• Dividend Policy

    In a CNN interview, Alan Mulally, CEO of Ford, said that the firm’s sales, profits, and market share have increased in North America, but the firm faced some losses in Europe and Asia.  He believes that demand for fuel-efficient vehicles may lead to future profits, and that’s good news for shareholders.


    When asked whether Ford would reinstate its dividend, Mr. Mulally indicated that they are waiting to see improvements in operational efficiency, free cash flow, and debt reduction.  They hope to reinstate the dividend sooner rather than later.  They want to feel confident that they can continue to pay dividends, rather than announce a new dividend and then be forced to cut it immediately. 


    Sounds like “signaling,” doesn’t it? Mr. Mulally understands that an announcement to start or discontinue a dividend is news.  Such an announcement delivers a signal to shareholders.  To avoid the negative signal associated with discontinued dividends, he prefers to postpone the positive signal associated with reinstated dividends. 


    Discussion Questions:


    1.    How would the reinstatement of a dividend affect the price of Ford stock?


    2.    If you are considering buying Ford stock, what issues must you consider?


  • Greek Debt Resolved For Now

    European leaders are hopeful now that lenders have come to agreement on the Greek debt crisis.  Bankers have agreed to accept a 50 percent “haircut” which means that they are forgiving half of their Greek debt. Measures have been taken to control any contagion effects on countries such as Spain, and market participants are optimistic. 

    The true test, however, is coming as the details are worked out.  According to this Reuters report:

    …Key aspects of the deal, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks to pin down, meaning the plan to rebuild confidence after two years of crisis could unravel over the details.

    According to the Economist:


    Markets are ecstatic, though that may be more a sign of the lowness of previous expectations than the quality of the agreement (which is, of course, quite vague at this point).


    … And so the euro zone's leaders tip-toe toward a mildly satisfying temporary solution, in hopes that the ECB will pick up the slack.


     Discussion Questions:

    1.    What steps were taken to prevent the debt crisis from spreading to other countries in Europe?

    2.  What is the involvement of the European Central Bank?


  • Against the Grain

    Photo by Photographer2008 licensed under Creative Commons and available at http://en.wikipedia.org/wiki/File:Wheat_blue_sky2.JPG


    The ripple effects of the European debt crisis are extraordinary.  Today, the prices of commodities such as corn, soybeans, and wheat rose as markets became more comfortable that the crisis is being handled.  For the last two days, fears that the debt crisis would translate into weak demand for grains caused commodity prices to decline.  Folks are gaining confidence that the crisis has been averted…for now.


    According to Bloomberg Business Week on Oct 27:


    “Europe has avoided a default disaster for now, and the short-term trend is to buy riskier assets including the grains,” Mark Schultz, the chief analyst at Northstar Commodity Investment Co. in Minneapolis, said in a telephone interview. “Improved consumer spending and a weaker dollar may help to boost overseas buying. Export demand needs to improve to sustain the rally.”

    Read more in this Bloomberg article and this Business Week article. 

  • Securities Fraud

    The government is cracking down on securities fraud and insider trading.  Former Goldman Sachs director, Rajat Gupta, surrendered to the FBI today.  He is accused of leaking inside information to Raj Rajaratnam, the hedge fund manager who was sentenced to 11 years in prison earlier this month.  According to the NY Times:   


    Authorities have broadly pursued insider trading on Wall Street, exacting guilty pleas from a chemist at the Food and Drug Administration, among others, as recently as this month. In the last two years, authorities have charged 56 people with insider trading, including Mr. Gupta; of those, 51 have pleaded guilty to or have been convicted of swapping illegal tips about company earnings and other major corporate events.

    While the majority of those charged have been traders and analysts on Wall Street, Mr. Gupta is the first executive from the upper echelons of corporate America to be implicated. In charging Mr. Gupta, the government is tying up one of the biggest loose ends resulting from the investigation into the Galleon Group, which began nearly five years ago at the Securities and Exchange Commission.

    Read the full NY Times article here.


