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Five Things You Need to Know: Why Should We Care About Commercial Paper?; Subprime: Cause or Symptom?; Mortgage Delinquencies Grow; Is Back-to-School Shopping Consumer Discretionary?; Senior Retirement Planning Crackdown


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Why Should We Care About Commercial Paper?

Bloomberg this morning noted that the U.S. commercial paper market shrank for a fourth week, extending the biggest slump in at least seven years. What is the commercial paper market, and why should we care?

  • Commercial paper is short-term debt maturing in 270 days or less that is issued by large banks and corporations .
  • Because it is short-term debt, it is generally not used to finance long-term investments but rather for purchases of inventory or to manage working capital.
  • And therein lies the issue; companies are finding it difficult to obtain short-term financing to manage their day-to-day operations.
  • But what does that really mean?
  • Think of your own "balance sheet" for a moment.
  • A balance sheet is a statement of all ones' assets, liabilities and equity at a given moment.
  • Suppose you own a house and some land, your car is paid for, you have retirement account balances, checking and savings accounts.
  • You may have some amount of "equity" in your home and land if it is currently appraised at a value higher than what you owe.
  • Your mortgage is your long-term debt.
  • What about your short-term debt? After all, commercial paper is short-term debt used in day-to-day operations.
  • Suppose that you are paid monthly, not every week. You put some of that money toward your long-term debt, invest some in a retirement plan, put a little bit away toward savings.
  • Meanwhile, although you have a decent income and no trouble meeting your long-term debt obligations, what happens if, say, your car's transmission breaks? You need your car to run to meet your day-to-day operations.
  • Now, if you have enough cash flow you can simply write a check for the new transmission and move on.
  • However, if you do not have the cash flow at hand even though your next paycheck three weeks from now will more than cover the cost of repairing it, then like most people you would perhaps put the cost of the repair on a credit card, and hopefully pay the credit card off when you get your next check before interest accrues on the balance.
  • A shrinking of the commercial paper market is similar to the credit card company refusing to approve the transmission charge even though you may have a zero balance.
  • It impacts day-to-day operations, raises borrowing costs, and can sometimes even force a company to sell other assets to raise cash.

2. Subprime: Cause or Symptom?

Moody's Investors Service yesterday downgraded or placed on review $14 billion of bonds sold by funds, known as structured investment vehicles (SIVs), that rely on the commercial paper market for borrowing because they are losing the ability to fund themselves, Bloomberg reported.

  • These are links in a long, long chain.
  • The confusion right now on Wall Street is over whether subprime mortgage issues are a "cause" or a "symptom."
  • If subprime issues are a "cause," then eventually these issues will pass through the system and, after considerable pain, normalcy and health will return.
  • However, if as we believe is the case subprime issues are a "symptom," then central banks, in treating the symptom, are missing the larger, underlying disease responsible for the health issues.
  • A multi-decade appetite for credit and debt are responsible for the disease.
  • Subprime issues are just a symptom of that disease spreading.

3. Mortgage Delinquencies Grow

The number of Americans who may lose their homes to foreclosure rose to a record in the second quarter and late payments by subprime borrowers surged to one out of every seven loans, according to Bloomberg.

  • Delinquencies overall climbed to 5.12% of all outstanding mortgages, up from 4.39% a year ago, the Mortgage Bankers Association (MBA) said in a quarterly survey.
  • The subprime delinquency rate rose to 14.82% in the second quarter of the year from 13.77% at the end of the first quarter.
  • Serious delinquencies, those 90 days or more late, jumped to 1.11 percent of all loans, from 0.98 percent in the first quarter.
  • "What continues to drive the national numbers, however, is what is happening in the states of California, Florida, Nevada and Arizona," MBA's Chief Economist and Senior Vice President of Research and Business Development Doug Duncan said.
  • "Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings."
  • However, Duncan noted that it is unclear whether subprime ARM loans are causing the problems for California or whether California is causing the problems for subprime loans.
  • California has 17% of the subprime ARMs in the country and over 19% of the foreclosure starts on subprime ARMs.
  • The four states of California, Florida, Nevada and Arizona have more than one-third of the nation's subprime ARMs.

4. Is Back-to-School Shopping Consumer Discretionary?

1).jpg" width="200" align="right" />Wal-Mart (WMT) posted a 3.1% increase in U.S. same-store sales beating the 1% to 2% range of growth the company projected last month. Nothing like setting your own low bar to step over.

  • The company said back-to-school shopping drove sales, with notable strength in electronics, school supplies and children's apparel.
  • Overall the retail sales reports from a wide array of stores are being highlighted this morning as "signs that the consumer isn't dead."
  • Target (TGT), which forecasted gains of 4% to 6%, reported a 6.1% increase in sales.
  • But is back-to-school shopping really a consumer discretionary category?
  • We're not so sure.
  • After all, the common themes among most retailers were: consumers waited until the last minute, or for discounts, to make purchase, and consumers limited purchases on items viewed as non-necessities.

5. Senior Retirement Planning Crackdown

Federal lawmakers yesterday called for a universal accreditation standard for financial advisers who work with senior citizens, the New York Times reported.

  • According to the New York Times, tens of thousands of financial advisers are working with insurance companies to market themselves to older Americans using credentials with names designed to appeal specifically to seniors.
  • Christopher Cox, chairman of the Securities and Exchange Commission, and state regulators will soon propose guidelines prohibiting sales agents from using titles that imply an expertise in financial issues for older Americans when that designation has little or no value, the Times reported.
  • For example, some advisers are using weird, lofty titles that denote expertise that is non-existent, such as registered financial gerontologist, certified retirement financial adviser and certified senior adviser.
  • Although lawmakers' focus is on deceptive practices targeting seniors, this issue highlights the difficulty many face in choosing a financial adviser and planning for retirement.
  • That's why, below, Minyanville has developed a helpful guide to retirement planning.

Minyanville Guide to Retirement Planning

Planning for retirement is one of those goals that many people never seem to find time to do, but it is critical to develop a solid, well-formulated gameplan for reaching your retirement goals. Minyanville is on your side. Here are some retirement-planning tips designed to help you retire on your own terms:

  • A good rule of thumb is to allocate your retirement investments between stocks and bonds according to your age. Another good rule of thumb is to somehow get a whole lot of money just before you retire.

  • Diversification is the key to any sound retirement plan. Don't just focus on the slots. Casinos offer a wide variety of senior "investment" options.

  • When it comes to saving for retirement, some people say "Don't put all your eggs in one basket." But if all you are saving are eggs, well... good luck with that.

  • Have you considered a Rothschild IRA? The 2000 Chateau Lafite Rothschild Pauillac (rated 98 points by Wine Spectator) is a safe bet with a maturity range of 2031 to 2050.
  • When choosing a financial adviser, watch for red flags. If your financial adviser refers to you as a "mark," and your financial plan as a "grift," it could be a red flag. Get a second opinion.

  • Did you know that a single Styrofoam cup of coffee a day would in 40 years turn into the equivalent of $381,437 in the stock market? Clearly, this demonstrates that the best retirement plan is to horde Styrofoam cups.

  • Some people are concerned that social security will run out by the time they retire. In order to increase the odds that you will receive social security payments, assume various identities with unique social security numbers.
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