• Investing in Times of Austerity

    According to analysts, we are in the “Second Lost Decade,” and the question presented in the MarketWatch article by Paul Farrell is this: are you ready?


    He quotes Gary Shilling and “The Age of Deleveraging”:


    Shilling says our economy needs real GDP growth of at least 3.3% just to keep unemployment stable. But we’ll be lucky to get an average 2% real growth.


    Actually we face a long decade of “less than zero growth,” high-stress chronic unemployment, accelerating global unrest, regional conflicts, higher Pentagon budgets. All because “much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S consumers, remain to be worked off.”


    Some of his investment strategies include:


    1.      Buy high dividend “safe” stocks.

    2.      Buy U.S. Treasury bonds for safety.

    3.      Consider becoming a landlord.


    Times are tough.  And they may get tougher.  Are you prepared?


    For discussion:

    ·        What are the 13 strategies identified in this article?

    ·        Do you agree or disagree with these strategies? Why?



  • Collateralized Borrowing and Lending by Financial Institutions

    When you hear the word “collateral,” what do you think of? Most people would think of a house being used as collateral for a mortgage loan.  Or maybe a car being used as collateral for an auto loan.  Some might even think of jewelry or musical instruments being used as collateral for a loan from a pawn shop.


    All of these forms of collateral have one thing in common: they are assets that many believe will maintain their value over time. “Safe” assets, so to speak.


    For financial institutions, safe assets aren’t necessarily real assets like houses or cars or guitars.  Big banks and portfolio managers rely on safe financial assets like government-backed bonds.  The problem is that the number of safe government borrowers is dwindling, and so is the availability of safe assets that serve as collateral.


    According to a recent article in The Economist (May 26th, 2012):


    Regulators are pushing over-the-counter derivatives towards central counterparties (CCPs), which are usually pickier than banks about the quality of collateral they will accept. Creditors are becoming warier about lending on an unsecured basis when things are so uncertain. That creates a vicious circle: as more borrowing is secured, fewer assets are available to other creditors in the event of default.


    A recent report by Morgan Stanley and Oliver Wyman suggested the move to clear derivatives trades alone could generate demand for $500 billion-$800 billion of extra collateral. But there is a finite supply of safe assets, and that pool is dwindling as the creditworthiness of certain governments becomes more questionable. Many pension schemes, insurers and asset managers balk at the drag on returns associated with holding lots of safe assets to post as collateral.


    For discussion:


    1.     What does it mean to buy stocks or bonds on “margin?”


    2.     What is a repurchase agreement (also called a “repo” or “RP”)?


    3.     According to the article cited above, what are the opportunities for financial institutions related to the supply and demand for collateral?




  • Real Estate Market Shows Signs of Recovery

    Purchases of new homes increased in April by 3.3 percent from the previous month and homebuilders reported “an average 25 percent increase in purchase contracts in the first quarter, the biggest jump since 2005 according to Barclays” and reported by Bloomberg (May 25, 2012).


    From the Bloomberg article:


    U.S. homebuilders are reporting their most-improved spring selling season in seven years as record low mortgage rates, job gains, and shrinking inventories are drawing buyers to sales offices that have been quiet since the property market collapse. After dragging the economy into recession, housing is set to “contribute modestly” to growth, according to Vincent Foley, a credit analyst for Barclays Plc in New York.


        (read the full article here)

    Buyers include “traditional” homebuyers, not just investors in distressed properties.  And these traditional buyers are finding new homes to be a good deal.  With rents rising, buying a home has become a good deal. And the prospect of buying a foreclosure is a little daunting because of the work that a distressed home will require.  Consequently, new homes are looking even more appealing.


    For discussion:


    ·       What are current mortgage rates on a 30-year fixed rate loan? On a 15-year fixed rate loan?


    ·       What would the monthly mortgage be on a home that costs $200,000 if the borrower puts 20 percent of the price as a down payment and finances the remainder with a 30-year fixed rate mortgage with monthly payments? What if the mortgage is a 15-year fixed rate loan with monthly payments?


