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We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
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Monday, July 07, 2008
Dutton Associates Announces Investment Opinion: General Steel Holdings Strong Speculative Buy In Update Coverage By Dutton Associates
Comtex
ROSEVILLE, Calif., Jul 07, 2008 (BUSINESS WIRE) ----Dutton Associates updates its coverage of General Steel Holdings (NYSE: GSI) with a Strong Speculative Buy rating and a price target of $14.60. The 13-page report by Dutton senior analyst Stanley Ng is available at www.jmdutton.com as well as from First Call, Bloomberg, Zacks, Reuters, Knobias, and other leading financial portals.
We believe investors should consider the disappointing financial results for 1Q08 for General Steel as an atypical non-recurring event because the higher-than-expected revenue and sustained increase in product prices suggest General Steel's products are in strong demand. The positive demand drivers, such as massive infrastructure and construction projects in the Shaanxi Province, growth in the energy sector along with the need to transport oil and natural gas through steel pipes, and higher demand for hot rolled carbon and silicon steel sheets for producing agricultural vehicles, discussed in our previous update report, will remain intact. Meanwhile, the sourcing of cheaper iron ore from its joint venture partner and the shift in product mix to higher margin silicon sheet at Daqiuzhuang Metal should contribute to visible improvement in gross margin ahead. Based on our revised revenue and net income forecast, the stock is trading at estimated 2008 PE of 12.5 times, which is at a substantial premium over its Chinese peers. Given its much higher ROE, more prestigious NYSE Arca listing status, inclusion in the Russell 3000 Index and forecast impressive 84.3% net income growth in 2009 driven by its latest acquisition of Hengda Steel, we believe General Steel will continue to trade at a significant premium to the average PE valuation of its Chinese peers. At our new target price of $14.60 per share, the stock is trading at prospective fully diluted 2008 PE of 17.8 times and 10.0 times for 2009.
About Dutton Associates
Dutton Associates is one of the largest independent investment research firms in the U.S. Its 30 senior analysts are primarily CFAs, and have expertise in many industries. Dutton Associates provides continuing analyst coverage of over 140 enrolled companies, and its research, estimates, and ratings are carried in all the major databases serving institutions and online investors.
The cost of enrollment in our one-year continuing research program is US $35,000 prepaid for 4 Research Reports, typically published quarterly, and requisite Research Notes. The Firm does not accept any equity compensation. We received $35,000 from the Company for 4 quarterly Research Reports with coverage commencing on 11/05/2007. Our principals and analysts are prohibited from owning or trading in securities of covered companies. The views expressed in this research report accurately reflect the analyst's personal views about the subject securities or issuer. Neither the analyst's compensation nor the compensation received by us is in any way related to the specific ratings or views contained in this research report or note. Please read full disclosures and analyst background at www.jmdutton.com before investing.
SOURCE: General Steel Holdings
Dutton Associates John M. Dutton, 916-960-0623
Copyright Business Wire 2008
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