• Germany's Tarnished Credit Rating

    Moody’s put Germany on notice Monday as the outlook on Germany’s Aaa rating was changed from “stable” to “negative.”  Even worse news would be if the announcement is followed by a full downgrade in the near future.  Moody’s also revised the outlooks on the credit ratings of the Netherlands and Luxembourg to “negative.”

     

    From CNNMoney (July 24, 2012):

     

    Moody's said the revisions for the three countries were prompted by "the rising uncertainty regarding the outcome of the euro area debt crisis" and the "increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required."

     

    The possibility of a Greek exit from the euro, Moody's said, could threaten banks throughout the eurozone. German banks also have significant exposure to other struggling countries on the continent, particularly Italy and Spain, the agency added.

     

    Even if the monetary union remains intact, Moody's said Germany, as the eurozone's largest economy, will likely bear an increased financial burden as further bailout funds are required.

     

    For discussion:

     

    1.      What impact would a credit downgrade have on Germany?

    2.      What impact would a German credit downgrade have on other Eurozone economies?

     

     

  • Apple Misses Earnings Estimates

    Apple missed earnings estimates, but hope is not lost.  Growth is still expected to be strong.  iPad sales are still expected to dominate the tablet market.  And with the forthcoming introduction of the iPhone 5, sales are expected to pick up next year.

     

    According to Bloomberg (25 July 2012):

     

    While Apple is outgrowing its closest technology-industry peers, the company’s sales climbed at the slowest pace since mid-2009. Apple said the results will be worse during the quarter now under way, as Chief Financial Officer Peter Oppenheimer said speculation about a new device “has caused some pause” in sales. Analysts are predicting a new iPhone will be released by October.

     

    The company said sales in the quarter ending in September would fall to about $34 billion, and that profit would fall to $7.65 a share. That compares with predictions by analysts for sales of $38 billion and profit of $10.27 a share.

     

  • A New ETF In Town

    Vanguard Group, a well-known investment company offering mutual funds, filed with the SEC to offer exchange traded funds (ETFs) that track the Barclay’s U.S. Treasury Inflation-Protected Securities 1-5 Years Index.  This ETF will seek to mimic the performance of TIPS at a very low expense ratio of 0.10%. 

     

    According to Investment News (24 July 2012):

     

    Vanguard's low-cost approach to investing has been a home run with investors since the financial crisis. Over the past five years, Vanguard's assets have grown 40% to almost $1.7 trillion, as of June 30. Meanwhile, overall industry assets have grown just 10% over the same time period.

     

    Exchange-traded funds are the popular investment that is similar to mutual funds in that they normally mimic the performance of an index.  However, unlike traditional open-ended mutual funds, ETFs can be bought and sold all day on a traditional exchange.  The first ETFs mimicked well-known equity indexes: S&P 500 mimicked by the SPDR or “spider” (ticker SPY) and the Dow Jones Industrial Average mimicked by Diamonds (ticker DIA).  Today’s ETFs seek to mimic the performance of stocks, bonds, even commodities.  This EFT being introduced by Vanguard will mimic TIPS or Treasury Inflation Protected Securities.

     

    For discussion:

     

    Go to the U.S. Treasury website that describes TIPS at http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm.  What are TIPS and why would investors choose them?

     

     

  • Bond Issuance Continues

    According to this Bloomberg video, U.S. Treasury notes are trading at record lows with the 10-year note at 1.49 percent.  Not so for Spain.  The European nation was able to borrow money but had to agree to high interest rates in order to attract investors—5.2 percent for two year bonds.

     

    The winner in the land of bonds is bank bonds, according to this report.  Investors have renewed interest in debt issued by banks compared with industrial firms.

     

    For discussion:

     

    1.    What will happen to the prices of existing U.S. Treasury bonds and notes at the rates described in this video?  What about the prices of existing Spanish bonds?

     

    2.    Why might investors be willing to buy U.S. Treasury bonds with such low yields?

     

     

  • Lessons from the Auction

     

    We’ve been hearing quite a bit about the failure of Libor.  Collusion, fraud, interest rate manipulation.  Everyone is crying foul, and some have even suggested scrapping Libor altogether.

     

    However, this article by the Economist suggests that lessons learned from other auction systems might be all that’s needed to repair the process by which the British Bankers Association (BBA) establishes the Libor rate.

     

    The banks accused of Libor manipulation are accused of forming a type of cartel where they colluded to report interest rates that would be most beneficial to themselves.  The article suggests breaking the power of the cartel by

     

    a)     Forcing bidders to trade at the rates they report

    b)    Encouraging competition

    c)     Keeping bids private

     

    From the article:

     

    The BBA needs to rework LIBOR completely if it wants to save it. The kinds of ideas being used in auctions might help it do that. If it could elicit honest prices for various quantities of money-market lending it would be able to provide both an accurate LIBOR rate and information on how LIBOR might move as banks’ financing needs change. This price information would be valuable to regulators. At the moment LIBOR is just a made-up price for an ill-defined quantity of money. Time to call an auctioneer. 

     

    For discussion:

     

    ·        What are the different types of auction systems described in this article? 

     

    ·        What are the conditions that must exist for a cartel to successfully maintain its market power?

     

  • A Credit Card Company Guilty of Deceptive Practices? Inconceivable.

    The NY Times reported yesterday that the Consumer Financial Protection Bureau has fined its first firm: Capital One.

     

    From the article:

     

    Capital One, one of the nation’s biggest banks, will reimburse $150 million to more than two million customers for selling them credit card products they could not use or did not want, as the nation’s new consumer watchdog leveled its first enforcement action against the financial industry.

