By Walter Updegrave, Money Magazine senior editor
Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).
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NEW YORK (Money) -- Question: I'm planning to invest some money in the stock market, but I'm wondering whether I should buy mutual funds or individual stocks. Which do you think is better? And in the event I decide to go with stocks, which ones to you think are really good buys now? --Monique Thompson
Answer: The stocks vs. funds issue has always been a biggie for individual investors. But the question of whether you should go it alone or turn over your money to a mutual fund manager who'll invest it for you is even more critical today, if only because this uncertain economy and volatile market make the rewards for success and the cost of failure that much higher.
Clearly, the answer will vary from person to person, depending on such factors as how much money you have to invest, how well versed you are in the ways of the financial markets and how much time and effort you want to put into your finances.
It's also clear that each approach has advantages and drawbacks. With mutual funds, you get convenience, a diversified portfolio and the security of knowing that you have an experienced stock picker working full time on your behalf.
On the other hand, you have less control over your investments - not just which ones you choose, but when you recognize gains. That can be an issue when it comes to taxes. If the fund manager sells enough shares at a profit so that the fund has realized capital gains in a given year, you'll have to pay tax on a share of those gains even if you haven't sold shares of the fund (assuming you hold the fund in a taxable account).
If you decide to buy stocks on your own, you definitely have more control over what you own and when you sell. But you've also got to be willing to devote more time and attention to your investments.
So as I see it, the decision to go with stocks or funds comes down to a realistic assessment of how much you want to make your own investing decisions and your ability to handle that responsibility. Here are three questions you might ask yourself to help you with that assessment.
Am I willing (and able) to analyze companies' prospects? You don't have to be a rocket scientist to identify promising stocks. But you should be able to evaluate a company's finances. What sort of earnings growth is it likely to achieve? What's the value of its assets? Is it vulnerable because of a heavy debt load or a weakness in its product lineup?
But even that's not enough. You've also got to be able to assess whether it's selling at an attractive price. If a company has solid earnings and an impeccable balance sheet but is so popular that it's trading at a bloated share price, buying it may be an invitation to subpar returns.
There are many ways you can develop stock-picking skills. CNNMoney's Money 101section has easy-to-read lessons on everything from assessing stocks to putting together a portfolio. The American Association of Individual Investors also offers lots of information about stock investing [www.aaii.com/basics/] that's geared toward beginners, as does the Learn [www.weseed.com/learn/learn.html] section of relatively new site called WeSeed.
But until you at least familiarize yourself with the basics of stock investing, stick with funds (or at least keep all but a tiny portion of your money in funds).
Am I ready to devote the time and effort to monitor my holdings? As we know from recent experience, the investing world can change dramatically. I certainly don't want to suggest you need to be buying or selling stocks every time the market or the economy reverses course or the fortunes change for a company whose stock you own. But there may be times when you should react.
If a company's potential has dimmed, you may want to sell some or all of your shares and plow the proceeds into a firm that has a rosier future. Conversely, if one of your stocks has racked up such huge gains that it now represents an outsize percentage of your portfolio, you may consider selling some shares to avoid having too much riding on one stock.
There may also be times when you can turn the tax system to your advantage, say, by selling shares that are trading for less than you paid for them and then using the loss to trim your tax bill.
Keeping an eye on your portfolio and making occasional adjustments isn't a 24/7 job. But you should be prepared to spend at least a few hours a week tending to your holdings. If you're not disposed to put in that amount of time - and possibly more during periods of upheaval - then you're better off in funds, which generally require less attention.
Do I have enough money to make it worthwhile to choose stocks on my own? Here, mutual funds offer a clear advantage for most investors. By using a tool such as Morningstar's Fund Screener, you can easily find funds that allow you in for a minimum initial investment of as little as $500, even less in some cases. Many of the funds on our Money 70 list of recommended funds also require a minimum of $1,000 or less. And once you're in, you can typically add to your account in increments of $50 to $250.
If you want a reasonably diversified portfolio of stocks, on the other hand, you're talking about a much larger investment. You don't have to buy in round lots of 100 shares as was the case back in the day. But at the same tie you don't want brokerage commissions to eat up your returns. So even if you figure on paying a modest $10-per-transaction brokerage fee, you'd probably want to invest a minimum of $1,000 per stock in order to prevent your costs from exceeding 1% of the amount you invest. (Remember, you'll also have to pay a fee when you sell.) Assuming you'll need at least 20 stocks to create a balanced portfolio, you're talking about investing in the neighborhood of $20,000 to $25,000, if not more.
You can always invest smaller amounts, either initially or when adding shares. But the less you invest, the higher the percentage of your return that gets eaten up by brokerage fees.
One final tip: If you're relying on personal finance columnists or cable TV pundits for stock picks, then my feeling is that you probably shouldn't be in stocks at all.
The point to buying individual shares is that you think you bring something to the table that adds value and can boost your return - in-depth research, expertise at valuing securities, a sense of discipline that prevents you from buying or selling on emotion.
But if all you're going to do is buy on someone else's say so - in other words, substitute their judgment for yours - you'll save yourself a lot of time, energy and money by acknowledging that upfront and sticking to funds.
Thursday, May 28, 2009
Major GM bondholders OK revised deal
By Chris Isidore, CNNMoney.com senior writer
Detroit Three's survival report card
GM, Ford, and Chrysler, the former Big 3 now dwindled to the Detroit 3, have gone in such different directions they don't seem to be on the same planet - let alone the same city. Will they make it? Fortune grades each on its performance and prospects.
View photos
Quick Vote
Do you think the changes being made at Chrysler and General Motors will save the companies?
Yes, both of themOnly GMOnly ChryslerNeither or View resultsDETROIT'S DOWNFALL
Chrysler fate in judge's hands
Major GM bondholders OK revised deal
Visteon files for Chapter 11
Fiat was Chrysler's only option
Germany to shield Opel from GM bankruptcy
NEW YORK (CNNMoney.com) -- The Treasury Department and a committee of major bondholders at General Motors have reached a deal that could give creditors a larger stake in GM than previously offered as long as they agree not to fight the government's plans for a quick bankruptcy at GM.
The agreement, revealed in a Securities and Exchange Commission filing by GM (GM, Fortune 500) early Thursday, would essentially give the bondholders 10% of the company but also give them the rights to buy an additional 15% of the company's stock at a low price.
The deal is unlikely to allow GM to avoid bankruptcy, however. If anything, it might clear away potential obstacles to the government's plans to use bankruptcy as a way to turn around the nation's largest automaker.
As part of such a filing, GM would emerge with only its more profitable plants, brands, dealerships and contracts. GM's unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind in bankruptcy court.
According to Thursday's filing, the new offer is structured so that the assets of GM that would remain in bankruptcy would receive a 10% stake in a "new GM" that would be used to pay bondholders. The old GM would also technically receive the right to buy the 15% stake in the new company that emerges from bankruptcy.
In the original offer to bondholders, which was soundly rejected earlier this week, creditors would only receive a 10% stake in a new GM.
The filing also disclosed that GM will not repay the loans it has already received from the government or much of the additional federal aid it will get as part of the bankruptcy.
The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.
GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.
But more than $40 billion of federal help to GM will be converted into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase dramatically in value following an exit from bankruptcy.
A trust fund run by the United Auto Workers union would also have a 17.5% stake in the new GM, as well as the right to buy an additional 2.5% stake.
Detroit Three's survival report card
GM, Ford, and Chrysler, the former Big 3 now dwindled to the Detroit 3, have gone in such different directions they don't seem to be on the same planet - let alone the same city. Will they make it? Fortune grades each on its performance and prospects.
View photos
Quick Vote
Do you think the changes being made at Chrysler and General Motors will save the companies?
Yes, both of themOnly GMOnly ChryslerNeither or View resultsDETROIT'S DOWNFALL
Chrysler fate in judge's hands
Major GM bondholders OK revised deal
Visteon files for Chapter 11
Fiat was Chrysler's only option
Germany to shield Opel from GM bankruptcy
NEW YORK (CNNMoney.com) -- The Treasury Department and a committee of major bondholders at General Motors have reached a deal that could give creditors a larger stake in GM than previously offered as long as they agree not to fight the government's plans for a quick bankruptcy at GM.
The agreement, revealed in a Securities and Exchange Commission filing by GM (GM, Fortune 500) early Thursday, would essentially give the bondholders 10% of the company but also give them the rights to buy an additional 15% of the company's stock at a low price.
The deal is unlikely to allow GM to avoid bankruptcy, however. If anything, it might clear away potential obstacles to the government's plans to use bankruptcy as a way to turn around the nation's largest automaker.
As part of such a filing, GM would emerge with only its more profitable plants, brands, dealerships and contracts. GM's unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind in bankruptcy court.
According to Thursday's filing, the new offer is structured so that the assets of GM that would remain in bankruptcy would receive a 10% stake in a "new GM" that would be used to pay bondholders. The old GM would also technically receive the right to buy the 15% stake in the new company that emerges from bankruptcy.
In the original offer to bondholders, which was soundly rejected earlier this week, creditors would only receive a 10% stake in a new GM.
The filing also disclosed that GM will not repay the loans it has already received from the government or much of the additional federal aid it will get as part of the bankruptcy.
The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.
GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.
But more than $40 billion of federal help to GM will be converted into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase dramatically in value following an exit from bankruptcy.
A trust fund run by the United Auto Workers union would also have a 17.5% stake in the new GM, as well as the right to buy an additional 2.5% stake.
Sunday, May 24, 2009
So far, investors aren't fighting back to change CEO pay levels
By Rachel Beck, Associated Press
NEW YORK — This was the year corporate governance experts predicted that investors, stung by plunging stock prices as the recession intensified, would finally demand big changes in CEO pay levels and ineffective boards.
