Clay Ivy Finance

As Europe works to relieve its debt crisis, fiscal rules are emerging that leave me wondering: Can financially punishing a country lead to financial improvement in that country?  Does it help to prevent financial problems?  The issue I have is with the provision in the EU’s treaty that allows for fines and sanctions to be put on countries that exceed a certain deficit limit.

As soon as a country exceeds the deficit limit (3% of GDP), it will be subject to a fine and sanctions.  Requiring a country with money shortages to pay more money in the shape of fines does not seem like a brilliant solution.  It’s kind of like telling a boxer that if he’s losing after the first round, he has to fight the second round with his arm behind his back.  It’s similar to suspending a student for missing too many classes.  The punishment simply makes the situation we were trying to prevent worse.  I agree that there needs to be some sort of deterrent to prevent fiscal irresponsibility, but fining the country only makes the situation worse.

I’ll be the first one to tell you that I love Wal-Mart, and I own the shares ( If you were signed up for my portfolio alerts you would have gotten in at $51.55 like I did).  Wal-Mart (WMT) reported fiscal year 2012 first quarter diluted earnings per share of $.98 today.  This beat the high end of the estimated range and was 11 cents per share higher than the previous year’s quarter.  So why did the shares drop to as low as $55.24 before closing today at $55.54?  It seems that investors are focusing in on the one weak spot of Wal-Mart’s reporting: U.S. Comparable Store Sales down 1.1%

Wal-Mart’s U.S. operations, the largest part of its business, has been struggling recently.  This is no new event.  With the exception of the recession,the majority of the problem seems to be the previous strategy to appeal to more high end customers by removing certain items, charging the lowest price on some items while raising the price on others. The company has dropped that campaign and is back to offering everyday low prices on all or its items.  The other problem, also well known before today, is the fact that Wal-Mart’s core customer is still struggling in this economy.  This negative part of Wal-Mart’s report should have been expected, and beating earnings estimates despite these problems should have given the shares a jump.  Given the re-focus back into everyday low prices, the probability that the core customers will eventually recover, and a whole list of other reasons makes Wal-Mart’s shares look attractive for purchase at their current price.

Take a look at the information Wal-Mart posted on its Investors’ Page today:

Look at the international growth and the return on investment.  The only negative thing in that list was the comparable store sales.  The rest of the information is very encouraging.  Given Wal-Mart’s acknowledgement of the problem and its plans to fix it coupled with all of the other positive numbers, including increased earnings for at least the past 10 years, may make for a great buying opportunity.

P.S. It doesn’t hurt that Warren Buffett owns shares of WMT.

Learn more at:

http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-newsArticle&ID=1564457&highlight=

David Einhorn’s Greenlight Capital Inc. has bought in to Best Buy (BBY), and you might be wise to buy in yourself.  Best Buy is the first thought in minds of many when considering almost any electronic product.  They offer a membership rewards program, and they have an incredibly knowledgeable staff.  If you have ever been to a Best Buy then you know that staff is also great at selling.  They have you walking out with the product you came for, the sweet new accessories, and the warranty.

Best Buy’s financials present a company that may be undervalued.  Closing the day at $32.13, BBY is trading at a P/E ratio of just 10.43, well below the average for the S&P.  Return on equity is at an attractive %19.16.  The company has been increasing revenue for the last ten years, but that has not always led to an increase in earnings per share.  This is because selling/general/administrative expenses have also been increasing, sometimes at a faster rate.  This being said, I expect Best Buy to continue to increase revenue, and I expect that to eventually lead to an increase in stock price.

For more information visit:

http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=IROL-IRhome

What do rich people have that poor people do not? MONEY! Ever heard the phrase “Cash is king?” Or what about “It takes money to make money?” Well I’ve got news for you—both statements are true. This in no way means that cash is the best investment. Overtime, cash cannot keep up with more aggressive investing methods. The point of this post is that it is important to save, and it is important to have liquid savings. When it comes to being comfortable financially, money is what it’s all about. Money is what allows you to buy all of the things you want and need. This is why saving is so important.

Every month we have bills, such as rent, utilities, and cellphone. Everyone has a list of bills that must be paid each month before money can be expended on other, less necessary expenses, such as the newest video game. The one entity that never seems to be on people’s “must pay first list” is themselves. This section is dedicated to showing you why it is important to make paying yourself a priority each month. A future post about budgeting will show you how to find more money to save each month. For now, we want to focus on why it is important to save and some of the best methods for saving.

