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Investment Tutorial: : continued>

How to Read Flow of Funds Accounts

Identifying Sub-Totals

Federal Reserve Release Z.1 presents flow of funds tables with some rows representing the sub-totals of subsequent rows.

This is confusing to those of us who are accustomed to having sub-totals following, not preceding, data that is summed.

Subtotals as shown in Release Z.1

Furthermore, rather than clearly indicating sub-totals by using bold type or boxes, the only clue the reader has to which rows represent sub-totals is the indentation of row titles and the logical relationships between titles.

Because of the way the Federal Reserve flow tables are printed, it takes extra effort to distinguish the sub-totals from the basic data, which wastes the analyst's time.

With color-coding, sub-totals stand out in white against the basic data

Flow tables on this site show sub-totals against a white background that stands out from the blue-yellow and red-green backgrounds of the basic data.

Row titles for basic data rows are flush left on a colored background, while row titles for sub-totals are flush-right on a white background, with indentation that indicates sub-total hierarchy .

Highlighting Major Flows

Of the tens of thousands of data points in the national flow of funds accounts, capital flow analysts focus on those flows that represent significant shifts in holdings of financial assets.

Major flows on a sector table shown in bold type

When there is no major change in holdings of a certain type of asset for a sector, this flow is probably not central to the explanation of supply and demand for this instrument.

To make it easy to spot important movements of funds that are likely to be relevant to the explanation of price trends, flows that represents more then ten percent of total net uses or sources (for sector tables) or ten percent of total net purchases or sales (for instrument tables) are shown in bold type.

Coding Motivation

In Capital Flow Analysis, there is a concept of motivated purchases or sales of securities.

When a sector, on balance, purchases securities in a up market, the purchasers are assumed to be driving prices upwards and are said to be motivated.

In contrast, sellers that sell into a down market are said to be motivated sellers.

Major flows are bolded and motivated flows are underlined

Motivated purchases and sales of corporate stocks or bonds are indicated by underlining flow data for corporate equities and bonds, when such rows appear on the sector tables.

On the flow tables on this site, the direction of security price trends is shown at the top of each table, directly below the date, as follows:

	1999	2000	2001
stock price direction	UP	UP	DOWN
bond price direction	DOWN	UP	UP

The price bar does not indicate the percentage that prices changed, only the direction.

This coding is derived from reported changes in the S&P 500 stock index, in the case of equities and, in the case of bonds, from changes in interest rates, as measured by Moody's AAA Corporate Bond series.
In yearly columns, changes represent differences in prices between the beginning and the end of the year.
For quarterly columns, changes reference the three-month period.

On instrument tables, motivated purchases and sales are shown for each row on tables F.213 (Corporate Equities) and F.212 (Corporate and Foreign Bonds), but on no other instrument tables.

The motivation indicator (underlining) is relative only to stocks or bonds, depending upon the context. For example:

In table F.213 (Corporate Equities), motivation is measured only with respect to the stock market.
In table F.212 (Corporate and Foreign Bonds), motivation is only with respect to bond prices.

On sector tables, where motivation is indicated for both corporate bonds and equities (in their respective rows), motivation is calculated on bond and stock trends respectively.

On sector tables, motivated buyers are shown in green type, underlined.

On sector tables, flows of motivated buyers are shown in green type, underlined:

On sector tables, motivated sellers are shown in red type, underlined.

Some tables do not have any reference to corporate bonds or equities and consequently there are no indications of motivation.

However, all tables maintain the price bars along the top to provide market context.

Motivated flows in the instrument tables are underlined to indicate buyers in an up-market and sellers in a down-market.

The Advantages of Color-Coding

The combined use of color-coded backgrounds, bolded type, and underlining helps to distinguish sources and uses of funds, purchases and sales of securities, major flows, and motivated buyers and sellers.

Before proceeding, check your progress:

Self-Test

Sub-totals are identified on the color-coded tables on this site by: A light blue background. A light yellow background. Bolded type. A white background.
Flows that are more than 10% of totals are indicated on the flow tables on this site by: Underlining. Red backgrounds. Bolded type. Green backgrounds.
On sector flow tables on this site, motivated sellers are indicated by: Red type, underlined. Green type, underlined. Bolded type on a white background. Bolded type on a gray background.