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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
Wednesday, January 23, 2008
Buy Order
Electronics for Imaging Stock Packs Long-Term Punch
Matt Egan
FOXBusiness
NEW YORK--Shares of printing technology company Electronics for Imaging (EFII) have tumbled more than 40% since the beginning of this
year, but that doesn’t mean it's time to sell the stock.
John Buckingham, CEO and chief investment officer of Al Frank
Asset Management, said now is a perfect time to buy shares of the battered stock.
Unlike several other tech stocks,
like Apple (AAPL) and Google (GOOG), which are looked at as the “cool” stocks to have in your portfolio, Electronics for Imaging
is just a value buy, plain and simple, said Buckingham.
“It’s not a sexy story, it’s a boring one," said Buckingham.
"It’s not a hot stock, it’s a cold one.”
Then why buy? Buckingham said the company still has a bright future and
is cheap at about $13 a share.
He said Foster City, Calif.-based Electronics for Imaging, which sells printers,
servers and other products, is best suited for long-term investors: those looking to hold onto it between three and five years.
The stock price fell after the company released its preliminary fourth-quarter earnings on Jan. 9, saying its earnings
per share will come in between 22 cents and 24 cents. Analysts polled by Thomson Financial had estimated Electronics for Imaging
would report earnings of 37 cents a share. The stock sold off on the news.
The company blamed the miss on “weak demand”
for its Fiery digital print servers and higher-than-expected operating expenses.
Buckingham noted that the quarterly
earnings still don’t change the fact that Electronics for Imaging has little to no long-term debt and $550 million in cash
and equivalents on its balance sheet, which equates to $9.50 a share. “So you are essentially paying $3.50 for the business
right now,” said Buckingham.
Also, analysts polled by Thomson are still forecasting earnings of more than $1 a share
for fiscal-2007. The consensus recommendation for Electronics for Imaging is hold.
“Many investors don’t pay attention
to valuation in tech. They will buy when companies have hot products and sell when they have cold products,” said Buckingham.
Electronics for Imaging’s Fiery server is certainly its cold product but the company said it sees growth momentum
in its inkjet segment with an expected 25% rise in sales year-over-year in the first quarter.
Buckingham conceded
that Electronics for Imaging, like many other companies, will be negatively affected if the economy falls into a recession.
“Yes, we may enter a recession but ultimately you emerge from a recession," said Buckingham. "The great opportunities
to buy companies on sale occur at times like these. And they occur because there are more sellers than buyers."
He
likened it to buying another beaten down tech stock years ago: Apple. Buckingham said he bought the stock when it was worth
just $7 a share.
“At the time the iPod was just a twinkle in Steve Jobs’ eye. The amazing thing is no one liked Apple
at $7 but they like it at $167,” said Buckingham.
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