• Women on Wall Street

    According to recent studies, Wall Street firms are recruiting more women for financial advising. “It’s not just a matter of promoting diversity in the work force. Turns out it may also make good business sense. Women are controlling a rapidly growing share of global wealth, and data show that at least some of those women prefer female financial advisors” (Kristen French for Registered Rep, 29 Dec 2011).

    Firms such as Morgan Stanley and Wells Fargo are making efforts to recruit women clients and advisors. 

    To get women advisors as well as investors in the door, the big wirehouse firms have begun building internal women’s forums and councils like the one at Morgan Stanley and organizing events that bring professional and like-minded women together, both for their own financial advisors and for potential recruits.

     The NY Times reported “8 Lessons from the Women on Wall Street Conference” by Kevin Rose in October. One of those lessons was this:

     Ms. Petach of BlackRock said that there was a business case for having female executives on Wall Street. …“In today’s world, our clients are women,” Ms. Petach said, noting that BlackRock had been able to relate more closely to its client base as a result of its increased female presence.

     

  • The Return of Layaway

    source: Kmart Layaway Screen shot at  http://www.kmart.com/shc/s/dap_10151_10101_DAP_Kmart%20Layaway?sid=KSx20070515x00001a&psid=42x2943164

    Buying a product on layaway is the opposite of buying on credit. With credit, you buy now and pay later. With layaway, you make payments to the store until you’ve paid the price in full, and then you take the product home. Credit is costly because most people incur interest expenses. But the cost of layaway is usually small—maybe a $5-10 layaway charge—with no interest charges. 

    According to the New Yorker (Jan 2, 2012):

    The return of layaway makes historical sense, since it first became widespread during the Great Depression, when the country, just as it is now, was dealing with the hangover from a colossal credit binge. During the nineteen-twenties, the vast majority of consumer durables, like refrigerators, washing machines, and furniture, had been purchased on installment. But credit dried up during the Depression. Similarly, one reason for layaway’s resurgent popularity is that credit, for many Americans, is much harder to come by these days. Credit-card companies have tightened their standards, dropped customers, and shrunk credit lines. But consumers aren’t using layaway just because they don’t have other options. They’re using it as a way to manage their money better. It’s a question not necessarily of spending less but of learning how to spend smarter.

     

    Financially, layaway actually doesn’t make sense. Why pay a $5 fee when you can simply park the money in your savings account until you’ve saved enough to buy the refrigerator?  

    The answer lies in “Behavioral Finance.”

    …In the real world most of us rely to some extent on what the economist Richard Thaler calls “mental accounting”—we split our money into different mental accounts, and treat it differently depending on what account it’s in. Money that’s in the bank is more likely to be spent on other things, while layaway insures that it’ll be spent on one thing.  (Read the full article from the New Yorker here)

     

    Discussion Questions:

    1.    In your opinion, why have consumers preferred credit purchases over cash or layaway purchases?

    2.    What are the benefits and limitations of layaway purchases for the average consumer?

     

  • Investing in the New Year

    Only a couple days left in 2011 to pick some stocks, and many experts in the financial markets have some advice to share. 

     

    According to this CNBC video above, companies worth watching include those with:

    ·        Pricing power

    ·        Market share

    ·        Ability to sustain profit margin

     

    Sectors that these analysts favor include energy, high-grade industrials, and technology.  The interview also points out that any gains next year are likely to be driven by increased revenues rather than by cutting costs.

     

    Discussion Questions:

     

    1.    What are some of the companies recommended in the CNBC interview above? 

     

    2.    For each of these firms, go to http://finance.yahoo.com/ and identify the:

    ·        Stock price

    ·        52-week high and low

    ·        P/E ratio

    ·        Dividend yield

     

    3. Which of these stocks, if any, would you choose?

     

  • The Santa Claus Rally

    The end of this week marks the beginning of the stock market season called the “Santa Claus Rally.”

    The stock market, at long last, is about to enter the seasonally favorable period that honestly can use the name “Santa Claus Rally.” It begins at the close this coming Friday, the last trading day before Christmas, and lasts until the end of the year.

    It’s not a very long period of favorable seasonality — just one week, after all — but the historical odds are quite impressive.