We have already established that, for the most part, it takes money to make money (it at the very least makes it a lot easier). And generally, the more money you have the more money you can make. Ever heard the saying the rich get richer? This one is definitely true. So, what is our goal? We want to save as much of our income as possible. This gives us more money to allocate to our different investment vehicles. These investment vehicles are where our dollars work to make us money without us having to trade our time for it. The only investment vehicles we will talk about in this post are cash equivalent vehicles.

To understand why saving is so critical to our financial success, we must first understand the idea of compounding. Compounding is defined as “the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings” (http://www.investopedia.com/terms/c/compounding.asp). Let’s make this clearer with a story demonstrating the power of compounding.

Let’s imagine that you are sitting at home one day when you hear a knock at your door. You answer the door, and there is a young girl, Sara, standing in her girl scout outfit. She tells you that she is trying to raise money for her girl scout troop. The girl scouts are going to run for three days and are collecting donations per mile. She tells you that it is one cent for the first mile and then double every mile after that. The young girl tells you that she intends to run thirty miles and asks if you would sponsor her. “Sure” you say. What’s a couple dollars for a good cause? Well, you better have some deep pockets. Because of compounding, you just made a very generous donation.

For the first mile that Sara runs, you owe a penny to the girl scouts. That’s no problem. You can probably find a penny on the sidewalk. The second mile costs twice as much as the first, so it is worth two cents. This is still no strain on the wallet. You probably have a couple pennies under your couch cushion. The pattern continues and the third mile is worth four cents. The fourth and fifth miles are worth eight and sixteen cents, respectively. We still aren’t concerned. I mean, I have a quarter in my pocket right now to cover all of this and still have nine cents in my pocket. Let’s see how good your math skills are. If after five miles the total is sixteen cents, what is it after eight miles? Did you get $1.28? I hope so…otherwise, you might need to go grab a calculator. So after eight miles we have gone from one cent to one dollar and twenty-eight cents. I know what you’re thinking. A dollar twenty-eight? That’s less than just selling a box of cookies. Well, let’s see what you think after a few more miles.

If we skip ahead seven miles to fifteen, we are now committed to donating $163.84. WHAT?? We were just talking about some pocket change a few miles ago. Now we are at $163.84? Are you starting to see the power of compounding? You think that seven miles was a big jump, well do you remember the phrase the rich keep getting richer? Let’s skip ahead just five more miles. After twenty miles, you will be scheduled to contribute $5,242.88 to your local girl scout troop. Add five more miles and you will not believe what you have gotten yourself into. After twenty-five miles, you owe $167,772.16. WOW! The girl scouts are probably going to name a building after you. I am sure you get the point. Money compounding can really really add up. Finally after Sara completes thirty miles, you can write a check for $5,368,709.12. That’s right. Five million three hundred sixty-eight thousand seven hundred and nine dollars and twelve cents. You’ve just put the whole troop through undergrad and medical school.

Do you see the amazing power of compounding? We started this whole thing with a lousy penny. The point is, start saving now. No matter how little you have to put away, it is worth it to begin saving immediately. The longer you have your money working for you, the more it will compound and the more you will gain. What if Sara would have waited five miles to begin saving? She would have ended up with $167,772.16 instead of $5,368,709.12. The same point can be made for spending money. What if after fifteen miles Sara would have spent her money. She would have cashed out at only $163.84.

As you can see from the example, when you first start, it may seem like you are barely making progress because your savings account isn’t going to compound at 100% like the girl scout example. However, if you stick with it, your money will grow and eventually amount to a number of which you are very proud.  Are you ready to prosper?

Bank Savings Account

The first cash account we will talk about is the regular bank savings account. This is a very easy place to begin saving your money. The account is located at your local bank, you can easily make deposits to it, you can access it with online banking, and it gives you a way to keep your savings separated from your regular spending money. There are some other benefits a regular savings account.

Another benefit of these accounts is that they are FDIC insured. FDIC is an acronym that stands for Federal Deposit Insurance Company. It was created in 1933 to protect bank customers in the event of bank failures (www.fdic.gov). If an FDIC insured bank does fail, bank customers’ money will be protected as long as it is within the FDIC limit (currently $250,000 per signer on the account).

One more benefit of regular savings accounts is the easy access to your money. You are able to pull money out of your account at an ATM or teller window if there is an emergency that requires you to tap into your savings. Also, savings accounts pay interest, which means your money will compound helping you make even more money (for more on this see the post for Sunday, June 13th). The best part of this is that you receive these interest payments without incurring any risk. This means there is no chance of you losing the money you have put in the account. This is by far the best attribute of a regular savings account.

The downside to these accounts is that the interest rates are usually minuscule. If we are able to find an investment vehicle that gives us easy access to our money, is protected by the FDIC, and pays a higher interest rate than a regular savings account, then why would we not participate in it? I can’t think of a reason. If two investments are totally equal with the exception of the interest rate, it would be foolish to not choose the investment with the higher interest rate. This is why I prefer the money market savings account over the regular savings account.

