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Today at TILE… Spending and Your Next Job

Tuesday, October 6th, 2009

Today at TILE, we talked about the difference between Wall Street which is rebounding and Main Street which seems to be struggling due to uncertainty about the future. We asked why is the Dow still near its 12-month high of 9800 while unemployment is also at a 26-year high of 9.8%? If investors are “bullish” or positive about stocks and pumping new money into companies, why are companies still not hiring? Shouldn’t we be worried that job seekers outnumber job openings by six to one?

Basically, the financial markets, the economy, and the financial health of your school/company/family are all interconnected. It’s a bit like a game of Pick-up Sticks or Jenga; each piece is dependent on the others and without one, the structure could tumble. In the current environment, the key “building blocks” being discussed are Consumer, Government, and Business behavior – and each one reacts differently to the world around it.

For consumers, spending is way down and savings is up. The consumers’ decision to spend less means that stores or restaurants or travel destinations need to plan for lower sales and fewer visitors. Think about it: if you aren’t certain you are getting a raise at the end of the year or a bonus (or that you will even have a job) will you spend more or less on new clothes, restaurants, and concerts? In the recent past, consumer spending has been boosted by the fact that the value of homes has increased (giving a sense of richness), easy credit (“I can always borrow a little more”), and an overall mood that excess was good. But with a general sense of uncertainty, spending has declined significantly.

In contrast to individuals, the government has increased its spending – and is building its debt instead of paying it back. Total public debt stands at more than $11 trillion today and the 2009 projected deficit is $1.8 trillion. Compare this to total debt of $5.6 trillion in 2000. In essence, the government is trying to pick up where consumer spending fell short – by chipping in a bit more. The problem is that no one is sure that the government can keep spending long enough to cover for the consumer. In addition, we all know that larger government debt or deficits eventually mean higher taxes. Someone has to pay off the debt at some point.

The business community is taking it all in. Short-term, they are being thrifty and benefitting from the increased government spending. Longer-term uncertainty remains. Until they have a clearer picture, most companies will tend to hold onto cash and not make large investments – either in people, inventories, or equipment. Businesses are enjoying the current rise in stock prices, but not yet ready to invest in the future. And until companies start looking ahead and consumers start spending, it is doubtful we will see the unemployment figures falling materially – even if our portfolios are looking a little better.

What does this mean for the TILE community? For those of you looking for a part time job, thinking ahead to next summer, or contemplating life after graduation, you are, unfortunately, facing a tough market. The good news is that this is an excellent time to volunteer for a charity or pursue an internship. There are a lot of great nonprofits and companies looking for volunteers and interns – especially now. You can learn more about what really interests you and get your foot in the door to gain experience or learn what you want to do next.

- Amy

Today at TILE… Next Generation Financial Services

Monday, September 28th, 2009

Today at TILE we talked about the desire of young adults to learn about financial services, the frustration parents feel talking about wealth, and the need for next generation financial services. When do we stop focusing on literacy and start developing a financial identity? Why aren’t there financial tools that appeal to Gen Y? When will financial institutions begin to recognize there is a new generation of consumers – who have different expectations and different ways of communicating?

At TILE, “Next Generation Financial Services” is a vision inspired by young people and delivered through tools they can relate to. Generation Y is out to change the world. They’ve already altered our political process (i.e. the 2008 Presidential election), the values we cherish (i.e. environment first!), and how we communicate (i.e. texting and instant messages). This is all before they have control of the $1 trillion+ they stand to inherit in the next 10 to 15 years!

Our research has shown that young people want to learn, but ”old people” and “old firms” are speaking the wrong language. Think about it, there are a lot more grandparents learning to text than young kids writing hand written letters. This is the first time the onus is on the older generation – financial institutions need to learn to text too!

Traditional educators focus on literacy – open a book, listen to a lecture, or memorize definitions. TILE is about moving from literacy to identity – from education to action! If we want young adults to be responsible consumers of financial services in the future, we need to stop telling them what we want them to know and start giving them the tools to connect what they care about to their financial life. For example, how do spending habits relate to the market? How can my collective giving impact the market or other people?

What does this mean for the TILE community? There is finally a place to develop a financial identity and bring together all the pieces of our financial life – Spending, Growing, and Giving. While parents or grandparents fund the accounts, TILE members set their own preferences, privacy level, budgets, and donation amounts. The TILE Library is filled with engaging content and answers to all sorts of questions and the Learn to Grow module will jump-start those long overdue conversations with financial advisors. Parents can feel comfortable knowing that TILE is a safe place and advisors get to build a positive brand image. Whether every day, a few times a week, or just when you feel like it, there is now a place to get lost in learning and begin to build a financial identity. At the end of day, TILE members can not only become better investors, but maybe tomorrow’s financial experts!

