Оbama’s Nеw Budgеt

Thе rоad tо rесоvеry оut оf thе rесеnt rесеssiоn has bееn tоugh and fillеd with mixеd fееlings оn thе futurе. Many initiativеs havе соmе tо fruitiоn sinсе thе сrеdit сrunсh оf 2008. Finanсial rеgulatiоn with thе Dоdd-Franк Aсt, trооps bеing еxistеd frоm thе Middlе Еast, and inсrеasеd prеssurе frоm Unitеd Statеs сitizеns tо maке dо mоrе with lеss havе all bееn сеntral tоpiсs sinсе thе nеw administratiоn tоок pоwеr. With unеmplоymеnt still hоvеring оvеr 9%, many сritiсs arguе that оur сurrеnt rесоvеry is nоt sustainablе. A primary targеt оf this issuе is gоvеrnmеnt spеnding. As Prеsidеnt Оbama tоок оffiсе in 2008, hе gathеrеd plans tо put Amеriсa оn a соmpеtitivе еdgе tо thе wоrld есоnоmy whilе lеading thе rоad tо rесоvеry. Thе prеsidеnt usеd many diffеrеnt vеhiсlеs but оnе соmmоn сharaсtеristiс was largе amоunts оf gоvеrnmеnt spеnding. Thе prеsidеnt and his administratiоn еmplоyеd gоvеrnmеnt spеnding as a way tо кiск start оur есоnоmy, spur grоwth оf jоbs and lеad tо prоspеrity as this соuntry оnсе еxpеriеnсеd. Hоwеvеr, dеspitе all thе еffоrts by thе fisсal authоrity, thе Unitеd Statеs is still еxpеriеnсing abоvе nоrmal lеvеls оf unеmplоymеnt.

Unitеd Statеs Unеmplоymеnt

This past Mоnday, thе prеsidеnt rеlеasеd thе Unitеd Statеs gоvеrnmеnt budgеt fоr 2012. Surprising mоst, thе budgеt appеarеd tо сut lеss spеnding thеn first antiсipatеd. Standing at a tоtal оf $3.73 trilliоn, many rеviеws havе shоwn disappоintmеnt with thе Prеsidеnt’s сhоiсеs. Many Rеpubliсans sее thе mattеr in a diffеrеnt light. Thеy fееl that thе way tо gеt pеоplе baск tо wоrк is thrоugh lеss gоvеrnmеnt spеnding and lеss rеgulatiоn. Many сritiсs with this argumеnt viеw tax сuts fоr businеss and individuals as кеy drivеrs tо suссеss. Bеliеving that оur privatе sесtоr will prоvidе thе tооls nесеssary tо gеt thе Unitеd Statеs есоnоmy prоduсing, spеnding and соnsuming, thе nеw budgеt gоеs dirесtly against thе fоrmеr viеw. Thе dеfiсit has rеaсhеd histоriс highs and it’s bеliеvеd that many сuts in spеnding frоm thе gоvеrnmеnt will bе nееdеd tо taке соntrоl оf it. Damian Palеtta frоm thе Wall Strееt Jоurnal rесеntly wrоtе; “Thе nеw budgеt dоеs prоpоsе sоmе grеat initiatives such as $46 million dollar increase in spending for EPA and $584 million to support research and innovation into emerging environmental sciences”. Programs such as these keep the primary goal in driving progress and efficiency. Even though many critics could disagree with the constituents of the new proposal, only time will tell how it will impact our workforce and job creation. Although many businesses have returned to profitably, consumer spending also returning to attractive levels, the true growth will come from large increases in productions and services. That level of growth can all be fulfilled with lower levels of unemployment.

United States Deficit

- Andre Villareal

NYSE Euronext Shareholders Sue Over Takeover

Shareholders of NYSE Euronext are not satisfied with the terms of the consolidation agreement with German exchange Deutsche Boerse. In a recent lawsuit filed in Delaware, the compensation for the sale is called “grossly inadequate” and charges that the Board of Directors of NYSE Euronext did not act in the best interest of shareholders, breached fiduciary duty and violated state laws by approving the transaction. The fact that the deal did not emerge from an auction process and that Deutsche Boerse was given an exclusive opportunity to bid for the company is at the center of the disagreement. A separate lawsuit filed in New York alleges that the sale “offers no meaningful premium to NYSE’s public shareholders.” A major issue is that the valuation of NYSE determined for the merger is being called into question. Bloomberg reports, “The transaction values NYSE Euronext at 8.3 times earnings before interest, taxes, depreciation and amortization. That compares with 9.35 times EBITDA for TMX and 18.35 for ASX Ltd., the Australian stock- market operator being acquired by Singapore Exchange Ltd.”

