• Advice to Lottery Winners

    Watch this CNBC video here:




    The upcoming $540 million is the largest jackpot in history.  


    What are the odds of winning? Not good—1 to 176 million.


    But if you do win, advice from a prior winner includes:


    1.      Find a good financial planner and legal team

    2.      Do your research on financial advisers

    3.      Have someone to serve as a buffer that can say “no” to the various requests


    For discussion:


    ·        Why do you think so many people are willing to play the lottery with such poor odds of winning?


    ·        Why do you think that so many winners go bankrupt within a few years of winning the lottery?


  • No More Pennies

    No more Canadian pennies to be mistaken for U.S. pennies. The Royal Canadian Mint announced yesterday that it is withdrawing the penny from circulation this year. Canada is not the first country to stop using the penny. Others like Australia, Brazil, and Sweden have already successfully done it.


    From the Bloomberg article 29 March 2012:


    “It’s a cost to the government that can be easily saved, given that most pennies get stuck down the back of the sofa or under the streetcar,” said David Tulk, chief Canada macroeconomic strategist at TD Securities Inc., a unit of Toronto-Dominion Bank. (TD)


    The penny, with two maple leafs on one side and Queen Elizabeth II on the other, can continue to be used in payments. As they are gradually withdrawn from circulation, price rounding on cash transactions will be required, the government said.


    For discussion:


    ·        What might be some objections to eliminating the penny from circulation?


    ·        How are these objections addressed in the Bloomberg article referenced above?



  • Stocks or Bonds?

    Dividend yield and dividend growth are looking better than bond coupon income these days. With interest rates as low as they are, Edward Perks, Senior Vice President of Franklin Templeton Investments is reducing holdings of long-term bonds and increasing holdings of the shares of dividend-paying firms.


    Shares are more attractive than bonds because companies can and do increase their dividends, but they are not going to be increasing the coupon rates on their long term debt. In other words, dividend growth is the attractive element here.


    Mini-case study:


    ·        Choose a firm that issues both stocks and bonds.


    ·        Go to the firm’s annual report and identify the credit rating of the firm’s long-term bonds. Then go to http://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.php and identify the yield-to-maturity on the company’s current long term bonds. (hint: if the “spread” for AAA rated bonds with 10-year maturity is 68, then the yield-to-maturity is 68 basis points or 0.68 percent above the yield-to-maturity on the 10-year U.S. Treasury note.)


    ·        Go to http://finance.yahoo.com/ and look up the company’s stock. What is the dividend yield?

    ·        Based on historical dividends, what is a reasonable estimated growth rate for the dividends?


    ·        Would you recommend an investment in the shares of stock or in the long-term bonds? Why?


  • International Internships

    (photo by Nicholas Roy 2012)


    Internships are a good idea, even unpaid internships.  Especially if they are international.

    This Bloomberg Businessweek article tells the story of several students who are “part of a wave of undergraduate students, many of them business majors, that are heading to Shanghai, Beijing, and other Chinese cities to get international work experience….”

    From the article: (read it here)

    In the 2009-10 academic year, the latest for which data is available, 20,000 students received academic credit at U.S. colleges and universities for internships or work abroad, according to the Institute of International Education’s 2009-10 Open Doors report. Many of these students have interned in such countries as Israel, the U.K., and Germany; lately, an increasing number seek positions in China, say several internship providers.

    Having traveled with college students overseas several times, I have seen the benefits of international work experience. Some of the issues students encounter include:

    1.      Cultural differences

    2.      Language barriers, even when all parties speak English

    3.      Travel hassles, both international and local

    For finance and accounting students, we can add different accounting standards and different financial vocabulary to the list. What we commonly know as “revenue” might be called “turnover” elsewhere. And of course U.S. generally accepted accounting standards (GAAP) are not necessarily followed outside the U.S.

     Why bother?

    Because in our increasingly global marketplace, learning to communicate in spite of barriers and being flexible in spite of obstacles are valuable qualities for prospective employers.

    For discussion:

    ·        For finance students, what internships can you envision abroad?

    ·        If you can choose a country for an international internship, where would you go?

    ·        If you have traveled for study abroad or for an internship, what did you learn? What issues did you face? What advice would you offer to others?