    Consider the performance of the Dow Jones Industrial Average (DJIA) +0.29%  during this period. Since 1896, when this benchmark was created, it has produced an average gain between Christmas and New Years of 1.07%. On an annualized basis, that works out to a gain of more than 80%.

    The market’s performance during this period has been relatively consistent, turning in a gain 78% of the time. That compares to a gain rate of 54% for all other weeks of the year.

    (Read the MarketWatch article here)

    What does this mean for investors?  After all, 1.07% is not enough to write home about.

    According to Mark Hulbert of MarketWatch (21 Dec 2011):

    If you were otherwise inclined to sell some or all of your stock holdings, for example, the existence of the Santa Claus Rally would suggest that you hold off on those sales until early January.

    And if you were otherwise planning to invest a lump sum in the stock market in coming weeks, year-end seasonal strength would suggest that you might want to make that investment in the next couple of days rather than wait until January.

    Discussion Questions:

    ·        What are some reasons for the Santa Claus rally identified in the article above?

    ·        If this rally is as predictable as the article suggests, then what does this imply about the efficient market hypothesis?  Are markets weak-form, semi-strong form, or strong form efficient?

     

  • Dividends and Cash For Christmas

    Stock pickers continue to sing the same song.  Choose stocks with known labels and strong dividend yields. 

     

    Laszlo Birinyi says he knew it would be hard to make predictions for 2012 in October, when he saw a headline suggesting that markets would rise or fall depending on whether the tiny nation of Slovakia approved a bailout plan for Europe.

     

    Birinyi, president of stock market research and money- management firm Birinyi Associates Inc., says markets are so volatile that it doesn’t take much to send them reeling, reports Bloomberg Markets magazine in its January issue.

     

    “There are so many exogenous factors that to try to forecast the market with a degree of confidence is difficult,” Birinyi says.

     

    The best strategy for stock investors, he says, is to stick with iconic brands, such as Apple Inc. (AAPL) or Ralph Lauren Corp. (RL), and with companies that offer “meaningful dividends” of at least 5 percent.

     

    (read the Bloomberg article here)

     

    Other investment professionals offer similar advice:

     

    Seeking out dividend yield is also a theme for Mark Luschini, chief investment strategist of Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion. Large, high-quality U.S. companies such as Chevron Corp. (CVX) and Microsoft Corp. (MSFT) that have a history of increasing their dividends and substantial free cash flow are the most prudent equity investments, he says.

     

    Discussion Questions:

     

    ·        What is the dividend yield for AAPL, RL, CVX, and MSFT? 

     

    ·        What are some other stocks with high dividend yields that you can add to this list?

  • The 106-Year Old Stockbroker

    Times have changed since 1905, but some things never go out of style.  Mr. Kahn is 106 years old and he has seen markets come and markets go. 

     

    Mr. Kahn has seen quite a lot in his 106 years: the advent of technology such as radio and television to mobile phones and iPads.  One thing has remained the same—value investing.  His investment “idol” is Ben Graham, the father of value investing and the idol of other notable investors like Warren Buffet. 

     

    Discussion Questions:

     

    1.    What is value investing?

     

    2.    What are some stocks today that a value investor would consider choosing?

     

  • Blackberry in Trouble

    Wall Street is becoming increasingly skeptical that Research in Motion (RIMM) the maker of Blackberry will make it to Christmas.  With a lower than expected earnings report, folks are wondering what the company can do to recover. Even worse, the next generation of Blackberry—the Blackberry 10—is delayed until the end of 2012. 

     

    Investors are betting against the firm.  According to Forbes, more investors are buying put options than call options. 

     

    Options volume on the stock is just about to top 400,000 contracts as of 1:00 PM in New York, making it the most actively traded single-stock name by options volume today. Puts on the Blackberry maker are changing hands roughly 1.8 times for each single call option in action today. Trading in weekly options set to expire next Friday suggest some traders expect the price of the underlying to slump to fresh lows during the next five trading sessions.

     

    What is RIMM to do?

     

    Some suggest firing the two CEOs.  Others suggest selling the company or breaking it up.  But as the video above suggests, with the trouble facing RIMM, who would want it?

     

    Discussion Question:

     

    How can investors use call or put options to make money on RIMM if they believe the shares are going to decline further?  What if they believe shares will increase eventually?

