essentially borrowed the stocks from stock brokers with a contract that stated they would give the stocks back, and pay interest for borrowing the stocks. As stock prices plunge, the margin traders rush to sell, because they are borrowing money they don't have (a risky gamble). If the stock value decreases, the investors have to pay the price/value difference out of their own pocket to the broker (might involve selling some assets), and pay borrowing fees on top of it. With the professional investors selling because they predict that companies will not beat revenue estimates in the future (company is no longer profitable), other investors selling because they see the professionals selling and recognize it is a good time to get out, and the margin traders selling, the stock market will definitely tumble.

The above chart illustrates the theory that there is a direct correlation between the S&P Monthly Close and Negative Credit Balance. From 1980 to August 2000, the S&P monthly close (blue line) increased about $200 billion. At the same time, the Negative Credit Balance (red) increased to about $120 billion by the end of August 2000. The S&P Monthly Close (blue line) then proceeds to decrease about $150 billion while the Negative Credit Balance (red) became Positive Credit Balance (green). The only way the Negative Credit Balance could have become positive that quickly is if the investors who borrowed stocks (margin traded) returned their shares (sold them) to the brokers; a massive stock sell off. The $150 billion decrease in the S&P Monthly Close (blue line) shows that there was a massive sell off in the stock market.
Fast forward to 2009, the S&P Monthly Close and Negative Credit Balance are both steadily increasing, just like in the year 2000. The Federal Reserve's Quantitive Easing Program was enacted in 2011 and lowered interest rates to rates between 0% and 0.25%. Because it was cheaper to borrow money, many investors borrowed money and invested them in stocks (margin trading). The sharp spikes in Negative Credit Balance and S&P 500 Monthly Closing price between 2011 and 2013 that investors were borrowing more money, and investing that money in the stock market. The graphs and data of the crash of 2000 (all time high Negative Credit Balance and S&P Monthly Close) replicate the same all time high Negative Credit Balance and S&P Monthly Close, history is essentially repeating itself, and we should prepare for the stock market bubble to burst (massive sell-off).

Overall, the huge stock market rally was not because companies were becoming very profitable and consistently beating earnings by above average amounts; it was because stocks were becoming more profitable then other financial investment instruments because of the low interest rates caused by the Federal Reserve's QE.


Update: Today Goldman Sachs (analysts Damien Courvalin and Jeffrey Currie) predicted a gold rally towards the end of this year. Wells Fargo and Deutsche Bank advised their clients that they predict a stock market crash in 2014.

A Quick Update on the FOMC

Today was the monthly Federal Open Market Committee Meeting.
At this meeting, the Federal Reserve decided to not begin tapering off the aggressive Quantitive Easing program until the economy showed more evidence of strong growth. This was expected of the Feds, as Chairman Ben Bernanke repeatedly stated that he would not begin the tapering until the economy recovered, and there is no set schedule for the tapering. Gold, stocks, and bonds are surging, while the dollar is plummeting. The Committee nearly unanimously decided to keep interest rates between 0% and 1/4% until the unemployment rate dropped to 6.5%.

To recap what was discussed in depth in previous articles, the Federal Reserve adopted an aggressive Quantitive Easing program a couple years ago in order to help jump start the economy after the depression. The Quantitive Easing program called for the Feds to buy $85 billion in US Treasuries and Bonds per month, in order to keep interest rates low. The low interest rates would encourage businesses and consumers to borrow more money in order to spend money and hire/pay workers, thereby pumping money in to the economy. The QE program has worked very well, unemployment dropped from a high of 10% in 2010 to it's current 7.3% level, and consumer and business spending and PMI are at all time highs. For most of 2012, and the first half of 2013, the economy has been improving steadily, at times even beating bullish analysts' estimates. This was a good sign and proof that the QE program should begin to be tapered off, which is what the Federal Reserve foreshadowed in the first half of 2013. Investors on the other hand were split. Some investors (doves) believed that if the Fed's tapered off the QE program, interest rates would rise and damage the still weak economy. The doves also believed that the interest rates should remain low until the unemployment rate lowered even more. Other investors (hawks) believed that the QE program should be ended almost immediately, because the low interest rates were causing an increase in inflation rates. The low interest rates caused many people to want to borrow money (it's cheap), so there was an increase in the demand for money, while the supply of money stayed constant. Simple supply and demand illustrates that the prices will rise if the supply stays constant and the demand grows; which is what hawkish investors did not want to happen.