- Amy

Bailing Out From The Bailout…

Friday, September 25th, 2009

Some banks are doing their best to free themselves of the regulatory requirements imposed on them to ensure the TARP bailout money is put to good use.

  • Early repayment of bailout funds may be a sign that the financial industry is recovering from last year’s crisis, but it’s not yet clear whether banks that repay will change any of their business practices.
  • These ten companies will no longer be subject to TARP-related oversight and restrictions by the government, giving them a potential competitive advantage over companies that have not repaid.
  • The U.S. Treasury began buying stakes in struggling financial institutions in October 2008, with the expectation that it would hold onto those investments for at least 3 years. But Congress recently forced the administration to allow some banks to exit the arrangement just eight months later.
  • The federal government will no longer have a direct stake in banks that repay, but it will continue owning warrants and, according to President Obama, will continue to closely monitor the business practices of all financial institutions.

Facts & Figures

  • Since October, the government has spent $199 billion on TARP funding for 600 different companies. The 10 companies now repaying the funds represent $68 billion of that total.
  • The big ten: J.P. Morgan, Goldman Sachs, Morgan Stanley, U.S. Bancorp, BB&T Corp., American Express Co., Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., and Northern Trust Corp.
  • TARP restrictions addressed: “executive pay, dividend increases, hiring certain foreign workers for U.S. jobs, and lavish spending on corporate jets and conferences, which fueled a public backlash.”

Best Quote

“These are challenging times, and that’s not going to change simply because we repaid TARP.” – Michael Cavanagh, CFO at J.P. Morgan

TILE Announcement: Get to Know Us

Friday, September 25th, 2009

To find out more about TILE, watch our demo video, read our FAQ, or sign up for updates, click here.

TILE Announcement: Presenting at Finovate

Friday, September 25th, 2009

TILE Financial is excited to announce our public debut at Finovate 2009 on Tuesday, September 29th.

Today at TILE… The Power of Networks

Tuesday, September 22nd, 2009

Today at TILE we talked about this week’s gatherings in New York City, some of the people who are attending, and the potential impact powerful networks can make in the world. Why are all these “heavy hitters” coming to New York (and making traffic even more crowded)? What are they hoping to accomplish? Is it something that makes a difference to me?

Specifically, the UN General Assembly, the Clinton Global Initiative, and Climate Week NYC are bringing royalty, heads of state, business leaders, celebrities, directors of non-profits, and just some “people who care” to center stage. Each forum has a unique objective, yet at the same time each asks their members and participants to consider the relationship between individual responsibility and collective action – what can you contribute to the things that matter to you, your business, your organization, and your world?

Organizations like these exist in all kinds of shapes and sizes. They range from the most prominent, such as the World Economic Forum in Davos, to the most traditional, such as the New York Stock Exchange, to the most virtual, such as Facebook, to the most fun, such as a sorority or fraternity, to the most informal, like when you and your friends decide to raise money by biking cross country or running a race. What makes them effective is the ability to attract different kinds of people and different points of view. What we learn from these networking events is that a call to action is much more effective when all the decision makers or influencers are in the same room. For example, when it comes to the New York Stock Exchange, it isn’t just about showcasing the impact that companies have on the market, but also the impact government organizations/politicians, non-profits and cultural icons have on the market. Think about climate change or the fight against breast cancer. It is easier for politicians to approve funding or ease restrictions on research and development when they know there is public support – and companies will allocate more of their R&D when they know government is supportive and consumers are advocates. It can be a virtuous cycle when everyone gets together and realizes they can actually help each other towards mutual goals.

So what do these networks mean for the TILE community? Well, just because you are in one, doesn’t mean it will be a success. Just like relationships, you need to nurture them or they can become dysfunctional or start acting like a baseball team that is 0 and 10 (not fun or effective!) At the same time, when they work they can be really powerful. You get to engage with people who have similar passions and interests. Whether for a business, political, cultural or meta cause, it is usually the case that more gets done the more people come together and pool their resources (financial or otherwise). Have you been wanting to take a stand? Give more of your time to a special cause? Most likely there is either an existing network or an easily reachable group of people that share your interests – go find them and make a difference. I guarantee you the group will benefit from your involvement. In that context, we hope TILE makes it easier for you to find and learn more about the things that interest you. And who knows, it could turn into a powerful network along the way!

