Consumer prices rise, industrial output jumps

The Bureau of Labor Statistics (a unit of the US Department of Labor) reported that the productivity grew at 1.6% in the 4th quarter of 2006.

What is Productivity and how is it important to the economy?

The Labor Productivity is the amount of output created per unit input used. The output is the goods produced and the services rendered. The input is the labor cost. The factors that cause the increase in productivity are 1.) The Technology. (automation and computerization) 2.) Workers comfort (such as good health).

Productivity is different from efficiency – the higher output is called increased productivity, the lower input used is called efficiency.

The higher prodcitivity also causes the decline in inflation because the unit labor costs decreases.

In 1990’s due to proliferation of PCs/Internet in work space (Do computers help the economy?), the productivity went up to 2.7% – a percentage point higher than what it used to be. That led to the largest expansion of the economy and the rise in stock market.

This graph shows the productuity growth from 1990 to 2006

In this article in Business Week, the author Michael Mandel riases concerns about the falling productivity and it’s effect on the economy.

Further Reading:

• How Productive Are We?
• Pructivity Report – Productivity in Industry and Government
• The New “Productivity Paradox”
• Productivity – What is it and Why do we care about it?
• The saving and investment in the rise and fall of the NEW economy
• Productivity in the 21 Century
• Exploding Productivity growth: Context, Causes and Implications

The economy added 97,000 jobs in February. The unemployment rate edged down to 4.5% from 4.6%. The Bureau of Labor Statistics releases these numbers every month

The companies some times resort to Poison Pill to prevent the leveraged buyout.

What is Poison Pill in Business?

The measures the company takes in order to avoid takeover bids. One common type of Poison Pill is “Shareholder Rights Plan”. The target company issues stocks (common or preferred) to the existing shareholders.

More and more companies are being taken private by means of levereged buyout. Some of the largest buyout in history are $31.8B for the Texas Power Company by Private Equity firms and Texas Pacific Group, The 21B buyout of HCA Inc and $46B buyout of Equity Office by Blackstone group.

What is Levereged Buyout?

The financial sponsor (private equity groups such as the blackstone group, the Carlyle Group, Warburg Pincus) uses the borrowed money to gain control of the target company. They use the assets of the companies as collateral for the loans. According to an article in Wikipedia, the debt/equity ratio is 70% debt and 30% equity. The equity component is provided by the private equity capital. It is utlimately the respobsibility of the acquired company to pay off the debt.

Credit Default Swap is one of the popular instruments for hedge funds.

What is Credit Default Swap?

It is a counter party agreement in which the Credit Risk is insured by the third party. The three entities involved are Lender, Borrower and the Insurer. The Counter Party (the insurer) agrees to insure the credit risk in exchange for an insurance premium. If the borrower defaults, the counter party will purchase the defaulted asset and pays the insured the remaining interest on the debt as well as the principal.

Counterparty – Party to a contract. There is a signed contract between the parties.

The rising Interest rate and the falling housing market are causing the borrowers to default on their mortgage. The subprime lenders such as Country Wide Financial, Accredited, HSBC, GM’s GMAC are suffering.

What is causing subprime lenders down fall?

Subprime borrowers are those who do not qualify for prime market interest rates because of limited or blemished credit. The banks that lend money to them charge them a higher interest rate due to higher risk. Competing for the customers, the banks started drastically lowering the lending standards since the end of 2005. As the interest rate is going up and the housing sector is in the downturn, more and more people are defaulting on their loans.

• Why Subprime Lenders are In Trouble
• Subprime Contagion ?
• Some of the Subprime lender’s Products

Today Greenspan said that the Carry Trade has limited room to run.

What is a Carry Trade?

The investors borrow in Japan where the interest rate is low (almost 0) and invest in high yield regions such as US – This is also called Interest rate arbitrage. As the Yen rises, the investors/traders head to unwind the position. In 1998 similar situation arose when Russia defaulted on the debt and the implosion of LTM. The yen surged 20% in less that 2 months.