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We spend a good deal of time discussing financial ratios in these articles and in most cases, they provide sufficient academic fodder for us to debate the problems and challenges facing the economy. There is one ratio, however, that affects many of us on a deeper, more personal level: the dreaded debt to income ratio. Few of us realize just how important this ratio is in terms of its impact on our personal finances.

The debt to income ratio is used by commercial banks to determine whether individuals and businesses qualify for loans. If you’ve applied for a mortgage, chances are that someone reviewed this ratio. In a nutshell, the ratio is calculated by computing monthly debt payments and dividing them by monthly gross income. If the ratio falls below a certain level, you just might qualify. Suppose a bank sets that threshold at 50 percent. It would seek to approve loan applicants whose monthly debt payments are less than 50 percent of their monthly income. In other words, such applicants have sufficient income to cover their monthly debt service. Here’s where it gets interesting. The debt payments can be based on any or all of the following: mortgage principal payments, mortgage interest payments, property insurance, property taxes, credit card payments, auto loan payments, student loan payments, etc. The list can even be expanded to include alimony, child support, condo fees and numerous other fixed monthly expenses.

The moral to this story is very simple: keep your monthly debt and fixed expense payments to a minimum. The lower they are, the lower your debt to income ratio and the greater your likelihood of obtaining bank loans.

The Consumer Price Index (CPI) is one of the most important economic numbers. The number affects business and policy decision makers regularly and often provides an indication as to where the economy is headed. So what comprises this magical number? You might be surprised.

In a nutshell, CPI measures the prices of a market basket of goods and services produced within an economy. This sample basket is driven by two variables: price and weighting. The weighting data derives from proportions of items consumed. In other words, if frozen concentrated orange juice is purchased in greater amounts than thumbtacks, its price would weigh more on the index. By reviewing prices of sample goods and services through a sampling of distribution outlets, economists are able to compute CPI.

So why is this number so important? If CPI is on the rise, it indicates the onset of inflation. Inflation can slow the economy and in turn affect the financial markets. Policy makers and business executives need to act fast if inflationary pressures persist. While it’s far from perfect, CPI can offer early warning signs should the economy take a wrong turn.

The year is off and running and one of the big questions we’re asking is, “How will the stock market do this year?” While many experts like to offer their predictions, I liken this exercise to calling roulette (or perhaps Russian roulette given market conditions the past few years). I prefer to highlight forces that will impact the stock market in 2012. So here goes:

5. Corporate earnings
4. The Euro
3. EU debt crisis
2. US presidential campaign and election
1. US unemployment

These factors are worth watching as any movement in them will certainly lead to movements in the stock market. Clearly other forces may play a role if matters escalate (e.g. Mideast conflict, commodity prices, Wall Street scandals) but we’ll stick with these five for now. So watch the news and watch your portfolios. And when all else fails, there’s always the roulette table.

One of the most important economic indicators is the yield curve. This graph enables investors and economists to gauge the economy and in turn, fixed income returns. Normally, the yield curve is upward sloping with a steeper ascent in the near term tapering off to a gradual incline in the long-term. This shape indicates uncertainty and risk in the longer term, which requires yields to be higher to compensate investors for taking on more risk. In other words, the greater the risk, the greater the return. Over the long-term, the investor must deal with greater uncertainty thus supporting higher yields.

An inverted yield curve, which is less common, reveals higher yields in the near-term declining to a lower lever over the long-term. This indicates greater economic uncertainty and as such, risk, in the near term. In times of crisis, this is what you might find. Additionally, investors may anticipate a drop in interest rates over time and therefore the curve would reflect this. Historically, an inverted yield curve precedes an economic downturn.

While far from a perfect economic indicator, the yield curve offers an indicator of economic conditions to come based on debt financing costs. Use it wisely and it can serve as a nice complement to other investment decision variables.

One of the most important factors to influence a company’s stock price is the equity research report. Equity research analysts at major banks and investment houses cover specific companies within an industry and periodically publish reports on these companies. The reports can be useful to the average investor in that they summarize a great deal of information and culminate with a simple buy, hold or sell recommendation. While these reports are helpful, they create numerous controversies given that rarely do any two analysts agree. One may rate Google a buy with a $1000 price target and another a sell with a $200 price target. Why do such differences in opinion present themselves? Consider the structure of the report.

Most analyst reports will begin with a summary of the company’s strategic initiatives and recent news. This is usually followed by detailed financial analysis including key ratios and valuation models such as the discounted cash flow model and comparable multiple model. As we’ve discussed in past articles, valuation models are more art than science and the art is built on the assumptions. One analyst may have a rosey outlook for the future while another a bleak one. Catch an analyst on a bad day and positive growth assumptions can easily turn into negative ones.

This is not to say research reports are simply based on guesswork. Rather, it’s important to remember that no one can predict the future with absolute certainty which is why Google could trade at $1000 or $200 one year from now. Nonetheless, the reports do a good job of synthesizing volumes of information, which saves the investor a great deal of time. Deciding whether to buy, hold or sell the stock is up to you.