  • L.A. Dodgers: Return on Investment

    The debt-ridden L.A. Dodgers have found a buyer. Magic Johnson and his colleagues have agreed to buy the franchise for $2.15 billion dollars—an “extraordinary number.” That price tag buys them the team, the stadium, and the surrounding land.


    With the closest bidder being $600 million away from the price paid by Mr. Johnson et. al., folks are questioning the valuation of this team. Is it an “outlier” or are sports franchises really worth this much? In comparison, the Toronto Maple Leafs sold recently for $1.3 billion and included the TV network. And in 2009, the Chicago Cubs sold for $845 million.


    The bid is still pending approval by the league, but according to this video above, it is likely to be approved.


    For discussion:

    ·        If the Chicago Cubs sold for $1.3 billion in 2009, and if they are worth about the same as the L.A. Dodgers, what rate of return has the team’s owner earned?


    ·        What factors would Magic Johnson and his group have considered before arriving at the bid of $2.15 billion?



  • Equal Credit Opportunity Makes Good Business Sense

    Women buy cars, houses, and any number of expensive items. It makes good business sense to treat women buyers well, but that lesson is still lost on some sales people today.


    This article by Becky Quick, co-anchor of CNBC’s Squawk Box morning show, describes the foolishness of some car salesmen when she went shopping for a new car.


    The scenarios all went something like what happened at a nearby Toyota dealership, where I walked to the front desk and asked to have someone show me the Sienna. A salesman came right out and introduced himself to the man who happened to be standing behind me. After the bystander made clear that he wasn't my husband, the salesman asked me where my husband was -- still without introducing himself or asking my name. The sales rep then went on to respond to questions I asked about the Sienna by looking at my husband and talking to him, until my husband told him to talk to me. When the guy took me to his desk to take down my information, he asked me for my home phone number and followed up with: "Obviously you don't have a work phone."


    Many women, including me, have their own stories to tell. Like the time I told a realtor that we were not interested in a particular type of mortgage loan, to which she promptly suggested that I talk to my husband so he could explain “these things” to me.  What?


    Today, these stories make us smirk…or cringe…but years ago this same behavior at financial institutions had to be legislated.


    The Equal Credit Opportunity Act was enacted in 1974 to “promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract)….”


    One example where marital status was used to discriminate prior to the Act was that women were often required to have a co-signer for a loan.  Today, the Act specifically prohibits such a requirement. 


    From the ECOA (read the full Act here):


    (d)  Signature of spouse or other person--(1)  Rule for qualified applicant.  Except as provided in this paragraph, a creditor shall not require the signature of an applicant's spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.


    For discussion:


    ·       What are the major provisions of the Equal Credit Opportunity Act?


    ·       What are the major provisions of the Community Reinvestment Act?


    ·       What are some discriminatory lending practices that led to the implementation of both of these Acts?



  • Meet the New Landlord: Bank of America



    Watch this CNBC video here





    If the bank forecloses on a home, and then seeks to find someone to live in that home, who is the most likely tenant? Answer: the current homeowner. After all, if folks lose their home and are forced to move out, they will probably rent a new place in the same neighborhood or at least in the same school district.


    This is why Bank of America is launching a pilot program to rent foreclosed properties to the current homeowners. They’ve chosen 1,000 homeowners who are at least 90 days delinquent and who have already begun the foreclosure process.  The bank is now contacting these homeowners to see if they would be interested in renting their current residence.


    Bank of America is not seeking to become a long-term landlord and is hoping sell the rented properties to investors when the time is right.


    Is this a win-win?


    No one knows. If this pilot program is successful, perhaps.


    For discussion:


    ·       What are the benefits of the landlord-tenant arrangement for the bank and for the current homeowner?


    ·       What risks do the bank and the renter face in such an agreement?


    ·       In your opinion, is this a good idea?


  • Diamond Foods Gets a Break from Lenders

    Diamond Foods, the maker of Pop-Secret, Diamond nuts, and Kettle potato chips, announced that it has reached a forbearance agreement; its lenders are postponing calling in their loans to allow the firm to raise capital.                  

