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The ISM’s manufacturing index plunged in June, entering contractionary territory for the first time since the recovery began. June’s reading fell 3.8 points to 49.7, below the expansionary threshold of 50. This month’s report is the first contraction reported since July 2009.



Many of the details in June’s report were weak as well. The new orders index plunged 12.3 points, to 47.8, its biggest drop since 1980. The production index dropped 4.6 points, however, remained in expansionary territory at 51.0.

Employment was the one bright spot in June, falling a modest 0.3 points and remaining at a relatively high 56.6. Employment, however, is a lagging indicator, and may catch up with the other indicators in the next report.

Read the ISM release.

Homeownership is the key to building wealth for most people because it is an involuntary savings account. As you pay down your mortgage each month, the value of your interest in the home rises.

Build Equity By Choosing The Right Mortgage

Equity is a beautiful word as every homeowner knows. Once you get used to making your mortgage payments, you can rest assured that you are creating a nest egg every month. Throw in the appreciation on the property and your nest egg can grow large before you realize it. This savings account, better known as equity, can provide the means for putting your kids through college, dealing with emergencies and retiring.

Building equity is fairly simple. Just make your monthly mortgage payment. There are additional steps you can take to move the process along at a faster pace. These steps are all about the type of mortgage you obtain when you purchase your home.

When you purchase a property, particular for the first time, it can be a stressful event. Right or wrong, most people tend to take anything they can get in a mortgage loan so they can meet the closing of escrow. This is understandable, but can come back to haunt you financially. If you can step back from the chaos for a moment, you might consider the following options that will help build equity.

A 30 year mortgage is the default for most homebuyers. It is the first thing that comes to mind and most assume it is the safest option. A 15 year mortgage, however, is going to cut down on the total interest you pay on the loan as well as supercharge your equity growth. The 15 year loan is far better than a longer option, but only if you are absolutely sure you can meet the monthly payment requirements. If you have any doubts whatsoever, there is another option that you can consider.

Making prepayments on principal is a simple, proven way to build equity. The idea is to make an extra monthly payment when you have sufficient cash to do so. Effectively, you use your home as a savings account by doing this. The advantage over other investments is the equity growth should be tax free. Before taking this step, find out from your lender if there are any prepayment penalties. Regardless, making two of these payments each year will quickly build equity in your home.

If any of these ideas sound interesting, you can still take advantage of them even if you currently have a mortgage. Refinancing your mortgage gives you an opportunity to correct mistakes you made when you more focused on getting through escrow. Talk with a mortgage broker to find out your options.

Fundamental Analysis and the five main ratios

Fundamental analysis also known as quantitative analysis involves the detailed analysis of financial statements to assess how a company may perform in the future. Fundamental analysis is not qualitative analysis, i.e., it does take account of the intangible and hence hard-to-measure aspects of a companys operations such as the value of its goodwill, the value of any brands it may own and other intangibles. Neither does fundamental analysis encompass technical analysis where decisions to trade are based solely on a shares price and volume movements. Fundamental analysis uses real, hard data to ascertain a shares real (intrinsic) worth by examining revenues, earnings, future growth, return on equity, profit margins and other data. When positive anomalies are found i.e. a companys share appears undervalued, then the investor may consider buying in.

Investors who depend solely on fundamental analysis (Value Investors) will normally use at least five key ratios to decide whether a share represents good value or not. For these ratios to be meaningful, the comparisons should be between i) similar entities in similar sectors or industries and ii) well established businesses as distinct to start ups, or businesses in other special circumstances.

Price-to-Earnings Ratio (P/E)
One of the best-known and most valuable of the five key ratios. P/E compares a companys current share price with its past (trailing P/E) or potential earnings (forward P/E) per share. If, for example, a companys share price is currently 10 a share and the earnings over the last 12 months (a trailing P/E) were 0.50p a share, then the P/E ratio would be a value of 20 (10 divided by 0.50p). Assuming the financial performance of two companies is almost identical, then the company with the lowest P/E ratio costs less per share for the same financial outcome than the one with the higher P/E.

