With the passage of the national banking legislation, the Republicans completed process of building a new infrastructure that would allow them to fi nance the war. Although their measures did not dismantle fi scal federalism,  they did push the limits of antebellum fi nance in new directions. As the war continued, they would have to learn how to meld the past with the future in order to carry the nation through this crisis. Th e policies they enacted did not represent a new, innovative, or uniquely Republican way of looking at the economy. Instead, at each turn, they had turned to precedents. In the process, they altered the course for the public economy and fi nancial structure of the government.

The national bank system had significant flaws that hurt rural economies during the late nineteenth century; however, the urgency of the country at the start of the war ‘made such banking legislation fi nancially desirable and politically feasible’. Th e ‘exhausted condition of the Treasury’ that began before the war, and continued through 1863, compelled reluctant lawmakers to adopt a new system of national banking. Chase expressed his earnest desire for a  ‘circulation of notes bearing a common impression and authenticated by a common authority’, in both his 1861 and 1862 Annual Reports to Congress. He wanted a system of national banks established that would facilitate the distribution of this common money. He did not wish to create a new model of banks; nor did he wish to resurrect the Bank of the United States. Instead he based his vision of the national banks on the New York Free Banking law; ultimately this antebellum measure would become the basis for the national banking system. The difference would come from consistency and oversight; whereas the individual states had a spurious system of regulation, the National Bank system would have national government oversight. Bonds of the national government, not state bonds or speculative railroad bonds, would provide the basis for the reserves for these banks. ‘Th e people in their ordinary business would find the advantages of uniformity in currency; uniformity in security’, and have a ‘safeguard against depreciation’, said Chase.

Corporate bond investors should target industries with a balanced business risk and financial risk profile. In mature industries cash flows become increasingly predictable and capital expenditures of companies tend to stabilize.

In such an industry the task is to select those companies who succeeded in controlling their cost structures and operate at efficient levels.

Those sectors will show a stable credit trend. Structural changes might push a whole industry into a declining stage. Companies out of those industries will experience structural losses, hence their credit metrics will deteriorate. Management will have no options available to stop this trend. In a next step the competitive environment of an industry has to be analyzed.

The 5-Forces diagram by Michael E. Porter summarizes best the interaction of an industry with its economic environment. An understanding of those relationships is essential for the projection of credit trends in a sector. The competitive environment determines profit margins and the pricing power of companies.

The analysis of an industry’s life cycle is useful for making projections about profit margins, earnings growth, trends in sales and profitability. To simplify things it is quite common to reduce the entire life cycle of an industry to 5 stages Such a 5-stage model is described by Reilly and Brown (2003). Abrief description of the different stages will follow next.

Pioneering development: A modest sales growth is accompanied by small or negative profit margins and profits. The firms face high R&D costs. Most recent examples are high-tech companies or internet-based companies with unproven business models. Most of the financing is obtained through venture capital or private equity.

Rapid accelerating growth: Demand for products and services grows and due to only few competitors, profit margins are high. Firms experience substantial backlogs and production capacity is being built up. At this stage successful companies will be able to access the capital markets for further financing.

Mature growth: An increasing number of competitors enter the market. The demand for the industry’s goods and services is satisfied, prices decline and profit margins begin to decline. At this stage financial discipline is important because future earnings might be lower due to competition. Companies with sustainable debt levels will benefit in the long run.

Stabilization and market maturity: The growth rate of the industry declines to the growth rate of the aggregate economy and profit growth will vary by industry due to different competitive structures. Competition will result in lower profit margins. In this stage industry trends will contribute to the development of aggregate credit quality.

Deceleration of growth and decline: Sales growth declines because of changes in demand and new substitutes. An increasing number of companies start to generate losses. The industry experiences a negative credit trend.

Besides fundamental developments the risk appetite of investors is a driver of the spread differentials between various risk classes. Risk appetite in general describes the willingness of market participants to invest in risky assets as opposed to risk-free assets. Clearly, risk appetite is an unobservable factor but there are various indicators that are designed to extract a measure for risk appetite or risk aversion from market data. More details on this subject are provided later With respect to the performance of subordinated bonds versus senior bonds, there is an impact of risk appetite.

Spreads usually widen when risk appetite falls and tighten when risk appetite increases. From this chart there seems to be a lead–lag relationship between risk appetite and subsequent credit spread changes. If the leading character of risk appetite holds for the future it may provide valuable trading signals for subordinated financials.

Let’s say that you want to buy the example property we mentioned earlier. Remember, this property consists of two houses on one 5,197-square-foot lot, which were built in 1948. The mix has two one-bedroom houses that are in good condition. The owner wants $279,000 for this property. Is that a fair price? We’ll see. After checking with a few local brokers and appraisers, let’s further assume that you are able to locate three comparative sales (comps). We’ll call these comps Properties “X,” “Y,” and “Z.” Here’s what we know about those properties.

Property “X” also has two houses and looks like it may have been built by the same contractor as the property you want to buy. The difference is both units have two bedrooms each (the Lawndale duplex has one one-bedroom and one two-bedroom). Property “X” also has nicer landscaping. This property sold two months ago for $293,900.

