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  • The Importance of Collateral, or the Difference Between Secured and Unsecured Bonds

    In the latest edition of the Marketplace Whiteboard , Paddy Hirsch explains the difference between secured and unsecured bonds. It is a lesson that may be coming a little too late to Irish taxpayers :

  • Marketplace Whiteboard: Re-hypothecation Explained

    At the Marketplace Whiteboard , Paddy Hirsch explains re-hypothecation . The term found its way into the news with coverage of the MF Global Holdings bankruptcy. Hirsch warns us not to be fooled into thinking that it is some sort of special, magical tool, just because some traders came up with a strange name for the practice: Re-hypothecation from Marketplace on Vimeo . Meanwhile, the bankruptcy of MF Global Holdings could have a lasting impact on commodities markets. And that is hitting some American farmers, according to Jeremy Bernfeld and Eric Durban of Harvest Public Media . Read MF Global case leaves cloud over commodities markets here .

  • Marketplace Whiteboard: What Makes a Junk Bond Junky?

    If junk bonds have become so popular-- beating out equities for the last five years , for example--are they still "junk"? Marketplace 's Paddy Hirsch says that while the moniker isn't quite accurate, these bonds do have a certain "trash or treasure" way about them: What is a junk bond? from Marketplace on Vimeo .

  • Seth Godin on Market Creation

    Sometimes creating markets for products can be a lot more difficult than creating products. Seth Godin says that "buying something for the first time" is a fairly recent phenomenon. Before the second half of the Twentieth century, we bought what our parents bought, who bought the products their parents bought. So the challenge for getting consumers to buy new things, even when those products could really truly make their lives better and healthier, remains quite high in parts of the world where people are still buying what their parents bought. Godin discussed this challenge at the Acumen Fund's 2011 Investor Gathering :

  • Biggest Market Moments of 2011, from The Reformed Broker

    We've reached that point in the year where we have get to read through scores of best of the year lists. Some are instructive or illuminating. Others, not so much. We don't track market news closely at the watch--for that you should be reading Nivine Richie at our KnowNOW Finance blog. But we found The Ten Biggest Market Moments of 2011 list from Joshua Brown -- The Reformed Broker --to provide one succinct summary of the year's big business events. For example, #5: Bank of America in Free Fall - Of all the spectacular crashing and burning of 2011, nothing even comes close to the destruction in shares of Bank of America, a company that lost almost two thirds of its market capitalization over the last 12 months. Every effort was made by management to please the investor base, from asset sales to mass layoff announcements (40,000!) to open conference calls hosted by mutual fund managers who were in disbelief at how low the stock was sinking with every passing day. BAC dropped from a January high of 15 to 10 by August - but it was just getting warmed up; from August to November it was cut in half again, trading to as low as 5.08 by Thanksgiving and wrecking the funds of John Paulson as well as the careers of several boldfaced mutual fund managers like Bill Miller and Bruce Berkowitz. And #1: Steve Jobs Resigns as CEO of Apple - We knew that one day, the cancer in Steve Jobs’s liver would force him out, but we were never truly prepared for theannouncement to come. After fourteen years at the helm of Apple and one of the most miraculous corporate turnarounds in history, on August 24th Jobs told Apple that he could no longer serve the company in his condition. The stock sold off that night on the news but quickly recovered, Steve would live to see Apple trade at a new all-time high and eventually become the most valuable company in America. On October 5th, Steve Jobs passes away and the world both mourns his passing and celebrates the amazing revolution he’s sparked from a garage in Los Altos, California. Read the full list here . (Hat tip Barry Ritholtz )

  • Robert Frank on Competitiveness and 'The Darwin Economy'

    The cover of Robert Frank 's new book, The Darwin Economy: Liberty, Competition, and the Common Good , features a picture of two bull elks with their enormous antlers locked in battle. It is a timely picture, and not just because most states are in the height of hunting season. As Frank noted in a recent speech at the Carnegie Council , male elks battling for their own advancement is a fitting metaphor for the nature of competitive markets. What is often good for the individual, Frank argues, is not always the best for the herd. Here is an excerpt from his talk: Watch the full talk here .