The Federal Reserve Chairman and Vice Chair(wo)man, Ben Bernanke and Janet Yellen, are more dovish then hawkish, which explains their decision to not taper off the Federal Reserve's aggressive QE program just yet. July and August's unemployment numbers do show a decrease in unemployment, however that decrease is still below analysts'/economists' estimates, and the lower unemployment rate has been attributed to a decline in the number of people looking for jobs, not an increase in the number of jobs/hires. As a result of the FOMC's decision to not taper off the QE until the economy (primarily the unemployment rate) improved, stocks, bonds, and gold surged while the dollar's value plummeted.

The stock market surged because low interest rates meant that consumers could (borrow more money to) spend more money, increasing the cash flow and income of companies. Stock prices increase if the company earns more income/revenue then the previous quarter, because it shows the company has grown and an increased in value. So, stocks in general surged because the low interest rates meant greater cash flow/income for companies, which makes them look more profitable to investors, who in turn buy the stock (increase demand), causing an increase in price of that stock.
Bond yields increase because bonds are financial tools of debt, and because of low interest rates, companies can borrow more money at cheaper/lower rates to pay off its debt. Because the money is so cheap to borrow, the company will increase its bond yield in order to attract investors into buying that company's bond over another company's bond.
Gold prices surged because gold and commodities in general are used as hedges against inflation. When inflation increases, money has less purchasing power (you can buy less goods with the same amount of money). Commodity prices increase because the price of raw materials to make goods increases, making the commodity increase in price. Commodities now become more attractive then stocks and bonds as an investment tool, because the rate of return is higher. Today, gold prices surged because the Feds decided to keep buying $85 billion in bonds and Treasuries every month in order to keep interest rates low, which would cause an increase in inflation.
The dollar's value plummeted because of fears of an increase in inflation. Low interest rates meant there would be more demand of money then supply of money, so prices would rise (inflation). If there was inflation, the same amount of money today would not buy the same amount of product tomorrow.

Larry Summer's Withdrawal From Fed Chairman

Recently, Larry Summers withdrew his name for Federal Reserve Chairman. This might not seem like big news, but in the Business/Economic world, it was monumental.
Current Federal Reserve Chairman Ben Bernanke's term is scheduled to end in January of 2014, and Economists and Investors around the world are looking for a replacement Chairman who will continue to support Quantitive Easing. Larry Summers, former Treasury Secretary, was rumored to be one of the top two people most likely to replace Bernanke.

Larry Summers: Larry Summers has been described by most Economists as a hawk towards fiscal policy. By definition, he is more concerned with interest rates and inflation then economic growth. If Summers was elected/approved by the Senate to be Fed Chairman, one of his first actions would be to end/drastically slow down the Fed's Quantitive Easing program. The Quantitive Easing program is responsible for helping keep Interest rates low by having the Federal Reserve buy $85 billion in US Treasuries and Bonds per month. The QE program was started to help jump start the economy; by keeping interest rates low, companies could afford to borrow money, hire more workers, spend more money, and have consumers/people spend more money. The Quantitive Easing program worked, currently, the economy has improved a lot, consumer, and business spending is up, the stock market is doing well, and unemployment rate is at 7.3%, and has been on a steady decrease. The problem with this massive bond buying program is that it will cause inflation. Because the bond buying program will keep interest rates low, the consumer has more borrowing power, and will spend more money causing prices to increase. In other words, the demand for money will increase because people borrow more at low interest rates, and the supply of money will not increase, causing an increase in prices, and a decrease in purchasing power. As a hawk, Summers will be more concerned with keeping inflation rates low by increasing interest rates. How can he easily increase the interest rate? Stop the QE program. By stopping the program of buying $85 billion in bonds and treasuries per month, the price of bonds decreases, and the interest rate increases.
Although keeping inflation rates low seems like a good idea, higher interest rates will negatively affect the growth of the economy, which worries many investors and economists. The economy is not where most economists would like to see it at; the economy has not recovered to pre-Depression levels. As a result, they fear that the economy is still fragile, and increasing interest rates will only damage the economy, and further slow growth. At the beginning of 2013, Summers seemed like an ideal replacement for Bernanke. Now, however, the economy's growth is below what most economists and analysts predicted, which means that the economy still needs QE, which Summers does not support. This is probably the primary reason that Summers withdrew his name from Fed Chairman; his policies were not favorable/best for the current American economy. Investors in the stock market are concerned with Summers because if interest rates increase, bond yields will increase, and the stock market returns will decrease. The effects of Summers 'drop-out' from Fed Chairman were shown in the markets immediately; the dollar fell, and Dow and S&P 500 futures shot up.

