Manage Money and Income Sucessfully

Almost all bonds of companies being upgraded into investment grade show a significant spread tightening long before the actual rating action.  Of course at the time of the upgrade technical factors (new previously restricted buyers emerge) tighten the spreads further.

This is an effort to categorize the evaluation of Fallen Angels. Only the most important points are mentioned. In a first step, the analyst has to decide whether the company falls into the category stressed or distressed. The following points should help in the decision-making process. A distressed credit is very likely to default, and break-up value has to be determined. A stressed credit has a realistic chance for a turnaround and one has to estimate how likely this case is.

Companies that have a successful turnaround will show most of the following characteristics:

• Successful deleveraging and improvement of the liquidity situation is realistic.
• Asset Sales can be done in an adequate time and at acceptable levels.
• Debt maturity profile is improved by refinancing (new bank lines and bond issues).
• Additional rights issue is feasible.
• Capital structure option is exercised in favor of bondholders and the equity market rewards these steps as well.
• Corporate actions (reduction of CAPEX, postponement or cancellation of acquisitions, cost cutting, solid management of working capital).
• Change of management.

For a fee, newsletter writers rate individual stocks and funds. Most newsletter writers are optimistic sorts who like to predict ever-rising stock prices. A few are perennial bears. Newsletters sell from $60 a year to more than $1,000. The higher priced newsletters claim to have better information.

Newsletter writers on a hot streak sell more copy; some become household names for a few years until their streak runs out. Extensive studies of newsletters show less than 20 percent outperform the market. Higher priced newsletters are no more accurate than cheap newsletters. Most newsletters die within a few years of sending out their first batch of predictions.

Investors looking for certainty in an unpredictable market turn to newsletters. Their authors become gurus. Many a fortune has been lost along the way. The gold bug gurus of 1975-1980 continued to recommend half or more of a portfolio in gold throughout the 1980s as gold lost more than 65 percent of its value.

Investors who choose among newsletter recommendations and supplement newsletter research with their own research will benefit. One or two good picks can be worth the price of a subscription. On the other hand, as a newsletter subscriber, you may believe you are in an exclusive club with special knowledge about the market. This sense of grandiosity can be hazardous to your financial and mental health.

For discouraged investors, other products are available. Closed-end funds (CEFs) are mutual funds that are sold on the exchanges like stocks. Openend mutual funds are sold directly to investors; every dollar invested adds to the assets under management and management fees. After an initial public offering to raise capital, CEFs are bought and sold between investors at whatever price investors are willing to pay. The price of a CEF can be higher or lower than the value of the stock held by the fund. CEF managers are only able to offer new shares if returns have been good and the fund becomes popular. However, the prices of CEFs are volatile.

Closed-end funds are subject to mass psychosis. When certain stocks are hot, CEFs owning those stocks can sell for several times net asset value (NAV). Investors often experience overconfidence and grandiosity. When these stocks are unpopular, CEFs plunge to a fraction of NAV. When CEFs linger below NAV for long periods of time, frustration sets
in. Often shareholder suits are filed to open up the fund and distribute assets at NAV. CEFs are also subject to management changes and style changes. In addition, CEFs are often taken over by outside management companies and converted into larger funds. Spreads and commissions on CEFs are often painful. Closed-end funds are outside the comfort zone of most mutual fund investors.

A feeling of complete powerlessness is unusual. We all like to feel that life is moving along in a positive, predictable fashion. For most, a sense of control over his or her own destiny is important. Unfortunately, savings, investing, and speculating are all affected by elements beyond our control.

At times, these elements produce extreme results. When the stock market dropped 90 percent between 1929 and 1933, the sense of powerlessness was so great that a whole generation vowed never to buy a single share again. Those left out of the great tech bubble that ended in March 2000 felt equally powerless as they saw friends or acquaintances become instant millionaires.

Powerlessness is most extreme in stock investing, but it is found in real estate booms and busts, bond defaults, and other investments. Powerlessness is paralyzing for the majority of investors. Market shocks cause a few investors to panic; most sit on the sidelines experiencing a sense of powerlessness as prices gyrate wildly. Anxiety, numbness, and depression are common manifestations of the sense of powerlessness.