  • NY Fed Case Study: When an Internet Blooper Rocked Airline Stocks

    The New York Fed 's Liberty Street blog is featuring an interesting exercise in the power of breaking news headlines and "financial markets process news of unexpected events." NY Fed researchers went back to 2008, when a "news" story about United Airlines' 2002 bankruptcy story mistakenly was re-posted on the Internet. United stock took an immediate hit. It did recover, but not for some time. Here's a look at a chart from the post that shows the lag in United stock recovery: From Liberty Street: In short, we find that even in a situation where noise could be clearly singled out, it took markets about a week to fully process the signal component of news. Of course, in most circumstances, signal and noise arise simultaneously and cannot be separated so easily. Thus, normal delays may be longer than what we detect here. Is a week a long time or not? It certainly is when the delay pertains to the reaction of asset prices to a piece of news. Most likely it isn’t when it comes to investment decisions of companies or industries. The key question is whether normal information delays are long and pervasive enough to affect those investment decisions. If they are, such delays could be costly for the economy. Why did it take so long for the information to be processed? Our staff report investigates several potential explanations, but fails to find empirical evidence supporting any of them. In particular, explanations based on poor trading liquidity after the false news event, potential links to the financial market turmoil in September 2008, and uncertainty aversion by investors do not appear to be supported by the data. We therefore have to leave this question unanswered. So even as the question remains unanswered, this exercise seems a good one, as we see news reports sending waves through the markets on a weekly basis, or even a daily basis. In the 24 hour news cycle, more mistakes are likely to happen. But even beyond mistakes, exaggerated headlines or misleading reports likely will have some impact. Will that impact be lasting or temporary? Read How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper here .

  • Bernanke on Lessons from Emerging Economies

    Ben Bernanke spoke in Cleveland last night as part of the Cleveland Clinic's Ideas for Tomorrow Series . The Federal Reserve chair used the occasion to talk about what developed economies might learn from emergin economies when it comes to fostering sustained growth. He seemed to appreciate the opportunity to discuss issues in a larger economic context, as opposed to "short run economic concerns" that he usually addresses. Bernanke framed much of his outlook on the success of emerging economies on the Washington Consensus , as put forward by John Williamson in 1990 and adopted as a guide by the World Bank. From the speech: Ultimately, the principles that John Williamson enumerated two decades ago have much to recommend them. Macroeconomic stability, increased reliance on market forces, and strong political and economic institutions are important for sustainable growth. However, with the experience and perspective of the past 20 years, we can see that Williamson's recommendations were not complete. Reforms must be sequenced and implemented appropriately to have their desired effects. And a successful development framework must take into account that activities such as the adaptation of advanced technologies and the harnessing economies of scale are often critical to economic growth and depend on a host of institutional conditions, such as an educated workforce, to be fully effective. Indeed, advanced economies like the United States would do well to re-learn some of the lessons from the experiences of the emerging market economies, such as the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability. As the advanced economies look for ways of enhancing longer-term growth, a re-reading of Williamson's original Washington Consensus, combined with close attention to the experiences of successful emerging market economies, could pay significant dividends. Read the full speech here .

  • SF Fed Economic Letter: Boomer Retirement and the Equity Markets

    The oldest members of the baby boomer generation are turning 65 this year--the official retirement age. Not exactly the best time for a lot of new retirees to start selling off equities. In a new Economic Letter , Zheng Liu and Mark Spiegel of the San Francisco Fed 's Economic Research Department point out that "U.S. equity values have been closely related to demographic trends in the past half century." And that is cause for a little worry: Since an individual’s financial needs and attitudes toward risk change over the life cycle, the aging of the baby boomers and the broader shift of age distribution in the population should have implications for capital markets (Abel 2001, 2003; Brooks 2002). Indeed, some studies attribute the sustained asset market booms in the 1980s and 1990s to the fact that baby boomers were entering their middle ages, the prime period for accumulating financial assets (Bakshi and Chen 1994). However, several factors may mitigate the effects of this demographic shift. First, demographic trends are predictable and rational agents should anticipate the impact of these changes on asset demand. Consequently, current asset prices should reflect the anticipated effects of demographic changes. In addition, retired individuals may continue to hold equities to leave to their heirs and as a source of wealth to finance consumption in case they live longer than expected (e.g., Poterba 2001). Foreign demand for U.S. equities might also reduce the downward pressure on asset prices. However, the effect is probably limited for two reasons. First, other developed nations have populations that are aging even more rapidly than the U.S. population (Krueger and Ludwig, 2007). Second, there is substantial evidence of home bias in equity holdings. Individual investors typically hold disproportionate shares of domestic assets in their portfolios. For example, in 2009, the foreign equity holdings of U.S. investors were only 27.2% of the share of foreign equities in global market capitalization. While the low level of international equity diversification is still not well understood (Obstfeld and Rogoff 2001), it suggests that foreign demand for U.S. equities is unlikely to offset price declines resulting from a sell-off by U.S. nationals. Read Boomer Retirement: Headwinds for U.S. Equity Markets? here .