    Discussion Questions:

    1.    What is insider trading? How does the SEC investigate potential insider trading?

    2.    Why is the case of Mr. Gupta so unusual in the history of insider trading?



  • Greek Debt Not Resolved

    Banks holding Greek bonds are being asked to accept 40 cents on the euro, but no deal has been finalized yet.  According to the CNBC report, banks had already agreed to a 21 percent loss and have extended that to a 40 percent loss.  Officials are pushing for a write-down of at least 50 percent, while Germany is recommending that banks write down their debt by 60 percent.  The CNBC article quotes Charles Dallara of the Institute of International Finance (IIF) saying,


    "Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default, would isolate the Greek economy from international capital markets for many years, and would impose a harsh burden on the Greek people as well as European taxpayers who have already done a lot to support Greece,"


    Discussion Question:


    What are the potential repercussions if Greece defaults on its debt?


  • Blue Chip Art


    That’s the name of the painting by pop artist Roy Lichtenstein that will be auctioned by Christie’s on November 8, 2011.  Originally sold in 1961, this painting was sold in 1988 for $2 million dollars.  It is expected to bring $35-45 million at auction next month. 


    According to Christie’s, art is not a bad investment.  Andy Warhol paintings sell for $30 million or more.  To fetch these prices, art must be “blue chip” with a recognizable name and must demonstrate that it can maintain its value through the years.


    Art lovers get ready.  Do I hear $10 million? $20 million? $45 million? …going once, twice…


    Discussion Questions


    1.    What is the annualized rate of return earned by the investor who bought the Lichtenstein painting in 1988 for $2 million and sells it in 2011 for $45 million?


    2.    How would an investor determine the market value of such an investment?


  • Rising Dividends

    Dow Jones Indexes announced today that dividends on the 30 stocks in the Dow Jones Industrial Average are expected to increase by 11.79 percent over last year and 1.12 percent from the last quarter.   According to the Dow Jones Indexes press release on October 19,


    Nine of the ten largest dividend distributions in the U.S. market—by total estimated payout—are DJIA component companies….Annually, AT&T, Exxon Mobil and General Electric—the top three payers—would account for 9.46% of all dividends paid by the stocks included in the Dow Jones U.S. Index.”


    What does this mean for stocks? Not much if the news was anticipated by the markets.  However, if unanticipated, then an increase in dividends may indicate a growth in earnings, and that is good news.


    Discussion question:


    According to the dividend discount model, what should an increase in dividends do to the intrinsic value of a stock?


  • Housing Market Led by Renters

    The U.S. economy is experiencing a shift in housing trends.  Demand for multi-family homes is up due to increased rental demand.  According to the Economist/Free Exchange Blog:


    Single-family starts have been essentially flat for the last two years, while multifamily starts have been responsible for a muted but real upward trend in total starts. But strikingly, new mortgage applications for purchases continue to drop, and the most recent release but the figure at its lowest level since 1996. Finally, the latest CPI figures show that rents in America are up 2.1% over the past year and 0.9% in the last three months alone—nearly twice the increase in core inflation.


    This trend may be driven by several factors:


    ·       Individuals may be reluctant to buy homes because they may not qualify for new mortgages.

    ·       Americans are less enamored with homeownership; once real estate prices plummeted, they questioned the value of homeownership.

    ·       The U.S. has experienced a demographic shift to “older empty-nesters and childless young adults…who appreciate the benefits of economy in home size….”


    In any case, rental demand is leading to some recovery of the multi-family housing market.  That’s good news.


    Discussion Questions


    1.    Would you rather own a home or rent one?  What are some arguments in favor of each?

    2.    According to this research paper, what are the attitudes towards renting a home versus owning one?


  • Regulators Investigate Potential Interest Rate Manipulation

    On Tuesday, the European Commission raided banks looking for evidence that they are manipulating interest rates.  The interest rate in question is the Euribor or Euro Inter Bank Offer Rate.  This rate is set by a group of 44 banks and is based on the rate at which financial institutions lend money to one another. 

    The prices of many financial contracts are based on this rate.  Manipulation of Euribor means manipulation of the derivatives market. 

    Earlier this year, the SEC and the U.S. Justice department looked into possible manipulation of LIBOR, or the London Interbank Offer Rate. 

    Regulators are getting down to business.  Cheaters and manipulators beware.

    Read the Washington Post and Bloomberg article here.

    Discussion Questions

    1.     What are the current Euribor and LIBOR rates?


    2.     What kinds of derivatives are based on the Euribor?


  • Harley Stock Owners Group

    Harley owners lost money today.  Owners of Harley Davidson shares that is, not owners of Harley motorcycles. 