What would you think if I told you study after psychological study ranked financial pressure as the one of the leading causes of stress, anxiety, unhappiness, and relational discord? And what if I also told you a joint study done by the Universities of Virginia and Arizona linked physical health problems to financial stress?

My guess is that most of these problems didn’t come from having too much money, or even just enough money. Instead, it probably came from owing a whole lot of money to other people.

As you clean up your debt situation, I’ll bet that you’ll begin to see noticeable differences in everything from your emotions to your physical health. While it can’t replace a healthier diet, regular exercise, or a trip to the doctor, it can sure help the underlying problems!

Okay, I get it. Money is fun to spend, right? Would you be surprised if I told you that I agree and love to spend money? I do.

Ultimately, my beef with debt is that it forces you to send your money to someone else for something you bought in the past. I’d much rather get to spend it on things I truly want now or will need in the future (like a retirement or a college education for my kids). You have to shift your mind-set from “I don’t want to miss out on fun today” to “I want to have even more fun tomorrow.” It’s one of those “is the glass half empty or half full” type of moments.

By scrambling to pay off your debts now, that means interest does not accumulate as fast. That in turn means your debt gets paid off even quicker. This of course means the money you waste on debt each month will now be freed up for you to spend on whatever you like!

Let’s look at someone with $25,000 in combined short-term debts (a payday loan, a few credit cards, and some medical bills), with an average interest rate of 20%. Take a look at their total interest costs based on some different fixed monthly payments. What a difference $250 makes as you raise your payment from $500 per month to $750. It cuts your repayment period by more than half and saves $18,000 in interest! For what you saved in interest by paying off your debt as quickly as possible, you could go out and pay cash for a new car. If that doesn’t make the case for an opportunity cost of using your money for other things besides paying down debt, I don’t know what does!

Trademarks and trade names are a second class of identifiable intellectual property. Trademark law is intended to prevent consumer confusion as to the source of products or services. The great names of the old economy are largely trademarked: Coca-Cola, McDonald’s, Xerox, Sears, Gillette, DuPont, and Kodak all inspire trust on a global basis. They create shareholder value above the intrinsic value of the goods and services in the marketplace.

The proliferation of web sites has made trade names even more important in the New Economy. Witness the flood of dotcom advertising during the Christmas season of 1999 aimed at creating brand awareness. The very names America Online and AOL, Amazon, Yahoo!, and eBay are now important commercial franchises. The traffic that comes with consumer awareness generates real options to supply new services on these sites and thus leverages value beyond that earned from the existing services.

Trademarks can be used commercially almost as aggressively as patents. Monsanto spent millions to establish the Nutrasweet trademark and required soft drink suppliers such as Coca-Cola and PepsiCo to put the Nutrasweet swirl logo on every can and bottle. They succeeded, despite considerable resentment from their customers, because of their patent position on the composition of matter. The objective was to use the trademark to differentiate Nutrasweet from generic aspartame and to protect its market position after the patent expired. The strategy appeared to work for a while, but the swirl now has been harder to find on the cans of the major soft drink brands.

The case for continuous innovation is powerful. The key idea is that a company in time calibrates the slope of its technological Scurve in financial terms.3 It gains that knowledge through an analysis of the costs of its R&D programs, counting both successes and failures. At the same time, it learns the impact of improved performance on sales growth and margins. The combination tells it how fast it can move up the S-curve for a given level of technology spending.

Faster growth and higher margins translate directly into value. A higher, sustainable growth of free cash flow significantly boosts discounted cash flow (DCF) valuations. And higher margins improve return on invested capital. The combination of high returns and high growth rates can produce sensational gains in economic value.

Of course, an R&D investment reduces free cash flow in the short term, as in the Boeing case, so it is necessary to factor in R&D productivity to determine whether the long-term growth creates more value than the short-term penalty extracts. Several metrics have been proposed for measuring R&D productivity. In The Valuation of Technology, I proposed using a growth-related measure: the ratio of annual new product sales to the portion of the R&D budget dedicated to innovative new products.

Other companies have developed algorithms for calculating return on investment (ROI) on R&D investment. In the long term, however, R&D productivity cannot be expected to remain constant. As one mines out the more attractive opportunities at the foot of the S-curve and as its slope flattens, it makes sense to reduce R&D and to eliminate programs that no longer add value.