     

  • Debt-Free Firms

    Debt is not always a bad idea. Financial leverage allows a firm to increase its assets and earn more revenues, even though the added revenues come with a price tag. Also, when a firm is faced with the choice of debt or equity financing, debt is technically cheaper because the interest expense is tax deductible. So choosing not to use debt is dangerously close to leaving money on the table

     

    And yet not all firms borrow money. According to this CNBC report, 24 firms in the S&P 500 are completely debt-free. CNBC identified 15 that were also cash rich. The list includes firms such as:

     

    ·        Apple (AAPL)

    ·        Bed Bath & Beyond (BBBY)

    ·        Forest Labs (FRX)

    ·        Amazon.com (AMZN)

    ·        Mastercard (MA)

     

    Discussion questions:

     

    Use google scholar (http://scholar.google.com/) to research “capital structure trade off.”

     

    ·        What does the classical trade-off theory suggest about how much debt firms choose to use?

     

    ·        What does the pecking order theory suggest?  

     

    ·        Which theory are the firms cited by CNBC following?

     

  • GE: Still Bringing Good Things to Life

    In spite of the risks facing the European financial markets, U.S. firms like GE are expecting profits.  According to Reuters today:

    The world's largest maker of jet engines and electric turbines said it expects overall revenue to rise 5 percent next year, with 5 to 10 percent of growth at its industrial arms more than offsetting planned declines at GE Capital, as the company continues to scale back the finance unit.

    CEO Jeff Immelt told investors that GE Capital has limited exposure to the European debt crisis.  Furthermore, he expects to cut costs next year and gain market share. 

    Discussion Questions

    1.    What is GE’s current dividend yield?  Using data from Yahoo! Finance, what is your best estimate of the next dividend on an annualized basis?

    2.    From Yahoo! Finance or other sources, estimate the long term growth rate of GE’s earnings.

    3.    Using the dividend discount model, what is your estimated value of GE stock?  Is this stock undervalued or overvalued? 

     

  • Fed Actions Remain Unchanged In Response to "Moderate" U.S. Expansion

    The Federal Open Market Committee announced today that the “economy has been expanding moderately, notwithstanding some apparent slowing in global growth.”  Based on this assessment, the Federal Reserve is continuing with its current plan of action, which includes extending the average maturity of its investment holdings.  According to the announcement:

     

    The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

     

    According to Bloomberg (13 Dec 2011):

     

    Still, economists see the U.S. expansion slowing to a 1.9 percent annual pace in the first quarter from 2.8 percent in the three months ending Dec. 31, based on the median estimate in a Bloomberg News survey this month.

     

    Discussion Questions:

     

    ·        What is the Federal Open Market Committee?

     

    ·        According to the press release, what is the “dual mandate” of the Federal Reserve? 

     

    ·        What is the anticipated effect on long term interest rates if the Federal Reserve continues to buy long-term bonds?

     

  • Investing Advice: Don't Try For a Homerun

     

    Looking for investment ideas? Allan Sloan, Senior Editor-at-Large for Fortune Magazine shares his in the video above. 

     

    He is suggesting that you "seek singles" rather than go for the homerun.  In other words, look for blue-chip, dividend paying U.S. stocks that generate plenty of cash. Skip fads and stay away from U.S. Treasury bonds. Furthermore he suggests being wary of commodities and foreign stocks unless you know what you're doing.

     

    In short, choose boring rather than exciting. After the roller coaster ride of financial markets over the last three years, boring sounds pretty attractive, doesn't it?

     

    Discussion Questions:

    ·        What is a "blue-chip" stock?

     

    ·        Go to http://screener.finance.yahoo.com/newscreener.html and try to identify the top dividend paying U.S. stocks. What other criteria would you add to select an appropriate investment?

     

  • The Career Path of MF Global's CEO

    From star bond trader at Goldman Sachs in 1975 to CEO of MF Global, Jon Corzine’s career has been long and varied.  At Goldman Sachs, he worked his way up to the level of CEO but was pushed out by co-CEO, Hank Paulson, in 1999.  He went on to win a senate seat in NJ in 2000 and then became Governor of NJ in 2006.  In 2009 he lost his bid for Governor and subsequently returned to Wall Street as the CEO of MF Global.