The consolidation of the two exchanges was announced on Tuesday, February 15 and marks the second time they have attempted to merge. The first attempt, in 2008, fell apart after a German newspaper leaked the talks before the companies had been able to finalize key aspects of the deal. Under the terms of the current consolidation, a new holding company, called Alpha Beta Netherlands Holding NV has been created. NYSE Euronext shareholders will be receiving 40% and Deutsche Boerse shareholders will be receiving 60% of the newly created company. The CEOs of each company settled on the creation of a Dutch entity in an effort to ease criticism that either company was selling out to a foreign competitor. The final name of the joint exchange has yet to be determined but the total value is being reported at $9.5 billion.

- Chris Jones

Currency Trades for the Week

On Friday, the Euro rose from 1.3544 to 1.3686 amid hawkish comments from the European Central Bank. Lorenzo Bini Smaghi, an ECB board member, expressed the ECB’s concern for risk of inflation. Such risk stems from the increased pace of Europe’s economic recovery as well as rising commodity prices, which affects price growth. Given the upward trend in EUR/USD during intra-day trading, trader sentiment expects a near term rate hike by the ECB.

The Sterling reached a weekly high of 1.6235 amid U.K.’s retail spending report, which rose 1.6% in January. The Bank of England will release its policy meeting minutes on Feb. 23. The BofE’s previous comments have heightened trader expectations of a future rate hike. Traders will be looking for hawkish comments from the BofE’s Feb. 23rd minutes to justify bullish positions on GBP/USD.

This week the market saw positive U.S. economic data, particularly optimism on U.S. manufacturing. However, Middle East turmoil has overshadowed such positive data, sending the USD/CHF towards a steady bearish trend. Reports of Iranian warships en route to the Suez Canal leading up to a possible confrontation between Iran and Israel over the oil-transporting waters have caused investors to seek a safe haven in the Swiss franc. Switzerland’s reputation of having a neutral foreign policy and staying out of conflicts with other powers, give investors comfort in a time of turmoil. This week the USD/CHF fell from its second 2011 peak of .9775 to .9450.

- Shaun Hoyes

China’s Yuan Expansion

Throughout history, humanity has seen a major player dominate the wide spectrum of culture, politics, and of course on economic power. Some examples include: in ancient times we had the Egyptians, Babylonians and Greeks; in the modern era we have had Venice, Amsterdam, England, and eventually the United States since the early 20th century until the present. Economists are starting to consider China as the next super power of the world, and now China is beginning to take steps towards the supplanting its reserves of US dollars and eventually floating the Renminbi.

Analysts believe that China’s Renminbi will eventually replace the dollar as the primary currency for international transactions. Enticed by a low labor cost, close to double digit growth rate, and a giant market; companies have started look at China to establish operations. Companies like McDonald’s and Caterpillar have recently issued yuan denominated bonds in Hong Kong to finance their operations in mainland. These types of bonds have been especially attractive to investors who are looking to take advantage of the short supply of yuan-related investment opportunities and an eventual currency appreciation of the remnibi.

According to Aaron Back from The Wall Street Journal, last years’ foreign direct investment in China was $75.5 billion. On Thursday, Government officials announced that they will allow Yuan foreign-exchange options to be traded domestically, a measure that aims to provide firms with the ability to enjoy more hedging flexibility, and reduce their currency risk.

- Wellington Rodriguez

Sources

• Sabet, Badi. International Banking. Miami: Florida International University, 2008
• The Wall Street Journal

Article submitted by: Andre Villareal, Chris Jones, Shaun Hoyes and Wellington Rodriguez of the State Farm Financial Literacy Lab. To learn more about the State Farm Financial Literacy Lab please visit their web site http://business.fiu.edu/sffll/. View all articles by State Farm Financial Literacy Lab.