  • Was the Facebook IPO a Winner?

    Was the Facebook IPO a winner?


    For Mark Zuckerberg—definitely.


    For the underwriters like Morgan Stanley? Absolutely.


    For investors—well, not so much.


    CNNMoney reported today:


    Even as Facebook's shares dropped, causing losses for regular investors, Morgan and other underwriters of the company's IPO likely racked up big profits trading the social media company's shares. In fact, Morgan Stanley and the other banks who were selling Facebook shares to the public were positioned to make more money the lower Facebook's shares went.


    (read the full article here)


    Facebook shares were initially priced at $38 per share but fell to $31 by the end of Tuesday—not a good omen for a newly public firm.  The information that was shared with select investors at the last minute added to the drama.  According to CNNMoney May 23:


    Facebook (FB) and its underwriters, led by Morgan Stanley, whipped up enthusiasm for the offering, whose initial price range was $28 to $35 a share, but ultimately was increased to $38. Buyers were salivating. The buzz about the offering was deafening.


    Then, at the last-minute, some big investors were reportedly given access to an analysis saying that the company's prospects weren't quite as rosy as the picture painted in its early disclosure documents. So the big guys, it appears, cut back or even canceled their orders to buy shares in the offering.   


  • Cash Flow From Assets

    Companies generally have three ways to raise cash:


    (1)        Generate revenues

    (2)       Borrow money

    (3)       Sell fixed assets


    Method #1 is preferred as this is what the company is in business to do.  Method #2 can be effective when the company is expanding, but can lead to distress if not managed properly.  Method #3 can work too, but may also be a last-ditch effort to scrape together some cash.

    Sears Holdings reported good news this week: $189 million earnings during the last quarter, a higher stock price, and more capital.  In the words of Grandel (FORTUNE on CNNMoney 17 May 2012),  “Not bad for a company that seemed to be on everyone’s list for the next major bankruptcy.”


    From the article:


    What happened? To be fair, Sears is still far from healed. All of the company's recent profits and then some - $233 million worth - came from selling off stores and other real estate holdings. But its continuing operations showed some improvement as well, losing just $32 million, less than a quarter of the $142 million it lost in the same time a year ago. Sales shrunk, but only slightly, and less than analysts had expected.


    Sounds like Sears is raising money using method #3 above, not method #1.  However, it might not be a bad idea if it helps the company focus its business on what it does best


  • Technology's Biggest IPO Yet

    Facebook’s IPO has brought more wealth to its founders than they ever could have imagined.  Investors love the social network—enough to spend their time and now their money on all things Facebook. 


    However, some are getting out.


    According to this Bloomberg Businessweek article (May 18, 2012):


    Early investors such as the venture capital firm Accel Partners are selling an unusually high number of shares. Nearly 60 percent of the stock sold today comes from insiders, compared to 37 percent for Google (GOOG) when it went public in 2004. Goldman Sachs (GS) is selling about half its stake, far more than the firm initially planned. “If you really thought that 12 months later the stock would be 50 percent higher, you wouldn’t leave that on the table,” Erik Gordon, a professor at the Ross School of Business at the University of Michigan, told Bloomberg News.


    Some question whether Facebook is worth the price it sold for.  With a P/E ratio of 107, (that is the price of $38 per share is 107 times higher than its earnings per share) investors are betting that the company is going to grow dramatically.  Compare that with the P/E ratio of the S&P 500 which is currently around 15, and the Facebook share price seems very optimistic. 


    Then again, hope springs eternal.


  • A Support Price for Gold

    According to this CNBC video, gold reached a technical support level at $1,520 per ounce. For those who believe in technical analysis as a way of beating the market, a support level is the “floor” price and indicates that the price is likely to change direction and head upward.


    For discussion:


    1.    Go to http://www.investopedia.com/university/technical/#axzz1vBfZWP1d and answer the following questions:

    a.    What is technical analysis? How does it compare with fundamental analysis?

    b.    What is a support level? What is a resistance level?

