Market Buzz – Debt Ceiling & Earnings

Market Buzz – Debt Ceiling Looms for the US Government

The TSX Composite index closed the week at 13,495 on Friday, July 22nd, up 60 points for the day and 195 points (or 1.47%) for the week. In the U.S. market, the S&P 500 finished the week at 1,345 points, marking a weekly gain of 29 points, or 2.19%.

The closing bell on Friday brought the global community one business day closer to the looming debt ceiling in the U.S., which is expected to hit on August 2nd. For those not familiar with the subject, Congress provides the U.S. Treasury with the power to issue government backed debt up to a specified limit, which is referred to as the debt ceiling. In the words of the U.S. Treasury, “failing to increase the debt limit would… cause the government to default on its legal obligations – an unprecedented event in American history.”

Until recently, the concept of the U.S. government defaulting on its debt obligations was considered incomprehensible by the global financial markets. From Finance 101 text books to the real life offices of financial and credit analysts, U.S. government treasuries have for decades been touted as the international risk free benchmark of investment grade debt. Over the next week, President Obama and the U.S. Congress will undertake the task of determining whether or not the debt ceiling should be raised or eliminated outright. Although the long-term consequences of accelerating deficits and debt balances threatens to truly destroy the once great U.S. economy, a government default would undoubtedly send ripples through the global community to the extent of precipitating another financial crisis.

It is for this very reason that we in no way believe that the U.S. government will allow itself to default on its obligations. In our view, the debt ceiling will be increased before August 2nd and the nation’s politicians will continue to debate the importance of austerity measures and deficit reduction while continuing to do little to truly address the problem. This situation is comparable to an individual who allows themselves to build up mountainous quantities of consumer debt that they cannot service and then complains to their creditors that if they are not provided with more financing, they will not be able to pay the interest on their loans. While much more is at stake with the world’s largest economy, this practise provides no happy ending until truly drastic and painful measures are pursued. We can only hope that the U.S. government will develop the political will to address the problem, but we are not holding our breath.

Considering the state of affair in our modern world, it is no wonder that some seem determined to transfer all their assets to gold and head for the hills in preparation of Armageddon. We understand the fear, but we also advise investors to control their emotions in these uncertain times. With uncertainty does come opportunity. There is a human tendency to sometimes only focus on the bad news when it is more prevalent, but although negativity in the modern economy is available in abundance, there are also sources of strength and hope. So invest intelligently and selectively, perhaps defensively; diversify, and by all means, feel free to keep some capital on the sidelines for a rainy day, but don’t head to the hills just yet. As long as there are people on the planet that live and consume, there will be opportunities in business and investment.

For those who are interested, KeyStone Financial analyst Aaron Dunn was once again interviewed on BNN (Business News Network) at approximately 8:15 PST on Friday, July 22nd. The interview was a continuing of the discussion with BNN that began on July 8th and can be viewed at http://watch.bnn.ca/#clip497671.

Looniversity – It’s All About Earnings

You can’t get far in the stock market without understanding earnings. Everybody from CEOs to research analysts is infatuated with this often-quoted number. But what exactly do earnings represent? Why do they attract so much attention? We’ll answer these questions and more in this primer on earnings.

What Are Earnings?

A company’s earnings are, quite simply, its profits. Take a company’s revenue from selling something, subtract all the costs to produce that product and voila, you have earnings! Of course, the details of accounting gets a lot more complicated, but underneath all the financial jargon, all that’s really being measured is how much money a company makes.

Part of the confusion associated with “earnings” is caused by the many synonyms used to describe them. The terms profit, net income, bottom line, and earnings all refer to the same thing.

Earnings Per Share

To compare the earnings of different companies, investors and analysts often use the ratio earnings per share (EPS). To calculate EPS, you take the earnings left over for shareholders and divide by the number of shares outstanding. You can think of EPS as a per-capita way of describing earnings. Because every company has a different number of shares owned by the public, comparing only companies’ earnings figures does not indicate how much money each company made for each of its shares, so we need EPS to make valid comparisons.

Put it to Us?

Q. I am relatively new to the investment arena. While I have done well with your research this year overall, recently I lost on one company from another advisor and some of the prognostications have made me very nervous about the markets of late. Any advice to help me sleep better?

– Ted Walters; Calgary, Alberta

A. When investors lose their comfort level because of losses or volatility, they become consumed with terrible emotions such as fear, greed, and superstition, which often provoke mistakes. Volatility in the stock market can make even the savviest investor uncomfortable. Unless you know how to interpret and take advantage of day-to-day price movements, you may have to refrain from being consumed by them.

Volatility is a reality of the stock market, so before you invest, you must know how you are going to deal with volatility and then act accordingly. If price fluctuations leave you with sleepless nights, perhaps a lower risk investment would be better for you.

You may also want to look at a strategy know as “comfort investing,” which links your money to a particular corporation that has provided a strong reason for you to purchase their stock. In the end, investing is not about “playing the market,” but rather about maximizing the return on opportunities that are suitable to your risk tolerance and your skill level.

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