Few free sample questions :
http://www.finquiz.com
Sunday, May 30, 2010
Friday, May 15, 2009
Accounting Red Flags - Anomalies to watch out
Few points:
1) Periodic Earnings rate increase should be commensurate with cash flow increase - If earnings increase but not cash flow, there is a possibility that company may be selling assets/investments to cover losses.
2) Analyst can read the audit report to see if the auditor has a qualified, adverse of disclaimer of opinion.
3) Inventory turnover ratio keeps decreasing though sales is consistent. - Management could be piling up inventories on credit to boost the cash flow ( tax advantage)
4) Frequent changes in accounting policies.( like change from FIFO to LIFO without concrete reasoning). This should be viewed in terms of timing.
Good link:
http://accounting-financial-tax.com/2009/04/using-operating-cash-flow-to-detect-earnings-problems/
1) Periodic Earnings rate increase should be commensurate with cash flow increase - If earnings increase but not cash flow, there is a possibility that company may be selling assets/investments to cover losses.
2) Analyst can read the audit report to see if the auditor has a qualified, adverse of disclaimer of opinion.
3) Inventory turnover ratio keeps decreasing though sales is consistent. - Management could be piling up inventories on credit to boost the cash flow ( tax advantage)
4) Frequent changes in accounting policies.( like change from FIFO to LIFO without concrete reasoning). This should be viewed in terms of timing.
Good link:
http://accounting-financial-tax.com/2009/04/using-operating-cash-flow-to-detect-earnings-problems/
Derivatives Unleashed by Professor Michael Greenberg
On 05/15/2009, Michael Greenberg, Professor gave a good explanation of the derivatives.
My understanding: Derivatives are the value derived from the value of the underlying asset. If the underlying asset's value goes down, depending on the stand that the derivative took, the derivative value goes up or down.
Eg: If I own a house and run the risk of fire on the house, I get a fire insurance. When my house goes on fire, I can claim the loss through my insurance which is straight forward. If three other people buy the same insurance on my house, they are really indirectly betting that my house will go on fire and they make money if it does.While me taking the insurance makes economic sense from a risk perspective, the other bets turn the derivative market into a frankenstein monster cassino.
Currently Congress is contemplating on regulation similar to the Pecora investigation in the link below
http://en.wikipedia.org/wiki/Pecora_Commission
From an accounting point of view, there is no contingent obligation through any unrealized loss booked as well which hides these exposures until they realize.
CSPAN also shared the illustration of Derivatives published in The Washington Post -
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/05/15/GR2009051500187.html
My understanding: Derivatives are the value derived from the value of the underlying asset. If the underlying asset's value goes down, depending on the stand that the derivative took, the derivative value goes up or down.
Eg: If I own a house and run the risk of fire on the house, I get a fire insurance. When my house goes on fire, I can claim the loss through my insurance which is straight forward. If three other people buy the same insurance on my house, they are really indirectly betting that my house will go on fire and they make money if it does.While me taking the insurance makes economic sense from a risk perspective, the other bets turn the derivative market into a frankenstein monster cassino.
Currently Congress is contemplating on regulation similar to the Pecora investigation in the link below
http://en.wikipedia.org/wiki/Pecora_Commission
From an accounting point of view, there is no contingent obligation through any unrealized loss booked as well which hides these exposures until they realize.
CSPAN also shared the illustration of Derivatives published in The Washington Post -
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/05/15/GR2009051500187.html
Saturday, December 27, 2008
A Modern Approach to Graham and Dodd Investing - By Thomas P. Au
As I am put on hold for the Security Analysis book by Benjamin Graham and Dodd, I thought of going through the following
A Modern Approach to Graham and Dodd Investing - By Thomas P. Au
This book can be previewed at google books .link below.
http://books.google.com/books?id=O4xKiTAOxT4C
Per my current reading, the first 2 chapters are basic concepts around financial analysis on value, growth oriented investment analysis factors and how Benjamin and Dodd viewed it and how Warren Buffet has extended those ideas.