    From the press release (21 March 2012):

    "I am pleased to have reached this agreement with our lender group," said Rick Wolford, Diamond's Interim President and Chief Executive Officer. "This agreement enables Diamond to continue to work through our restatement process and with our financial advisor to develop capital alternatives to strengthen Diamond's balance sheet and reduce leverage. Also, during this period, Diamond will continue working to rebuild our walnut grower relationships, to take steps required to ensure Diamond's competitiveness and ongoing success in the walnut industry and, importantly, to continue to successfully support the growth of our snack brands."

    The amendment requires Diamond to suspend dividend payments to stockholders. The interest rate on borrowings under the facility will increase by 75 basis points. In addition, Diamond has agreed to pay a one-time forbearance fee of 25 basis points to its lenders.

    According to the NY Times (21 March 2012), Diamond is pursuing the sale of a minority stake to a private equity firm and other “capital-raising options.”

    From the NY Times article:

    Both steps have been necessary in the wake of Diamond’s disclosure of accounting problems, severe enough to require revising two years’ worth of financial statements. The accounting irregularities, related to the company’s payouts to walnut farmers, blocked Diamond’s deal to buy the Pringles line of snacks from Procter & Gamble. They also led to the sidelining of the company’s chief executive and chief financial officer.

    Diamond has until June 18 to get back in compliance with its lender agreements.


    For discussion:

    What is private equity? What options does Diamond have to raise capital?


  • The Internet Economy

    The internet was the largest contributor to the U.S. economy in 2010. 


    CNN Money (19 March 2012) reports:


    The Internet contributes more to the American economy than the entire federal government, according to a new study by the Boston Consulting Group.


    The Internet accounted for $684 billion, or 4.7% of all U.S. economic activity in 2010, Boston Consulting Group found. By way of comparison, the federal government, contributed $625 billion, or 4.3%, to the nation's output.


    If it was considered its own separate industry, the Internet would also be larger than America's education, construction or agricultural sectors.


    From the BCG Report (available here):


    By 2016, there will be 3 billion Internet users globally—almost half the world’s population. The Internet economy will reach $4.2 trillion in the G-20 economies. If it were a national economy, the Internet economy would rank in the world’s top five, behind only the U.S., China, Japan, and India, and ahead of Germany. Across the G-20, it already amounted to 4.1 percent of GDP, or $2.3 trillion, in 2010—surpassing the economies of Italy and Brazil. The Internet is contributing up to 8 percent of GDP in some economies, powering growth, and creating jobs.


  • Target-Date Funds: A Staple of Many Retirement Plans

    Target-date mutual funds are available in most 401k plans in the U.S. these days. According to Smart Money (20 March 2012) “Americans now hold $343 billion in target-date funds, up threefold in six years.

    From the article:

    The funds invest in a mix of stocks, bonds and other investments that gets more conservative as an investor's retirement, or target date, approaches, rebalancing automatically for investors who prefer not to or don't know how to do it themselves. Congress passed a law in 2006 making it easier for employers to use target-date funds as a default 401(k) option, and 81 percent of large employers now offer them.

     source: http://online.wsj.com/media/0412401kworth.jpg

    For discussion:


    ·        What are the benefits of target-date funds?


    ·        What are the criticisms of target-date funds?


  • The Goldman Sachs Resignation Letter

    First came the resignation letter from Greg Smith, an Executive Director at Goldman Sachs.  He published his resignation letter in the NY Times on March 14, 2012.


    From the letter:


    TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.


    To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.


    Then came the street reaction to the letter in this video:

    Next, JP Morgan’s CEO told traders not to take advantage of Goldman’s issues to make money for themselves:


    According to Reuters (15 March 2012):


    "Today's New York Times op-ed by a Goldman Sachs executive is generating a lot of discussion around the street," Dimon said.


    "I want to be clear that I don't want anyone here to seek advantage from a competitor's alleged issues or hearsay -- ever. It's not the way we do business."


    The Dimon message was sent to the bank's global operating committee and later forwarded to wider parts of J.P. Morgan, sources who have seen the memo said.


    J.P. Morgan declined to comment on the memo.


    For discussion:


    In your opinion, has Greg Smith hurt his changes of being hired by another Wall Street firm by publishing his resignation letter?


  • Why are Borrowers More Interested in Reverse Mortgages?

    U.S. seniors age 62-64 are finding themselves in need of cash, and are turning to reverse mortgages in increased numbers. 