    At first glance, the drop in the stock price doesn’t make sense.  Harley-Davidson (NYSE: HOG) issued a press release announcing that income rose by 95.9 percent compared with a year ago.  Retail sales of new motorcycles grew by 5.1 percent compared with 5.4 percent a year ago. 

    And yet, in spite of all this seemingly “good” news, the share price of Harley-Davidson fell by 7 percent, its biggest drop since August, according to Bloomberg.  The decline in the stock price was driven by the drop in gross margins from 34.9 percent a year ago to 33.7 percent for the third quarter, which was worse than analysts expected. 

    Financial statement analysis is an important tool in the investor’s tool belt.  Harley owners learned that the company made some changes and temporarily reduced production of the more expensive bikes, which hurt profit margins.  So looking beyond sales and income revealed a more complete picture of this firm’s financial health.

    Discussion Questions

    1.    Why were gross margins hurt by the production changes at Harley Davidson?

    2.    Why did that lead to a decline in the stock price?

  • Investment Rule #1: Diversification

    Don’t put all your eggs in one basket. 

    Hedge your bets.


    We all know the wisdom of reducing risk through diversification. But when markets move together, diversification benefits go out the window.                                  

    True diversification happens when the values of our investments do not move perfectly in tandem with one another.  CNBC describes this recent phenomenon:

    When it comes to combating financial markets that all seem to move in unison, the options are getting so limited that some are questioning whether stock picking is a dying art.  The market term is "correlation," and it's a dirty word for anyone looking to diversify their portfolios

    Correlations among various stocks are high.  And correlations of stocks with the euro are also relatively high.  On the other hand, the correlation of the stock market with gold is –0.24 while the correlation with silver is 0.25 (read the full CNBC article here). 

    With correlations that low, looks like metals might be a way to diversify a portfolio.

    Discussion Questions:

    1.    How is total risk estimated?

    2.    How would you estimate the benefits of diversification?

  • Earnings Announcements

    Google profits were up while J.P. Morgan’s were down.  It all comes down to revenue and expenses.  Google was able to boost revenues while keeping costs under control; J.P. Morgan not so much.  Shareholders responded by driving the price for Google stock up to $594.10 per share and J.P. Morgan down to $31.60 per share.

    About Google, Reuters reports:

    The Internet search and advertising leader, benefiting from a growing online ad market and sharper research focus, increased its profit by 26 percent and revenue by 37 percent in the third quarter.

    And about JP Morgan, the NY Times reports:

    Revenue remained under pressure, falling to $24.4 billion, or 11 percent, from the second quarter, amid a slowdown in stock and debt offerings that had propped up the bank’s results in the past. Difficult trading conditions, slimmer profit margins on lending, and the elimination of overdraft and other penalty fees all weighed on top-line growth.


    Read the Reuters Google report and NY Times JP Morgan report here


    Discussion Questions:

    1.    What is the goal of the firm?  What are some alternate goals of the firm?


    2.    What are the benefits and limitations for the firm that seeks to maximize revenues? What about the firm that seeks to minimize costs? What about maximizing net income?


  • Hedge Fund Protects Its Property

    Is it OK to download data at work? Not if the data belong to the employer.

    Yihao Ben Pu is learning that the hard way.  Hired as a “quantitative engineer” at Citadel, a well-known hedge fund, Pu was accused of taking information from the firm’s computer systems and then trying to destroy the evidence. 

    What could be so sensitive?  Customer data?  Inside information?

    No, the sensitive items were computer trading programs.  According to the NY Times:  

    Citadel, the giant hedge fund founded by Kenneth C. Griffin, has one of the most sophisticated computer systems in the investment world. One of its major money makers is housed in its computer trading division, which attempts to read the markets through complex algorithms and then execute lightning-fast trades with no human intervention.


    Discussion Questions:

    1.      Do you think Mr. Pu is guilty of a crime?  Why or why not?

    2.      What is algorithmic trading and why would Citadel want to keep that information secret?


  • Harrisburg PA Files for Bankruptcy

    Investors in Harrisburg, PA bonds got some bad news on Tuesday.  The Harrisburg city council voted 4 to 3 to file for Chapter 9 bankruptcy because the city cannot afford to repay its debt.  Harrisburg would be the second municipality to file for bankruptcy in 2011 and the largest municipal bankruptcy after Orange County, CA filed in 1994.