But so far during this spring's annual meeting season, there have been few examples of investors fighting back. Shareholders have yet to vote down a single executive pay plan at U.S. companies and only a handful of corporate directors have lost investor backing. Support for corporate management is still the status quo.
"It turns out (U.S.) shareholders may be more accepting of how things work than the perception really is," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
In contrast, five companies in England already have lost shareholder votes on executive pay this year. The latest came Tuesday when oil company Royal Dutch Shell Group's pay plan was rejected. There was also significant dissent, though not by a majority, at three other British companies, according to RiskMetrics, a financial risk management company.
That kind of activism comes six years after what is known as "say on pay" was first used by British shareholders. While those votes don't require boards to take any action, they still allow investors to make themselves heard.
NEW YORK — This was the year corporate governance experts predicted that investors, stung by plunging stock prices as the recession intensified, would finally demand big changes in CEO pay levels and ineffective boards.
But so far during this spring's annual meeting season, there have been few examples of investors fighting back. Shareholders have yet to vote down a single executive pay plan at U.S. companies and only a handful of corporate directors have lost investor backing. Support for corporate management is still the status quo.
"It turns out (U.S.) shareholders may be more accepting of how things work than the perception really is," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
In contrast, five companies in England already have lost shareholder votes on executive pay this year. The latest came Tuesday when oil company Royal Dutch Shell Group's pay plan was rejected. There was also significant dissent, though not by a majority, at three other British companies, according to RiskMetrics, a financial risk management company.
That kind of activism comes six years after what is known as "say on pay" was first used by British shareholders. While those votes don't require boards to take any action, they still allow investors to make themselves heard.
Friday, May 22, 2009
Largest bank failure of '09: Equity firms get BankUnited
WASHINGTON) (Reuters) — U.S. bank regulators Thursday closed troubled lender BankUnited Financial, Florida's largest bank, and sold its banking operations to a private equity consortium that includes WL Ross & Co.
BankUnited, which had $12.8 billion in assets and $8.6 billion in retail deposits, is the biggest of 34 U.S. banks to fail so far this year.
The Federal Deposit Insurance Corp. said it estimates BankUnited's failure will cost its insurance fund $4.9 billion.
The private equity group buying BankUnited is headed by John Kanas, a veteran of the banking industry and former head of North Fork Bank. Other members of the group, besides WL Ross & Co, include Carlyle Investment Management, Blackstone Capital Partners, and Centerbridge Capital Partners.
BankUnited's 86 offices will open on Friday during normal business hours, the FDIC said.
BankUnited is the largest failure since California-based Downey Savings & Loan was closed in November with $12.8 billion in assets.
The private equity group will recapitalize BankUnited with $900 million in new capital, the FDIC said.
The FDIC said selling the bank to the consortium was the least costly option and noted that "in the near future" it will provide general guidelines for how private equity investors can make investments in banks.
"Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments," the FDIC said in a statement.
Copyright 2009 Reuters Limited.
BankUnited, which had $12.8 billion in assets and $8.6 billion in retail deposits, is the biggest of 34 U.S. banks to fail so far this year.
The Federal Deposit Insurance Corp. said it estimates BankUnited's failure will cost its insurance fund $4.9 billion.
The private equity group buying BankUnited is headed by John Kanas, a veteran of the banking industry and former head of North Fork Bank. Other members of the group, besides WL Ross & Co, include Carlyle Investment Management, Blackstone Capital Partners, and Centerbridge Capital Partners.
BankUnited's 86 offices will open on Friday during normal business hours, the FDIC said.
BankUnited is the largest failure since California-based Downey Savings & Loan was closed in November with $12.8 billion in assets.
The private equity group will recapitalize BankUnited with $900 million in new capital, the FDIC said.
The FDIC said selling the bank to the consortium was the least costly option and noted that "in the near future" it will provide general guidelines for how private equity investors can make investments in banks.
"Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments," the FDIC said in a statement.
Copyright 2009 Reuters Limited.
Wednesday, May 20, 2009
Bank of America raises $13.5 billion selling stock
CHARLOTTE (AP) — Bank of America (BAC) said Tuesday that in less than two weeks it has raised $13.47 billion through the sale of 1.25 billion shares at an average price of $10.77 each.
"We're pleased to have this portion of our capital plan completed," said Chief Financial Officer Joe Price, in a statement Tuesday. "This strengthens and diversifies our capital structure."
The government recently released the results of "stress tests" it ran on the nation's 19 largest banks to determine if they would need additional capital to protect against losses should the economy worsen. It found that Bank of America would need an additional $33.9 billion, more than any other bank reviewed.
Bank of America launched a plan to raise the capital through asset sales and stock offers. It recently sold part of its stake in China Construction Bank to Asian investors for about $7.3 billion, which together with the stock sales, put the bank well past the halfway mark in its capital raising goals.
BofA executives have said they are mulling sales of the bank's Columbia asset management unit, as well as several other businesses. The bank previously said it planned to sell its First Republic Bank unit, which it inherited when it bought Merrill Lynch & Co. in January. Those sales could help raise $10 billion.
"We're pleased to have this portion of our capital plan completed," said Chief Financial Officer Joe Price, in a statement Tuesday. "This strengthens and diversifies our capital structure."
The government recently released the results of "stress tests" it ran on the nation's 19 largest banks to determine if they would need additional capital to protect against losses should the economy worsen. It found that Bank of America would need an additional $33.9 billion, more than any other bank reviewed.
Bank of America launched a plan to raise the capital through asset sales and stock offers. It recently sold part of its stake in China Construction Bank to Asian investors for about $7.3 billion, which together with the stock sales, put the bank well past the halfway mark in its capital raising goals.
BofA executives have said they are mulling sales of the bank's Columbia asset management unit, as well as several other businesses. The bank previously said it planned to sell its First Republic Bank unit, which it inherited when it bought Merrill Lynch & Co. in January. Those sales could help raise $10 billion.
Geithner expects banks to pay back $25 billion
By Jim Kuhnhenn, Associated Press Writer
WASHINGTON — Treasury SecretaryTimothy Geithner expects financial institutions to repay $25 billion of their government rescue loans in the coming year.
He also told the Senate Banking Committee Wednesday that a public-private partnership to help banks shed their bad assets will begin operating in the next six weeks.
The program would combine up to $100 billion in government money with private investments in hopes of building a purchasing pool of up to $1 trillion.
Bank lending has in part been hindered by the amount of real estate-related loans and securities on banks' balance sheets. Treasury has received applications from more than 100 potential fund managers to help run the program. Geithner says Treasury will inform applicants of their preliminary approval in the "next several weeks."
The program was announced March 23 and some lawmakers have questioned why the program is not yet up and running.
WASHINGTON — Treasury SecretaryTimothy Geithner expects financial institutions to repay $25 billion of their government rescue loans in the coming year.
He also told the Senate Banking Committee Wednesday that a public-private partnership to help banks shed their bad assets will begin operating in the next six weeks.
The program would combine up to $100 billion in government money with private investments in hopes of building a purchasing pool of up to $1 trillion.
Bank lending has in part been hindered by the amount of real estate-related loans and securities on banks' balance sheets. Treasury has received applications from more than 100 potential fund managers to help run the program. Geithner says Treasury will inform applicants of their preliminary approval in the "next several weeks."
The program was announced March 23 and some lawmakers have questioned why the program is not yet up and running.
Stocks inch higher as oil jumps
By Tim Paradis, AP Business Writer
NEW YORK — Investors' optimism about the nation's banks wavered Wednesday, erasing most of a big early advance, but energy stocks showed some of the biggest gains after oil topped $62 a barrel for the first time since November.
Financials turned mixed after enthusiasm about Bank of America's ability to raise billions of dollars by selling stock couldn't erase fears that banks are still a long way from scrubbing all the stains off their balance sheets.
Bank of America's stock sale puts it more than halfway toward raising the $33.9 billion in capital the government is requiring as a result of its stress test of 19 big banks. The company already raised $7.3 billion from the sale of a business in Asia since the government issued its report cards for banks on May 7.
NEW YORK — Investors' optimism about the nation's banks wavered Wednesday, erasing most of a big early advance, but energy stocks showed some of the biggest gains after oil topped $62 a barrel for the first time since November.
Financials turned mixed after enthusiasm about Bank of America's ability to raise billions of dollars by selling stock couldn't erase fears that banks are still a long way from scrubbing all the stains off their balance sheets.
Bank of America's stock sale puts it more than halfway toward raising the $33.9 billion in capital the government is requiring as a result of its stress test of 19 big banks. The company already raised $7.3 billion from the sale of a business in Asia since the government issued its report cards for banks on May 7.
Monday, May 18, 2009
Geithner's gift to Wall Street
By William D. Cohan, contributor
Last Updated: May 18, 2009: 10:39 AM ET
Related
Geithner to rein in derivatives
The rich get richer on Wall Street
More from Fortune
The credit card company everybody hates
NEW YORK (Fortune) -- Imagine if you were not really in the market for a house but the government came along and said that it would finance 94% of a home's purchase price with a mortgage rate of less than 3%. Still not interested? Wait, Uncle Sam has some additional sweeteners: if you do the deal and buy the house for only 6% down, you also get the equivalent of rental income every month to the tune of at least an annualized yield of 10% of the purchase price.
But wait there's still more: if, say, after two years, you decide you don't want the house any longer, you can just walk away from it. No need to pay the balance of the mortgage (it won't affect your credit rating), and you can keep the rental income received to date.
That's essentially the deal that Treasury Secretary Timothy Geithner has offered qualified professional investors who participate in the so-called TALF (Term Asset-Backed Securities Loan Facility). Two months into the program as the first TALF- backed deals hit the market, you can see why the likes of hedge fund Fortress Investment Group are drooling over it. "I'm a big believer in the impact that TALF can and should have," Fortress CEO Wes Edens said on a May 6 investor call, adding that he expects that Fortress will be "a big participant" in the TALF program "three to six months from now."