    According to CNBC (14 March 2012):


    "The average age for taking out reverse mortgages has been around 71,"  explains Sandy Timmerman, director of the MetLife Market Institute who conducted the survey with the National Council on Aging.


    "But with job losses, higher debt and living costs, more and more of the 'younger' seniors are looking at reverse mortgages as a way to pay their bills and keep their homes," Timmerman adds. "It shows the devastation some seniors have gone through since the financial downturn."


    According to the U.S. Department of Housing and Urban Development (HUD) a home equity conversion mortgage (HECM) or “reverse mortgage” is:


    A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.


    For discussion:


    1.      What are some alternative explanations for the increase in reverse mortgages among “young” seniors?


    2.      In your opinion, is a reverse mortgage good for the borrower?


  • Fender Guitar IPO

    Some investors buy shares in initial public offerings (IPOs) because they believe the company’s growth plans. Others buy IPO shares because they love the name.


    Fender—the famous guitar maker—is trying to launch an IPO and is likely to attract the second group of investors. The ones who love the brand.


    From Business Week (13 March 2012):


    Analysts would ordinarily be skeptical of a company that’s going public to help balance its books. Investors prefer companies with clear plans to expand; they don’t usually want to help pay for acquisitions and debts already undertaken. But Fender has something going for it that very few others possess: It’s an iconic brand people truly love. The company has been around since 1946 and has a solid reputation for making first-rate guitars such as its Telecaster and Stratocaster models. Eric Clapton, Jimi Hendrix, Pete Townsend, and John Mayer either are—or have been—loyal customers.


    “It’s up there with Harley (HOG),” says Tom Taulli at InvestorPlace’s IPO Playbook, “as a company that people love so much they’re willing to tattoo the logo on themselves.” That tattoo cachet, as it were, could lure additional investors when the stock starts trading in a few months.


    Fender is looking to raise $200 million to pay down some of its debt.


    For discussion:


    Would you buy shares of the Fender IPO? Why or why not?


  • Euro or Local Currency?

    Some Germans have begun using local currencies to buy local products. However, there is a price. The currency shown in this video is intentionally devalued every three months and costs 2% to extend the note. According to the interview, this keeps the currency in circulation and encourages its use as a medium of exchange, and not as a commodity to be hoarded.


    Is it worth the trouble? Some claim that the use of a local currency ensures that consumers and producers are trading goods and services locally. Others claim that the currency is basically tied to the euro, but with an added cost.


    For discussion:


    What is the purpose of currency? What is the impact on the economy if there is no reliable currency?

  • U.S. Banks Deemed Healthy

    The results of the recent bank stress tests are in. According to the Fed press release, “the majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical scenario.”


    Of the 21 financial services companies tested (19 of which are the largest U.S. banks), four institutions failed the test:


    ·        Citigroup, with a Tier 1 capital ratio of 4.9%

    ·        Ally Financial, with a 4.4% ratio

    ·        SunTrust, with a 4.8% ratio

    ·        MetLife, with a 6.6% ratio


    According to CNBC (13 March 2012):


    The stress tests, now mandated under the Dodd-Frank financial-services law, were first instituted after the 2008 financial crisis, which saw the collapse of Lehman Brothers and AIG and the near-failure of several other big banks. The US government was forced to inject billions of dollars into credit markets to prevent the entire financial system from collapsing.


    The Fed's latest stress test tried to determine whether the banks have enough capital to withstand another financial crisis, including a 13 percent jobless rate, a 50 percent drop in stock prices and a 21 percent decline in housing prices.


    "American banks are healthier and have ample capital when compared with their European counterparts," said Stephen Wood, chief market strategist at Russell Investments. "They are in better conditions than where they were four years ago. The bigger issue is how insulated American banks are to the European situation."


    For discussion:


    1.      What is a Tier 1 capital ratio? What does that tell us about the health of a bank?


    2.      Choose a manufacturing firm or a firm in a sector other than financial services. What is the capital ratio, or degree of financial leverage, based on the most recent balance sheet? What does that tell you about the financial leverage of financial institutions?


  • Million Dollar Foreclosures

    The share of foreclosures on $1 million properties has risen by 115% since 2007 while the share of foreclosures on mid-priced houses has fallen by 21%, according to CNN Money.com.