Janet Yellen: Janet Yellen, current Federal Reserve Vice Chairman, is predicted to win the Fed Chairman nomination. Yellen is more dovish then the previously mentioned Larry Summers. By definition of being a dove, Yellen will be more tolerant of increasing inflation rates, and more concerned with lowering the unemployment rate. In Yellen's mid 2000, post-crisis book, she states that "everything the Fed should be doing should be oriented towards addressing the unemployment problem", confirming the "dovish theory". Yellen is also widely recognized as being one of the first people to recognize and predict the looming financial crisis in 2007 that Bernanke thought would be avoided. The Fed's job is to predict the path of the economy, and adjust policies to fix the economy, and she did a perfect job of the prediction part. Another reason why Yellen is favored by many Democrats is because she has no ties to Wall Street, and is in favor of stricter regulations to limit financial losses, like the London Whale loss. 

India's Economy

I've recently begun reading The Growth Map by Jim O'Neill. Jim O'Neill is Goldman Sach's top Economic advisor, and Chair of Goldman's Asset Management Group. He is most notable for coining the term BRIC,  an acronym for Brazil, Russia, India, and China, four countries whose economies he predicted would boom within the first two decades of 2000. So far, O'Neill has been right on, each BRIC economy has increased by tens of billions of dollars, and growth has been (near) double digits year after year. However, the growth in China, India, and Brazil has begun to slow down, causing many investors to be worried, and pull out their cash.

India. With a population of over 1.1 billion people, and largely undeveloped, many investors are calling India the next China. India has a huge supply of labor, and that labor is cheap. It's certainly cheaper then US labor, and around as cheap as Chinese labor. In the early 2000's, many American companies began outsourcing their labor to India, because they could pay the Indian workers less then a tenth of what they could pay American workers, and the work output was a higher quality. Investment banks outsourced a large portion of their analysis/back-end office work, firms outsourced their software development, IT help, and call centers. All the business going to India actually encouraged more American companies to invest their money in India.
Taco Bell, Pizza Hut, Papa Johns, and Apple began setting up stores in India. Then came the banks, JP Morgan, Goldman Sachs, Citi Bank, and Wells Fargo. This boosted the Indian economy; foreign money was pouring in at an unprecedented rate, people were being hired 'left, right, and center', and exports were increasing. As parents were becoming wealthier, they could afford to send their children to study, work, and vacation abroad (primarily to America and Europe), thereby helping the American and European economy. But soon, most of India's top students, primarily doctors, engineers, and scientists, went off to live in America and Europe, where they would be paid more then when they were in India.
India's corrupt government became greedy and began increasing taxes, thereby decreasing spending. The government attempted to adjust for the decrease in spending by increasing government spending through infrastructure upgrades, and printing more money. As a result, the inflation rate almost doubled. From 2006-07 inflation was 7%, from 2009-10 inflation increased to 12.4%, and is now at 10.7% in 2013 (April - June). The high inflation and taxes scared away foreign investment, and the GDP growth halved from 9.3% in 2010 to 5% in 2013. The unemployment rate rose, spending fell, and the rupee (India's currency) fell 17% in just 2 months (compared to USD). In addition, Moody's downgraded India's debt return/bonds by two ratings. Investors took their money out of India, and put it back in America, where the growth rate was higher and more stable.
For this year, India's economic outlook is bleak. However, I do anticipate a recovery on the rupee. I was in India over the summer and did extensive research and reading on India's economy and market. During this time, I discovered that geographically and economically, India's economy is poised to take off. International trade with China, America, and Europe will definitely increase. Foreign spending in India will also increase. Many American companies have finished expanding in America; almost every house has two cars, several laptops, several TVs, and several phones. In order to keep American investors/Wall Street happy, the companies must increase their revenue by investing abroad, since America is tapped out (less future growth). India is one of the best markets to expand to. Those 1.1 billion people will need cars, phones, TV, computers, and Internet Access. American companies have had the money, and the time advantage in developing those technologies to the point that they are years ahead of Indian companies. For example, most Indians have basic Nokia phones, and survive on 20 KB download rates. A low cost/cheap iPhone would take the market share out of Nokia's hands, and change it from basic flip-phone to smart phone. Smartphones need good satellite/Internet access, which Verizon and AT&T have perfected. Investors will invest in Indian stocks (Sensex market), giving Indian companies the capital to expand and purchase newer/better technology that will allow them to provide service for hundreds of millions of Indians, hence increasing their profits/revenues.
Although I predicted an Economic recovery next year in India, I acknowledge that drastic changes need to be made in the federal government. The largely corrupt government is using up money (personal bribes), and not spending enough. Billions of Rupees were planned to be spent on tens of thousands of infrastructure projects, yet only a handful have actually been started. Infrastructure is very vital to help boost the Indian economy. The problem with the infrastructure/roads in India is that many of the cities (Bangalore, Bombay) were built by the British a hundred years ago to be mainly used as British Navy bases with small population. Since then, the cities have grown exponentially, and little thought has been put into strategic road development that will be able to handle thousands of more people in the future. As a result, traffic jams are very frequent, and last for hours, which hurts the economy.The government also needs to regulate businesses, because there are many monopolies that are hurting small businesses and slowing down growth and innovation. Airtel, India's primary mobile phone service, is a prime example of a large monopoly that needs regulation. Airtel is one of India's only phone carriers, and because no other company is able to put their 'foot in the door' or offer any competition, Airtel can increase their prices, and decrease their spending on innovation. As a result, Internet speeds in India remain very slow, causing some American companies to stop outsourcing business there. McGraw-Hill Financials listed that as a primary reason for their decrease in outsourcing to India, in combination with difficulty communicating due to poor networking/phone services.

