• The Time Value of Art




    Edvard Munch’s The Scream is up for auction and Sotheby’s is estimating its value at $80 million or more. This is one of the most well-known pieces of art and is likely to be purchased by a private collector or by a museum. This painting holds the distinction of being one of the most widely-copied as well as one of the most stolen pieces of art.


    This particular painting is one of four versions of The Scream. Because it is at so much risk of theft, the originals never leave their home museums in Oslo, Norway. This version is the only one that is held by a private collector, and therefore is the only one that will ever be sold. 


    For discussion:


    How would an investor determine the value of a piece of art like The Scream?


  • The Burden of Student Loans

    Photo: by j.o.h.n. walker, licensed under Creative Commons


    With the rising cost of a college education and more graduates struggling to repay their student loans, many are rethinking our U.S. method of paying for university with debt.  Bloomberg (Apr 26, 2012) points out that some problems in the current student loan market:


    ·       Increasing defaults

    ·       Poor economic growth

    ·       High unemployment among young adults


    Taking on student loans that are impossible to repay looks worse and worse.  However, according to the same Bloomberg article, not all debt is bad debt:


    Keep in mind that much of that $1 trillion is “good debt.” Most borrowers have manageable loans, and workers with a bachelor’s degree earn 84 percent more over their lifetimes on average than those with only a high school diploma. They also face much lower unemployment rates. So a college loan remains a very smart investment for many people.


    But not for everyone. Some students take on more debt than they can expect to repay. Some borrow on ruinous terms. Some drop out, make poor career choices or attend for-profit schools that provide little education. Partly for such reasons, more than 5 million borrowers are past due on a loan account.


                (read the full article here)


    For discussion:


    1.     What solutions to the student loan problem are offered in this Bloomberg article?


    2.     What is the “Know Before You Owe Act” and what problem is it trying to address?


  • Investment Opportunity: Own A Gold Mine

    The cost of this gold mine in Arizona is $43 million, though that may be negotiable. With estimates of $50-60 million of gold still in the mountain, it may be worth the price tag.


    How should an investor evaluate an opportunity like this? What factors should the buyer consider?  Here are a few for starters:


    ·       The cost of finding and extracting the gold

    ·       The length of time required to extract the gold

    ·       The selling price of gold

    ·       The uncertainty regarding just how much gold is in the mountain


    In any case, this is no ordinary sale for the realtor in this video.   

  • Apple: What To Do With All That Cash?

    Photo: Apple retail store, Fifth Avenue New York City, courtesy of www.apple.com)



    Apple announced strong quarterly earnings and folks are wondering what management with do with the extra cash. In March, the company announced that it will pay a quarterly dividend of $2.65 and that it will be buying back shares. 


    According to CNBC (25 April 2012):


    “The best thing they can do is [make] steady increases in the dividend,” said Larry Haverty, portfolio manager at Gabelli Multimedia Trust on CNBC's "Closing Bell." “There's plenty of room for improvement in the payout…Steady increases maybe once every six months and push the stock up between 2.5 and 4 percent yield and we might even get more than $750 [a share].”


    Apple (AAPL) closed today at $610, up $49.72 a share. With such strong financial statements, no wonder analysts are calling for the stock price to continue going up.


    For discussion:


    ·        What is the risk faced by shareholders if a company has too little cash? What is the risk of too much cash?


    ·        In your opinion, do you think AAPL stock is a buy, sell, or hold?



  • Investment Decision Criteria: Was TARP A Success?

    Did the government bailout of U.S. banks ultimately turn a profit? Or was it costly in the end? The U.S. Treasury calls a net cash inflow a “profit.” However, according to this Reuter’s column by Daniel Indiviglio (25 April 2012), the issue is the time value of money and net present value of the investment.


    From the article:


    Treasury estimates an ultimate profit of $22 billion. Even if that’s achieved by year’s end, taxpayers will have earned a paltry annualized return of 2 percent. Simply investing in the S&P 500 index would have earned 14 percent a year. Worse, applying Buffett’s Goldman return as the risk-based cost of capital turns the net present value of the bank rescue into a loss exceeding $15 billion.


    Then there’s Fannie Mae and Freddie Mac. Treasury says its “loss” may shrink to $28 billion in a decade, generously assuming that profits from the giant mortgage backers will exceed housing-bubble era averages. Even using that questionable projection generates a net present value loss of $88 billion. Tabulate automakers and AIG similarly, figure a $28 billion loss on mortgage backed securities Treasury bought and sold, and accept Treasury’s estimated $46 billion loss on foreclosure programs and its $3 billion gain on its flop of a public-private toxic asset scheme – and it all adds up to a whopping $230 billion loss, adjusting for the cost of capital.