    What led to this distress?  According to this Bloomberg Business Week article:

    The city of 49,500, which is the seat of Dauphin County, faces a debt five times its general-fund budget because of an overhaul and expansion of the incinerator, which doesn’t generate enough revenue. Its guaranteed debt is about $242 million, with $65 million of it overdue, according to the petition.

    Discussion Questions:

    1.      According to the Bloomberg article, who are the major creditors or investors in the Harrisburg bonds?


    2.      According to this Moneywatch.com article, why are some citizens opposed to the bankruptcy?


  • Another Bank Bailout--European Style


    photo courtesy of Dexia (http://www.dexia.com/EN/journalist/resources_centre/photos/Pages/seats.aspx)



    Banks need funds in order to stay in business.  Back in the old days, fearful depositors would storm the bank and withdraw all their money if they thought their money was at risk.  Without the safety of deposit insurance, depositors would lead a ‘run’ on the bank, and the bank would be forced to close its doors within days.


    Dexia Bank Belgium is facing a quiet run on the bank.  Institutional investors have determined that the bank is too risky, and they’re taking their funds elsewhere.


    According to Reuters,


    Dexia has a global credit risk exposure of $700 billion --more than twice Greece's GDP -- and its rescue has stoked investors' concerns about where other troublespots may lie.


    The lender faced significant losses on its Greek government debt holdings, but, more significantly, was shut out of wholesale funding markets, which it was highly reliant on to finance its long-term loans to municipal borrowers.



    Discussion Questions


    1.     According to this article from Business Week, how do banks access funds?  Why are some banks struggling to raise money?


    2.     How is the Belgian government bailing out Dexia bank?


  • EU Objects to Deutsche Boerse and NYSE Merger

    photo of NYSE by N. Richie



    The German Stock Exchange, Deutsche Boerse AG, is offering to buy the New York Stock Exchange, but the European Union is concerned that the combined stock exchange would lead to a drop in competition, which ultimately would hurt markets. 


    According to the Reuters report on October 7th:


    When the EU opened the in-depth probe in August, it cited concerns about the deal's effect on derivatives and equities. The combined company would have a near monopoly on exchange-based futures trading in Europe once the Eurex and Liffe venues are brought together, and it would run share markets in several countries across the continent.


    In its August press release, the NYSE countered these arguments by listing the benefits of the merger.  They identified one of the benefits was that they would,


    “Provide significant benefits for clients and issuers, thanks to increased efficiencies and reduced costs from opportunities for post-trade harmonization. The Companies expect US$ 3 billion in capital efficiencies for customers”


    Discussion Questions:


    1.     How would investors benefit from the pending merger between the NYSE and the Deutsche Boerse?


    2.     How might investors be hurt by the merger?


  • Voting on the Volcker Rule

    President Obama Signs the Dodd-Frank Wall Street Reform and Consumer Protection Act

    President Barack Obama delivers remarks and signs the Dodd-Frank Wall Street Reform and Consumer Protection Act at the Ronald Reagan Building in Washington, July 21, 2010. (Official White House Photo by Lawrence Jackson)


    The Volcker Rule—that is, the regulation in the Dodd-Frank Act that prohibits proprietary trading by banks—is set to be voted on by regulators next week.  Named after Paul Volcker, former Fed Chairman, the rule attempts to limit trading in risky investments by banks.

    Proprietary trading, or “prop” trading, is the buying and selling of securities for short-term profit, rather than to fill customer orders.  Some blame the financial crisis on these kinds of trades and undue risk-taking by banks.  The Volcker rule is the government’s attempt to put an end to these shenanigans.

    The question is—what exactly is proprietary trading? 

    You may think you can’t answer this question because you lack the expertise.  Apparently, folks with plenty of expertise are arguing the answer even now.  According to the American Banker (see the article by Adler, Borak, Davidson Oct 5):

    The rule would apply to any trading account that takes a position for the purpose of selling in the near-term. Regulators opted not to define "near-term" or "short-term" acknowledging the difficulty in ascertaining the purpose of a particular position.