A popular strategy in stock trading is to create what is called a call spread. There are various forms of this but the one I like involves buying a call and selling another call with a higher strike price. By purchasing a call option, you buy the right, but not the obligation, to own a stock. Selling a call allows you to collect the premium on a call option. So how does this work? Let’s look at an example.

Suppose company ABC stock trades at $40. It’s January $40 calls are priced at $2. It’s January $42 calls are priced at $1. That means if you were to buy the January $40 calls and the stock moved to $42 at expiration, the option would be worth $2. The $42 would be worth nothing and you would keep the $1 premium. Your gain on the spread would be $1. If the stock moved higher than $42, you would still earn only $1 because both options would reflect the same gain above $42. If the stock fell to below $40 at expiration, your maximum loss would be $1.

With this position, what you effectively did was lower your cost bases from $2, if you had only purchased the call option, to $1 by also selling the higher priced call. The only drawback, of course, is that you capped your upside. So in a situation like this you would have to ask yourself whether it is worth giving up additional upside to save a buck.

The Price to Earnings (PE) ratio seems to get all the attention but it’s the lesser-known little sibling, the Price to Earnings Growth (PEG) ratio that is gaining momentum. The PEG ratio moves the PE ratio to the next level by helping to determine whether a company is undervalued, overvalued, or fairly valued.

The PE ratio is typically calculated by dividing a company’s stock price by it’s earnings per share. High PE ratios indicate stronger growth stocks while lower PE ratios indicate lower growth stocks. In other words, an investor is willing to pay more for $1 of earnings if the company is expected to grow at a healthy rate. The bigger issue, however, is whether or not the company is overvalued. Enter the PEG ratio.

The PEG divides a PE ratio by the company’s earnings growth rate. A PEG greater than one indicates an overvalued company and a PEG less than one indicates an undervalued company. While far from perfect, the PEG ratio offers a reasonable answer to the question “Is this company overvalued.”

Those of us who follow the stock market sometimes feel that no matter how much homework we do, we’re bound to lose money. It certainly feels that way these days with so many geopolitical risk factors at work. So what’s an investor to do? Consider selling call options through a strategy referred to as covered call writing.

Covered call writing is often an effective way to profit from market uncertainty and volatility. It allows you to generate income through the premium earned from selling the option. Suppose you bought Apple stock at $400 per share. You could hold Apple indefinitely while you wait for it to appreciate. What if it dips to $350 and stays there for the next few months? Your losses are only on paper since you haven’t sold it but the decline in value is troubling nonetheless. Now, consider what happens if you buy the stock and sell the $400 strike price call option that expires next month for $10? You keep the $10 premium regardless of what happens. If Apple closes above $400 at expiration, your shares are called away and you keep your $10 premium. What happens if the stock is below $400 at expiration? You keep your $10 premium and the stock as well. While you’ve incurred some paper losses, the stock may bounce back and you can always consider writing more call options.

Covered call writing can be a good strategy provided you’re willing to hold a stock for a while and you don’t believe it will spike anytime soon. It can be a good income generator for a portfolio although you may have to forego some upside if the stock does indeed surge before expiration.

With MF Global’s recent bankruptcy, we ask ourselves how something like this can happen yet again. It seems as though bank, brokerage and fund collapses are becoming a regular occurrence. So how do we protect ourselves from ending up among the many casualties as either consumers or investors? I present you with the “Don’t Get Fooled Again Checklist.”

1. Read every piece of financial disclosure. Balance sheets, income statements, cash flow statements, oh my! It can be daunting but take the time to read them. Analyze changes in liquidity, profitability and cash flow to get a better sense of company performance. Most of all, make sure you understand what is behind each change. Not knowing can be a red flag.

2. Don’t believe the hype. Management will always tell you that things are good. That’s what they get paid to do. However, it pays to be skeptical. Remember, Enron’s management was touting the company’s stock only a few months before the company went under.

3. Who’s the boss? Make certain you know who runs the business and how they performed in the past. A company is only as good as its leadership so make sure you know who calls the shots and what they have done in the past.

Follow these three simple rules and you just might avoid the next MF Global.

Mergers and acquisitions are showing signs of life in an otherwise week market. What drives a company to acquire another ultimately boils down to compelling valuation. In other words, the financial markets resemble Kmart and the target companies are on blue light special. So what does an acquiror consider when deciding on whether to make a bid on a target and more importantly, determine that the valuation is attractive? Consider the following checklist:

-Target’s cash on hand. Cash rich companies are attractive. The cash they have on their balance sheets can offset some of the acquisition costs. Additionally, the cash can be used to fund further expansion efforts later.

-Tax benefits. Here is where things can get complicated. In a nutshell, a target’s tax credits could be used to offset the acquiror’s tax gains, which could lower the overall acquisition price.

-Expansion. A target’s customer base or product suite may provide an acquiror with an effective platform to expand into a new market.

-Competition. If you can’t beat ‘em, join ‘em. Sometimes the best way to win a battle is to join forces with your enemy. After all, in business you only really win when you maximize profits.

These are just a few considerations that factor into the M&A decision model. In theory, they help the acquiror determine whether the target’s price is attractive.