" Occurs when the supply of goods and services suddenly is greater than demand ".

While inflations can make things too expensive for consumers to buy, deflation can make things cheaper .

Profit margins at businesses will be squeezed.

Can lead to layoffs. 

Federal Open Market Committee

(FOMC)

Monitors and manipulates short-terms interest rates in an attempt to find the right economic "temperature".

Inflation of about 2-3% is considered ideal.

-Maximum Employment  

-Stable prices                

-Stable economic growth

Measures -Inflation/Deflation

Tracks the prices consumers pay for basic things:

-Groceries     

-Movie tickets

-Milk             

-Jeans           

-Gasoline      

Tracks increase and decrease in those prices 

-Sometimes excluding (food & energy) to track for Core Inflation.

Real Rate of Return

Adjusted by investors by CPI

If an investor receives 4% interest on a bond when CPI is 2%, then her real rate of return is 2%

4%-2%=2%

Family of indices showing the prices received by producers at various stages of the production cycle:

-Commodity level       

-Intermediate demand

-Final demand  

If PPI and CPI reveal Inflation, the FOMC will raise interest rates. If they reveal Deflation they will lower rates.         

Discount Rate- Rate banks have to pay when borrowing from Federal Reserve;

Fed Funds rate- rate banks charge each other for overnight loans in excess of $1 M (daily change);

Broker call loan rate- Rate broker-dealers pay when borrowing on behalf of their margin customers

Prime Rate- Rate that most creditworthy corporate customers pay when borrowing through unsecured loans;

LIBOR- Benchmark rate that many large international banks charge each other (London Interbank Offered Rate)

Yield Curve with (debt securities)

-Bonds

-Maturing bonds in 2025 will demand a higher yield than those getting their principal back in 2017. The longer your money is at risk, the more of a reward you demand.

Short term- up to 3 years maturity

Intermediate term- 4 to 10 years maturity

Long-Term- >10 years maturity.

Normal Yield Curve

(Economic conditions are stable)

Higher yields on short-term bonds than on intermediate- or long-term bonds.

Often follows a period of high-interest rates, why?

Because investors will start selling all short-term debt securities and buying long-term securities for highest interest rate possible. Making yields higher for short-term and making yields lower for long-term, inverting the curve.

Same Yields across T-Bills, T-Notes and T-Bonds.

It typically flattens when investors expectations for inflation are so low that they are not demanding higher yields to hold long-term debt securities. A flat yield curve is though to signal an economic slowdown.

Yield Spread

Considers yields over different credit qualities (high rated/Low-rated) 

If investors demand a much higher yield on Low-rated bonds then on high-rated bonds, that's a negative sign because it signals that investors are nervous about issuer's ability to repay.

When the yield spread narrows- GOOD sign

When the yield spread widens- BAD sign

The strength of the American Dollar relative to foreign currencies affects our imports and exports. As our dollar strengthens, our exports will become less attractive to consumers in other countries, whose weak currency can't buy our expensive goods.

Strong dollar- foreign travel less expensive

Weak dollar- foreign travel more expensive

Tracks money in and money out of the economy for imports and exports.

Trade Surplus- Exporting more than what we import from a specific country.

Trade Deficit- Exporting less than what we import from a specific country.

If people aren't working that signals economic slow down (fed lowers rates)

If too many people are working that signals inflation (fed raises rates).

1. Average weekly New Claims for Unemployment Insurance
2. Unemployment rate
3. Employment Cost Index(ECI)-growth of wages 

Leading Indicator

(predict changes in the economy)

• Avg weekly hours worked by manufacturing workers
• Avg number of initial applicants for unemployment 
• Amount of manufacturers' new orders for consumer goods and materials
• Speed of delivery of new merchandise to vendors from suppliers
• Amount of new orders for capital goods 
• Amount of new building permits for residential build
• S&P 500 Stock Index
• Inflation-adjusted monetary supply (M2)
• Spread between long and short interest rates
• Consumer confidence 
• Bond yields 

• Number of employees on non-agricultural payrolls
• Industrial production
• Manufacturing and trade sales
• Personal income levels 

Lagging 

(confirm trends, do not predict)