Current Economic View of the World

This post will sum up the current Economic status of most major Economies in the world, and will identify problems in emerging markets.

Thesis: America's improving Economy is causing problems for emerging markets who can't keep up with the security and rate of return of investments in America, which in turn can hurt America's economy a couple years down the road.

Update: The school year has started, and I don't have as much time as I would like to blog and research, so today I will publish this article on America's economy which I have been working on, and then I will publish one on the international economy in a couple of days.

America's Economy. America's economy has been improving steadily for the past four years under the direction of Ben Bernanke at the Federal Reserve.
The Unemployment rate is currently at 7.3%, the lowest since December of 2008.

(Image: Unemployment rate from Jan 2008 - Aug 2013, Bureau of Labor Statistics)

Unemployment reached a high of 10% towards the end of 2009, and since then has been dropping an average of 0.6 per year. This year, however, the Unemployment rate dropped the most, 0.6% in the first eight months. The decrease in unemployment has been attributed to a decrease in loan rates, and a decrease in jobs sent abroad (less outsourcing).

Loan Rates: A few years ago, the Federal Reserve started an $85 billion-per-month program of buying US Treasury and Mortgage Bonds in order to keep loan rates and mortgage rates low to help jump start the economy. Short term interest rates are currently at 0.15%, and Bernanke stated during the most recent Federal Open Market Committee meeting that he will continue to try to keep interest rates as close to 0% until 2014. In May of this year, the Federal Reserve announced that they might end the bond and treasury purchasing program by 2014. This caused a very negative reaction with investors as they felt it was too soon to end the program, and they feared higher interest rates would damage the fragile economy. 
The next day, the markets tanked sharply, causing the Federal Reserve bank officials to state that they would only begin tapering off the $85 billion-per-month bond purchasing program, as the economy was improving significantly. That positive news brought the markets up, and the massive stock rally of 2013 raged on. The ISM Manufacturing Index reports came in, and the results were much higher then most analysts predicted. More and more people are spending money on buying new cars and trucks, and even houses, almost a direct result of lowered loan rates.