0:00 /24:35Geithner opens up
The first few TALF deals -- one for Ford Credit (the financing arm of the automaker), another for American Honda Receivables Corp., a third for the student loan company Sallie Mae and a fourth for motorcycle icon Harley Davidson -- shed some light on our tax dollars at work.
"I've had accounts that dropped everything they were doing to take a look at this TALF financing," one Wall Street trader explained. "It was like nothing they had ever seen. It beats any financing that the private sector could ever come up with. I almost want to say it is irresponsible." For instance, Prudential Financial, Inc. (PRU, Fortune 500), the large insurer and investment manager, borrowed $786 million from the TALF as of March 31 and put up only $50 million to do so, some 6.4% of the deals.
In case you're not totally conversant with the alphabet soup of financial remedies emanating from the Obama Administration, here's a brief refresher: Geithner and the Federal Reserve announced the launch of the TALF in March. The TALF is a $200 billion (on its way to $1 trillion) non-recourse lending program to private investors as a way to encourage them to buy newly underwritten securities backed by auto loans, credit-card receivables and student loans, among other asset classes. (The TALF program is set to extend, in June, to the issue of new commercial real-estate mortgage-backed securities.)
These securitizations were once upon a time a key component of the so-called "shadow" financing system that helped raise trillions of dollars of capital worldwide. Of course, the securitization and sale of mortgage-backed securities was one of the leading causes of the current financial crisis as the people who took out the underlying mortgages started to default upon them in unexpected numbers. Still, Geithner has determined, correctly, that getting these securities circulating again is crucial to restoring the health of the credit markets. The Treasury designed the program, but it is the Federal Reserve that provides the government's share of the capital. "The increase in the TALF is expected to help stimulate both new issuances and the removal of assets from bank balance sheets," Credit Suisse wrote to its shareholders on May 8.
Investors interested in borrowing from the TALF program have to be approved by the Treasury and then, once approved, have to set up an account with a broker-dealer that is subject to a variety of the usual terms and conditions. The investor then must indicate a desire to buy, say, at least $10 million of one of the dozen or so deals, worth an aggregate of around $25 billion, which have come to market since the TALF program was set up in March. An early test for TALF was a May 5, $1.5 billion car-receivables securitization for American Honda Receivables Corp. and underwritten by JPMorgan Securities (JPM, Fortune 500) and BNP Paribas Securities. Investor demand for the deals so far is said by one trader to be "strong" and the deals are selling well. The real market test, though, of TALF will come when the first deals involving CMBS (Commercial Mortgage Backed Securities) start coming to market in the next few months.
The way the TALF works in practice is this: The amount of equity an investor has to put up, or the "haircut" as the TALF documents call it, depends upon the assets involved, the term of the loan or lease of the underlying asset (say, a car) and the credit quality of the underlying borrower. A loan to buy a three-year security backed by a group of credit-card receivables from high-quality borrowers would require an investor to put up 6% of the capital -- a 6% "haircut" -- and then can borrow the rest from the TALF through his brokerage account. To buy a two-year high-quality credit-card receivable security, a borrower would put up 5% of the face amount of the securities purchased. Auto receivables require as 12% equity investment for a three-year security. Small business loans require 5% down. Student loans require 10% down for a three-year deal.
An investor interested in a $10 million slice of three-year credit card receivable would put up 6% of the money -- $600,000 -- and borrow the balance of $9.4 million from the TALF at a rate of three-year LIBOR plus 100 basis points (Attention K-Mart shoppers, that's 2.85% at this moment.) Depending on all sorts of assumptions, the yields on these investments are said to be in the 11% to 15% range, especially attractive since the TALF loans are non-recourse to the borrowers -- you can just walk away and lose only your underlying equity investment and the collateral but you are not held responsible for the unpaid portion of the TALF loan itself.
In addition, the TALF loan is not marked-to-market so if the underlying collateral deteriorates in value, the investor is not required to put up more equity. What's more as the car payments or credit-card payments on the underlying security are made, the payments are distributed to the government and the investor on equal footing -- that means the investor starts getting paid back at the same time as the government even though the government is the senior secured creditor and even though an investor has put up only a small fraction of the original money. One private equity investor, who would not normally have looked at investing in such a deal but did, called this particular aspect of the TALF "shockingly good."
But who will the TALF deals be shockingly good for -- the players on the field or those of us in the bleachers? If what Geithner calls "our lending facility with the Fed" does its job and jumpstarts the credit markets then the extraordinary concessions the government has made to attract private capital may have been worth it.
William Cohan is the author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, published this month by Doubleday Books, a division of Random House, Inc.
Last Updated: May 18, 2009: 10:39 AM ET
Related
Geithner to rein in derivatives
The rich get richer on Wall Street
More from Fortune
The credit card company everybody hates
NEW YORK (Fortune) -- Imagine if you were not really in the market for a house but the government came along and said that it would finance 94% of a home's purchase price with a mortgage rate of less than 3%. Still not interested? Wait, Uncle Sam has some additional sweeteners: if you do the deal and buy the house for only 6% down, you also get the equivalent of rental income every month to the tune of at least an annualized yield of 10% of the purchase price.
But wait there's still more: if, say, after two years, you decide you don't want the house any longer, you can just walk away from it. No need to pay the balance of the mortgage (it won't affect your credit rating), and you can keep the rental income received to date.
That's essentially the deal that Treasury Secretary Timothy Geithner has offered qualified professional investors who participate in the so-called TALF (Term Asset-Backed Securities Loan Facility). Two months into the program as the first TALF- backed deals hit the market, you can see why the likes of hedge fund Fortress Investment Group are drooling over it. "I'm a big believer in the impact that TALF can and should have," Fortress CEO Wes Edens said on a May 6 investor call, adding that he expects that Fortress will be "a big participant" in the TALF program "three to six months from now."
0:00 /24:35Geithner opens up
The first few TALF deals -- one for Ford Credit (the financing arm of the automaker), another for American Honda Receivables Corp., a third for the student loan company Sallie Mae and a fourth for motorcycle icon Harley Davidson -- shed some light on our tax dollars at work.
"I've had accounts that dropped everything they were doing to take a look at this TALF financing," one Wall Street trader explained. "It was like nothing they had ever seen. It beats any financing that the private sector could ever come up with. I almost want to say it is irresponsible." For instance, Prudential Financial, Inc. (PRU, Fortune 500), the large insurer and investment manager, borrowed $786 million from the TALF as of March 31 and put up only $50 million to do so, some 6.4% of the deals.
In case you're not totally conversant with the alphabet soup of financial remedies emanating from the Obama Administration, here's a brief refresher: Geithner and the Federal Reserve announced the launch of the TALF in March. The TALF is a $200 billion (on its way to $1 trillion) non-recourse lending program to private investors as a way to encourage them to buy newly underwritten securities backed by auto loans, credit-card receivables and student loans, among other asset classes. (The TALF program is set to extend, in June, to the issue of new commercial real-estate mortgage-backed securities.)
These securitizations were once upon a time a key component of the so-called "shadow" financing system that helped raise trillions of dollars of capital worldwide. Of course, the securitization and sale of mortgage-backed securities was one of the leading causes of the current financial crisis as the people who took out the underlying mortgages started to default upon them in unexpected numbers. Still, Geithner has determined, correctly, that getting these securities circulating again is crucial to restoring the health of the credit markets. The Treasury designed the program, but it is the Federal Reserve that provides the government's share of the capital. "The increase in the TALF is expected to help stimulate both new issuances and the removal of assets from bank balance sheets," Credit Suisse wrote to its shareholders on May 8.
Investors interested in borrowing from the TALF program have to be approved by the Treasury and then, once approved, have to set up an account with a broker-dealer that is subject to a variety of the usual terms and conditions. The investor then must indicate a desire to buy, say, at least $10 million of one of the dozen or so deals, worth an aggregate of around $25 billion, which have come to market since the TALF program was set up in March. An early test for TALF was a May 5, $1.5 billion car-receivables securitization for American Honda Receivables Corp. and underwritten by JPMorgan Securities (JPM, Fortune 500) and BNP Paribas Securities. Investor demand for the deals so far is said by one trader to be "strong" and the deals are selling well. The real market test, though, of TALF will come when the first deals involving CMBS (Commercial Mortgage Backed Securities) start coming to market in the next few months.
The way the TALF works in practice is this: The amount of equity an investor has to put up, or the "haircut" as the TALF documents call it, depends upon the assets involved, the term of the loan or lease of the underlying asset (say, a car) and the credit quality of the underlying borrower. A loan to buy a three-year security backed by a group of credit-card receivables from high-quality borrowers would require an investor to put up 6% of the capital -- a 6% "haircut" -- and then can borrow the rest from the TALF through his brokerage account. To buy a two-year high-quality credit-card receivable security, a borrower would put up 5% of the face amount of the securities purchased. Auto receivables require as 12% equity investment for a three-year security. Small business loans require 5% down. Student loans require 10% down for a three-year deal.
An investor interested in a $10 million slice of three-year credit card receivable would put up 6% of the money -- $600,000 -- and borrow the balance of $9.4 million from the TALF at a rate of three-year LIBOR plus 100 basis points (Attention K-Mart shoppers, that's 2.85% at this moment.) Depending on all sorts of assumptions, the yields on these investments are said to be in the 11% to 15% range, especially attractive since the TALF loans are non-recourse to the borrowers -- you can just walk away and lose only your underlying equity investment and the collateral but you are not held responsible for the unpaid portion of the TALF loan itself.
In addition, the TALF loan is not marked-to-market so if the underlying collateral deteriorates in value, the investor is not required to put up more equity. What's more as the car payments or credit-card payments on the underlying security are made, the payments are distributed to the government and the investor on equal footing -- that means the investor starts getting paid back at the same time as the government even though the government is the senior secured creditor and even though an investor has put up only a small fraction of the original money. One private equity investor, who would not normally have looked at investing in such a deal but did, called this particular aspect of the TALF "shockingly good."
