Tag: finance

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Philippine Global Competitiveness

Read John Mangun’s article this morning and learned that the country rose 10 places in the World Economic Forum’s ranking to 75th. This despite the poverty level, corruption (PNoy is all talk and no walk on this), inefficient government bureaucracy, security issues (bus hostage-taking), inadequate infrastructure (where are the PPP projects promised by PNoy?), poor education, poor investor protection (NAIA3, PLDT foreign ownership), and the difficulty of starting a business. Personally, I think all these hostile factors contribute to leaving only the smartest and most resilient thus contributing to robust and sophisticated businesses. Supporting factors are good fiscal and monetary policy (BSP governor Tetangco got an “A” grade recently from a finance magazine), good banking industry, and a good stock market. That’s good news to start the day!

Full report here.

 

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US Rating Downgrade

So S&P downgraded the credit rating of the US from AAA to AA+.  What are the implications? I think, nothing. Rating agencies such as S&P might be applicable for companies and even governments but when you’re talking the US it’s different. Japan and China, with their huge holdings of US debt won’t really base their own rating and pricing from some rating agency. And in self interest, they certainly won’t simply let their holdings lose value which would be the case if yields rise due to the ratings downgrade. These large holders are the rating agencies when it comes to the US. Already Japan has indicated that their confidence is unchanged and China with it’s bigger holdings is likely of the same mind.

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Bloodbath

Today was a bloodbath in the market. Everything was red. I was actually expecting it to go down but for the wrong reason. I was thinking that if the debt ceiling will be raised, and it was, then there would be a measure of recovery in the US market. It had been going down for some time due to uncertainty brought about by the prolonged debate on raising the debt ceiling. And once that uncertainty is lifted, I was thinking some capital would flow back. But it seems the reason for the bloodbath is that with the uncertainty lifted, the shape of the economy went fore into the picture and it wasn’t good. So downward the US market continued. Enough to jitter everyone else.

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Debt Crisis

Despite it’s usefulness in certain cases, a lot of people just can’t seem to handle debt: your friend, your girlfriend, your neighbor, your company, even your country (e.g. Ireland, Portugal, or Greece). But when it’s the US, the largest economy in the world, that is at risk of defaulting on its debt, you take notice.

There’s nothing new in the US being in debt really. However, it has already reached the so-called debt ceiling. More easily understood as a credit card limit for really big spenders. Unfortunately, the government is spending so much that its salary can’t pay for its spending and its credit card bills without having to borrow. Talk about spending beyond your means.

So definitely the government needs to earn more (taxes), spend less (budget cuts),  and if possible, get a credit line increase (debt ceiling). Coming from the recent recession, increasing taxes and decreasing spending to the level that there’s no need to borrow will be counterproductive. Thus, it hinges on borrowing more. All the discussion on the hill is more on how to best address the budget deficit: how to earn more and spend less.

But the ceiling has to be raised. If not, we’re screwed.

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The Math of Company Ownership

The Supreme Court is at it again with their whimsical decisions. They have decided to change the rules in the middle of the game. They have decided that ownership is only achieved through common stock and not preferred stock. So with their new formula, PLDT is now 64% foreign owned. And the same goes for more than a few other companies.

How they came to that decision boggles me. A company is the sum of its assets. And assets are purchased with equity and possibly debt.

A = D + E

In accounting both common stock andpreferred stock are owner’s equity.

A = D + (CS + PS)

Debt is borrowed money and is paid off with interest. Equity is owner’s money and shares benefits from earnings via dividends or suffers from losses. And preferred stocks get first dibs at dividends. If you look at it this way, preferred stock is more ownership than common stock.

Now, if the company is to be dissolved and the assets liquidated or sold,

A = D + (PS + CS)

$$$ = D + (PS + CS)

Debtors collect first,

$$$ – D = PS + CS

$$ = PS + CS

followed by preferred stockowners,

$$ – PS = CS

$ = CS

and finally common stock owners.

$ – CS = 0

If you look at it this way, preferred stock is more ownership than common stock. In fact the only thing going for common stock is it’s decision-influencing attribute via stockholder vote.