    2.    If technical analysis can deliver abnormal gains, then markets are not as efficient as some believe.  What is the efficient market hypothesis? Which form of the efficient market hypothesis would gains from technical analysis disprove?


  • Stay-at-home Parents Denied Credit

    In an effort to protect consumers from credit card abuses, the Credit CARD Act required that lenders consider a borrower’s ability to pay before issuing a new credit card.  While that seems like a reasonable request, some stay-at-home parents object to the restriction placed on them.


    According to CNNMoney (May 16, 2012), a 34-year old stay-at-home mother, Holly McCall, has an excellent credit score and holds other cards but was recently denied a Target card.  She responded by creating an online petition and collected 30,000 signatures from other stay-at-home parents who object to the requirements.


    From the article:


    On Tuesday, McCall said she and about half a dozen other petitioners delivered the signatures in thick binders to the Consumer Financial Protection Bureau in Washington, D.C.


    Some petitioners dressed up as housewives from the 1950s -- complete with A-line skirts, pearls and tightly pulled back hair -- since the rule "feels like a flashback to the 1950s because of the way women aren't empowered financially." One petitioner held a sign in the shape of a credit card with the word "DENIED" stamped on it in red.


    McCall said she hopes the petition will push the CFPB to amend the Card Act rule in order to protect the rights of all stay-at-home parents -- both moms and dads alike.


    For discussion:


    How can the government balance the rights of stay-at-home parents and consumer financial protection at the same time?


  • Homeowners' Settlement Money At Work

    The National Mortgage Settlement is the “largest multistate settlement since the Tobacco Settlement in 1998” according to www.nationalmortgagesettlement.com.  This agreement between big banks, 49 states, and the federal government was meant to “provide as much as $25 billion in relief to distressed borrowers and direct payments to states and the federal government.”


    However, according to the video interview from CNBC, 15 states have used all or part of the settlement money for other purposes.  For example:

    ·      Georgia for economic development

    ·      Missouri to ease higher education cuts

    ·      Virginia to give a raise to state employees


    For discussion:

    1.      What are some arguments in favor of states diverting the money to other purposes?

    2.      What are some arguments against states diverting the money to other purposes?



  • The Loss at JP Morgan

    Jamie Dimon, the Chairman and CEO of JP Morgan, tells CNBC that the bank was sloppy and it cost them $2 billion.  This situation is a bit tricky.  Mr. Dimon represents a bank that is known for risk management.  Furthermore, he has opposed the Volcker rule, that controversial bit of banking regulation designed to protect the financial system. Therefore, a significant loss due to a lapse of oversight is difficult for the bank to explain.


    According to this article from the NY Times (Mark Scott, May 11 2012)


    “The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making,” Senator Carl Levin, a Michigan Democrat, said in a statement on Thursday.


    For discussion:


    In your opinion, did JP Morgan or Jamie Dimon do anything wrong?



  • The Price of U.S. Citizenship

    More wealthy people are choosing to renounce U.S. citizenship and spare themselves the tax consequence of remaining an American.


    One recent high-profile case involves Eduardo Saverin, the co-founder of Facebook, Inc. Before the company goes public and makes him a billionaire, he is getting out while the getting is good.


    According to Bloomberg Businessweek (May 11, 2012):


    “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement.


    Saverin’s name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. Saverin renounced his U.S. citizenship “around September” of last year, according to his spokesman.


    Mr. Saverin is not alone.  Taxes prompt many to renounce their citizenship, and the number is growing, especially now that regulations require those living abroad to disclose their foreign assets.  (Read more about the requirements in this Reuters article.) 


    For discussion:


    In your opinion, is U.S. citizenship worth the price? Why or why not? 


    What other factors must enter into the decision to renounce one’s citizenship beyond financial considerations?