But who will the TALF deals be shockingly good for -- the players on the field or those of us in the bleachers? If what Geithner calls "our lending facility with the Fed" does its job and jumpstarts the credit markets then the extraordinary concessions the government has made to attract private capital may have been worth it.
William Cohan is the author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, published this month by Doubleday Books, a division of Random House, Inc.
Wednesday, May 13, 2009
Stock selloff accelerates
Dow sinks 200 points; Nasdaq, S&P 500 drop almost 3%. Reports show weaker-than-expected consumer spending and a big jump in foreclosures.
By Alexandra Twin, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- A stock selloff gained steam Wednesday afternoon, with the S&P 500 sliding for the third session in a row, as weaker retail sales and a report showing a big number of foreclosures gave investors a reason to retreat.
The Dow Jones industrial average (INDU) lost 200 points, or 2.4%, with under 2-1/2 hours left in the session. The S&P 500 (SPX) index fell 25 points, or 2.7%. The Nasdaq composite (COMP) dropped 48 points, or 2.8%.
The worse-than-expected retail sales was dragging on stocks, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. He said investors were also a little jittery about the bevy of banks rushing to raise capital to pay back the government bailout money they received.
Detrick said that over the last two years, when the monthly retail sales report missed forecasts, the S&P 500 generally closed more than 1% lower on the session.
"We were due for a pause here and with questions about the consumer and the banks, investors are finding an excuse to take some profits," he said.
Stocks seesawed Tuesday as investors showed caution after a roughly 2-month rally that propelled all the major stock gauges by at least 30%. That hesitation remained in place Wednesday.
Stocks have risen since early March on bets that the economy is close to turning a corner. But April reports on retail sales and the housing market threw such bets into question.
Economy: Retail sales fell 0.4% in April, according to a report from the Commerce Department released before the market open. Sales were expected to hold steady, according to a consensus of economists surveyed by Briefing.com. Sales fell a revised 1.3% in March.
Sales excluding volatile autos fell 0.5% in April, after dropping 1.2% in the previous month. Economists forecasts had called for a rise of 0.2%.
The number of U.S. households facing foreclosure jumped 32% in April versus a year ago, according to RealtyTrac. More than 342,000 homes received notices of default in the month, up 1% from March.
In other economic news, March business inventories fell 1% after falling 1.4% in the previous month. Economists expected inventories to have fallen 1.1%.
Company news: AIG (AIG, Fortune 500) shares slipped as the company's CEO discussed restructuring plans at a House hearing about how the company plans to pay back billions in government loans.
In other news, Intel (INTC, Fortune 500) was fined a record $1.45 billion by the European Union for allegedly anti competitive practices, a decision the chipmaker plans to appeal. Shares were little changed.
Freddie Mac (FRE, Fortune 500) posted a $9.9 billion quarterly loss after the market close Tuesday and also asked the government for another $6.1 billion in aid.
GM (GM, Fortune 500) shares continued to slide on concerns that it will have to file for bankruptcy, with the stock touching $1 per share, the lowest level since 1933.
Market breadth was negative. On the New York Stock Exchange, losers topped winners six to one on volume of 690 million shares. On the New York Stock Exchange, decliners beat advancers four to one on volume of 1.09 billion shares.
By Alexandra Twin, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- A stock selloff gained steam Wednesday afternoon, with the S&P 500 sliding for the third session in a row, as weaker retail sales and a report showing a big number of foreclosures gave investors a reason to retreat.
The Dow Jones industrial average (INDU) lost 200 points, or 2.4%, with under 2-1/2 hours left in the session. The S&P 500 (SPX) index fell 25 points, or 2.7%. The Nasdaq composite (COMP) dropped 48 points, or 2.8%.
The worse-than-expected retail sales was dragging on stocks, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. He said investors were also a little jittery about the bevy of banks rushing to raise capital to pay back the government bailout money they received.
Detrick said that over the last two years, when the monthly retail sales report missed forecasts, the S&P 500 generally closed more than 1% lower on the session.
"We were due for a pause here and with questions about the consumer and the banks, investors are finding an excuse to take some profits," he said.
Stocks seesawed Tuesday as investors showed caution after a roughly 2-month rally that propelled all the major stock gauges by at least 30%. That hesitation remained in place Wednesday.
Stocks have risen since early March on bets that the economy is close to turning a corner. But April reports on retail sales and the housing market threw such bets into question.
Economy: Retail sales fell 0.4% in April, according to a report from the Commerce Department released before the market open. Sales were expected to hold steady, according to a consensus of economists surveyed by Briefing.com. Sales fell a revised 1.3% in March.
Sales excluding volatile autos fell 0.5% in April, after dropping 1.2% in the previous month. Economists forecasts had called for a rise of 0.2%.
The number of U.S. households facing foreclosure jumped 32% in April versus a year ago, according to RealtyTrac. More than 342,000 homes received notices of default in the month, up 1% from March.
In other economic news, March business inventories fell 1% after falling 1.4% in the previous month. Economists expected inventories to have fallen 1.1%.
Company news: AIG (AIG, Fortune 500) shares slipped as the company's CEO discussed restructuring plans at a House hearing about how the company plans to pay back billions in government loans.
In other news, Intel (INTC, Fortune 500) was fined a record $1.45 billion by the European Union for allegedly anti competitive practices, a decision the chipmaker plans to appeal. Shares were little changed.
Freddie Mac (FRE, Fortune 500) posted a $9.9 billion quarterly loss after the market close Tuesday and also asked the government for another $6.1 billion in aid.
GM (GM, Fortune 500) shares continued to slide on concerns that it will have to file for bankruptcy, with the stock touching $1 per share, the lowest level since 1933.
Market breadth was negative. On the New York Stock Exchange, losers topped winners six to one on volume of 690 million shares. On the New York Stock Exchange, decliners beat advancers four to one on volume of 1.09 billion shares.
A billion reasons to charge for luggage
The money-losing airline industry reaped more than $1 billion last year from excess baggage fees
By Aaron Smith, CNNMoney.com staff writer
Quick Vote
How is the paycheck stimulus tax break affecting your economic situation?
It's helpfulIt's not a big dealI don't get the break or View results
NEW YORK (CNNMoney.com) -- The round of baggage fees that came last year may have annoyed the heck out of customers, but according to government figures, they were a billion-dollar lifesaver for cash-strapped airlines.
Baggage fees from the U.S. airline industry totaled $1.15 billion in 2008, according to the U.S. Department of Transportation.
0:00 /Airline earnings grounded
Traditionally, airlines would not charge for the first two pieces of checked luggage unless they exceeded weight limitation. But in February of 2008, United Airlines, owned by UAL Corp., (UAUA, Fortune 500) began charging $25 for the second checked bag. In July of that year, US Airways (LCC, Fortune 500) started charging $15 for the first checked bag.
Many of the competing airlines followed suit. This was in addition to a whole host of other fees for once-free services and products, such as meals, snacks and non-alcoholic drinks, as well as ordering tickets via phone and redeeming flight miles.
American Airlines, owned by AMR Corp., (AMR, Fortune 500) topped the industry, according to the DOT, gleaning $278 million in baggage fees during 2008, followed by US Airways, with $187 million, and Delta Air Lines (DAL, Fortune 500), with $177 million. The baggage fees for United Airlines totaled $133 million last year, while Northwest (which merged with Delta in 2008) totaled $121 million and Continental Airlines (CAL, Fortune 500) made $97 million.
Southwest Airlines (LUV, Fortune 500), which avoided much financial hardship through successful hedging of fuel prices, totaled $25 million in excess baggage fees in 2008, the DOT said, the least among the seven major carriers. Southwest promotes itself as not charging excessive fees.
"I am positive consumers don't like the fees but they have little choice other than to change their behavior," said Rick Seaney, chief executive of Farecompare.com. "Southwest is the lone holdout on this point."
Seaney was speaking from the A-La-Carte Pricing Conference in Miami on Tuesday. The conference host, a company called Airline Information, estimates that excess luggage fees could total $3.5 billion in 2009.
"2008 was only a partial year for bag fees," said Seaney. "These numbers will be up dramatically in 2009 and are here to stay even though the justification to add these fees was related to the run up in fuel prices early last year."
0:00 /2:05United's new 'big' policy
While the added charges have fueled resentment among some passengers, airlines blamed the price of fuel, which escalated to unprecedented levels. In the U.S.-based airline industry, fuel costs averaged more than 30% of all operating costs in 2008, according to the DOT, compared with five years before, when it was 14%. But while fuel prices in 2009 have come way down off their highs, the fees are still there.
"We think the passengers are being gouged by these baggage fees," said David Stempler, president of the Air Travelers Association, an advocate for passengers. "They initially came into effect from the high fuel costs. But since the fuel costs have fallen off, they haven't rescinded these fees."
A decline in business and vacation travel stemming from the recent recession has also posed serious threats to the industry, which has met the drop in demand by cutting capacity in scaling back its least fuel-efficient flights.
David Castelveter, spokesman for the Air Transport Association, an airline industry group, defended the baggage fees as necessary to the survival of a money-losing industry.
"The first quarter for the industry is still a multi-billion dollar loss," said Castelveter. "I don't know of a business model that calls for a company to lose money. I fail to understand why the industry is demonized for trying to return to profitability."
Castelveter also said the "a la carte" nature of the baggage fees favors the light travelers who don't have to "subsidize" the passengers with lots of luggage.
Harlan Platt, a finance professor at Northeastern University College of Administration in Boston who follows the airline industry, said that a checked bag costs an airline $15 on average, so the fees are designed to alleviate that cost.
