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US government bank steps in to contain bad loan crisis!
The bad loan crisis that we have talked about in our previous newsletters (see Volume 11) is spreading globally. As a result, this week, S&P500, the Dow Jones Index and NASDAQ took a steep dive. On Wednesday, one of the largest home loan bank, Countrywide, announced that it was having financial trouble because of the bad loan problem. Countrywide ran into what is called “decrease in the money supply” problem, also called “money liquidity crunch”. Countrywide had to go to other banks for $12 billion loan to keep the bank running. This news caused a major panic in the market. By Thursday, S&P500 had dropped 42 points, Dow, 390 points and NASDAQ, 90 points.
The central bank of the US
, called the Federal Reserve Bank had to step in to calm the jittery nerves of the investors. As the central bank, Federal Reserve loans money to other banks. It also monitors all US banks by setting rules about how other banks should operate in the US. By controlling the money it lends to other banks, it can control how much money flows into the economy, and it can also dictate the interest rate for loans that it makes to the bank (which will affect the rate at which these other banks will lend to consumers).
So what did the Federal Reserve do to calm the nerves? On Friday morning, it cut the interest rate by half a percent point, to 5.75%. The interest rate cut makes it cheaper for other banks to borrow from the Federal Reserve Bank, and, in turn, makes it cheaper for these banks to make loans to other people. In summary, the interest rate cut should increase the money supply and improve the credit squeeze that we have talked about in our past newsletters. Moreover, this move by the Federal Reserve sends a message to all that the Federal Reserve is watching the bad loan problem and it is willing to step in, if needed. Sure enough, the stock market responded positively to the action by Federal Reserve. The Dow jumped by more than 233 points on Friday. Let us see if stock markets will continue this rally in the next week.
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Major toys recall!
Chances are that you have played with a toy made by a company called Mattel. Its most famous toy is Barbie doll. Last week, Mattel, recalled nine million toys made in because they are unsafe for kids. These safety concerns range from small parts that can be swallowed by children to lead paint which is dangerous for kids’ health. Barbie, Polly Pocket dolls, Batman action figures, and Military Jeeps were among the toys that were recalled. Earlier this month, Mattel also recalled Dora the Explorer, Big Bird, and Elmo for the safety reason. The recall will cost over $30 million to Mattel. What about the future sale of Mattel toys? Will people stay away from the toys made in China? We will have to wait and see.
Look at the label on your toy and read where it is made. You will find that 3 out 4 toys that you have were made in China. There is a good reason for it. China ships over $30 billion worth of toys globally every year. US companies alone buy over $20 billion worth of toys from China.
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What is Foreign Currency Exchange Rate?
In the last volume (What is Currency? Volume 11), we talked about currency of a country. In this volume, we will talk about foreign currency exchange. Normally, if you live in a country, you will need the currency of that country to buy things. So, if you want to buy an ice-cream cone anywhere in US, you will need US dollars, if you want to buy a burger in London, you will need British pounds, and if you need to buy a painting in Paris, you will need Euros.
The current volume of global travel and global trade is at its highest level in the human history. People of one country travel to another country, or, buy things made in another country, therefore we need to learn about foreign currency exchange rate. Exchange of foreign currency is an old system for people to buy or sell currency of another country. The rate at which one country’s currency can be sold or bought is called the Foreign Currency Exchange rate.
Let us say you want to visit Japan. You will need Japanese currency, i.e., the Japanese Yen when you are in Japan. You can buy Japanese Yen by paying in US dollars, through a foreign currency exchange dealer (these dealers buy or sell currency of different countries.) For each US dollar, the dealer will give you certain number of yens, calculated by the Exchange rate for yens per dollar for that day. Let us say you have one hundred US dollars and the exchange rate for Yens per Dollar is $1 = 115 Yens. So you can exchange $100 for 11,500 yens! Although you may suddenly feel very rich, you will soon realize that your wealth is short-lived. It will cost you about 150 yens for a soda pop in Japan, a hamburger may cost 500 yens in McDonald, and cab ride from the airport to your hotel may cost more than 5,000 yens.
How does the exchange rate change and why? We will talk about this in the coming week. Here are some key exchange rates for the week ending August 17th, 2007. One US Dollar ($) = 114.2 Japanese Yen(¥), = 0.7 European Euro(€), = 0.5 British Pound(£), = 7.6 Chinese Yuan, = 40.9 Indian Rupee(Rs.).
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Your Favorite Stocks (For details click Volume 5)
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Company
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Company known for?
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If you bought one stock in Jan-07
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This week stock is?
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Your gain or loss?
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Mickey Mouse, Toys, Entertainment, and more.
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$34.20
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$32.68
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-$1.52
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Frosted Flakes, Rice-Krispies, and more.
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$49.89
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$54.20
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$4.31
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Fast food hamburgers, restaurants and more.
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$43.87
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$47.57
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$3.70
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Weekly Stock Market Summary
Bears Market-Stocks Down!
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Aug 13-17, 2007
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Index
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Change
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Last
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DOW
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Down 159
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13,079
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S&P500
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Down 7
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1,446
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NASDAQ
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Down 62
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2,505
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What is Economy? The word economy means everything related to the production and use of goods and services in an area. On a daily basis we buy many things (products) that come from many businesses, such as, food, drinks, toys, cars, etc. When we buy or not buy such products it affects businesses, economy and all of us.
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What is a Stock? A stock is a share of a business. So when you buy a stock of a company, say, McDonald's, you become a McDonald's shareholder or part owner of the business.
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What is DOW? The Dow (also known as DJIA or Dow Jones Industrial Average) tracks 30 large US companies stocks and it is 100 years old. DOW going up is good news as it indicates that the companies are expected to do well in the future.
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What is S&P500? Standard & Poor's 500, is also called S&P500. It tracks 500 companies and how they are doing. It is over 50 years old and most widely used because it is a better way to track the stock market. It represents over 7 out of 10 US public companies.
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What is NASDAQ? NASDAQ stands for National Association of Securities Dealers Automated Quotations system. It sounds complicated but it is a highly computerized stock market. It was started in 1971. It has over 3,200 companies that are leaders in technology, communication, media etc.
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What is a Business? Business offers goods and services to customers for money. Businesses create jobs for people who work to make goods and or provide services for other who need them.
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Who are the Workers? The people who work at the businesses are also called workers. Workers are paid money which they use to take care of their loved ones. When these workers are paid money they pay some money to the governments, called taxes, so that the government can provide the services to the communities where we live such as schools, police, fire station, parks, roads, and many more.
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What are Goods? Goods are things that you can see, such as toys, balls, dolls, candies, cereals, etc.
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What are Services? Services are things that are done for others for money, such as, barber gives you service of hair cutting, waiter serves you food at the restaurant, etc.
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What is Currency? See Volume 11
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We use multiple information resources, such as, websites, companies, stock exchanges, newspapers, libraries, and books.
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