    High-end homeowners choose foreclosure for different reasons than homeowners of lower-priced homes.  From the CNN Money article:


    …With a recovery in the housing market still years away, foreclosure has turned out to be a worthwhile option after all. Saddled with bloated mortgages after a long run up in property values, many high-end homeowners have chosen to pursue a "strategic default." Even though they can afford the monthly mortgage payments, they still decide to walk away from their home because they owe more on the property than it is worth.


    "In the lower-priced houses you'll see more people defaulting because they can't afford the payments and it's a choice between feeding their family and paying the mortgage on a home that's under water," said Stuart Vener, a national real estate and mortgage expert with the Florida-based Wilshire Holding Group.


    "In million-dollar homes, you're looking at people who can afford it, but they have to make a business decision: Does it make sense to make payments on a mortgage when the home is worth less than they owe?" he said. In many cases, it often makes more financial sense to walk away.


    For discussion:


    ·        In your opinion, is a strategic default a sound business decision? Why or why not?


    ·        In your opinion, is a strategic default a sound ethical decision?  Why or why not?



  • More on the Greek Saga

    Greece announced details of the debt restructuring this morning. Approximately 85% of bond holders agreed to the “haircut” and the market is waiting to see if the collective action clauses (CAC) will be announced later today forcing those holdouts to accept the deal, bringing the total participation rate to 95%. (read the article on CNBC here)

    The International Swaps Dealers Association (ISDA) is meeting later today to decide whether the restructuring is, effectively, a “default.” This means that forcing the remaining bondholders to accept the deal through the CACs could trigger a “credit event” and cause the holders of credit default swaps to get paid. 

    Stay tuned.

    For discussion:

    ·        What does this event mean for the Greek people?

    ·        How will this affect the debt of other European countries? How are bondholders of Italian or other sovereign debt likely to react?


  • Greek Debt Restructuring To Be Announced

    Greece has been able to get 95% of its creditors to agree to the proposed bond swap that will rescue the government from bankruptcy and save billions of euros in borrowing costs.


    According to Reuters (March 8, 2012):


    The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece's crippling public debt.



    According to Bloomberg earlier today:


    While Greece would prefer a voluntary deal, the government has said it will use so-called collective action clauses to force holders of Greek-law bonds into the swap if the private sector involvement falls short and it gets approval from investors to change the bonds’ terms.


    Under the rules of the exchange, investors holding at least 50 percent of the eligible bonds must vote on the swap, and 66 percent of those must agree to amend the bonds to enable the government to impose the collective action clauses, said Christoph Rieger, Commerzbank’s head of fixed-income strategy.


    For discussion:


    What is a credit default swap (CDS)? How does this agreement impact the holders of CDS?


  • Household Net Worth

    Household net worth is up. That’s good news.


    The Fed reported household net worth increased by 0.25%, the first gain since the 2nd quarter of 2008—an increase of about $1.2 trillion. This is encouraging in light of the fact that real estate values declined to their lowest level since 2003.


    For discussion:


    ·        How did household net worth rise if household equity declined?


    ·        What does the report mean by “deleveraging?”


  • What Goes Into Your Credit Score?

    That one little number says a lot about you: your credit score. It tells lenders how likely you are to repay a new loan, and in today’s financial markets, getting a new loan is no small feat. 


    According to a CNN Money article, here are “7 Small Mistakes That Can Do Big Harm to Your Credit Score:”


    1.      Opening too many credit accounts because each “hard inquiry”—that is, each time a credit card company checks your credit score—will cost between 3 and 5 points.

    2.      Missing one payment will cost at least 100 points, though that will improve in about 12 months if no more payments are missed. Those who are chronically late, however, will not find their credit scores improving as quickly.

    3.      Closing an old account that you aren’t using because it might hurt your “credit-to-debt utilization ratio.” Apparently there is an “ideal number of credit cards” to have in your wallet.

    4.      Maxing out a single credit card or carrying a credit card balance that is more than 33% of the available credit can hurt your score.

    5.      Racking up a bill right before your statement closes means that the high balance will get reported to on your credit history.