"It's hard to argue with user fees," he said. "Why should a guy who's not bringing luggage on the plane pay for the guy who's bringing too many bags?"
Stempler disagreed. He said that travelers have limited control over their luggage-toting behavior, considering certain restrictions, like those applying to liquids.
"Passengers can't always carry their luggage on board because of the strict [Transportation Security Administration] rules," he said.
First Published: May 12, 2009: 12:04 PM ET
By Aaron Smith, CNNMoney.com staff writer
Quick Vote
How is the paycheck stimulus tax break affecting your economic situation?
It's helpfulIt's not a big dealI don't get the break or View results
NEW YORK (CNNMoney.com) -- The round of baggage fees that came last year may have annoyed the heck out of customers, but according to government figures, they were a billion-dollar lifesaver for cash-strapped airlines.
Baggage fees from the U.S. airline industry totaled $1.15 billion in 2008, according to the U.S. Department of Transportation.
0:00 /Airline earnings grounded
Traditionally, airlines would not charge for the first two pieces of checked luggage unless they exceeded weight limitation. But in February of 2008, United Airlines, owned by UAL Corp., (UAUA, Fortune 500) began charging $25 for the second checked bag. In July of that year, US Airways (LCC, Fortune 500) started charging $15 for the first checked bag.
Many of the competing airlines followed suit. This was in addition to a whole host of other fees for once-free services and products, such as meals, snacks and non-alcoholic drinks, as well as ordering tickets via phone and redeeming flight miles.
American Airlines, owned by AMR Corp., (AMR, Fortune 500) topped the industry, according to the DOT, gleaning $278 million in baggage fees during 2008, followed by US Airways, with $187 million, and Delta Air Lines (DAL, Fortune 500), with $177 million. The baggage fees for United Airlines totaled $133 million last year, while Northwest (which merged with Delta in 2008) totaled $121 million and Continental Airlines (CAL, Fortune 500) made $97 million.
Southwest Airlines (LUV, Fortune 500), which avoided much financial hardship through successful hedging of fuel prices, totaled $25 million in excess baggage fees in 2008, the DOT said, the least among the seven major carriers. Southwest promotes itself as not charging excessive fees.
"I am positive consumers don't like the fees but they have little choice other than to change their behavior," said Rick Seaney, chief executive of Farecompare.com. "Southwest is the lone holdout on this point."
Seaney was speaking from the A-La-Carte Pricing Conference in Miami on Tuesday. The conference host, a company called Airline Information, estimates that excess luggage fees could total $3.5 billion in 2009.
"2008 was only a partial year for bag fees," said Seaney. "These numbers will be up dramatically in 2009 and are here to stay even though the justification to add these fees was related to the run up in fuel prices early last year."
0:00 /2:05United's new 'big' policy
While the added charges have fueled resentment among some passengers, airlines blamed the price of fuel, which escalated to unprecedented levels. In the U.S.-based airline industry, fuel costs averaged more than 30% of all operating costs in 2008, according to the DOT, compared with five years before, when it was 14%. But while fuel prices in 2009 have come way down off their highs, the fees are still there.
"We think the passengers are being gouged by these baggage fees," said David Stempler, president of the Air Travelers Association, an advocate for passengers. "They initially came into effect from the high fuel costs. But since the fuel costs have fallen off, they haven't rescinded these fees."
A decline in business and vacation travel stemming from the recent recession has also posed serious threats to the industry, which has met the drop in demand by cutting capacity in scaling back its least fuel-efficient flights.
David Castelveter, spokesman for the Air Transport Association, an airline industry group, defended the baggage fees as necessary to the survival of a money-losing industry.
"The first quarter for the industry is still a multi-billion dollar loss," said Castelveter. "I don't know of a business model that calls for a company to lose money. I fail to understand why the industry is demonized for trying to return to profitability."
Castelveter also said the "a la carte" nature of the baggage fees favors the light travelers who don't have to "subsidize" the passengers with lots of luggage.
Harlan Platt, a finance professor at Northeastern University College of Administration in Boston who follows the airline industry, said that a checked bag costs an airline $15 on average, so the fees are designed to alleviate that cost.
"It's hard to argue with user fees," he said. "Why should a guy who's not bringing luggage on the plane pay for the guy who's bringing too many bags?"
Stempler disagreed. He said that travelers have limited control over their luggage-toting behavior, considering certain restrictions, like those applying to liquids.
"Passengers can't always carry their luggage on board because of the strict [Transportation Security Administration] rules," he said.
First Published: May 12, 2009: 12:04 PM ET
Wednesday, May 6, 2009
Will 'world's best job' earn tourism dollars?
(CNN) -- The "best job in the world" contest has generated huge interest around the globe, but the jury is out on whether that will translate into more tourism dollars for Queensland, Australia.
Ben Southall will move into a three-bedroom beach home overlooking the Great Barrier Reef.
"That's the million dollar question," said Anthony Hayes, CEO of Tourism Quensland, which sponsored the contest.
"Quite frankly you can have $150 million worth of publicity, but if it doesn't generate sales you've really wasted your time on a pretty story."
A British man beat 34,000 other applicants Wednesday to win the right to stroll the white sands of a tropical island in Queensland, Australia, file weekly reports online to a global audience and earn a cool $100,000. Watch as lucky winner is revealed »
For the winner, Ben Southall, the six-month assignment is a far cry from his old job as a fundraiser.
"I love discovering new places," Southall said in his hyperkinetic minute-long application video for the position.
"Last year, I drove all around Africa, I crossed deserts, climbed mountains, run marathons, bungee jump, mountain-bike, scuba-dive and snorkel everywhere because I'm practically a fish myself."
Oh, and he rode an ostrich.
He will move into a three-bedroom beach home overlooking the tropical island's Great Barrier Reef. For six months, he will feed the fish, clean the pool and send weekly blog and video reports on what is happening on the island.
Other benefits include free return airfares from their nearest capital city, transport on the island, computer and camera gear and travel to other islands.
Ben Southall will move into a three-bedroom beach home overlooking the Great Barrier Reef.
"That's the million dollar question," said Anthony Hayes, CEO of Tourism Quensland, which sponsored the contest.
"Quite frankly you can have $150 million worth of publicity, but if it doesn't generate sales you've really wasted your time on a pretty story."
A British man beat 34,000 other applicants Wednesday to win the right to stroll the white sands of a tropical island in Queensland, Australia, file weekly reports online to a global audience and earn a cool $100,000. Watch as lucky winner is revealed »
For the winner, Ben Southall, the six-month assignment is a far cry from his old job as a fundraiser.
"I love discovering new places," Southall said in his hyperkinetic minute-long application video for the position.
"Last year, I drove all around Africa, I crossed deserts, climbed mountains, run marathons, bungee jump, mountain-bike, scuba-dive and snorkel everywhere because I'm practically a fish myself."
Oh, and he rode an ostrich.
He will move into a three-bedroom beach home overlooking the tropical island's Great Barrier Reef. For six months, he will feed the fish, clean the pool and send weekly blog and video reports on what is happening on the island.
Other benefits include free return airfares from their nearest capital city, transport on the island, computer and camera gear and travel to other islands.
Tuesday, May 5, 2009
Fiat boss tries to transform auto industry
CNN) -- A former accountant from Toronto is looking to remake the auto car industry.
Sergio Marchionne, CEO of Fiat, has ambitious plans to combine with Chrysler and GM Europe.
1 of 2 When Sergio Marchionne took the helm of Fiat five years ago, the carmaker was driving toward insolvency and saddled with more than $12 billion in debt. Four years and 15 profitable business quarters later, Marchionne is attempting to position Fiat just behind pole sitter Toyota in the race to win global car customers.
"I've heard him speak many times and it's clear he's got a certain target in mind of what scale is necessary to succeed," said John Bonnell, an auto industry analyst with J.D. Power and Associates.
Although Fiat, like many automakers, lost money in the first quarter this year due to the credit crisis, Marchionne is making an impressive play to take advantage of the troubles at GM and Chrysler.
A combined company of GM Europe, Chrysler and Fiat would generate about $100 billion annually with sales of between 6 and 7 million cars a year, according to Fiat.
"Clearly they're trying to take advantage of the opportunity when a lot of stakeholders may be willing to accommodate them," said Bonnell, the auto analyst. "It may be their only opportunity to get to the kind of scale necessary to succeed in this market."
In an interview with the Financial Times, Sergio Marchionne, chief executive officer of Fiat, detailed a plan to separate Fiat Auto core car divisions and join with Opel/Vauxhall, Saab and GM's other European operations.
Last week, Fiat agreed to take an initial 20 percent of Chrysler as the U.S. manufacturer filed for bankruptcy protection.
"It's an incredibly simple solution to a very thorny problem," Marchionne told the Financial Times.
Marchionne hopes to have the deal finished by the end of this month, and list shares for the new company -- which may be called Fiat/Opel -- by the end of August.
Sergio Marchionne, CEO of Fiat, has ambitious plans to combine with Chrysler and GM Europe.
1 of 2 When Sergio Marchionne took the helm of Fiat five years ago, the carmaker was driving toward insolvency and saddled with more than $12 billion in debt. Four years and 15 profitable business quarters later, Marchionne is attempting to position Fiat just behind pole sitter Toyota in the race to win global car customers.
"I've heard him speak many times and it's clear he's got a certain target in mind of what scale is necessary to succeed," said John Bonnell, an auto industry analyst with J.D. Power and Associates.
Although Fiat, like many automakers, lost money in the first quarter this year due to the credit crisis, Marchionne is making an impressive play to take advantage of the troubles at GM and Chrysler.
A combined company of GM Europe, Chrysler and Fiat would generate about $100 billion annually with sales of between 6 and 7 million cars a year, according to Fiat.