Stock Rally: It's only the 9th month of the year, and the S&P 500 and DJIA have both risen more then 20%. The DJIA had a record 17 consecutive day increase. The stock market growth has caused stocks to have a higher ROR (Rate of Return) then bonds, treasures, commodities, derivatives, and other financial instruments, causing more people to invest their money in the stock market, further increasing growth. A Citi analyst first noted that the stock market had been fueled by the Fed's aggressive quantitative easing, not because of companies beating Wall Street Earnings Estimates, which have been single digit gains at most, and the main reason for stock market growth. A Goldman Sachs analyst interviewed investors, and reported that they were currently more interested in monetary and fiscal policy risks to the stock market, and the move from bonds to stocks then corporate results. In other words, investors just cared about the Feds policy to keep interest rates low, which meant that the stock market would grow (inverse correlation). 
Deutsche Bank recently released a bearish report; margin debt is sky rocketing. Margin debt (trading on margin) is when investors take out loans with their brokers/banks in order to pay for stocks they can not afford, thereby using the stock as collateral for their loan. The problem with margin trading is that when the markets go down, the investor then has to sell their stocks and other assets in order to pay off their debt. Deutsche's report observes the steady increase in margin debt, tracked by the New York Stock Exchange. Deutsche doesn't believe a sell-off is not around the corner, but they declare that the indicator shows that the underlying basis on which prices trade is growing more fragile.

Personally, I agree with Deutsche's report. For the past half year, I have been following the New   York Stock Exchange's margin debt charts, and the charts have been steadily increasing. In terms of percentage growth per month, the Margin Debt charts are beginning to resemble the percentage growth per month at the end of 2008, when the stock market crashed, and the financial crisis began. I will have another article going more in-depth of my observations of the Margin Debt charts that indicate a stock sell off.

First Post; About Me

Hello Everyone!
I have recently decided to begin blogging about current Economic issues and forecasts on both the Macro (Global level), and Micro (US level) after a friendly Ms. Anna Dearybury (Stanford '10) brought up the idea. I had begun talking to Ms. Dearybury on Quora after she posted an answer on how she became an analyst at the prestigious Goldman Sachs. Since I was interested in the same type of job (along the lines of analyst, equity or FX trader, Portfolio Manager), I began asking her questions about her job, how she got there, how she prepared for the job, when the conversation gently transitioned into what I was doing. I told her that I religiously (as in the #1 thing I do) read news about the Markets/Economy every day, including during the school year. I read and understand articles written by AP, Bloomberg, the Economist, and the infamous Wall Street Journal. I also read a lot of Business Insider, which I love because the writers attend a lot of the Federal Reserve meetings, and are able to write what was discussed, and opinions on actions in a level that I can understand as a high schooler. Business Insider's writers also publish opinions by top Economists/Analysts' opinions at Goldman Sachs (Jan Hatzius, Jim O'Neill), and JP Morgan (Jim Glassman), along with the graphs/charts that support why they made that opinion.
Another reason I love Business Insider is because the writers publish the latest Economic data (Unemployment, Purchasing Manager's Index (PMI), Construction Spending, Mortgage/Loan rates, Manufacturing/Trade sales etc.) and how it will affect the Economy. Besides reading the news, I also invest in equities, and have recently begun FX (Foreign Exchange) trading.

But first, here's a bit of background information about me. My name is Ryan D'souza, and I am currently a Junior at Princeton High School. I'm working on my Eagle Scout Project which is the construction of three trophy cases for my high school. I am also the President of my school's Red Cross Club/Community Service, and a member of the Red Cross Youth Council. I play trumpet in school, and for the Youth Orchestra of Central Jersey, and I run Cross Country. My interests' right now are in Economics/Finance, and Computer Science. I have been interested in Economics for about three years. My interest was first in the stock market, but as I got older, I began wondering why the stock market (in general) was going up and down. So, I began researching and learning about the factors that influence the movements of the stock market. I then understood why people were pouring money into stocks, because they thought the returns of the stock market would be greater then the yields of bonds. Next, I was curious about why bond yields were increasing and decreasing, so I dived into Interest Rates, and the Federal Reserve. Eventually, it panned out to the global economy, which is where I am today.
In Computer Science, my interest is now in Application/Trading System development, and Embedded Systems. I am currently building an Android App that is able to get live stock prices, the financial statements, and analyst opinions for any stock in the US that the user enters. I am specifically working on an Algorithm that will look at the Financial Statements/Information (Beta, Income, Revenue, Spending, etc.) and come up with a rating for that stock (buy, sell, hold). I have already built a decent User Interface, and been able to download the financial statements and analyst opinions from Yahoo Finance. Although any algorithm can continuously be improved, I plan to release the first version of my app by the end of the year.