- Amy

TILE Announcement: Learn to Grow with NYSE Euronext

Monday, September 21st, 2009

TILE is proud to announce that it has formed a strategic partnership with NYSE Euronext for the new “Learn to Grow” section of GROW. This module will help young people assess their risk tolerance as they begin their exploration of investing.

Today at TILE… The Difference a Year Makes

Tuesday, September 15th, 2009

Today at TILE we talked about the one year anniversary of the September 2008 financial panic, the September 15th anniversary of Lehman’s bankruptcy filing, and what a difference a year makes. Should we, as current and future consumers of financial products and advice, be comfortable with the changes that the crisis brought about? Do the changes in the system adequately protect us from the same experience happening again?

Some economic indicators (or measures of economic health) seem like they haven’t moved, even though if you looked at a chart, it could be an awesome roller coaster ride. For example, as of the end of August this year, Consumer Confidence was at 54.1 versus 58.5 last August, but with a low of 25.3 in February; the Unemployment Rate stood at 9.7% this August versus 6.2% last year and 4.8% at the end of 2008; Crude Oil is around $70 per barrel versus $115 a year ago; and the market, as measured by the S&P 500 was 1,021 at the end of August, 1,283 a year ago, and hit a low of 735 in February. This past year has had a ton of ups and downs (or volatility), but miraculously, we seem to be at a pretty good place now.

Somehow, while 106 banks failed in the last year, the remaining financial institutions seem to have a “business as usual” attitude. This is strange considering that 416 of them are on the FDIC Problem List (hint, there are more failures to come). The cost of these failures can be measured by the fact that the FDIC Deposit Insurance Fund stands at only $10.4 billion (versus over $45 billion a year ago) and the reserve ratio (what banks are legally required to hold onto as an offset to future losses), is at 0.22% – the lowest ratio since 1993. In contrast to the failures, some firms seem to be benefiting from the reduced number of competitors – actually making huge profits and increasing risk. According to the Wall Street Journal, trading revenues for the five largest Wall Street banks increased to $56.3 billion in the first six months of 2009 – more than double the $22.5 billion in 2008 and nearly the same as 2007. It should be noted, that compensation hasn’t changed too much either. With fewer banks, there is less competition. This means it may be harder to get a loan or a credit card; banks may offer less competitive rates for your deposits; and there could be less innovation in the future. With less money in the insurance fund, there is more risk that tax payers will need to foot another bill. If a bank made bad bets on real estate, how much should it cost you in the future?

The U.S. Government has made a monumental shift in its philosophical approach towards financial support. Nonetheless, it isn’t clear whether it has made the same monumental shift in how the industry will be regulated in the future. In the last year, the Government has spent $16 trillion across 30 government programs and Congress ok’d a $787 billion fiscal stimulus package. According to Deutsche Bank research, the Fed’s balance sheet expanded from $800 billion in 2007 to over $2.2 trillion today. Imagine if your balance sheet expanded almost threefold in less than 2 years. The key indicator for the future, however, is government regulation – and in that area, change seems slow.

What does this mean for the TILE Community? Have you ever gotten a driving ticket or been in trouble with your parents or school? Did you learn a lesson? Did you change your behavior? Or, did you just say, “I won’t get caught twice”? Well, in many ways, we are waiting to see whether the financial institutions that took big bets and made bad loans have “learned a lesson.” Yesterday, President Obama said, “Instead of learning the lessons of Lehman and the crisis from which we are still recovering, [banks] are choosing to ignore them. They do so not just at their own peril, but at our nation’s.” We hope that is not the case. However, it does feel like we bounced back pretty quickly (maybe too quickly) and while a few firms seem to have changed their practices, there are still a lot of people without jobs, without homes, and without a sense of optimism. Wall Street indicators are an important gauge of economic success or failure. But they’re not the only ones to look at.

- Amy

Today at TILE… Winners and Losers

Thursday, September 3rd, 2009

Today at TILE we talked about the relationship between “winners and losers” in the market. Specifically, when someone loses money, does it mean another person makes money? It is a great question, because it sometimes feels as if there are more “win-lose” than “win-win” situations in life, when everyone comes out ahead. The market, reflecting real-life, has examples of both.

The best market environment in which there are multiple winners is an expanding economy – the economy and market are growing, which means there is room for multiple people to benefit. Today, good examples (believe it or not they exist!) of growing industries are microfinance and the green market. New investments, increasing demand from consumers, and growing awareness means that companies that enter this market are finding it easy to expand, grow, and “win.” To make the examples come to life, try to think back to just a few years ago… were you as interested in purchasing “green” merchandise? Did you even have a choice between “green” and “not-green?” Had you heard of microfinance? The stock market, in general and especially when it is going up in value, works in a similar manner. While a trade depends on the existence of both a buyer and seller, it doesn’t mean the seller loses when the buyer buys (or vice versa). For example, let’s say you purchased a stock for $10 and sold it for $20 (good trade), you are a winner. Let’s say the seller in the transaction purchased it for $20 and then waited until it reached $25 to sell. They “won” too! As long as the market keeps expanding, everyone wins.

