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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.
Home / Markets / Industries / Technology
Tuesday, October 30, 2007
Buy Order
Buy Order: A Fresh Look at Hewlett-Packard
Kathryn Glass
FOXBusiness
NEW YORK--
For one fund’s money, the personal-computer market isn’t a horse race anymore.
In the investment back-and-forth between Hewlett-Packard (HPQ) and Dell (DELL), Hewlett-Packard
has pulled away enough that Rigel Capital, a firm in Seattle with $2.3 billion in assets under management, has made it its
top holding, said Richard Stice, a Rigel vice president and analyst.
“HPQ is our number one position in the portfolio
now, because we think the manner of change has been very positive in the last couple years,” he said.
Stice said
that change came when Mark Hurd stepped in as chief executive in 2005 and began cutting costs to beat out Dell. Since
then, the company has reported consistent revenue and earnings growth and has shown market expansion, improved operational
efficiencies, and strong technical characteristics, Stice said.
HP has been the leader in global
PC sales since the third quarter of 2006, and Stice thinks it’s likely to stay that way, despite Dell’s recent efforts to
reorganize and make a comeback.
“We do have a small position on Dell because we think they’re starting to get their
act together and become stronger,” he said. “But HP continues to expand its business overseas and improve sales in various
business segments like printing and software.”
HP has done well in the global market, with close to two-thirds of
its revenue coming from overseas, Stice said. The weak dollar has helped to boost sales abroad, but irrespective of the dollar,
he thinks HP will continue to be successful in emerging markets. The company’s strategy is likely to be successful in markets
like
Stice looks for the company to
continue to right-size in the coming months and said he will watch to see if it uses the extra cash on its balance sheet to
make more acquisitions or to buy back shares of the stock. HP acquired software supplier Opsware last July for $1.6 billion,
maintaining a trend of acquisitions designed to bolster its software business.
But the real question is what HP will
do to maintain its leading position in PC sales. Stice thinks the competition is going to intensify.
“They have a nice lead now, but the question is, ‘How will they handle it?’” he said.
Regardless of what Dell does,
Stice said HP is still a good investment.
“This is a company that is technically strong with a good management team.
It is number one in the PC space, has strong cash generation, continues to gain market share and has more consistent execution
than the competition; it’s a good buy,” he said.
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