Quick takeaway, stock can be viewed very similar to bonds. Just like discount, premiums on bonds ( against par value) determine the yield against current market interest rate, the premium/discount on stocks ( against book value) determines the dividend yield against the dividend distribution rate.
To illustrate, assume book value of stock is $10 per share, $1 is earning for an year and 60 cents paid as dividend. For this scenario
Dividend distribution rate = D/B = $0.6/$10 = 6%
Naturally, the remaining 40 cents or 4% makes the Earnings reinvestment rate.
With the above said, let us assume the price of the stock trades at a discount, say $6, then the dividend yield 10% ($ 0.6/$6) is greater than the Dividend reinvestment yield, thereby forming an analogous comparison to the bond behavior.
A Modern Approach to Graham and Dodd Investing - By Thomas P. Au
This book can be previewed at google books .link below.
http://books.google.com/books?id=O4xKiTAOxT4C
Per my current reading, the first 2 chapters are basic concepts around financial analysis on value, growth oriented investment analysis factors and how Benjamin and Dodd viewed it and how Warren Buffet has extended those ideas.
Quick takeaway, stock can be viewed very similar to bonds. Just like discount, premiums on bonds ( against par value) determine the yield against current market interest rate, the premium/discount on stocks ( against book value) determines the dividend yield against the dividend distribution rate.
To illustrate, assume book value of stock is $10 per share, $1 is earning for an year and 60 cents paid as dividend. For this scenario
Dividend distribution rate = D/B = $0.6/$10 = 6%
Naturally, the remaining 40 cents or 4% makes the Earnings reinvestment rate.
With the above said, let us assume the price of the stock trades at a discount, say $6, then the dividend yield 10% ($ 0.6/$6) is greater than the Dividend reinvestment yield, thereby forming an analogous comparison to the bond behavior.
Saturday, October 4, 2008
How good is the Bail Out ?
On 10/03/2008, the $700 Billion bail out/rescue plan passed US Congress ( After the first attempt that failed a week earlier). The bail out probably passed since the issue at hand posed a double edged sword. The still open edge which is 'What has changed in average person's life?. Treasury buying the bad assets through tagging a price will help companies. While getting their books to some decent shape could have helped corporates goto 2001 level, the consumers are still stuck. With this, how can one expect a consumer based economy to change things unless some design has changed radically ?
From a global perspective, this is artificial inflation of the assets through additional pumping of fresh US dollars ( Thanks to non-public disclosure to M3 supply). This just means that dollar will go down in the long term and China and other Gulf nations get more opportunity to stack $700 billion more to their reserves. It will be interesting to see how the emerging markets behave for the next 4-5 months and their GDP levels with a distressed US. This will validate how the US's cold makes the the rest of the world to sneeze.
From a global perspective, this is artificial inflation of the assets through additional pumping of fresh US dollars ( Thanks to non-public disclosure to M3 supply). This just means that dollar will go down in the long term and China and other Gulf nations get more opportunity to stack $700 billion more to their reserves. It will be interesting to see how the emerging markets behave for the next 4-5 months and their GDP levels with a distressed US. This will validate how the US's cold makes the the rest of the world to sneeze.
Tuesday, September 23, 2008
Wall Street Turmoil and US Congress response
I planned to take a minute to recap on some of the recent happenings on the current Financial crisis hitting Wallstreet that is ubiquitous on internet, radio, TV and street talks.
To provide some background on why we are where we are :
The creative financial instruments invented by the Wall Street heads in terms of derivatives like MBS, ABS, CDO, CDS etc have started to expose their real face as the interest bearing debts collateralized by these assets don't meet the investment expectations. In simple words, as people holding mortgages can't make their payments on time or get into foreclosures, these derivatives which expect their returns through their payments take a direct hit. This leads to banks not able to pass through their payments to the investors who had bought those derivatives from the bank. In addition, those investors who have insured these risks through insurance companies have passed on these effects to those Insurance companies as well. The creative financial instruments masked the mortgages with low ratings through packaging in different facets thereby giving them an artificial uplift.