     

    According to this article on CNN:

     

    Corzine, a Democrat who served as a U.S. senator and governor of New Jersey, was called to Capitol Hill to participate in the Agriculture Committee's investigation of the firm, which went bankrupt after disclosing bets on risky European debt that sparked a panic among investors….

     

    Corzine said he was "stunned" on Oct. 30 when he was told "that MF Global could not account for many hundreds of millions of dollars of client money." He said he was not involved in the mechanics of the firm's trades and was unsure of what might have happened.

     

     

    Discussion Questions:

     

    In your opinion, how much responsibility should the CEO bear for the missing money?

     

  • Investors are Lovin It

    ‘Tis the season for peppermint mochas and chicken McNuggets.  With more than 33,000 stores worldwide, “McDonald’s Corp. (MCD), the world’s largest restaurant chain, said sales at stores open at least 13 months rose 7.4 percent globally last month, driven by demand in Japan and China” (Bloomberg Dec 8, 2011).  The sales beat analyst estimates.

    According to Bloomberg: 

    Chief Executive Officer James Skinner has sought to compete with Yum! Brands Inc.’s KFC and Pizza Hut chains in China by accelerating store growth. McDonald’s will open as many as 250 locations in China in 2012 and has opportunities to grow in other Asian nations including South Korea, Taiwan and Hong Kong, Chief Financial Officer Peter Bensen said at an investor meeting last month.

    Discussion Questions:

     

    ·        In your opinion, what makes McDonald’s appealing to consumers and investors?

     

    ·        What are McDonald’s competitors and how does McDonald’s compare with these competitors in the U.S. and abroad?

  • Municipal Bonds Offer Value

    In spite of the recent, high-profile municipal bankruptcies in 2011, muni bonds may still offer value to the savvy investor.

     

    According to CNBC, munis may be a wise choice for several reasons:

     

    1.    Though bankruptcy is an option, state and local governments do what they can to avoid such drastic measures.  They make every effort to maintain their ability to borrow money, and that means meeting debt obligations.

     

    2.    Municipal principal and interest payments represent less than 10 percent of government budgets in all but three states, according to S&P.

     

    3.    Recent budget crises have served as a “wake-up call” for state and local governments, and budget reforms have strengthened municipal financial conditions.

     

    4.    With hundreds of potential municipal bonds to choose from, investors can diversify their portfolios.

     

    Discussion Questions

     

    ·        What is a general obligation or “GO” municipal bond and how does it differ from a revenue bond?  Which one would be a safer investment?

     

    ·        According to the CNBC article cited above, what are some things an investor might look for when choosing municipal bonds to buy?

     

  • The Euro: Is One Big European Budget Necessary?

    Is it wise to have a currency without a government? That is the case with the euro.  According to former British finance minister, Norman Lamont, having a currency without a government “has turned out to be a minus point because no one is in charge.”

     

    The 17 nations that share the euro face a decision.  According to the video above, either change the rules and allow countries to leave the euro or create a fiscal union in addition to the monetary union that currently exists. In other words, create “one big budget.”

     

    In Mr. Lamont’s words, “Either cough up or break up.”

     

     

    Discussion Questions:

     

    ·        According to this video, why did Greece get into financial trouble?

     

    ·        What are the possible solutions to the Eurozone financial crisis?

     

  • Making Money on Wall Street

    If you don’t work for an investment bank but want to share in their profits, you can.  Just invest in bank stocks. 

    Bank stocks are currently trading at low prices.  If banks are profitable in the months and years to come, then their stock prices will rise.  That means anyone who invests now can profit too.                       

    According to this MarketWatch article by Brett Arends:

    At today’s prices, anyone who is even remotely bullish on the economy — or even on Wall Street — ought to be a buyer. The stock trades on a bargain-level eight times forecast earnings. It’s barely 70% of book value. That’s a distressed valuation scarcely ever seen since Goldman went public in 1999. Just once — briefly, during the 2008-9 crash — has it been this cheap in relation to net assets. For most of the past decade it’s traded at twice book value, and in 2007 it traded at three times.