Price-to-Book Ratio (P/B)
The P/B indicates the amount investors are willing to pay for a share of the companys tangible assets, which by definition excludes intangible assets such as goodwill. The investor must first know the book value of all the companys fixed and current assets minus its current and long-term liabilities values which can be obtained from the balance sheet. The ratio is calculated by dividing the total value of the assets by the total number of issued shares. If the resultant ratio is less than 1, it would mean that shares can be bought in that company for less than the book value of its assets.

Debt-to-Equity Ratio (D/E)
The D/E ratio also known as Gearing indicates what proportion of shareholders funds (and some other types of debt such as loans or bonds) are being used to finance the assets of the business. It can also indicate how much money a company can safely afford to borrow over the long term. To determine the D/E ratio, the companys total long term debt is divided by shareholders equity. If a company has total debts of 1,000,000 and shareholders equity of 4,000,000 then the debt/equity ratio would be 0.25 (1,000,000 divided by 4,000,000). Where the ratio is higher than 100 the majority of the companys assets are financed through debt: if the ratio is less than 100, then the assets are financed mainly through equity.

Free Cash Flow (FCF)
Free cash flow measures how much money a company has left over after paying its overheads and taxes, making any capital investments and covering its working capital requirements. Knowing the FCF is particularly important to shareholders as it shows the amount of money thats available for dividend payments. FCF also enables the business to buy back shares, reduce or eliminate debt and invest in plant and equipment. The ratio is calculated by subtracting non-discretionary costs such as capital expenditure from the companys operating cash flow and then dividing that figure by the companys market capitalisation and total debt. Strong companies usually show positive free cash flow and the higher the FCF ratio, the better.

The price to earnings growth ratio (PEG)
This is an extended version of the P/E ratio as it takes earnings growth into account. PEG compares a companys P/E ratio to its earnings growth rate to determine whether the shares are undervalued or overvalued. The ratio is calculated by dividing a shares P/E ratio by its projected year-over-year earnings growth rate. So if for example the companys earnings per share the previous year were 15p and projected earnings per share this year are 18p that represents an earnings growth rate of 20%. On that basis if the companys P/E ratio were 30 then the PEG would be 1.5 i.e. 30/20 suggesting that the shares may be overvalued by as much as 50%. Conversely, and as a rule of thumb only, a PEG of less than 1.might suggest the shares are cheap. Generally speaking, the lower the PEG, the better the value, because each module of earnings growth costs the investor less.

A recent article in the Financial Times noted that banks are increasing holdings of collateralized mortgage obligations (CMO’s), credit instruments that aggregate mortgages into pools. The article noted that banks were increasing holdings of “the sliced-and-diced debt that some blame for the financial crisis.” Later in the article the author noted that some of these instruments were backed by the U.S. government and “generally considered safe.”

A closer inspection of the data shows that all of the growth in CMO holdings comes from the safe, government backed CMO’s. Moreover, banks have been allowing holdings of privately issued CMO’s to run off.



In fact privately issued CMO’s have decreased by 54% from their peak at the end of 2007, and currently represent 1.2% of bank assets, down from 2.7%. During this same period banks grew their holdings of government backed CMO’s to 3.5% of assets, from 1.3% in 2007. It is this growth alone that led to a 21% growth in CMO holdings.

Interestingly, the growth cited in the article looks only at the government backed CMO holdings. By not including the runoff in privately issued CMO’s, it overstates the growth of the entire market. In fact, the overall CMO growth did increase from the end of 2007 to present by 21%; however looking simply at government backed CMO’s for the same period makes growth appear to be 175%.

*The article mentioned appeared in the Financial Times on February 8th under the title “US banks snap up bundled mortgage products”

Existing home sales fell by 0.9% to 4.59 million annual units in February. The decline is due to a strong upward revision in January’s sales, as February’s pace is stronger than January’s initially reported pace. January’s pace of home sales was revised up from 4.57 million units per year to 4.63 million. As a result, despite February’s slight decline, sales are running 4% faster in the three months ending February than the three months ending in November.


Months’ supply of homes on the market increased to 6.4 million however part of this increase was due to increased listings. The median house price appreciated in February by 0.3% versus a year ago to $156,600. After adjusting for seasonal factors the appreciation of prices was 1.6% from the previous month.

Read the report.