Where are we now:
As investors sense a risk to their expected returns due to missing mortgage payments, the confidence level in the underlying assets ( All the securitized derivatives mentioned above) goes down, thereby shorting them. With no cushion build up to resist this fall, this gets into a spiral downward movement. Aaha, the credit ratings , who is supposed to be leading the curve, now wake up and short their ratings on these companies as well paving way for the perfect storm. The companies who didnot see this coming but are burdened with these poor assets are at the brink of filing bankruptcy or closing their business. The trillions of dollars and the big institutions involved in this has the potential to crack the US Financial system which is the rockbed for the jaggernaut capitalistic system. Hence the government intervention to ponder a $700 billion bailout.
Root cause of these issues from my point of view:
1) The rate of these instruments/derivatives coming up were too fast for the credit rating agencies to keep up that ended up endorsing these.
2) The SEC and Govt regulations were not keeping up with these as well.
3) The institutions impacted by this turmoil were too busy finding new customers than take a second look at their risk management models. In addition, their models relied on the credit agencies' ratings.
4) People were either greedy or scared of the skyrocketing home appreciation that everyone wanted to be part of the crowd than taking time to calculate if they can meet their financial obligations.
To provide some background on why we are where we are :
The creative financial instruments invented by the Wall Street heads in terms of derivatives like MBS, ABS, CDO, CDS etc have started to expose their real face as the interest bearing debts collateralized by these assets don't meet the investment expectations. In simple words, as people holding mortgages can't make their payments on time or get into foreclosures, these derivatives which expect their returns through their payments take a direct hit. This leads to banks not able to pass through their payments to the investors who had bought those derivatives from the bank. In addition, those investors who have insured these risks through insurance companies have passed on these effects to those Insurance companies as well. The creative financial instruments masked the mortgages with low ratings through packaging in different facets thereby giving them an artificial uplift.
Where are we now:
As investors sense a risk to their expected returns due to missing mortgage payments, the confidence level in the underlying assets ( All the securitized derivatives mentioned above) goes down, thereby shorting them. With no cushion build up to resist this fall, this gets into a spiral downward movement. Aaha, the credit ratings , who is supposed to be leading the curve, now wake up and short their ratings on these companies as well paving way for the perfect storm. The companies who didnot see this coming but are burdened with these poor assets are at the brink of filing bankruptcy or closing their business. The trillions of dollars and the big institutions involved in this has the potential to crack the US Financial system which is the rockbed for the jaggernaut capitalistic system. Hence the government intervention to ponder a $700 billion bailout.
Root cause of these issues from my point of view:
1) The rate of these instruments/derivatives coming up were too fast for the credit rating agencies to keep up that ended up endorsing these.
2) The SEC and Govt regulations were not keeping up with these as well.
3) The institutions impacted by this turmoil were too busy finding new customers than take a second look at their risk management models. In addition, their models relied on the credit agencies' ratings.
4) People were either greedy or scared of the skyrocketing home appreciation that everyone wanted to be part of the crowd than taking time to calculate if they can meet their financial obligations.
Sunday, August 10, 2008
Good Youtube links
Over the years, I have learned that learning through Videos and Podcasts can be efficient and effective. The following is a good place to learn more on financial concepts and in depth security related subject. I plan to add more such Video links both for my reference as well as to save time for people like me. If you have more such links, please share them through comments.
http://www.youtube.com/user/bionicturtledotcom
Goto google and do a search for the following
Structured Finance, Lecture 1 - The Alphabet Soup of the Credit Crisis - 62 min - Jan 30, 2008
Above is from Krassimir Petrov, AUBG - http://home.aubg.bg/faculty/kpetrov/
http://www.youtube.com/user/bionicturtledotcom
Goto google and do a search for the following
Structured Finance, Lecture 1 - The Alphabet Soup of the Credit Crisis - 62 min - Jan 30, 2008
Above is from Krassimir Petrov, AUBG - http://home.aubg.bg/faculty/kpetrov/
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