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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, February 12, 2008
Buy Order
Dell Targets Mistakes, Becomes a Hot Buy
Kathryn Vasel
FOXBusiness
“Dell is a world-class company at a fire-sale price from every perspective,” said David Katz, chief investment officer at Matrix Asset Advisors.
After losing its No.1 position in the PC world in 2006 to rival Hewlett-Packard (HPQ), many investors were left wondering if Dell would be able to stage a comeback.
The computer maker had a number of missteps in the last few years, Katz said, but they’ve taken many steps to rectify their mistakes.
“Two years ago they were doing a horrible job in customer service and producing a poor quality product,” Katz said. “But in the last few months you’ve seen trade publications give them favorable reviews. They’ve improved the quality of machines and dramatically improved customer service.”
After a rough 2006, founder Michael Dell took back the chief executive position early last year. "He really served as a catalyst and sparked the turnaround of the company," Katz said.
Weak economic data, slower consumer spending and recent disappointing corporate earnings reports have fanned fears of recession, but Katz said Dell is fit to weather the storm.
“Our take is, yes, we are in a recession, but it will be fairly short-lived -- there is already a fix in place with the Fed cutting interest rates and the stimulus package,” Katz said. “This has been the most talked-about recession and people are preparing for it, but consumers are willing to spend on new products and gadgets.”
Dell’s expansion in retail and new distribution methods will help it weather a recession, Katz said.
The Round Rock, Texas-based company changed its selling strategy in 2007 and joined its competitors at retail stores like Best Buy (BBY), Staples (SPLS) and Wal-Mart (WMT). For more than a decade, customers who wanted a computer had to call Dell directly and place an order to be shipped to them.
"Most people want to touch and feel a laptop or computer so when they go online to place a order they know exactly what it's like and what they are ordering having seeing it in person," Katz said.
According to technology researcher IDC, Dell shipped 4% fewer PCs domestically in 2007 compared with 2006.
Dell took a lot of heat for poor customer service in the last couple of years to earn the nickname “Dell Hell.” In August 2005, the University of Michigan reported Dell's customer service satisfaction dropped to 74 from 79, on a 100-point scale.
To try and improve customer service, the company launched Dell ProSupport earlier this month to get quality help to customers quickly by offering more tailored services.
Dell’s build up in international markets adds to its attractiveness, Katz said. Dell's global PC shipments grew 17.1% in the fourth-quarter, according to IDC's Worldwide Quarterly PC Tracker.
“Anywhere they are selling PCs, Dell is expanding there," Katz said. "We see tremendous opportunity for this company globally.”
Katz said his target price on the stock is somewhere between the high $20s and low $30s and expects it to hit those levels in the next 12 to18 months.
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