"Clearly they're trying to take advantage of the opportunity when a lot of stakeholders may be willing to accommodate them," said Bonnell, the auto analyst. "It may be their only opportunity to get to the kind of scale necessary to succeed in this market."
In an interview with the Financial Times, Sergio Marchionne, chief executive officer of Fiat, detailed a plan to separate Fiat Auto core car divisions and join with Opel/Vauxhall, Saab and GM's other European operations.
Last week, Fiat agreed to take an initial 20 percent of Chrysler as the U.S. manufacturer filed for bankruptcy protection.
"It's an incredibly simple solution to a very thorny problem," Marchionne told the Financial Times.
Marchionne hopes to have the deal finished by the end of this month, and list shares for the new company -- which may be called Fiat/Opel -- by the end of August.
Monday, May 4, 2009
Chrysler to lose $4.7B this year
By Chris Isidore, CNNMoney.com senior writer
May 4, 2009.
NEW YORK (CNNMoney.com) -- Chrysler LLC expects to lose $4.7 billion this year and to continue to lose money for the next two years, according to a filing from one of the company's top financial advisors.
Robert Manzo, a financial advisor hired by Chrysler for help with the company's bankruptcy process, estimated in the filing that the company will have cash expenditures far greater than losses for the next few years. Chrysler is estimated to go through about $15.7 billion this year as part of its restructuring.
The company filed for bankruptcy Thursday as part of a deal with the federal government, unions, some lenders and Italian automaker Fiat to keep the company from being shut down.
The filing also discloses the company lost $16.8 billion in 2008,. That's about the same as what larger rival General Motors (GM, Fortune 500) lost in 2008, excluding special items, and worse than the $14.6 billion lost by Ford Motor Co. (F, Fortune 500) last year.
Manzo's filing forecasts that Chrysler will lose about $900 million in 2010 and another $300 million in 2011, before finally reporting a $100 million profit in 2011.
May 4, 2009.
NEW YORK (CNNMoney.com) -- Chrysler LLC expects to lose $4.7 billion this year and to continue to lose money for the next two years, according to a filing from one of the company's top financial advisors.
Robert Manzo, a financial advisor hired by Chrysler for help with the company's bankruptcy process, estimated in the filing that the company will have cash expenditures far greater than losses for the next few years. Chrysler is estimated to go through about $15.7 billion this year as part of its restructuring.
The company filed for bankruptcy Thursday as part of a deal with the federal government, unions, some lenders and Italian automaker Fiat to keep the company from being shut down.
The filing also discloses the company lost $16.8 billion in 2008,. That's about the same as what larger rival General Motors (GM, Fortune 500) lost in 2008, excluding special items, and worse than the $14.6 billion lost by Ford Motor Co. (F, Fortune 500) last year.
Manzo's filing forecasts that Chrysler will lose about $900 million in 2010 and another $300 million in 2011, before finally reporting a $100 million profit in 2011.
Thursday, March 12, 2009
Grab Market Share Now With Your Website!
Now is the time to grab market share. When every penny counts, one important place you can really put your marketing dollars in and truly track results is with your website.
Here are five things to try to help increase the amount of traffic to your website and keep visitors coming back.
The first tip is to have proper page titles. This refers to how each page of your website is named. A proper title means that it contains key words and relevant information that describe the content of the page. The order of the words within the name is also an important factor. Make sure that the most relevant keyword appears first. Remember, the closer the title describes the page, the likelier it becomes to gain a better ranking in search engines.
Adding additional relevant keywords to your homepage is another thing to try. While your homepage may already have some relevant text, it needs to spell out your services in terms that people would use to search for you. Also keep in mind that if your text is in flash or graphics, search engines are not able to read it.
Speaking of content, another thing that is a must is keeping your content fresh. Keeping your content fresh plays a very big role in keeping visitors coming back. A content management system is a great tool that allows site owners to upload new content any time they want. Visitors will come back to your site again and again as long as it meets their viewing expectations and it provides them the information they are looking for.
Fourthly, improve the links that point to your site. Some search engines such as Google use the number of links pointing to a site as a measurement tool. You should not only check how many sites link to your site but also check how relevant the data is that links to you. You can find this information on alexa.com or by using Google.
Finally, start a blog and put relevant articles on it that contain important keywords. Link the blog back to your main website. Blogs are easy to use and a fun way to communicate real time information. A blog for your business can be implemented within 24 hours and can have a huge effect on your relationships and website traffic. It is a unique way to connect with existing clients and build trust with prospects.
Here are five things to try to help increase the amount of traffic to your website and keep visitors coming back.
The first tip is to have proper page titles. This refers to how each page of your website is named. A proper title means that it contains key words and relevant information that describe the content of the page. The order of the words within the name is also an important factor. Make sure that the most relevant keyword appears first. Remember, the closer the title describes the page, the likelier it becomes to gain a better ranking in search engines.
Adding additional relevant keywords to your homepage is another thing to try. While your homepage may already have some relevant text, it needs to spell out your services in terms that people would use to search for you. Also keep in mind that if your text is in flash or graphics, search engines are not able to read it.
Speaking of content, another thing that is a must is keeping your content fresh. Keeping your content fresh plays a very big role in keeping visitors coming back. A content management system is a great tool that allows site owners to upload new content any time they want. Visitors will come back to your site again and again as long as it meets their viewing expectations and it provides them the information they are looking for.
Fourthly, improve the links that point to your site. Some search engines such as Google use the number of links pointing to a site as a measurement tool. You should not only check how many sites link to your site but also check how relevant the data is that links to you. You can find this information on alexa.com or by using Google.
Finally, start a blog and put relevant articles on it that contain important keywords. Link the blog back to your main website. Blogs are easy to use and a fun way to communicate real time information. A blog for your business can be implemented within 24 hours and can have a huge effect on your relationships and website traffic. It is a unique way to connect with existing clients and build trust with prospects.
Thursday, March 5, 2009
Stop Foreclosure Yourself and Save Time and Money
If you've never lost your job or ran into financial difficulty then it possibly might be that a foreclosure is nothing you have had to deal with. However if you're like far too many in the United States today then you may be facing the possibility of foreclosure on your home or property as you read this article. There is no doubt about it - foreclosure is an ugly thing to have happen in your life, but it is something that can be stopped if you make some right moves.
The first caution is to not jump in and start contacting these companies that claim that they can stop foreclosure for you. Although many of these companies may be legitimate and they probably could stop the lender from taking back your home. You can most likely do the same actions yourself and save yourself a lot of time and money.
The first thing that you want to do is find out which division in the bank - where your loan is through handles the details of working with somebody in a bad loan situation. Once you are talking to the proper people you'll find that you get somewhere much quicker.
Take into consideration that your bank or lender does not want to foreclose on your property and take it back if they do not have to. If there's any way that you can show them some good will and that you are willing to make some sort of payment, they can often times drastically reduce your payments for you without refinancing your loan and stop foreclosure on your property.
If you need more foreclosure help then quickly head over to http://foreclosure-help-now.com where you will find helpful foreclosure tips, advice and resources including information on foreclosure plans, negotiating and more Stop Foreclosure.
The first caution is to not jump in and start contacting these companies that claim that they can stop foreclosure for you. Although many of these companies may be legitimate and they probably could stop the lender from taking back your home. You can most likely do the same actions yourself and save yourself a lot of time and money.
The first thing that you want to do is find out which division in the bank - where your loan is through handles the details of working with somebody in a bad loan situation. Once you are talking to the proper people you'll find that you get somewhere much quicker.
Take into consideration that your bank or lender does not want to foreclose on your property and take it back if they do not have to. If there's any way that you can show them some good will and that you are willing to make some sort of payment, they can often times drastically reduce your payments for you without refinancing your loan and stop foreclosure on your property.
If you need more foreclosure help then quickly head over to http://foreclosure-help-now.com where you will find helpful foreclosure tips, advice and resources including information on foreclosure plans, negotiating and more Stop Foreclosure.
Sunday, February 15, 2009
Saving Money on Printer Supplies
During these hard economic times, we're all searching for ways to save money on basic consumer products. Although the price of printers remains low, the money spent on ink cartridges adds up quickly, especially if you do a lot of high-volume printing. Over the lifespan of your printer, it's not unusual for your ink and toner costs to exceed the original price of the printer itself. So take a look at this guide, and you'll find some simple solutions to saving money on printer supplies.
1.) Print in "Draft Mode": Most modern printers have a setting that uses less ink for each print job. Although your text may be lighter than normal, you should take advantage of this great feature when you don't need perfect results.
2.) Buy in bulk: Buying printer supplies in bulk may cost a lot up front, but it's a great way to save money in the long run. Most manufacturers offer significant savings if you purchase their consumables in large quantities, including paper, ink and toner.
3.) Opt for remanufactured or recycled cartridges: These cartridges go through a recycling process, so that they can be sold and reused at a much lower cost. During this process, the returned ink cartridge is disassembled and cleaned thoroughly. Once they are refilled with fresh ink, each individual cartridge is inspected and then tested to ensure premium quality.
4.) Proper installation and storage: After you remove the ink cartridge from its package, make sure you install it immediately to prevent any ink from drying out. If you're storing your cartridge for future use, make sure you put it in a cool, dry place that's protected from dirt and dust. You'll also need to keep track of the expiration date-using the cartridge after this date may result in low quality printing or clogging of the printer nozzle.
5.) Clean the cartridge regularly: As you continue to use your printer, a small amount of ink will be left in the nozzle after each print job. Over time, this dried ink will build up, causing the device to jam or to produce substandard quality output. Nowadays, most printers come with a maintenance program which can be used to remove clogging. You may have to pay a little extra, but it's definitely a worthwhile investment.
The best way to find great deals on ink cartridges is to shop online. If you choose to go this route, look for online retailers that ship for a low cost or no fee at all.
1.) Print in "Draft Mode": Most modern printers have a setting that uses less ink for each print job. Although your text may be lighter than normal, you should take advantage of this great feature when you don't need perfect results.