The opposite scenario, “win-lose,” takes place in the economy and in the futures market. When Snapple and Vitamin Water were first introduced to the market, it was great for all the companies creating the new products. However, it was not so great for companies like Coke and Pepsi – their customers were now drinking Snapple instead of soda, so they lost market share. This is called a “substitution effect.” The market for drinks stays the same, but new competitors take market share away from traditional players – not everyone wins. The futures market is different than the stock market because there is always a winner and loser. One person bets the value of the commodity (i.e. sugar or gold) will go up and one bets that it goes down. When you close a trade one side has a gain and another a loss. Definitely not a win-win.

What about the “I’m not so sure if there is a winner or loser” scenario? Today, the best example of this gray area may be the guarantee programs being offered by the government to banks and private equity firms that invest in failed institutions. On the one hand, it is great that the FDIC is finding other people to purchase troubled assets and banks – they will be much better at running them than the government, they are the only ones interested in buying the assets, and it means the FDIC doesn’t have to take another hit to its insurance fund (which stands at only $10.4 billion as compared to more than $50 billion a year ago). On the other hand, are the incentives too good, leaving losers on the other side? For example, as of August 31st, the government provided “loss sharing arrangements” on over $80 billion in loans, which could lead to real losses of over $60 billion. That means that if the new owner encounters losses on the investment, the FDIC (or you, the tax payer) covers nearly all the downside! Is it a good trade-off if the new investor gets all the upside and the Government (or you, eventually) takes only downside risk?

In terms of your own financial identity, maybe take a moment in the next day or two to consider the “win-win” versus “win-lose” scenario. Whether deciding what drink to pull from the shelf at the store, the type of light bulb you pick for your dorm room, or how you choose to invest (stocks, options, futures) there is always another side of the coin.

- Amy

Today at TILE… Is the Recession Over?

Tuesday, July 28th, 2009

Today at TILE we asked ourselves… is the recession over?

With the Dow Industrial index crossing the 9100 mark (the highest level since early November), should we take that as a sign that the recession is over? Is the economy healthy? Will your portfolio increase in value? And will it be easier to find a summer job?

Even though there is more optimism in the air, it isn’t clear that the recession is over. Just like you use “indicators” to judge how healthy you are, investors and economists rely on a range of indicators to gauge the health of the U.S. economy. When evaluating our personal health, we look at things like quality of sleep, eating habits, and do we have any aches or pains? For the economy, we look at indicators such as the unemployment rate (how many people are out of work versus earning an income), housing prices (what is the value of my home), or the consumer price index or CPI (does a basket of goods cost more or less today versus yesterday?).

One key indicator being looked at right now is corporate earnings – how much money public companies are earning today versus prior periods. Investors look for three things: 1) How much money did the company earn, 2) Is it more or less than expected, and 3) What is the quality of earnings (does it imply there will be higher earnings in the future?). Part of the reason the markets have gone up in value is that companies are not just reporting earnings, but they are beating expectations. For example, Ford lost $638 million or $.21 a share last quarter which beat analysts’ expectations of a loss of $.53 a share.

The first two are pretty straightforward, but it is the “quality of earnings” question that makes you ask yourself if the economy is really starting to grow. As of last week approximately 70% of the firms reporting earnings beat expectations. Unfortunately, not all earnings are the same. For example, imagine there are two companies, we’ll call them “Company A” and “Company B.” Last quarter, both had $100 in revenue, $80 in expense, and therefore $20 in pretax earnings. This quarter Company A created $30 in earnings by growing revenues to $120 and expenses to $90. In comparison, Company B created $30 in earnings by simply shrinking expenses to $70 and keeping revenue the same. Which company is better positioned for future growth? Company A, which is expanding its share and investing in the future or Company B, which is simply cutting costs?

What does this mean? Well, if you’re of the view that earnings only grew and were higher than expected because of cost cutting, you may not believe the economy is poised for growth. On the other hand, you may be a bit more optimistic and think cost cutting actually sets the stage for blow-out earnings once the economy picks up.

So, is the recession really over? It depends who you ask!

Just like you can come to a different conclusion than your friend when judging what a slight cough means to your overall health, economic indicators are the same. At the end of the day, while the indicators may be the constant, it is important to realize that everyone interprets them differently.

- Amy

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