Property “Y” is an attached duplex, was also built in 1948, and is the same size and condition as your property. The units have open parking instead of garages. This building sold a few months ago for $264,000.

Finally, Property “Z” is also just like the property you want except that it sold one year ago for $262,000. Because the sale occurred so long ago, it may be less relevant, albeit still important, to analyze, for there aren’t any other comps available.

What does it cost to run this property? That is  the next component to understand. Expenses include such things
as:

Property taxes
Insurance premiums
Utilities
Gardening costs
Management fees
Maintenance and repair costs
Vacancies, etc.

Note that you will not be including interest expense here for  the capitalization-of – income approach assumes you paid all cash  for your building (even though you didn’t).  Although getting an accurate analysis of expenses may be easier  said than done, it is still imperative that you do so. One owner  might not pay for professional management yet another may, and  one owner may have rents too low and another may be right on.

Whatever the case, finding out what the expenses actually are is  critical to determining if the property is a sound investment.  Often, appraisers are forced to estimate the expenses for a certain  property based on the type of property that is being appraised and the area where it is located. Obviously, a duplex with no amenities  has far less expenses than a full-security building with tennis  courts and extensive landscaping does. Similarly, the cost of heating  a building in Boston, for example, will be considerably more than  heating one in Arizona. Remember that these types of size and regional  differences must be accounted for when analyzing expenses.

The final item needed for this valuation method is the expected capitalization rate. The capitalization rate is determined by understanding how much of a return investors can expect to realize in a particular market. The rate will vary in different parts of the country, in different parts of a city, even in buildings within a few blocks of each other.

Additionally, residential, commercial, and industrial properties also have varying capitalization rates. Remember, because the capitalization rate measures the profitability of an investment, certain types of properties involve other risks and thus dissimilar profit possibilities.

Before all the hype about stocks, back in the Dark Ages of investing, novice investors put everything into savings accounts. After a few years of experience, they ventured into the bond market. Five years playing with government bonds led to another five years investing in corporate bonds. Having built up capital and emotional tools, these apprentice investors then bought utility stocks, blue chip stocks, or real estate. Another decade or so and they were ready for speculation in tech stocks, emerging market stocks, commodities, and anything else the markets could throw at them. At each stage of development, the investor learned the emotional twists and turns of investing along with the knowledge of companies and markets.

Today, investors start with tech stocks, possessing little knowledge of companies or markets and never building the emotional skills needed to handle the most challenging investments. Each stage of investment maturity triggers different emotions. Saving triggers different emotions than investing, which in turn triggers different emotions than speculating. Some of you have MBAs or CPAs and can quickly pick up company and market data. Others are therapists or trained emotionally to handle conflicts. Most readers are neither. This chapter will define common types of emotional traps you will encounter with investments. Chapters 4, 5, and 6 will show how savings, investments, and speculations trigger emotional reactions. Then, Chapter 7 shows how portfolio structure can twist your emotions. These five chapters will give you the emotional information equivalent to that of a 20-year, full-time investor. Step 2 will raise your level of self-knowledge so that you can determine what investments are appropriate for you.

It’s a question that comes up almost every time I sit down to help someone dig their way out of debt: should I wait until I’m out of debt to start saving toward retirement? Unfortunately, the answer doesn’t consist of a simple yes or no. Rather, the answer is probably a combination of “maybe” and “some.”

For the most part, we want to free up everything we can to get rid of our short-term debts before we dive headfirst into retirement planning. But there are four things you should be doing today, even if you are putting the majority of your free income toward paying down debt:

1. Take the 401(k) match. If your employer is willing to match your retirement plan contributions, I’d recommend contributing up to the point where they stop matching. Even if they only match you fifty cents for every dollar you contribute, that’s like getting a 50% interest rate on your savings in the first year.

2. Take the IRS match. Did you know Uncle Sam will also match you for saving money into a retirement plan or an IRA? The Retirement Savings Contribution Credit effectively gives you a bonus on your tax return in the form of a tax credit. This credit ranges anywhere from 10 to 50% of the amount contributed for unmarried wage earners who make under $26,000 ($52,000 for married filing jointly). Check out IRS Publication 590 for more details.

3. Buy your company’s stock. If your employer gives you an opportunity to buy shares of your company stock at a discount, this may be worth doing. Often, companies offer their employees a substantial discount on the current purchase price of their stock—sometimes as much as 15%. Additionally, the IRS may offer additional tax benefits in retirement to employees who invest a portion of their 401(k) or employer-sponsored plan assets in company stock. Of course, if you think your company’s stock is headed south, you’ll probably want to steer clear. Talk with your investment and tax advisor for more details.

4. Stay put at that good job. Do you have one of those increasingly rare jobs that promises to pay you a monthly pension when you retire? If you do, I’m jealous. Before you jump ship and go searching for greener pastures, find out how much longer you need to stay to lock in your future benefits. Another couple years at
the same desk may be a worthwhile trade-off for that monthly check at retirement.