Financial reform has been a hot topic of discussion since the start of the financial crisis. Recently, attention has shifted to the Volcker Rule, a section of the Dodd-Frank Financial Reform Act. The Volcker Rule has yet to take affect but has already emerged as one of the most contentious aspects of the reform movement.

The Volcker Rule is designed to curb excess risk taking by banks.  Specifically, it prohibits proprietary trading in securities and derivatives. In other words, banks will face serious restrictions when trading for their own accounts. Additionally, the rule prohibits banks from investing in hedge funds and private equity funds. In essence, the rule seeks to minimize the use of bank capital for investment purposes.

So where do Wall Street and Washington go from here? The rule is shrouded in controversy as it could reshape the Wall Street business model by increasing costs and decreasing returns. On the other hand, without the rule Wall Street banks could continue to engage in the kinds of risky trades that ultimately led to the financial crisis. Bottom line: no easy solution here.

The last few weeks have been unusually eventful, as Main Street has made a concerted effort to influence Wall Street. The Occupy Wall Street protesters have certainly raised awareness of what they perceive to be economic injustices. Whether you agree with them or not, it’s important to give the protesters credit for initiating a broad-based dialogue that has clearly struck a chord. In the spirit of this dialogue, it’s important to understand the structure of “Wall Street” as we know it.

First, Wall Street is more of a concept than a physical location. While the street does exist, you are more likely to find law firms and start-ups than major banks located there. Investment banks, commercial banks and investment shops are situated throughout Manhattan and some of the largest banks are based in other states. In fact, Bank of America, one of a few target poster children for the movement, is based in Charlotte, North Carolina.

Second, Wall Street was historically the home to several investment banks and commercial banks. Before the stock market crash of 1929, financial institutions could serve as both. In other words, a bank could do everything from borrow and lend money to invest it. Legislation passed after the 1929 crash made this illegal in order to prevent banks from risking the capital of its depositors. The law was repealed in the late 1990s; a move that many believe led to the financial extremes that led to the recent financial crisis.

Finally, Wall Street today is a concept that encompasses a wide array of financial institutions. This includes commercial banks, investment banks, private equity firms, hedge funds and retail brokers. In other words, any institution that borrows, lends, invests or facilitates financial transactions could be considered part of “Wall Street.” So what do the protesters want? Truth, justice and the American way? Peace, love and happiness? Who cares? It’s nice to see Main Street taking an interest in the world of finance.

Recently we’ve encountered a great deal of debate over whether the world is headed back to a recession or whether the world is in the midst of a prolonged depression. Neither option paints a pretty picture. Regardless of the final consensus, few can deny the fact that economic growth has faltered. With that in mind, what should individuals and businesses do during this time of uncertainty? Consider the following:

1. Stockpile enough cash to live or operate for at least 12 months. For many, that is easier said than done but any amount can go a long way in times of need.
2. Curb spending on non-essential items. What constitutes non-essential is for you to decide of course.
3. Start investing strategically. Again, easier said than done especially when you are conserving cash. But in times like these, the best opportunities present themselves. History has shown that economic uncertainty can inspire new business ideas or bold career moves. It can be scary but depending on your age, it might make sense to take a calculated risk.

The bottom line is this: whether we are in a recession or depression should not change the way we manage risk and capitalize on opportunity.

As stock prices tumble to near term lows, many analysts are recommending the purchase of high yielding dividend stocks. Dividend yields increase when a stock’s price falls given that dividend yield equals dividend payment divided by stock price. Suppose a stock trades at $50 per share and pays a dividend of $2.50. The dividend yield in this case would be 5 percent. What happens if the stock drops to $25 per share? The dividend yield doubles to ten percent. You now earn double what you were earning before so this could be a very compelling opportunity, right? Not so fast.

The flip side of this argument is that with the stock trading at such low levels, there could be serious problems within the company. In other words, what good is a ten percent dividend yield if the stock continues to tumble? Your dividend earnings could be easily wiped out by your stock losses. So what is the best approach when seeking strong dividend yield? Look for companies with higher yield plus strong fundamentals. If the stock dropped but the company has a strong balance sheet, income statement and cash flow statement, it might be worth considering.

Looks like financial markets are beholden to Europe these days. What happens in Europe, unfortunately, doesn’t stay in Europe. The problems in Greece, Spain, Portugal, Ireland and Italy are far reaching. For starters, a debt default by any government of these countries could halt economic growth in the region for the foreseeable future. Governments would likely face challenges funding social programs leading to tax increases. This additional financial burden would likely cause companies to announce layoffs raising unemployment rates beyond current levels which are already significant.

At the same time, the impact on banks could be significant. It’s unclear just how much exposure the banks have to government debt but most believe a default would render quite a few of them insolvent. Looking back at the 2008 banking crisis in the US, it’s safe to assume bank failures across Europe would spell disaster for the continent. Additionally, the lack of uniform standards for addressing such situations in the EU could further compound matters. Needless to say, a European debt crisis threatens not only European economies but the entire global economy.