2.) Buy in bulk: Buying printer supplies in bulk may cost a lot up front, but it's a great way to save money in the long run. Most manufacturers offer significant savings if you purchase their consumables in large quantities, including paper, ink and toner.
3.) Opt for remanufactured or recycled cartridges: These cartridges go through a recycling process, so that they can be sold and reused at a much lower cost. During this process, the returned ink cartridge is disassembled and cleaned thoroughly. Once they are refilled with fresh ink, each individual cartridge is inspected and then tested to ensure premium quality.
4.) Proper installation and storage: After you remove the ink cartridge from its package, make sure you install it immediately to prevent any ink from drying out. If you're storing your cartridge for future use, make sure you put it in a cool, dry place that's protected from dirt and dust. You'll also need to keep track of the expiration date-using the cartridge after this date may result in low quality printing or clogging of the printer nozzle.
5.) Clean the cartridge regularly: As you continue to use your printer, a small amount of ink will be left in the nozzle after each print job. Over time, this dried ink will build up, causing the device to jam or to produce substandard quality output. Nowadays, most printers come with a maintenance program which can be used to remove clogging. You may have to pay a little extra, but it's definitely a worthwhile investment.
The best way to find great deals on ink cartridges is to shop online. If you choose to go this route, look for online retailers that ship for a low cost or no fee at all.
Is Maverick Money Makers Just Another Scam Or the Real Deal?
Searching on the internet for a course, book or website that teaches you how to make money online can be very overwhelming. There are thousands of money making websites online so which one really delivers?
Recently I came across Mack Michaels Maverick Money Makers website. Here was a website that shared the same claims as most others so my initial thought was "Is Maverick Money Makers Just Another Scam?"
As I scrolled down through all the fluff like all websites I came to his videos. Watching the videos I was impressed by the quality and Mack Michaels way of delivering his message. This guy knows how to teach and explains everything in great detail making it easy for anyone to follow along.
After reviewing his website and doing my own research over the next several days I decided to join Maverick Money Makers Club and see if this site was the real deal. I figured I had nothing to lose as it is backed by a 60 day money back guarantee.
Boy was I surprised ...Mack Michaels has put together numerous video tutorials that teach in great detail everything needed to begin making money online.
The video tutorials are broken into the following sections:
· Complete Core Training System - 12 Comprehensive Videos each over 45 minutes giving you step-by-step tutorials
· Quick Money Blueprint System - 7 Videos showing you 7 quick ways to start making money online immediately!
· Skillset Training System - 20 videos that teach everything from setting up a Google Adwords campaign to setting up a domain name.
Let me just make one thing very clear, every video is over 40 minutes packed with very detailed information. Mack Michaels does a fantastic job explaining everything making it very easy for anyone to learn.
Mack Michaels also provide the following:
· Brilliant Niche Market Ideas - Hundreds of niche markets that are bugging to be marketed to.
· Turnkey Products to Sell - Hundred of niche markets that he includes ebooks, banners, articles, etc for each. This is huge as it gives you everything needed to begin marketing right away.
· Your Point and Click Rolodex - Mack Michaels give his members all his tools and links so you too can build a successful online business.
And last but not least...
Millionaire Mindset Coaching - 10 audio files from Mike Vance that provide coaching to get you thinking like a millionaire. Some of these are over 4 hours long...very powerful!
There you have it, a quick look into Maverick Money Makers. Is it a scam, absolutely not! There are few websites out there that really deliver and this is one of them.
Recently I came across Mack Michaels Maverick Money Makers website. Here was a website that shared the same claims as most others so my initial thought was "Is Maverick Money Makers Just Another Scam?"
As I scrolled down through all the fluff like all websites I came to his videos. Watching the videos I was impressed by the quality and Mack Michaels way of delivering his message. This guy knows how to teach and explains everything in great detail making it easy for anyone to follow along.
After reviewing his website and doing my own research over the next several days I decided to join Maverick Money Makers Club and see if this site was the real deal. I figured I had nothing to lose as it is backed by a 60 day money back guarantee.
Boy was I surprised ...Mack Michaels has put together numerous video tutorials that teach in great detail everything needed to begin making money online.
The video tutorials are broken into the following sections:
· Complete Core Training System - 12 Comprehensive Videos each over 45 minutes giving you step-by-step tutorials
· Quick Money Blueprint System - 7 Videos showing you 7 quick ways to start making money online immediately!
· Skillset Training System - 20 videos that teach everything from setting up a Google Adwords campaign to setting up a domain name.
Let me just make one thing very clear, every video is over 40 minutes packed with very detailed information. Mack Michaels does a fantastic job explaining everything making it very easy for anyone to learn.
Mack Michaels also provide the following:
· Brilliant Niche Market Ideas - Hundreds of niche markets that are bugging to be marketed to.
· Turnkey Products to Sell - Hundred of niche markets that he includes ebooks, banners, articles, etc for each. This is huge as it gives you everything needed to begin marketing right away.
· Your Point and Click Rolodex - Mack Michaels give his members all his tools and links so you too can build a successful online business.
And last but not least...
Millionaire Mindset Coaching - 10 audio files from Mike Vance that provide coaching to get you thinking like a millionaire. Some of these are over 4 hours long...very powerful!
There you have it, a quick look into Maverick Money Makers. Is it a scam, absolutely not! There are few websites out there that really deliver and this is one of them.
Wednesday, January 21, 2009
Night Photos Make Money
Today a lot of photographers that are trying to make money with photos are using digital photography. There is a lot of money to be made with photography marketing. Some of the top selling images are of night photos. A reason that theses photos are so popular is just because of the cool effects that are put off by the lights. This is really shown to be true if the lights are moving. The trails that are put off by moving lights is something that most people enjoy looking at.
If you wanted try your hand at night photography and maybe even getting that one shot that will have you making money with your photography, you will need to realize that as rewarding as night photography can be, it can be very challenging.
To help you overcome some of the challenges of night photography you will need to have decent equipment. An SLR style camera is recommended, this is because the SLR camera is very versatile and it has features that allow you to take great night time photos. Beside this benefit you may think that the SLR style camera is recommended because you use the same lens for both view finder and taking the picture. You may also think that the SLR style is best because you can swap lens. In both cases you would be right but the main reason to use the SLR style camera is because you can use a tripod.
When you are choosing a tripod to use in night photography or in any other field of photography,get one that is sturdy. A reason for you to take careful consideration when picking out the tripod is that night photography requires long exposure and this means that the camera will have to be held steady for long periods of time. You do not want to lose a great shot because a little breeze began to blow.
If you are serious about making money with photos and earning a living with photography marketing, you will want to invest into the two things that has been talk about here. I hope that you can see that the tripod can be just as important as the camera, especially in night photography.
If you wanted try your hand at night photography and maybe even getting that one shot that will have you making money with your photography, you will need to realize that as rewarding as night photography can be, it can be very challenging.
To help you overcome some of the challenges of night photography you will need to have decent equipment. An SLR style camera is recommended, this is because the SLR camera is very versatile and it has features that allow you to take great night time photos. Beside this benefit you may think that the SLR style camera is recommended because you use the same lens for both view finder and taking the picture. You may also think that the SLR style is best because you can swap lens. In both cases you would be right but the main reason to use the SLR style camera is because you can use a tripod.
When you are choosing a tripod to use in night photography or in any other field of photography,get one that is sturdy. A reason for you to take careful consideration when picking out the tripod is that night photography requires long exposure and this means that the camera will have to be held steady for long periods of time. You do not want to lose a great shot because a little breeze began to blow.
If you are serious about making money with photos and earning a living with photography marketing, you will want to invest into the two things that has been talk about here. I hope that you can see that the tripod can be just as important as the camera, especially in night photography.
Monday, November 17, 2008
Internet Marketing - Uncover 5 Methods to Make Money Through Internet Marketing
It doesn't matter if you have the best products and services over the internet, if you don't know how to properly market your offerings, you surely won't be able to generate decent sales.
Here's how you can make money through internet marketing:
1. Know the online behavior of your target market. Before you choose the marketing tools to use, you need to understand your prospects first. How often do they go online? What websites do they usually visit? Are they active members of relevant forums? Are they registered members of any social networking site? Do they often use the search engines? By knowing all of these things, you can easily figure out the best tools to use that can help you better connect with these people.
2. Advertising budget. Are you willing to spend money for your advertising cost? If so, how much? There are so many free and effective marketing tools that you can use. However, if you want a more aggressive approach in promoting your products, it is highly recommended that you also use paid advertising tools such as PPC advertising, banner ads, search engine marketing, and affiliate marketing.
3. Hire some help. If you are going to use all the effective marketing tools simultaneously, you will need to hire some people who can help you out. Depending on your needs, you may hire ghostwriters who can write your ebooks, newsletters, and your articles. You may also hire forum posters, bloggers, affiliate marketers, SEO specialist, and link builders.
4. Website. Keep in mind that your website plays a crucial role in your internet marketing strategies. If you want your target market to give you a visit and if you want to convert these people to buying customers, you better make sure that your website is well-designed, speaks volume about your credibility and expertise, and it must be easy to navigate.
5. Go with article marketing. If you don't have money to spare for your advertising cost and if you don't have the means to hire people to promote your products, you may use article marketing as your primary advertising tool. You can use this tool for free and as long as you care to do the process right, it can offer you all the elements that you need in growing your ebusiness -- search engine traffic, expert status online, and higher page ranking.
By the way...do you want to learn exactly how to create a high income online business by meeting the needs of people in your niche through coaching, consulting, and teaching online classes?
Here's how you can make money through internet marketing:
1. Know the online behavior of your target market. Before you choose the marketing tools to use, you need to understand your prospects first. How often do they go online? What websites do they usually visit? Are they active members of relevant forums? Are they registered members of any social networking site? Do they often use the search engines? By knowing all of these things, you can easily figure out the best tools to use that can help you better connect with these people.