    For discussion:


    ·       If a traditional firm was considering a cash outflow the size of the government bailout, what criteria would it need to consider before choosing to invest?


    ·       In your opinion, should the troubled asset relief program (TARP) be considered a success? Why or why not?


  • Savings Look More Attractive After the Recession

    Photo by Alan Cleaver, Creative Commons


    Many years ago, I saw an elderly man cash his pension check at the bank teller window. He then carried the cash to his safe deposit box in the back of the office and safely deposited his cash away. I assumed that this gentleman had lived through the Great Depression, and was leery of banks. Rather than be caught without cash again, he chose to tuck it safely away.


    Today, Americans are learning to save. We’ve learned a lesson from the recent economic situation.


    According to Bloomberg (Homan, 20 Apr 2012)


    Americans are likely to keep rebuilding their savings for years to come as the specter of job losses and the meltdown in stocks triggered by the recession lingers, economists say.


    Households are putting money away at a pace more than double that leading up to the economic slump. The saving rate has averaged 4.8 percent since June 2009, when the 18-month contraction ended, compared with 2.2 percent in the three years leading up the downturn.


    The recommended savings rate is 5% and investors seem to be in agreement: better to save than spend.


    The need to boost cash reserves and pay down debt may eclipse the urge to be the first on the block to drive the newest model car, stemming a recent decrease in the saving rate. Almost three years into the recovery, the economy has yet to regain even half the 8.8 million jobs lost or the $16.4 trillion in household net worth washed away as a result of the recession, indicating consumers will want to keep a bigger cash cushion.  





  • Are Investors Choosing Bonds?




    With all the economic news being releases next week, bonds might be a good place to park your money. This report from CNBC shows that though the DJIA was up this week, implying that investors prefer stocks over bonds, still, bonds are a safe bet because of the uncertainty facing the market next week.

    For discussion:

    ·        What are the economic indicators coming up, and how might they influence financial markets


    ·        What other factors might be contributing to investor anxiety?



  • How to Protect Your Credit Score

    According to this CNN Money video, one way to protect your credit score is to limit the number of inquiries that hit your credit report. Not all inquiries are equal. Some are worse than others.


    ·       Hard inquiries are those that appear on your credit report when lenders look at your credit score. Each of these inquiries indicates that you may be increasing your level of debt. Each inquiry remains on your report for two years and is included in the calculation of your credit FICO score for one year.


    ·       Soft inquiries are those that appear when you look at your own report. This has no impact on your score.


    For discussion:


    ·       What is one of the biggest factors affecting your credit score?


    ·       According to this video, renting a car using a debit card may hurt your credit score. Why would that be the case?


  • Can They (Should They) Stop the Speculators?

    (Photo by www.futureatlas.com/blog/)

    Rising gas prices are upsetting. Especially in an election year. Maybe if the government stops folks from buying and selling oil, that’ll fix it.


    CNBC reported on April 17:


    President Obama, under pressure from rising gasoline prices, unveiled a $52 billion program Tuesday to strengthen federal supervision of oil markets, increase penalties for market manipulation and empower regulators to increase the amount of money energy traders are required to put behind their transactions.



    …At issue is the increasing role of investment in oil futures contracts by pension funds, mutual funds, hedge funds, exchange traded funds and other investors. Much of that money is betting that oil prices will rise. Analysts say it is possible that such speculation has somewhat inflated the price of oil.


    At the same time, investors can also bet that prices will go down — indeed, speculators have been credited for low natural gas prices.


    According to CNBC, “Studies of the effects of speculation on oil markets indicate that it probably increases volatility, but doesn’t have a major effect on average prices.”


    The confusing thing is this: for every buyer, there is a seller. So how does the buying and selling drive up prices exactly? If everyone is buying, maybe. Then prices go up. Likewise, if everyone is selling, down they go. But having speculators in the market to buy and sell and buy and sell…?


    One answer is suggested in a 2009 study by James Einloth (read the full study here). Speculators buy when they think the future price will be higher than today, which induces folks to hold back some of the current supply and keep oil inventory on hand to sell at that future higher price.


    From the study:


    This suggests a simple test for the effect of speculation on price: check for an increase in inventory. … this approach suffers from two problems. First, our ability to observe inventory is severely limited. Second, this approach does not allow us to differentiate between the speculative and non-speculative motives for building inventory. The latter, which include preparing for seasonal shifts in demand and precaution against supply disruptions, are not easily defined or observed. It seems impractical to control for them.