Each quarter, earnings season sparks interest in corporations large and small. Analysts eagerly await the financial overview offered by senior managers by way of conference call. The managers cover general strategic developments followed by a detailed review of the income statement. Sales, costs, expenses and earnings are closely examined with the final performance tally culminating in net earnings. Unfortunately, these calls tend to downplay, if not ignore, the cash flow statement. Given the economic challenges facing companies today, the cash flow statement may prove to be a useful performance indicator for the company and more specifically, the management team.

The cash flow statement details the amount of cash generated from a company’s operations, investing activities and financing activities. In other words, it addresses the company’s ability to generate cash segmented by various business activities. It can indicate whether the cash is a product of a growing business or clever financial engineering. And most of all, it often serves as a good indicator of solid business management. When a company effectively generates consistent cash increases from business operations while deploying cash judiciously for growth related initiatives, it signals a management team on the right track.

Financial markets seem fairly indecisive these days. For the last several weeks, we saw some of the worst stock market declines in over two years. In the midst of this stomach churning roller coaster ride, traders and analysts turned to the Fed for some indication of help. Specifically, the prospect of QE3 (Quantitative Easing 3) renewed hopes of a Fed fueled stock market rally. So what happened when Fed Chairman Bernanke spoke in Wyoming last week and mentioned that the Fed had no immediate plans for another round of quantitative easing? The market rallied.

So what is going on here? Financial markets are craving one thing: confidence. And they will take it one of two ways. A.) The Fed tells us that things are extremely bad and they will fix them or B.) The Fed tells us things are bad but not so bad that they must intervene. It seems as though last week’s statement fell into the B category. If the Fed maintains a consistent view of the economy and presents it in such a manner, we just might see confidence return to the financial markets. Of course, the Fed can only do so much and if the economic data truly shifts the other way, look out below.

Lately, talk of an economic recovery has shifted to talk of a double dip recession. Since the emergence of this new discussion, the stock market has dropped significantly and companies are gradually moving back to lockdown mode. The American consumer seems to be losing confidence in the economy and consumer spending is likely to abate as a result.

So what is happening? We are allowing our fears to create a recession, which is usually how recessions form. Indeed, the global economy is under pressure as corporations and individuals undertake the massive deleveraging process. But this is something that started three years ago and will likely continue for quite some time. Let’s get used to it.

Does all of this mean that the economy must sputter along and periodically stall in the midst of this process? Perhaps. But what we must avoid as individuals and organizations is overanalyzing the economic data that surfaces on a daily basis. Let’s work hard, pay our bills and pay off our debts. Maybe then we just might avoid another recession.

Everyone is talking about gold. With prices hovering near record highs, it’s hard to ignore. What drives a non-income producing asset to reach such lofty heights? I’ll give you the textbook answer followed by the real one.

Most any textbook will tell you that holding gold is the smartest thing to do in difficult economic times. When adverse market conditions present themselves, investors turn to gold as a safe haven. Often seen as a substitute for currency, it has tangible value and no counter party risk. You buy it you own it.

Now the real answer: fear. When investors pile into goal, they think less about what it means from an economic standpoint and more about it how it feels from a psychological one. If the sky is falling, barricading oneself in Fort Knox feels pretty good. While this is not necessarily a bad move, consider the fact that holding gold can expose you to significant financial risks.

First, anything that increases significantly in value runs the risk of taking on bubble proportions. And of course, bubbles often burst. Second, gold is still a commodity and one that is used in jewelry and other products. That means that supply changes could have an impact on pricing. Finally, governments around the world can instantly disrupt the gold price trend line with currency policy changes.

Bottom line: gold may not always be as safe as they say it is.

It’s hard to ignore the headlines. The S&P credit downgrade of US government debt has clearly shaken the financial markets. But does it really matter? Unfortunately, credit ratings do matter in that the perception of weakness can often become a reality.

The recent downgrade will likely cause interest rates to increase, which affects consumers and businesses. At a time when the economy is on unstable ground, even a slight increase in interest rates can ripple through the economy by raising borrowing costs. Corporations will pay more to service corporate debt and consumers will pay more on their credit cards and mortgages. Given that austerity is all but a foregone conclusion, rising financing costs could force further cutbacks.

Now, the fear factor. If investors believe these things could happen, they start selling stocks. An increase in corporate financing costs and a cutback in consumer spending can mean one thing: a drop in corporate profits. And nothing drives corporate valuation, and in turn stock price, more than profits. Of course, all of this is based on what can happen when fear takes grip of the financial markets. The hope is that cooler heads will prevail and the real impact of a credit downgrade will be muted. Stay tuned…