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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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In the United States, stock exchanges are regulated by the Securities and Exchange Commission (SEC)SECURITIES AND EXCHANGE COMMISSION In the United States, stock exchanges are regulated by the Securities and Exchange Commission (SEC), which was created by Congress in 1934 during the Depression. It is composed of five commissioners appointed by the President of the United States and approved by the Senate and a team of lawyers, investigators, and accountants. The SEC is charged with making sure that security markets operate fairly and with protecting investors. Among other acts, they enforce the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. The SEC is also in charge of monitoring insider trading as well as detecting corporate fraud. Insider trading is a form of trading in which corporate officers buy and sell shares within their own companies. This type of trading is widely influenced by inside information that only corporate officers have access to. Many off-floor traders keep track of insider trading to gauge the movement of a specific stock. In addition, there are a multitude of regulations aimed at preventing corporate officers from profiting from information not released to the general public during mergers or takeovers. Corporate Fraud Corporate fraud has been in the news a great deal in the United States since the accounting scandals of 2002 rocked Wall Street and the U.S. economy. The collapse of Enron, the bankruptcy of WorldCom, and a series of lawsuits against high-profile executives, including Martha Stewart, give the impression that global corporate fraud and misconduct are rampant. This, of course, occurred during the second year of a bear market a period that saw some stocks lose 50, 60, and sometimes 70 percent or more of their values, Since stocks were already reeling, the exact impact on the stock market as a whole is difficult to determine. Therefore, the exact impact of the corporate misconduct remains difficult to quantify. While the exact impact of accounting scandals and corporate fraud is difficult to measure, without question the fact remains: The Enron debacle and subsequent bankruptcies have eroded investor confidence in U.S. financial markets. They also dealt a financial blow to the shareholders of bankrupt companies like WorldCom, Enron, and Adelphia Communications. On a national level, the scandals and fraud left many investors wondering, who is next? When will the next shoe drop? Those concerns served to keep many investors away from stocks. Unfortunately, there is little hope for a market rebound during an absence of prospective buyers. Eventually, some of the concern faded. On February 11, 2003, Federal Reserve Chairman Alan Greenspan said that he believed that the corporate scandals that shook Wall Street in the summer of 2002 were reaching an end. I would be very surprised if it were initiated beyond mid-2003, the Fed chairman said in a speech to the Senate Banking Committee. It is not a problem for the immediate future. One reason for his optimism stemmed from the passage of the Sarbanes-Oxley legislation approved by Congress in 2002. The new law restored some of the lost investor confidence. Yet investor confidence can prove fragile. While it is hard to tell just what impact corporate scandals had on the stock market, it is clear that investors have begun to recognize it as an additional risk. As time passed, some of the fears and uncertainty began to fade. Stricter regulation and greater enforcement by the Securities and Exchange Commission have played important roles in shoring up investor confidence in financial markets. Still, believing that every issue related to corporate malfeasance and accounting scandal has been solved would be naive. In fact, such problems might resurface at any time and rekindle investor jitters. If and when this scenario will play out again is unpredictable. Nevertheless, corporate misconduct is an important factor to consider before stepping into the financial world. Make sure that all your trades consider the possibility that such problems could resurface anytime in the not too distant future. Manage your risk! INFLATION CATEGORIES AND GOVERNMENT IMPACT Economists recognize two principal types of inflation: cost-push inflation, in which increases in the cost of raw materials and/or labor are reflected in higher prices, and demand-pull inflation, which is caused by the demand for goods increasing faster than the supply. Cost-push inflation usually results from a chain of related events. For example, if the labor costs involved in producing a specific raw material rise, the supplier of that material will pass on the increase to the manufacturer who uses the material in a finished product. The manufacturer, in turn, raises prices on the finished product in order to protect their profit margin. The consumer who buys the product ultimately pays for the higher cost of labor in the price of the product. When this happens in several industries at once, consumers who are also workers demand higher wages to help meet the increased prices. This, in turn, sets off another round of price increases as manufacturers and retailers attempt to recoup their higher labor costs. As the cycle continues, it raises the cost of living for everyone. Demand-pull inflation, in contrast, is caused by increased demand for a product or material, or by scarcity of that commodity. During the 1970s, many of the worlds oil-producing nations held their product back from the market at a time when demand for petroleum was increasing rapidly. The results were across-the-board increases in the prices of oil, gasoline, and synthetic materials made from petroleum. In turn, refiners, power generating companies, and manufacturers passed along the higher prices of crude oil to consumers. In addition, the fuel costs of freight haulers who delivered goods rose, and these, too, were passed on to consumers. In some instances, demand for goods is stimulated by the availability of extra dollars. The amount of money in circulation increases faster than productivity in the economy, leading to greater demand. In effect, money chases supply. For example, during the 1960s, the government increased the amount of money in the economy rather than raising taxes to pay for the war in Vietnam. The resulting inflation was, in effect, a hidden tax to pay for government operations, because wage earners were pushed into higher tax brackets. The federal government can impact inflation and the overall economy in three major ways. First, the government can spend more money than it collects in taxes, duties, and fees. Such deficit spending tends to stimulate the economy. But the government must borrow the difference between its income and expenditures, usually by selling Treasury bonds or bills. When the government enters the credit markets, it competes with other big borrowers, such as corporations, for the dollars that are available. The resulting increase in demand for money tends to raise the interest rate. Rising interest rates reduce the overall demand for many goods and services, particularly those that are financed, such as housing, durable goods, and plant and equipment. Thus, initially deficit spending tends to increase overall demand, while borrowing to finance the deficit tends eventually to decrease such demand. The net inflationary impact depends on the state of the economy and the relative effects of these two forces. If the economy has slack in it, additional stimulation has little or no inflationary impact. If the economy is already booming, further stimulation can push up prices dramatically. The relative effect of the deficit depends on how it is financed. This always prompts an economic debate on how best to impact our economy: balanced budgets versus deficit financing. The second way in which government can affect the economy is through its taxing policies. By raising taxes, government can slow the rate of growth in the economy. By reducing taxes, it can provide more money for economic growth. Over the years, the Congress has tended to use this technique to stimulate specific areas of the economy. For example, the deduction for mortgage interest payments on personal residences was designed to boost the home-building industry and the many other industries it influences. The investment tax credit, which was repealed in 1986, was instituted to encourage businesses to expand their plants and buy new equipment. Other tax measures have targeted areas in similar ways. Finally, the third major government influence on inflation and the economy is the Federal Reserve. One of its jobs is to regulate the supply of money in the economy. If the money supply grows too quickly, prices will rise faster than productivity, which fuels inflationary pressures. If the Federal Reserve tightens up on the money supply too much, it could throttle a growing economy. Despite the fact that the Federal Reserve is a government-chartered corporation, it is not required to work with other branches of the government to coordinate action affecting the economy. However, the Federal Reserve is required to report to Congress, and Congress can change the laws affecting it. In addition, the President appoints its membership. In some cases, actions by the Federal Reserve may be opposite those of the Administration and Congress, causing mixed economic results. Regardless of the current political environment a savvy investor must be keenly aware of the current inflation trend and the impact it has on the investors savings, income, and portfolio. This understanding can make a major difference in an investors financial future. |
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