2. Advertising budget. Are you willing to spend money for your advertising cost? If so, how much? There are so many free and effective marketing tools that you can use. However, if you want a more aggressive approach in promoting your products, it is highly recommended that you also use paid advertising tools such as PPC advertising, banner ads, search engine marketing, and affiliate marketing.
3. Hire some help. If you are going to use all the effective marketing tools simultaneously, you will need to hire some people who can help you out. Depending on your needs, you may hire ghostwriters who can write your ebooks, newsletters, and your articles. You may also hire forum posters, bloggers, affiliate marketers, SEO specialist, and link builders.
4. Website. Keep in mind that your website plays a crucial role in your internet marketing strategies. If you want your target market to give you a visit and if you want to convert these people to buying customers, you better make sure that your website is well-designed, speaks volume about your credibility and expertise, and it must be easy to navigate.
5. Go with article marketing. If you don't have money to spare for your advertising cost and if you don't have the means to hire people to promote your products, you may use article marketing as your primary advertising tool. You can use this tool for free and as long as you care to do the process right, it can offer you all the elements that you need in growing your ebusiness -- search engine traffic, expert status online, and higher page ranking.
By the way...do you want to learn exactly how to create a high income online business by meeting the needs of people in your niche through coaching, consulting, and teaching online classes?
Thursday, November 6, 2008
Top 10 Franchise Money Questions Answered
Top 10 Franchise Money Questions Answered
By Jeff Elgin,
How much money to buy a franchise? Where to get the funds? How long until I see a profit? Our expert tells all.
There are many reasons people decide they want to acquire their own franchise business--and each of these reasons involves a variety of considerations. In the mind of most people contemplating such a decision, however, there is one overriding factor: money. If you're considering buying a franchise, you should be asking yourself a number of significant money-related questions. Here's what we consider the "Top 10":
1. How much total investment will this franchise require? This is a key question, since the Uniform Franchise Offering Circular (UFOC) document normally expresses this information in terms of a very large range of possible answers. In your calls to existing franchisees, and your research concerning your local market, make sure to narrow down these answers to provide as accurate an answer as possible. If you aren't completely sure, be sure to err on the high side.
2. How much will I need in operating capital reserves to cover losses after opening the franchise until it reaches the breakeven point in terms of cash flow? You're not going to have any customers or revenue on the morning of your first day in your new business, but you will have expenses. Until your revenue grows enough to cover these expenses, you're going to have to feed additional cash into the business to pay the bills. Make sufficient allowance for this factor in your plans and, when in doubt, guess high. No one has ever gotten into trouble on a new business startup because he or she had put too much in financial reserves.
3. How much extra cash do I need to cover living expenses while I'm starting my franchise? This is one of the critical areas many new franchisees fail to consider. After becoming a franchisee, there's a gap in time before your new business begins operation and typically another gap before it starts making enough profit to cover your living expenses. You need to carefully budget your living expenses to understand how much you'll need on a monthly basis and then make sure you've got sufficient cash--in addition to your business investment--to cover your expenses during this period. Then add a significant reserve on top of this amount--it'll help you sleep better at night.
4. How long will it take my new franchise to reach break even? This is one of the most important money-related questions you'll need to answer. It's no fun to feed extra money into a business to cover operating losses, but that's the reality in most startups. You'll normally find the answer to this question is a potential range of time for the franchise you're considering. Always plan that it'll take the longest time within this range to reach breakeven, so you're as safe as possible.
5. How much of my total investment (including capital reserves) do I need to have in cash? This answer can range from 0 to 100 percent, depending on the franchise business being contemplated. There's no right or wrong answer--just make sure you know what applies to you and that you easily have that amount of cash on hand.
6. What standard financing options exist for me? The most common forms of standard financing are bank loans and/or commercial leases. Any bank loan to start a new business will probably either have to be secured by your personal collateral (such as the equity in your home) or through an SBA guarantee program, and the banks may require both forms of security. Most new franchisees find that securing an open line of credit against their home equity is the easiest and least expensive form of bank financing available to them. Leases can also be a favorable option, since they are typically fast to procure and secured by the assets that are being leased (though they sometimes require a personal guarantee as well).
7. What alternative financing options exist for me? In addition to standard sources, there's always the standby financing source: family and friends. There are also a number of companies that assist people in accessing retirement dollars in IRA or 401(k) accounts, without early withdrawal penalties, to use as a funding source for a franchise business.
8. How much money can I make in this franchise? This is the $64 question. You will normally find the answer is related to the amount of time the business has been open. The first year will probably be a loss, but by the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.
9. What are the ranges in financial performance of the existing franchisees? Though we've previously referred to the fact that there is going to be a range in franchisees' answers, this point is so important, it bears repeating. Don't stop your research until you are completely confident you know both the high and low end of the range. Two answers are not sufficient to establish a range you can have confidence in--10 or even more would be much better.
10. How financially strong is the franchise company? The franchise company is required to provide you with a copy of their audited financial statements in the UFOC document. You obviously want to work with a franchise company that is not only strong enough to survive, but that also has the resources to reinvest in training and support of the franchisees. Make sure you review their financials and ask for help from a competent advisor if you're not comfortable doing this yourself.
You should know the answer to each of these questions before you decide to invest in any franchise opportunity. If you do, and assuming the answers are acceptable to you, you can minimize some of your concerns about money as you build your new business.
--------------------------------------------------------------------------------
Jeff Elgin is the "Buying a Franchise" coach at Entrepreneur.com and has almost 20 years of experience in franchising, both as a franchisee and a senior franchise company executive. He is currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best matches their needs.
By Jeff Elgin,
How much money to buy a franchise? Where to get the funds? How long until I see a profit? Our expert tells all.
There are many reasons people decide they want to acquire their own franchise business--and each of these reasons involves a variety of considerations. In the mind of most people contemplating such a decision, however, there is one overriding factor: money. If you're considering buying a franchise, you should be asking yourself a number of significant money-related questions. Here's what we consider the "Top 10":
1. How much total investment will this franchise require? This is a key question, since the Uniform Franchise Offering Circular (UFOC) document normally expresses this information in terms of a very large range of possible answers. In your calls to existing franchisees, and your research concerning your local market, make sure to narrow down these answers to provide as accurate an answer as possible. If you aren't completely sure, be sure to err on the high side.
2. How much will I need in operating capital reserves to cover losses after opening the franchise until it reaches the breakeven point in terms of cash flow? You're not going to have any customers or revenue on the morning of your first day in your new business, but you will have expenses. Until your revenue grows enough to cover these expenses, you're going to have to feed additional cash into the business to pay the bills. Make sufficient allowance for this factor in your plans and, when in doubt, guess high. No one has ever gotten into trouble on a new business startup because he or she had put too much in financial reserves.
3. How much extra cash do I need to cover living expenses while I'm starting my franchise? This is one of the critical areas many new franchisees fail to consider. After becoming a franchisee, there's a gap in time before your new business begins operation and typically another gap before it starts making enough profit to cover your living expenses. You need to carefully budget your living expenses to understand how much you'll need on a monthly basis and then make sure you've got sufficient cash--in addition to your business investment--to cover your expenses during this period. Then add a significant reserve on top of this amount--it'll help you sleep better at night.
4. How long will it take my new franchise to reach break even? This is one of the most important money-related questions you'll need to answer. It's no fun to feed extra money into a business to cover operating losses, but that's the reality in most startups. You'll normally find the answer to this question is a potential range of time for the franchise you're considering. Always plan that it'll take the longest time within this range to reach breakeven, so you're as safe as possible.
5. How much of my total investment (including capital reserves) do I need to have in cash? This answer can range from 0 to 100 percent, depending on the franchise business being contemplated. There's no right or wrong answer--just make sure you know what applies to you and that you easily have that amount of cash on hand.
6. What standard financing options exist for me? The most common forms of standard financing are bank loans and/or commercial leases. Any bank loan to start a new business will probably either have to be secured by your personal collateral (such as the equity in your home) or through an SBA guarantee program, and the banks may require both forms of security. Most new franchisees find that securing an open line of credit against their home equity is the easiest and least expensive form of bank financing available to them. Leases can also be a favorable option, since they are typically fast to procure and secured by the assets that are being leased (though they sometimes require a personal guarantee as well).
7. What alternative financing options exist for me? In addition to standard sources, there's always the standby financing source: family and friends. There are also a number of companies that assist people in accessing retirement dollars in IRA or 401(k) accounts, without early withdrawal penalties, to use as a funding source for a franchise business.
8. How much money can I make in this franchise? This is the $64 question. You will normally find the answer is related to the amount of time the business has been open. The first year will probably be a loss, but by the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.
9. What are the ranges in financial performance of the existing franchisees? Though we've previously referred to the fact that there is going to be a range in franchisees' answers, this point is so important, it bears repeating. Don't stop your research until you are completely confident you know both the high and low end of the range. Two answers are not sufficient to establish a range you can have confidence in--10 or even more would be much better.
10. How financially strong is the franchise company? The franchise company is required to provide you with a copy of their audited financial statements in the UFOC document. You obviously want to work with a franchise company that is not only strong enough to survive, but that also has the resources to reinvest in training and support of the franchisees. Make sure you review their financials and ask for help from a competent advisor if you're not comfortable doing this yourself.
You should know the answer to each of these questions before you decide to invest in any franchise opportunity. If you do, and assuming the answers are acceptable to you, you can minimize some of your concerns about money as you build your new business.
--------------------------------------------------------------------------------
Jeff Elgin is the "Buying a Franchise" coach at Entrepreneur.com and has almost 20 years of experience in franchising, both as a franchisee and a senior franchise company executive. He is currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best matches their needs.
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