  • Learning to Love Algorithms

    Could it be that the financial services industry is really just one ongoing game of hide and seek? Kevin Slavin says much of the stock market is essentially made up of algorithms. Some of them are trying to hide. The others are trying to find the ones that are hiding. Slavin, founder of cross-platform game maker Area/Code , goes a long way in explaining the importance of algorithms in business, and in life in general, in this TedTalk :

  • Marc Andreesen on Investing in Groupon and LinkedIn

    There has been a fair bit of skepticism about the quick rise of value investors have put on the stocks for LinkedIn and Groupon . The phrase "tech bubble" has even come back into the parlance. But Marc Andreesen , who knows a thing or two about big public offerings from his days as founder of Netscape, is not buying it. All he's buying is the stocks of these two high tech companies. And he explained why in this interview with Kevin Delaney of the Wall Street Journal :

  • NYT DealBook: For LinkedIn, Success Depends on the Site Remaining the 'Go-to' Business Social Network

    The professional social media site LinkedIn went public late last week , and there were plenty of critics who argued that investors should be wary of the real value of stock that quickly doubled from the initial offering of $45 per share. But long term, the success of LinkedIn as a business, and as an investment, depends largely on whether the site remains the site of choice for business-based social networking, as argued in this short piece from the New York Times DealBook editors:

  • Ritholtz on the 'Many Hats' of a Great Investor

    Barry Ritholtz 's blog The Big Picture is one of the most popular--and frankly one of the best--in the econo-business blogosphere. But he's not above making an appearance in old media every now and then. He has a column in today's Washington Post that is worth a read. In it, Ritholtz muses on what it takes to be a great investor. He argues that an investor wears many hats. At times, an investor is an Historian : Knowing what has happened in the past (and how often) is an enormous advantage when it comes to investing. It informs you of the range of possibilities, allows you to conceptualize possible outcomes to various scenarios and provides a framework for thinking about market cycles. Heading into the market bottom in 2003, some market historians warned about a secular bear market. These are the decade-plus long periods of huge rallies and great collapses. Some warned that investors should not be surprised if after a decade, the markets were essentially unchanged, which is exactly what happened. Think back to the market lows in March 2009. After about a 20 percent bounce off the bottom, quite a few commentators expressed fears that the markets had gone “too far, too fast.” Market historians knew that the median bounce after a drop of 50 percent or more was 75 percent. With that information, you might not have been scared away from equities just before they gained 80 percent in value over 18 months. At other times he/she may be a Psychiatrist , a Trial Lawyer , a Mathematician , or an Accountant . Read the full column here .

  • The Coming Youth Boom in America

    Mark Hulbert , MarketWatch columinst and editor of the Hulbert Financial Digest , says America is about to get younger than most of its trading partners. Pointing to some findings by Ned Davis Research , Hulbert says that by 2020 the US markets and business will be driven by the youth market. One sector that might be hurt by the new demographics is the luxury retail market. Hulbert explains in this video:

  • Why Women Might Be Better At Investing

    MoneyWatch editor-at-large Jill Schlesinger is happy to share data that suggests women are better investors than men. One study shows that women outperform men in their returns by 1%. Men may be more active with their investments, but Schlesinger thinks that women do better overall because they are more likely to stick with a game plan : Schlesinger's MoneyWatch colleague Allan Roth writes about the gender differences in investing as well. Read Smart Women-Smart Investors here .
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