  • Exchanges and the Battle for Market Share

    Photo by N. Richie



    Trading volume is down for the New York Stock Exchange (NYSE) and the Nasdaq.  Both exchanges are losing market share to off-exchange trading.  According to Bloomberg Businessweek (Matthew Philips, May 10, 2012):


    Both exchange companies are contending with similar forces: an overall slowdown in trading, the rise of smaller public exchanges such as BATS and Direct Edge, and the increasing number of trades being executed “off exchange”—either at wholesale brokerages or on private trading venues known as dark pools. Since January 2008 the share of trades executed off public exchanges has increased, to 32 percent from 26 percent, according to market research firm Tabb Group. Nasdaq and NYSE “are getting a smaller bite of a shrinking pie,” says Sang Lee, an analyst at Aite Group.


    Dark pools of liquidity are one example of “off exchange” trading that is taking market share away from traditional exchanges.  According to the SEC factsheet (October 21 2009)


    When investors place an order to buy or sell on an exchange, the exchange typically makes that order available for the public to view. With some dark pools, however, investors are able to signal that they have an interest in either buying or selling a security. But that so-called indication of interest (IOI) is communicated only to a subset of market participants.


    That means that investors operating with the dark pool have access to information about a potential trade that other investors using public quotations do not. As a result, dark pool participants are able to have their orders filled, while those on publicly displayed markets go unfilled, even though dark pools use the information from publicly displayed markets to price the dark pool transactions. When dark pools share information about their trading interest with other dark pools, they can function like private networks that exclude the public investor.


    (Read the full SEC factsheet “Strengthening the Regulation of Dark Pools” here)


    For discussion:


    ·        What is the difference between an over-the-counter (OTC) and an exchange-traded market?


    ·        What are the benefits and limitations of each?


    ·        What is high-frequency trading or algorithmic trading, and why is it commonly associated with dark pools?


  • Private Equity's Contribution to Society



    This educational video portrays private equity firms as friendly sources of capital that purchase dying firms or start-up firms and then turn them around by bringing cash and management to the rescue.

    According to this summary article from the NY Times (10 May 2012), this educational video paints a pretty rosy picture of private equity firms.  From the article:

    Absent is any trace of the swagger that the private equity industry projected in its heyday. Instead, with animated whiteboard drawings and an upbeat soundtrack, the video makes the industry appear wholesome.

    For discussion:

    ·        What is private equity and why is the industry lobbying to improve market perception?

    ·        What benefits do private equity firms bring to the financial system? Do private equity firms hurt the financial system in any way?


  • Disney's Good News

    Disney beats expectations with higher revenues and higher earnings.  And it’s not just movies. Disney theme parks around the world are benefitting from consumers who are traveling and spending some money. 

    Earnings were 58 cents per share, up 18% from a year ago.

    The shares (ticker DIS) ended up about 1% for the day.


    For discussion:

    How do expectations of earnings impact the share price?



  • The New Way to Trade Bonds

    Bonds traditionally trade over the counter (OTC) from one institutional investor to another by way of a financial intermediary like a broker or a dealer.  Investment manager Blackrock  and now Goldman Sachs are revolutionizing the world of bond trading by offering clients the opportunity to trade among themselves electronically.


    According to Bloomberg (May 4 2012):


    GSessions will start by offering two five-minute trading sessions a day, one in an investment-grade bond and another in a high-yield, high-risk security, the person said. Speculative- grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.


    At the start of each session, Goldman Sachs will post a bid and offer price and notify clients of the maximum amount of liquidity the firm is willing to provide to fill orders, according to the person.


    Rather than matching trades between clients, Goldman Sachs will act as the counterparty to all trades and collect the spread, or difference, between the bid and offer prices, the person said. That gap will be lower than what Goldman Sachs earns on non-computerized trades, the person said.


    For discussion:


    ·        What are some differences between over-the-counter markets and exchange traded markets?


    ·        What might be the impact on bond markets once trading begins on platforms such as these?