Money Market Savings Account

For the most part, a money market account works like a savings account. The reason I prefer the money market account is quite simple…..it pays more interest. Also, all of the money market accounts I have seen accrue interest daily and pay interest monthly. This is great for compounding because each month you have more money earning interest than you did the month before.

Another great benefit of the money market account is that they are readily available from institutions that are insured by the FDIC. Like the regular savings account, we know that we are protected in the event of a bank failure.

So, we have found an account that offers more interest than a regular savings account with the same amount of risk….sounds like a no-brainer to me. But like all financial decisions we make, we need to make sure this is not one of those too good to be true situations. So we have established that with money market accounts we will receive more interest on the money we keep with the bank and FDIC protection makes our savings virtually risk free. What’s the catch? Well fortunately for us, the positives of the money market account far outweigh any negative aspects.

However, there are some restrictions. First, money market accounts usually require a minimum balance. This is usually somewhere between $500 and $5,000. The interest rate you receive generally increases as your balance increases. To see a table of Bank of America’s rates as of June 14, 2010, click the link below. http://www.bankofamerica.com/deposits/checksave/index.cfm?template=save_growthmoneymarket&context=tabpage_Rates_Fees

If you looked at the chart, you can clearly see that the more money you are willing to keep with the bank, the more interest the bank is willing to pay you. Banks make money by lending and charging interest on the loaned dollars. To be able to lend, they must have money available to loan out. This money comes from the deposits customers like us keep at the bank. Because we are helping the bank make money, the bank is willing to reward us for our deposits. However, if you fall below the minimum required balance, you will be charged a fee. Bank of America’s chart shows the rates for having less than $5,000 (the required minimum balance), and they will pay you that rate. However, they will charge you a monthly fee that is much greater than interest earned. Always be sure to ask a bank representative if there are any minimums or fees associated with the account you are considering.

The one other drawback to a money market account applies to almost all savings products. It is the withdrawal/transaction limit of the savings account. If you have a savings account, there will be a limit to how many times money can be removed from the account per billing cycle (usually 3 to 5 transactions). This includes withdraws, transfers from the account, and checks/debit card purchases from the account. In my opinion, this is not even close to enough reason to not have a money market account.

However, you should know and plan around the transaction limit. Since we know to use our credit card to make purchases and pay bills (see post from June 12th), the money market account could be used to make a single monthly credit card payment. That would allow you to earn the most interest on your money while still allowing you to remain below the withdraw limit. If you have enough savings to meet the minimum balance requirement, I would highly recommend the money market savings account. Take your time when choosing your account. I would suggest shopping around on the Internet for higher rates. You will often times see advertisements for “online banks” or banks with few or no branches. These banks greatly reduce their overhead expenses by not having physical branches. The lower expenses often allow these banks to pay a higher interest rate than their competitors with numerous branches.

Remember what we said earlier. If two accounts are the same except for the interest rate, choose the one with the higher interest rate.

Certificate of Deposit (CD)

A certificate of deposit (“CD”) is another savings instrument offered by many banks. Generally, I am not a huge fan of CDs. This is especially true for young people. As a young person, you are generally able to have more risk in your financial portfolio because if you make a mistake, you have time to recoup. Also, many young people have a support system (family) that allows them to take on more risk. I suggest if you have enough money to place in a CD, there are more lucrative places to put your money.

On the other hand, CDs can sometimes be a good instrument for seniors. Seniors often do not want to expose their savings to too much risk, but would like a higher return on their money. In this case a CD may be a reasonable choice. Like I said earlier, CDs are not my favorite savings vehicle. In fact, I have never put any money in a CD. The reason I don’t use this financial instrument is quite simple: limited access to my money.

That’s right. Most CDs require that you leave your money in the CD for a predetermined amount of time. Otherwise, you will be hit with an early withdrawal penalty. Listed below is how Wells Fargo describes certificates of deposit on the bank’s website:

How CDs Work

By depositing your money into a CD for a specific length of time (called a “term”) you lock in a higher rate. The longer your term, the higher your rate. You can withdraw your funds early if you need to, but there will be an early withdrawal fee. At term end, you have a seven-day grace period during which you can: 1.Let your CD renew automatically at the current rate — no need for you to do a thing 2.Withdraw all or part of your deposit 3.Select a new term 4.Make one additional deposit.

I think that pretty much sums it up. To me, the increase in interest rate for a CD is not enough to outweigh the limited access to my money. You may feel differently about it. Please let me know. I would be glad to hear opinions that differ from my own. As for now, my savings remains in a money market account.