    6.      Not checking your credit report and missing reporting errors that may be hurting your score.

    7.      Ignoring an account that has gone into collections, even if the bill is from the hospital.


  • Should Investment Banks Keep Their Commodities Warehouses?

    Goldman Sachs became one of the “Wall Street Refiners” when it bought a refinery in Rotterdam, Holland in the 1980s and natural gas fields in Canada. With the ability to trade in derivatives markets and the markets for physical commodities, Wall Street firms are finding themselves embroiled in the debate over whether they can expand their physical commodities business or must divest themselves of the warehouses and storage tanks altogether.


    According to Reuters (2 Mar 2012):


    The warehouses are lucrative on their own: As surplus metal stocks accumulated during the recession, profits at the UK-based Henry Bath surged to more than $110 million in 2009 and near $80 million in 2010, about $1 million per employee per year, according to annual reports filed to UK Companies House in November. These units could, in theory, be run as "merchant banking" investments, as with Metro, but that requires they be kept at arm's length and divested within 10 years.


    But for trading firms, that's only half the benefit.


    "The truth of it is that having access to the physical markets is about optimization and knowledge - it gives you the visibility of the market to make far more successful proprietary trading decisions in both physical and financial markets," said Jason Schenker, President and Chief Economist at Prestige Economics in Austin, Texas.


    The debate is not just about the risk that banks may be accepting. It is also driven by fears that investment banks may complicate the delivery and availability of commodities.


    From the article:


    Even so, Nick Madden, vice president and chief procurement officer at Novelis, the world's largest manufacturers of rolled-aluminum for drink cans, has said Goldman has purposively made it difficult for firms to get their metal out when they most need it, as the bank benefits from high rental fees.


    "The banks and metal producers are both benefiting from this, but the people who are paying the price are in the real economy who can't get their metal out in a timely fashion," Madden said in an interview in February.


    In a sentiment that may resonate in Washington, he added: "The last thing we want is to see is manufacturing jobs threatened by artificial market shortages and price squeezes resulting from short-term trading plays by the investment banks."



    For discussion:


    ·       How might investment banks be able to take advantage of arbitrage opportunities in commodities if they are allowed to continue their physical commodities businesses?


    ·       In your opinion, is the physical commodity business of investment banks something that should be restricted? Why or why not?


  • Will Municipal Financial Woes Hit Your Backyard?

    Are municipalities in financial trouble? Though Vallejo, CA made headlines in 2008 and Harrisburg, PA and Jefferson County, AL likewise in 2011, there have been relatively few cases of municipal trouble.


    According to Sean Williams of the Motley Fool, the cities of Detroit, Honolulu, New York City, Chicago, Cincinnati, Camden N.J., and Los Angeles all face significant budget shortfalls of at least 5% for 2012.


    From the article:


    Forget Los Angeles by itself; the entire state of California is in dire straits. Gov. Jerry Brown recently stated that without strict austerity measures, California could be unable to pay $3.3 billion in bills by March. The state appears to have run out of money three months ahead of what lawmakers had predicted.


    …State takeovers are more common than bankruptcies, and more large cities are facing this possibility due to falling tax revenue and weak economic growth. The mayor of Detroit, Michigan, has warned that his city may be headed toward a state takeover, as it may run out of cash by April.


    For discussion:


    ·       What is a municipal bond?


    ·       Where do municipalities generate the revenue required to pay bond interest and principal payments as they come due?


  • Most Fund Managers Don't Beat the Market

    It comes as no surprise. Most large-cap fund managers didn’t beat the S&P 500 last year, which according to Money magazine is the “worst showing since 1997.”  The reason for the poor performance is expenses.


    From the article:


    Why? Annual expenses—averaging 1.3% of assets for actively managed big-stock funds, vs. 0.69% for index funds—hampered returns. Plus, besting the S&P is harder in years like 2011, when the biggest stocks in the index outperform the smaller ones managers tend to load up on.


    To overcome the poor performance, investors should consider:


    1.    Choosing index funds that mirror the market, rather than those that try to beat the market.

    2.   Choosing active managers who charge lower fees and show consistently good performance.


    For discussion:


    ·       What is a mutual fund? What expenses are associated with mutual fund investing?


    ·       Why do investors choose mutual funds rather than individual stocks or bonds?