    He examines the convenience yield—that is, the benefit to holding inventory—and determines that speculation can be blamed for some price movements but not others.


    (Photo by Lars Christopher Nøttaasen, Creative Commons)

  • U.S. Retirement System: Average at Best

    The U.S. ranks first in the world in total GDP and among the top countries for GDP per capita and for disposable household income. But when it comes to public retirement benefits, the U.S. is “less generous” than other wealthy nations, according to Brin (16 Apr 2012, CNBC).

    From the article:

    “There’s a much richer support network in Europe than there is here,” says Jonathan Gruber, a professor at the Massachusetts Institute of Technology.

    U.S. Social Security Insurance  benefits typically substitute less than half the income Americans earned on the job, while in Europe, similar benefits often account for at least two-thirds of pre-retirement income, says Gruber.  

    In some countries, retirees post-retirement income is the same or close to their pre-retirement income. The ratio of these two values is called the net replacement rate. It is as high as 94% for Luxembourg  and as low as 33% for the Netherlands. The U.S. is close to the bottom with 47%. Not welcome news for retirees.


    So during our working years, we rank near the top of the class in terms of household income. But when it comes to retirement, we’re barely a passing grade—close to average.


    For discussion


    ·        What factors impact the net replacement rate?


    ·        Do you think the U.S. should have a mandatory private pension system?



  • Google's Unique Stock Split



    According to this CNNMoney article:

    The company effectively wants to split its stock, giving current shareholders two shares for every share they own. Here's the twist: The new shares will hold no voting powers, essentially giving the company's founders—CEO Larry Page, Chairman Eric Schmidt and co-founder Sergey Brin—more say over time in the company's management decisions.

    The company already has a dual-class share system, with the founders' stock holding 10 votes per share. That currently gives Google's power trio 66% of the voting power over the company's shares, according to a recent regulatory filing.

    The company released a letter to shareholders on April 12. In it, they describe their reasons behind this new capital structure:

    We have protected Google from outside pressures and the temptation to sacrifice future opportunities to meet short-term demands. Long-term product investments, like Chrome and YouTube, which now enjoy phenomenal usage, were made with a significant degree of independence.

    We have a structure that prevents outside parties from taking over or unduly influencing our management decisions. However, day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term. We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.

    What will investors do? Will they vote for the stock split or will they reject it at the next shareholders’ meeting?

    In the words of the Google letter to its shareholders:

    The proposal is subject to the approval of a majority of the voting power of Google’s common stock, voting together as a single class, at our annual meeting on June 21, 2012. Given that Larry, Sergey, and Eric control the majority of voting power and support this proposal, we expect it to pass.


  • Financial Innovation for the Good of Society

    Dr. Robert Shiller, the Economics Professor at Yale University who developed the Case-Shiller Home Price Index, has a new book: Finance and the Good Society.  According to this interview, he suggests that not all financial innovation is evil. Some serves a good purpose.


    Take securitization, for example. The process of packaging and selling mortgages ultimately makes mortgages more affordable, according to Shiller.


    For discussion:


    What is securitization? How does it help the economy? How might it hurt the financial system?


  • The London Whale

    Photo: River Thames in London. Rescuers attempt to calm the whale whilst placing the yellow undersheet underneath the whale. John Hyde, 21 Jan 2006, used by permission of Creative Commons


    One London trader named Bruno Iksil at JP Morgain is getting a lot of airtime lately. Dubbed the “London Whale” by some and the “Voldemort” villain from Harry Potter by others, Iksil is said to trade such large credit derivative positions that he is accused of “skewing the credit derivatives markets with his outsized bets, one of which they say may be as large as $100 billion” (Weil, Bloomberg 12 April 2012).


    From the Bloomberg article by Jonathan Weil (April 12, 2012):


    The information available about Iksil’s trades is limited. So we really don’t know exactly what he did, much less what he’s doing at this moment. We’re not even sure how old Iksil is, only that the French-born trader, who works in JPMorgan’s chief investment office, is said to be in his late 30s.


    The unknowns are what make Iksil’s trades so intriguing, of course. Was he making speculative, proprietary bets? Was he hedging other investments? And is it even possible to define the difference between speculating and hedging? At a bank the size of JPMorgan, it would seem almost anything could be made to look like a hedge if this suited the bank’s interests.