    The NY Times Dealbook reports:

    The Volcker Rule exists in a gray area, where the line is often blurred between when a trade is proprietary or part of a bank’s routine market-making activity, which can include buying securities with an eye toward later selling them to clients. (Protess, "Details Emerge on Draft of Volcker Rule," Oct 5)

    According to the NY Times, “This summer, noting the difficulty in detecting proprietary trading, a Government Accountability Office report painted the Volcker Rule as cumbersome and tough to enforce. At the time, Mr. Levin called the G.A.O. report ‘woefully incomplete.’”

    Discussion Questions

    1.     Why is it so hard to detect proprietary trading?

    2.     Why is there a need for exemptions to the Volcker rule?


  • Mortgage Rates Below 4%


    Mortgage rates are below 4% for the first time ever.  And yet, the number of mortgage applications is down from last year (according to this WSJ interview).

    Most people can’t refinance their mortgages, even if they wanted to.  One in five homeowners is underwater, meaning that they owe more than the home is worth.  Many Americans have experienced income loss or credit deterioration, making them ineligible for new loans.  And folks who could buy homes are waiting on the sidelines.  After all, who wants to buy a home and see it depreciate in value? 

    According to the WSJ interviewee, the low rates are only helping the “same universe of borrowers refinance again and again and again.” 

    Discussion Questions

    1.     What is the payment on a 30-year mortgage with monthly payments on a $250,000 house if the annual rate is 6 percent?  What if the rate is 5 percent per year?  What about 4% per year?

    2.     At 4 percent per year, how soon would the loan end if the homeowner made one extra payment per year?


  • Morgan Stanley Tries to Counter Blog Rumors

    Photo of Morgan Stanley by jimyi available at http://www.flickr.com/photos/jimyi/3152542752/



    At 9:30 on Friday morning, a popular blog (Zero Hedge) stated that Morgan Stanley's credit default swap spreads were widening and that this seemed to coincide with Morgan Stanley's huge exposure to French banks. 


    Almost immediately, investors started to fret, driving Morgan Stanley's stock price tumbling.  Investor relations tried to alleviate investor fears, but it could not say much because earnings are going to be announced in about 2 weeks. 


    The NY Times reports Mr. Gorman, the CEO trying to calm investors:


     “In fragile markets, where fear triumphs over common sense, these things are bound to happen. It is easy to respond to the rumor of the day, but that is not usually productive,” he wrote in a note to employees. “Instead we should let balanced third parties do their own analysis and let the facts speak.” 


    Discussion Questions:

    1.     What are credit default swaps and what do widening spreads signify?


    2.     Why can't Morgan Stanley provide more information to quell investor fears?



  • Regulator Stalks High-Frequency 'Cheetah' Traders

    (photo of High Velocity Cheetah by flickrfavorites licensed under creative commons)

    At a recent high-frequency trading conference, CFTC Commissioner Bart Chilton, told attendees that high-frequency traders, or ‘cheetah’ traders as he liked to call them, should be more closely regulated going forward (read more in this NY Times article). 

    Cheetah traders are fast, fast, fast. In the animal kingdom, cheetahs are the fastest land animal, racing from zero to 60 miles per hour in a few seconds. In financial markets, this species of trader, due to the advent of high-speed computing technology and sensitive algorithmic programs, runs in and out of markets trying to score micro-dollars in milliseconds. They aren't like traditional financial speculators because they are in markets fleetingly. At the end of every trading day, the cheetah's goal is to be flat, or neutral. They don't want to hold risk for very long, most of the time for only seconds

    Many market participants originally suspected that high-frequency traders were the cause of the flash-crash of May 6, 2010.  On that one day, prices of stocks and futures contracts plunged to ridiculous levels within minutes but recovered by the end of the day.  According to the September 30, 2011 joint report by the SEC and the CFTC:

    “Over 20,000 trades across more than 300 securities were executed at prices more than 60% away from their values just moments before.  Moreover, many of these trades were executed at prices of a penny or less, or as high as $100,000, before prices of those securities returned to their ‘pre-crash’ levels.”

    The report concluded that HFT was not to blame for the flash crash, but that high-frequency traders made a bad situation worse.  The original trigger for the flash crash was a large sell order placed by a mutual fund through a computer program, or algorithm. 

    Commissioner Chilton believes we should be wary.  The cheetahs are out there, ready to pounce, and there may be another flash crash just waiting to happen. 

    Discussion Questions

    1.     What is high-frequency trading and algorithmic trading? 

    2.     What happened during the flash crash of May 2010?