Decoding Wall Street's Most Bizarre Headlines
Many people are intimidated by the stock market because they don't like math. But luckily, investing is just as much about words as it is numbers. That's because the amount of business jargon an investor has to learn easily rivals all the data, formulas and strategies that also compete for brain space.
The good news: We're here to decode it so you don't have to be afraid of it.
Here are three recent financial headlines, translated into words you can understand and apply to your daily life:
You might think this is the Pope giving the stock market a blessing, but in the trading world, a golden cross occurs when a stock's short-term moving average rises above its long-term moving average.
Technical analysts believe that when a short-term moving average overtakes a longer-term moving average, it's a bullish signal. So they tend to buy a stock when the short-term moving average rises above the long-term moving average, and they tend to sell when the short-term moving average falls below the long-term moving average. Whether or not you believe in technical analysis, it is undoubtedly a factor in market movements, and one that an individual trader may be able to use to his or her advantage.
So how, exactly, does it work?
Let's assume that Company XYZ's 15-day moving average has been about $14 per share and rising. At the same time, Company XYZ's 200-day moving average is about $16.50 -- but declining.
In the chart below, you can see that when a stock's short-term moving average rises above its long-term moving average, a golden cross occurs.
If the trends continue, XYZ's 15-day moving average may rise above the 200-day moving average, forming the heralded golden cross and signaling that it's a good time to buy.
In early 2012, the S&P 500's 50-day moving average rose above its 200-day moving average, signaling that the market's upward momentum was "for real" and thus might stick around a while (especially if the trading volume is high). So for bullish investors, a golden cross really is like a blessing from above.
You can see how the S&P formed a golden cross earlier this year:
A haircut is a reduction in an asset's value. In this case, the Greek government borrowed about $483 billion from lenders around the world. Now it can't pay it back. So if an investor owns a Greek bond with a face value of, say, $1,000, the Greek government may offer to pay back only $300.
Why would an investor settle for this?
Because $300 is more than $0.
When a debtor is in as much trouble as Greece, the only thing lenders can do is get together with other lenders and try to renegotiate with the borrower. Everybody knows that the borrower is probably never going to repay 100% of the debt, so the new objective is to get the borrower to pay back as much as possible. This headline says that the lenders (the bondholders) will probably get back only 30% of their money, which means they're going to take a 70% "haircut."
A haircut doesn't always mean that the lenders are just going to let the borrower off the hook. In Greece's case, the lenders might cut the interest rate on the debt way back or push the repayment date way out into the future if Greece agrees to pay them in full. In that case, the Greeks may agree to pay back the $1,000, but they might do it at 2% for the next 30 years instead of 5% for the next 10 years.
This Quentin Tarantino-style headline refers to a televised debate among Republican presidential candidates this past winter. In the debate, GOP presidential candidates railed against the Dodd-Frank Act, a law sponsored by former Sen. Chris Dodd and Rep. Barney Frank. The law was enacted by Congress in July of 2010.
The intent of the Dodd-Frank Act is to increase the regulation of large financial institutions and reduce the availability of bailouts to financial institutions. But like any piece of legislation, the Dodd-Frank Act has a lot of pieces. For example, it:
- Creates a Consumer Financial Protection Bureau, a Federal Insurance Office, and an Office of Minority and Women Inclusion
- Creates a the Financial Stability Oversight Council to identify and address systemic economic risks
- Creates an Office of Credit Ratings to regulate credit-ratings agencies more tightly
- Gives the SEC authority to make brokers act in the best interest of their clients
- Changes the government's ability to provide financial support to failing financial institutions
- Tightens regulations on mortgages, derivatives, and hedge funds
- Implements the "Volcker Rule," which limits how banks can invest their capital
- Closes the Office of Thrift Supervision
- Changes laws regarding executive compensation, and enforces other new and existing laws
Much of the criticism heaped on Frank-Dodd centers around the Consumer Financial Protection Bureau, which some say has too much independence from Congressional oversight. It's currently led by a person whom the President appointed while Congress was in recess, because Congress couldn't agree on any of his nominations.
Other concerns involve the degree to which the new regulations might discourage economic recovery, the degree to which the regulations can actually prevent another financial crisis, the high cost of creating new bureaus and offices and the vague nature of some of the legislative language.
In a Washington Post column defending the legislation, former Sen. Chris Dodd argues his bill isn't slowing economic recovery. He says the housing market, budget deficit and European debt crisis are the real threats. Dodd also claims the regulations are vital to consumer protection and the prevention of another financial meltdown.
It's certainly too early to know what the real effects will be, but economist Douglas J. Elliott from the nonpartisan Brookings Institute says Dodd-Frank may generate fewer jobs in the coming years in exchange for circumventing another financial crisis, which really was a job killer.
The Investing Answer: Sometimes, the news from Wall Street sounds like it's in another language. Luckily, you can always turn to the InvestingAnswers Financial Dictionary to help deconstruct even the most confusing headlines. And, if you'd like our help with more headlines, feel free to comment below or send us a note at firstname.lastname@example.org.