    The actions of JP Morgan’s trader have led to renewed interest in the Volker Rule from the Dodd-Frank Act. About the Volcker rule, Weil says it best:


    Regulators have turned the rule into a bloated mess filled with exceptions, in dutiful response to lobbying by JPMorgan and other banks. Whenever the rule finally takes effect, it probably won’t be enforceable. Even if some parts are, by the time the regulators figure out which ones, the banking industry will have moved on to more lucrative and potentially disastrous financial innovations that the government will be clueless about.


    For Discussion:


    ·       What is “regulatory dialectic?” How does this Bloomberg article demonstrate an example of the regulatory dialectic taking place today?


    ·       In this article, Weil argues that Iksil is not the whale. JP Morgan is. Why might this be true? Do you agree or disagree?



  • Electronic Market Predicts Republican Nomination Outcome



    Rick Santorum announced on Tuesday that he will suspend his political campaign for the U.S. Republican Presidential nomination.


    Participants in the Iowa Electronic Markets (IEM) predicted as much back in September.


    From the Iowa Electronic Markets press release on April 10:


    On Sept. 10, Rick Perry was the market’s most probable nominee, with a contract price of 41.9 cents, which meant IEM traders believed there was a 41.9 percent probability he would win the GOP nomination. Romney was the second most likely nominee that day, at 40.5 cents.


    But investors flipped positions Sept. 11 and Romney has been the IEM’s most likely candidate ever since. He crossed 50 cents for the first time on Sept. 30 and stayed there, except for a few days in December when he dipped as low as 48 cents during Newt Gingrich’s brief ascent in public opinion polls, including those in Iowa.


    His price continued to rise past 80 cents through a hard-fought Iowa caucus campaign that was seen as a win at first (until the discovery of lost ballots several days later pushed him into second place behind Santorum) and then a big win in New Hampshire. The contract dropped in mid-January and mid-February after a handful of solid primary performances by Santorum and Gingrich in South Carolina and other Southern states. But the price of Romney’s contract never fell below 68 cents during either dip, as traders didn’t give much credence to either of their campaigns.


    The IEM was developed in 1988 by the University of Iowa as a teaching tool. Students and others can invest real money up to $500 to trade shares of contracts in political markets. Current markets include Fed Monetary Policy, the 2012 U.S. Presidential Election, the 2012 U.S., Congressional Election, and the 2012 U.S. Republican Nomination. 


    How good is the IEM at predicting political outcomes? Well, bull’s eye in 2008.


    Source: IEM website




  • Addicted to Credit

    Loans to subprime borrowers are picking up. According to the NY Times (10 April 2012), “Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up from 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.”



    Source: Equifax



    One borrower’s story from the article:


    Annette Alejandro just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.


    “Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.


    And another:


    Shauna Ames, 41, an office manager from St. Paul, said she got a credit card offer from Capital One even though the company had won a lawsuit against her for $5,485 in overdue credit card debt last September. Ms. Ames, who had filed for bankruptcy, said she was surprised at the offer. “I still can’t believe it,” she said.


    For Discussion:


    ·       How do banks choose their target markets? Should banks lend money to borrowers with damaged credit? Does this lending help or hurt the economy?


    ·       Who is to blame for folks getting into more debt than they can handle: the borrowers or the lenders?




  • March Jobs Report Fuels Flight to Quality in Bond Markets

    The Bureau of Labor Statistics released the March jobs report today.  From the Commissioner’s statement on the Employment Situation:


    Nonfarm payroll employment rose by 120,000 in March, and the unemployment rate, at 8.2 percent, changed little.  Over the prior 3 months, nonfarm job growth had averaged 246,000 per month.  Since a recent low point in February 2010, payroll employment has risen by 3.6 million.  Over the month, employment rose in manufacturing, food services and drinking places, and health care, while retail trade employment declined.

    (read the full statement here)


    According to this article from CNN Money (Censky, 6 April 2012),


    "It's a reminder that the U.S. recovery is not suddenly going to transform into a spectacular success, particularly not at a time when the rest of the world economy is stumbling," Paul Ashworth, chief U.S. economist of Capital Economics said in a note.


    For financial markets, the disappointing jobs report sparked a flight to quality in the bond markets.


    From CNN Money (Yousuf, 6 April 2012):


    As traders pushed prices higher, the yield on the 10-year Treasury note fell to 2.05%, the lowest in nearly a month, from 2.18% late Thursday. Bond prices and yields move in opposite directions. The 30-year bond yield also tumbled, as did yields on shorter-dated bills and notes.


    Although U.S. markets were closed in observance of Good Friday, U.S. stock futures were trading Friday, and tanked as investors expressed their disappointment in the jobs numbers. Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures tumbled about 1%, after trading slightly higher ahead of the report.