  • Bondholders Have Big Say

    Photo: American Airlines aircraft courtesy of www.aa.com



    Goldman Sachs is one of the larger creditors to AMR Corp’s American Airlines (Ticker AAMRQ), and therefore will have an important voice in the merger decision coming up.


    According to Bloomberg (May 4, 2012):


    The firm, an AMR bondholder, is among creditors being lobbied by US Airways Group Inc. (LCC) to back a possible takeover bid, said people with knowledge of the matter. Goldman Sachs has encouraged other debt investors to meet with US Airways to see if a merger would recoup more than AMR’s stand-alone plan, said one person, who asked for anonymity because details are private.


    Goldman Sachs is seen as an important stakeholder in the case because of the size of the New York-based firm’s holdings in AMR and its influence with other debt investors, the people said.


    For discussion:


    ·        What is the difference between debt and equity? What rights do shareholders have compared with bondholders?


    ·        What are the characteristics of bond investors compared with stock investors?



  • Wall Street Culture

    Author Michael Lewis of Liar’s Poker, The Big Short, Blind Side, and Moneyball describes some of the cultural differences between the Wall Street of yesteryear and the Wall Street of today. 


    He tells how traders back then did not necessarily come from fancy schools. They worked for investment banks that were private companies or partnerships, and though securities like derivatives were on the scene, securities were much less complex. Today, investment banks are corporations and folks get hired with MBAs from well-known business schools to trade very complex instruments.


    For discussion:

    According to this interview, how does Michael Lewis suggest that “Too Big To Fail” banks break up?

  • More on Art Investing


    Photo by Mark Burnett, used by permission of GNU Free Documentation License


    Last week on this blog, we noted that Edvard Munch’s The Scream was being sold at auction and expected to fetch $80 million.


    Well it did…and then some.


    The Scream sold for nearly $120 million, making it the “most expensive artwork ever sold at auction” according to Hajela and Ilnytzky (Boston Globe, 3 May 2012).


    From the article:


    During an intense 12 minutes, the 1895 artwork -- a modern symbol of human anxiety -- was sold at Sotheby's in New York City on Wednesday for a record $119,922,500. Neither the buyer's name nor any details about the buyer was released.


    The previous record for an artwork sold at auction was $106.5 million for Picasso's "Nude, Green Leaves, and Bust," sold by Christie's in 2010.


    Art is described in this Market Watch article by Harrison (2 Sept 2011) as a valuable investment.  From the article:


    As an asset class, art is a proven long-term store of wealth. With stock-market volatility and sovereign-debt woes driving investors toward hard assets, art is an increasingly popular way to add depth to a traditional investment portfolio.


    Art offers low correlation to the price movements of other assets, and it’s effective as a unique hedging strategy. Works of art can also attract an income stream. Experts point to annual rates of return of between 8% and 20% for the best-performing sectors.


    Plus it looks nice on the wall.


    For discussion:


    ·        What risks are associated with investing in art?

    ·        How can an investor assess the value of artwork?




  • Floating-Rate Notes: Innovation at the U.S. Treasury


    The U.S. Treasury is considering whether to issue bonds (i.e. borrow money) with floating rates of interest.  Floating rate notes (FRNs) are not currently offered by the U.S. Treasury, but investment advisory firms are indicating that investors would welcome this type of investment opportunity, particularly if they fear that rates will rise in the futures.  According to the May 2 press release by the U.S. Department of the Treasury, “Treasury believes that there are benefits to issuing floating rate notes (FRN)….”


    The issues that have to be ironed out include:


    1.      What index would the rate be tied to?

    2.      What maturity would the bonds have?



    According to Bloomberg (May 2, 2012):


    Floating-rate notes, which are already being offered by Fannie Mae, Freddie Mac and some European banks, have coupon payments linked to changes in short-term rates, which have been near zero since late 2008. The Treasury has sought to lock in borrowing costs for longer and cut the amount of outstanding short-term bills, which ballooned to $2.1 trillion during the financial crisis that began almost five years ago.


    The notes would be the first new U.S. government debt security since Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997.


    (read the full article here)