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THE BLUE MONEY REPORT.

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The Blue Money Report
"...contributors will only give money to challengers when they have a realistic chance of winning, and incumbents only spend a lot when they have a chance of losing"
~ Steven Levitt

Welcome to the Blue Money Report

Today's Commentary: 10.07.03
Interest Coverage Ratio: The New Watch-phrase
I often speak of balance among all of these articles I write about finance. Seldom is it achieved, but the quest for it is worth the continued crusade by writers like myself to help you accomplish it. Corporate chiefs are looking for balance also. Unfortunately, what they find could be more disturbing and quite possibility a new measure of how this recovery might occur.

A simple accounting principle states that the health of a company can be determined, at a quick glance, by simply subtracting debt from assets. The CEO uses a more complicated method for sure, but they can still take a cursory look every now and again. What they are seeing is actually expected. As the economy slowed down, so did the asset worth of their companies. What failed to dissipate along with that shrinking asset base was the company's debt.

The fixed income market has shut the door on many of these companies, closing off the taps and the chance to carry forward that debt until better times. Those times for those companies are a fingers-crossed future.

The economy is recovering slowly, mostly as a result of the slight increase in productivity. Even as jobs continue to drag the anchor on explosive growth, or so the majority of financial cheerleaders are suggesting, the debt that was carried will be the truest lagging indicator.

The ability for a company to pay those debts back is measured by interest coverage ratio. Debt is booked as an expense. The measure most popularly used takes the company's interest expense and compares it to the company's income.

These ratios change between industries as can be expected, but if these two figures begin to find the balance at equal, you may have your first warning that trouble is looming. It doesn't mean that the CEO will be carted off in handcuffs or even that bankruptcy is in the future. But this is the future of junk bonds and may just help you hedge the risk of default.

In other news
Does a strong dollar have any place in the current economic recovery? Probably not. But the current controversies and change in economic policy in this investment should not be ignored.

A strong dollar makes imports cheap. Americans like cheap products even as they rant about the loss of jobs to American and overseas companies on foreign shores. This appetite for outside goods has kept the recovery crippled, or at least that is the current unstated approach by those make policy.

A weak dollar acts in reverse making imports more expensive and exports more attractive. The hope, and I emphasize hope, is that this will act as a balance of trade. What few people want to determine is how low the dollar needs to go in relation to other major currencies to reach this balance.

But the world's cooperation may be slow in coming. Asian countries, specifically China, Japan, South Korea and Taiwan, are understanding the dynamic of what the United States wants better than we do. These countries understand they would need to let their currency float freely and react accordingly to the open market. Paul O'Neill espoused that view as the Secretary Treasurer. John Snow, his replacement is more or less openly suggested otherwise.

A couple of problems are present with this scenario. Not only does this make their exports more expensive with price fluctuations, but it makes the value of the debt they hold against the United States worth less. Considerably less. The current totals held by these four countries exceeds $1 trillion even as the U.S. is baiting more hooks to cover the growing deficits.

The Japanese recovery is just getting a foothold. Any currency moves might derail that effort. The result of that cooperation the Asians feel would drop the dollar like a rock.

Today's Commentary: 10.06.03
Tranquil Markets - Just Don't Look Too Deep

There is an overwhelming temptation to paint these markets as rosy with bright skies contrasted with colors such as bleak with dark clouds. But the markets all seem to be thumbing their collective noses at any real description concerning behavior. Suffice to say, investing these days is not as bad, nor is it as good as it appears.

There was a recent report published by the RiskMetrics group that suggested that risk has greatly diminished in these markets. Preferring descriptives such as tranquil, large moves away from highs or lows are not seen in the near future. This lack of volatility might just be picked up too late for those trying to time the market.

With gains of only 7%, supported by losses of no more than the same number, a fourteen percentage point swing can seem euphoric enough to make people want to chase the high water mark. Evening out any real strategy and resorting to dollar cost averaging will be good enough for most investors to take their gains with their losses.

The markets are asking a lot of investors. Tax rebates have been spent. Consumer confidence is still retreating. Congress is haggling over a budget while seeking to spend more that it has or should. Add to that, unemployment, the weakening dollar, and the outside chance that productivity will be the savior of this recovery, and you are being led to believe that you shouldn't look too deep.
In other news
Were you aware that the S.E.C. has developed a new rating system for your mutual funds? I'd be willing to wager that you were unaware that there was already one in place. With the Security and Exchange Commission getting trumped on a regular basis, it has begun to shown up in the news more frequently. A couple of weeks back, they suggested a revamping of the reports on fund management. The old system simply rated funds either exemplary, acceptable, or deficient. These widely subjective ratings will be replaced by widely subjective grading much like junior's teacher does. Now if any of you are in the presence of school age children, the grading process, either good or bad is often a very stressful time indeed. And not always indicitive of what really happened.

The S.E.C. plan involves a two (if you are considered low risk fund) and four (if you are high risk fund) year inspections of fund operations. With any luck, they are hoping that their new system will identify oversight issues, trading irregularities, and settlement concerns. This happens in the wake of the first wave of lawsuits arriving on the doorsteps of those evildoers that were responsible for the most recent mutual fund industry misdeed. The suits, in my opinion are a bit pre-emptive as many of the funds under investigation have offered provable restitution without enriching lawyers.

But should the suits continue, look for a quick financial education on the Securities Act of 1933 and the Security and Exchange Act of 1934. These two acts are usually the foundation of lawsuits brought by shareholders against companies and executives.

As the same agency appears to be jumping out of bed on the rating issue, they jump back in one another. New proxy rules proposed by the S.E.C. have raised the hackles of the big pension managers. In an effort to reform the way directors of large companies are elected, the S.E.C. has instead suggested that shareholders be given the right to vote. Institutional investors, in many cases the largest shareholders will be able to vote as many as three directors ot the boards of the companies they hold massive interest. The S.E.C. sees nothing wrong with this as long as the nominees (wink, wink) aren't associated with the fund.

Once again, the state of New York, specifically comptroller Alan G, Hevesi has brought the flip side of the proposal to light. Called the "false impression of reform" the new S.E.C. rules would make objecting to and contesting directors virtually impossible.
One more tidbit
Vanguard has entered into the sector fund business. Should you care? No mostly because you are mutually excluded from the increased volatility. The first of their offerings will effectively eliminate average investors from the speculative and short term risk that sector investing has become. To get into these new funds you need only pony up $250,000 into an open end fund.

Vanguard will however offer the average investor the opportunity to speculate by offering them as Exchange Traded Funds or ETFs. This type of offering is priced continuously throughout the day and requires no minimum investment. they boast that this will make them the only company able to offer a wide range of index options traded across a wide range of markets.

Vanguard fans, usually the most expense driven group will be delighted to know that they will begin offering a new Large-cap Index fund tied to the MSCI US Prime Market 750 Index. The Morgan Stanley Capital International indexes tend to be much more broad. This could be coming at just the right time as large caps, if the market mavens have any say so or predictive abilities, should begin a slow but steady assent back toward highs not seen in a number of years.