    For discussion:


    Why would bad economic news motivate investors to buy U.S. Treasury bonds?


  • Rent or Buy?

    With house prices continuing to fall and rents continuing to rise, buying is now cheaper than renting in many American cities. 


    Based on an article from CNN Money (April 5, 2012), this real estate market trend is being driven by the “rising demand for a limited supply of rental units.”  Here are a few explanations of the trend:


    1.    People who lost their homes in foreclosure have to live somewhere, driving up demand for rental units.


    2.  Some cities have limited the construction of new apartment buildings, leading to a limited supply of new rental units.


    Unfortunately, many folks who would take advantage of low purchase prices can’t buy.


    From the article:


    Unemployed, too broke to come up with a down payment or with credit scores too battered to qualify for a mortgage, many people simply cannot qualify to buy a home right now, according to Kolko


    With fewer consumers able to make the leap into homeownership, rents could continue to climb higher, he said.


  • Is the Failed BATS IPO A Sympton of Bigger Market Structure Problems?

    After a bad trade in Apple shares (ticker AAPL) on March 23, the BATS Global Markets Exchange announced that it would be canceling all open orders for stock tickers starting with A and ending with BFZZZ. This announcement couldn’t have come at a worse time.  March 23rd was the day that the exchange had scheduled for its own initial public offering.


    After this technological breakdown that caused a “mini flash-crash”, the exchange announced that it would be canceling its IPO as well.


    According to Rhodri Preece, CFA on Seeking Alpha (3 April 2012): read the full article here


    Technological glitches such as this are not new, but they are becoming increasingly common. Today, the equity market is very fragmented, extremely fast, and critically dependent on technological sophistication - in essence, it represents a vast, decentralized electronic network, driven by messages sent by one machine to another. While for the most part, these developments have improved the market's operational efficiency - cutting down processing times and reducing frictional trading costs - the reliance on automation, coupled with liquidity fragmentation, can make for a more fragile ecosystem.


    Preece draws three lessons from this experience:


    Lesson #1   The market’s complexity is breeding vulnerability

    Lesson #2   Circuit-breakers are effective and needed.

    Lesson #3:    Regulators need to pay more attention to the market structure


    Here is the description of the BATS exchanges from its website:


    BATS operates two stock exchanges in the U.S., the BZX Exchange and the BYX Exchange (The BATS Exchanges), which currently account for about 11-12% of all U.S. equity trading on a daily basis. Driven by its mission of "Making Markets Better," BATS has become synonymous with great technology, aggressive pricing and outstanding customer service while catering to the needs of the broker-dealer and trading community.  


     Read about the failed IPO on Reuters 23 March 2012.

  • Yahoo Job Cuts

    Bloomberg reported today that Yahoo is trying to turn the company around by cutting 2,000 jobs or 14 percent of its workforce.


    From the article:


    The move will save about $375 million annually, Sunnyvale, California-based Yahoo said today in a statement. Yahoo, which had 14,100 full-time employees at the end of last year, expects to record a pretax expense of $125 million to $145 million -- with the majority coming in the second quarter.

    (Read the full article here)



    Yahoo has been struggling to compete with Facebook and Google in “online advertising and social media….”


    Not everyone is happy with the decision. Third Point LLC owns 5.8 percent of the company and is fighting to get new directors placed on Yahoo’s board, including Third Point CEO Daniel Loeb.


    Watch an interview with Daniel Loeb, here


    According to Bloomberg, “Third Point faulted Yahoo today for embarking on the job cuts without having a more complete strategy in place.”


    For discussion:


    Based on a DuPont analysis, what other actions can a company take to improve profitability?


  • Debt-Free Living


    Lynnette Khalfani-Cox explains how she got out of $100,000 of credit card debt in three years on this CNN Money video. She offers these tips to others in the same boat:


    1.      Negotiate credit card interest rates with the lenders to lower your payments.

    2.      Double and triple the minimum payments so that you pay more than

    3.      Use windfalls—any extra money you earn—to pay off the debt


    When it comes down to it, the number one tip offered by Ms. Khalfani-Cox is the same advice most money experts would offer: Don’t spend more than you earn. She suggests making your spending plan (aka “budget”) an action plan. And it helps to give yourself something you look forward to spending your money on, something that helps keep you from feeling deprived while on the spending plan.


    For discussion:


    ·        What minimum payment is required to repay a $100,000 loan in 3 years of monthly payments if the annual interest rate is 15%? What if the rate is 22%?