    Investment bankers on Wall Street are known for their big bonuses.  The kind of bonuses that make folks jealous…and a little mad.  This year’s bonuses are not going to be the large cash sums as in the days of old.  Instead, bankers are expecting to be paid in company stock, and they’re happy about it according to this NY Times article.  If that sounds like a recipe for wealth to you, then Arends suggests you can join them by buying shares too.

    Discussion Questions

    ·       According to the NY Times article, why do firms choose to pay bonuses in the form of shares rather than in cash?

    ·       What are call options and how can an investor make money by buying calls?

     

  • Looking Back at Sarbanes-Oxley 10 Years Later

    Ten years ago, accounting fraud led to the collapse of WorldCom and Enron.  At the time, Enron was the 7th largest company in the U.S. and according to the interview above with former Congressman Oxley, Enron “was selling at $90 a share. It went to zero almost overnight. 7,500 people lost their life savings and their jobs at the same time.”

     

    The collapse of Enron led to the Sarbanes-Oxley act (or SOX) that was supposed to put an end to “all those corporate shenanigans.”

     

    Was it successful?  If it was so successful, why did we experience the recent financial crisis?

     

    According to Mr. Oxley, the recent crisis was not driven by accounting fraud.  And if there was accounting fraud—as in the case of Bernie Madoff—it was not happening at publicly traded firms. 

     

    Discussion Questions

     

    ·       What are the key provisions of the Sarbanes-Oxley Act?

     

    ·       Why did the Act face resistance by corporations?  

     

    ·       In your opinion, has the Act been successful in achieving what the legislators had hoped to achieve?

     

  • MF Global and the Repo-to-Maturity Play

    The drama of MF Global’s demise continues.  The story centers around leverage, particularly the use “repo-to-maturity” agreements that allowed MF Global to use customer money to buy more European debt than it could afford.

     

    A repurchase agreement is a contract where one party sells a security (in their case, a European bond) to a counterparty and agrees to repurchase the security at a later date.  In essence, the party selling the initial security is receiving money now (effectively borrowing cash) and using the security as collateral.  The counterparty is said to be entering into a “reverse repo” and is paying for the security now (effectively lending money), taking delivery of the collateral, and agreeing to return the collateral in exchange for repayment of the cash in the future. 

     

    Sounds complicated, but it’s nothing more than a collateralized loan.  Many of these loans are overnight where the collateral is returned the next day or a few days later.  Repo-to-maturity is a repurchase agreement where the repurchase date is the maturity date of the bonds being used as collateral.

     

    MF Global’s failure is blamed on a $6.3 billion exposure to European bonds.  Turns out the exposure was much greater because MF Global was able to use borrowed money from repos to buy the European bonds. 

     

    While MF Global disclosed in a May 20 filing that its net holdings among five European countries was $6.3 billion, it also said the figure was “net of hedging transactions.” The firm had actually expanded its bets to $11.5 billion as of June 30, according to data in the SEC filings.

     

    (read the Bloomberg BusinessWeek article here)

     

    Discussion Questions:

     

    ·       Why would a firm enter a repurchase agreement? Why enter a reverse repurchase agreement?

     

    ·       According to the Bloomberg article, how did MF Global use repos to try to earn a profit?

     

     

  • Farmers Hurt in MF Global Bankruptcy

     

    Midwest farmers are among the investors hurt by MF Global’s recent bankruptcy.  With $6.3 billion exposure to European debt, this derivatives trading firm is the 8th largest bankruptcy in U.S. history.

     

    A financial derivative is a contract whose value depends on the value of some underlying asset.  When the price of the underlying asset changes, then the price of the derivative contract changes as well.  Derivatives can be used to protect the value of an investment, or they can be used to speculate on the future price of an investment.

     

    Take corn for example.  A farmer who plants a field of corn can wait until harvest to sell the corn and take his chances on the price of corn at that time.  Or he can enter into a contract to sell corn at a stated price in the future using a “futures” contract. 

     

    The video above shows an interview with a Midwest farmer who was among the thousands of MF Global customers who lost money.  This particular farmer used corn futures to protect or “hedge” the value of his crops.  Now he’s missing $200,000.

     

    Discussion Questions:

     

    ·        What is the difference between hedgers and speculators?

     

    ·        According to this video, how do corn futures transfer risk from one party to another?