• Value of outstanding commercial and industrial loans
• Change in the Consumer price index for services from the previous month
• Change in labor cost per unit of labor output
• Inventories
• Ratio of consumer credit outstanding to personal income
• Average prime rate charged by banks
• Length/duration of unemployment 

INFLATIONARY/EXPANDING

• S&P up
• Building permits up
• #Manufacturing workers up
• Unemployment claims down
• Consumer confidence up
• Manufacturers' New orders up
• Capital goods spending up
• Personal income up
• Manufacturing & Trade sales up
• Payroll Employment up
• Inventory levels down
• Duration of Unemployment down 

• S&P down
• Building permits down
• #Manufacturing workers up
• Unemployment claims down
• Consumer confidence down
• Manufacturers' New orders down
• Capital goods spending down
• Personal income down
• Manufacturing & Trade sales down
• Payroll Employment down
• Inventory levels up
• Duration of Unemployment up 

• Expansion
• Peak(inflation)
• Contraction (recession)/(deflation)
• Trough (depression)

 Keynesian economists- recommend that fiscal policy to be used to increase aggregate demand for goods and services.

-To stimulate the economy just cut taxes and increase gov spending. Reducing taxes will increase purchasing power and government spending will create jobs. 

Monetarists-FED

They feel that controlling the money supply is the key to managing the economy. Playing with Interest rates.

• Reserve requirement-Member banks must keep a certain % of their customer deposits in reserve.

Multiplier effect- Banks can lend out maybe $10 for every $1 they have in reserve when the FED changes the amount required to be deposited in reserve by just a little bit, the effects are multiplied throughout the financial system.

Total Bank deposits/Reserve requirement 

Open Market Conditions- Fed can either buy or sell US Treasury securities on the secondary market.

Raise interest rates- Sell securities to depress their price and therefore increase their yield.

Decrease interest rates- Buy treasury securities increasing their price and decreasing their yield.

Preferred stock gets paid first.

Then Common Stock calculated in EPS- Earnings/common stock outstanding.

5000/1000= $5- each share of stock is attached to $5 of profit.

Annual dividends paid and divides it by the earnings per share (EPS). Your company has earning per share of $5, if you paid out $1 in common stock dividends, you paid out 20% of your earnings, which is called your "dividend payout ratio". 

Annual Dividend/Earnings Per Share

Compares the market price of the stock to the earnings per share. Growth stocks trade at high P/E ratios while those trading at low P/E ratios is considered value stocks.

P/E=Market Price/Earnings Per Share 

From Operating Activities- company provided or exhausted this much cash through their core operations.

From Investing Activities- How much money is being used or generated, usually from investing in capital equipment, and to some extent buying and selling securities.

From Financing Activities- Cash provided/used through basically any activity involving the shareholders (owners) or bondholders (borrowers) of the company.

-If stock is issued, cash is generated, while the company engages in share buyback programs, cash is used up. 

-Bond issuing bring in cash, while when it finally redeems or calls those bonds, cash is used up.

Assets=Liabilities+Stockholders' Equity

Assets-Liabilities=Stockholder's Equity

Assets represent what a company owns, liabilities represent what a company owes. Net worth of the company is the same as Stockholder's Equity.

Current Assets- Represent cash and anything that could be converted to cash in the short-term:

-Cash & Cash equivalents (money market instruments earning interest)

-Accounts receivable (what customers owe to the company)

-Inventory (manufactured goods for sale).

Intangible Assets- Include patents, trademarks, and Goodwill.

Goodwill- When a company acquires another company , they usually pay more than just the value of the fixed assets. They're paying for the brand-identity, the customer base, etc.. so, that excess paid above the hard, tangible value of assets you can touch and see is called Goodwill.

A measure of how able a company is to finance current operations (liquidity). When a company's short-term liabilities exceed its current assets, that company is in great danger of getting behind in payments to suppliers and interest payments to creditors.

Working Capital=Current Assets-Current Liabilities

The lemonade stand shows current assets of $640 and Current liabilities of $160. 

640/160=$4

Thi means that you have a current ratio of 4 to 1, for every $1 of short-term debt, you have $4 of liquid current assets to cover it.

Quick ratio=(current assets-inventory/current liabilities)

For this example lets consider the spoilage (unsellable) of some of the inventory, therefore we must remove it from current assets.