     

    The Consumer Financial Protection Bureau on Wednesday hit Capital One with findings that a vendor working for the bank had pressured and deceived card holders into buying products presented as a way to protect them from identity theft and hardships like unemployment or disability.

     

     The CFPB reported that Capital One pushed ineligible customers into credit-card add-on plans and misled customers into believing that the products were “free, mandatory, and would bolster credit scores.” 

     

    Capital One may not be the only bank guilty of deceptive marketing practices and hidden fees.  The CFPB may have more actions ahead. 

     

    For discussion:

    If the APR of a credit card is 18% and interest compounds monthly, then what would the effective annual rate (EAR) be?

     

  • Staples Kicks Off Back-to-school Shopping Season

    Staples kicks off the back to school season in July and looks forward to strong sales in the next few months.  Tech products, in particular, are expected to drive traffic back to the store— products like Windows 8 computers and tablets as well as the Google Nexus tablet.

     

     

    For discussion

     

    ·        Go to www.staples.com and scroll down to “Investor Relations” where you can select “Annual Reports.”  Based on the annual report, how much does Staples rely on sales of tablet computers, e-readers, and other tech products?

     

    ·        What do you forecast for the future of Staples based on what you know of the tech industry?

     

  • Study Finds Ethical Problems on Wall Street

    A recent study finds a disturbing percentage of Wall Street workers accept unethical or illegal behavior in their industry.  The NY Times reports:

    According to the law firm Labaton Sucharow, which represents investors and whistle-blowers, 24 percent of Wall Street workers who participated in a study said they believed unethical or illegal behavior could help people in their industry be successful. In addition, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace.

    The study, which involved 500 financial workers in the United States and Britain, also found that 30 percent of respondents said their compensation structure created pressure to compromise their standards or violate the law. And 16 percent of respondents said they would commit insider trading if they believed they could get away with it.

    What will it take for Wall Street to clean up its act and its image? Who knows. This study revealed that public opinion may not be too far off.                                                                                        

    For discussion:

    ·        Why do you think that employees are willing to participate in unethical or illegal behavior?

    ·        What solutions can you recommend?

     

     

  • IPOs: Hope Springs Eternal

    Despite the debacle of the recent Facebook IPO, five more firms are planning to enter the IPO market.  The L.A. Times reported today that:

     

    Travel website Kayak Software Corp., software developer Palo Alto Networks Inc., guitar maker Fender Musical Instruments Corp., teen retailer Five Below Inc. and biotech company Durata Therapeutics Inc. said they are proceeding with their IPOs.

     

    Analysts say that the shadow from Facebook's debacle continues to darken the mood for new stock issues and that the five planned IPOs don't represent a resurgence in public offerings. Facebook's stock plummeted 27% in the first two weeks on the market and continues to trade below its IPO price. No other company launched an IPO for five weeks after Facebook's flop.

     

    The IPO market is a tricky thing.  Academic research by Professor Jay Ritter suggests that stocks experience short-run underpricing but long-term underperformance.  Unfortunately for Facebook owners, short-run overpricing was their experience. 

     

    But hope springs eternal.  Maybe things will go better for these five firms and their future shareholders.

     

    For discussion

     

    ·        Based on the article by Professor Ritter, what is the process for going public?

     

    ·        What are some possible explanations for the short-run underpricing and the long-term underperformance?

     

  • Fallout From the Libor Scandal

     

    Barclays Bank has lost credibility.  Having been found of guilty of manipulating Libor (the London Interbank Offer Rate), the question has been raised in the minds of regulators and investors: what else is the bank guilty of?

     

    As a consequence, the CEO Robert Diamond has stepped down and the COO has joined him. 

     

    According to Jonathan Weil of Bloomberg, investors have demonstrated their lack of confidence in Barclays’ reputation by driving the stock price down.  In fact, the price is so low, it is currently trading below its book value.  That’s low.

     

    From the Bloomberg article:

     

    The trust deficit is evident in Barclays’s market value. At 20.6 billion pounds ($32 billion), Barclays trades for a mere 37 percent of its common shareholder equity, which shows that investors believe most of its 55.6 billion pounds of book value is fictional. The price-to-book discount also can be explained partly by the soft nature of some of the bank’s assets.

     

    Barclays showed 7.8 billion pounds of intangibles as of Dec. 31 -- things like goodwill and customer lists -- as well as 3 billion pounds of deferred tax assets. Such items would be useless in a crisis.

     

    For discussion:

     

    What is the market to book ratio? What does it tell investors about the firm?

     

     

  • Spanish Rates Rise: What's the Big Deal?

    Interest rates provide us with information.  Even if you aren’t considering investing in the Spanish markets, one look at the 10-year bond yield tells you that there’s trouble.  According to CNN Money (July 6, 2012):

     

    The yield on Spanish 10-year bonds briefly jumped back above 7% on Friday before edging back, a sign that investors aren't convinced the "breakthrough" agreement struck by EU leaders will stabilize the euro debt crisis…

     

    The yield has been near 7% since last month, marking the highest level since the euro launched in 1999. The 7% level is psychologically significant since it typically signals that financial rescue is needed.

     

    Greece, Ireland and Portugal moved much higher before they required a bailout, but the number still unnerves investors. Italy's 10-year yield, which was up above 6% on Friday, breached 7% back in January.

     

    But Spain has stayed front and center in the eyes of investors, and analysts say that the nation can't afford to borrow at 7% for long.

     

    For discussion:

     

    ·        What factors cause interest rates to rise? What do rising interest rates signal to investors?

     

    ·        If the government of Spain borrows at increasing rates, how will the citizens of Spain be affected?

     

    ·        What can the government do to bring the borrowing rate down?

     

     

  • How to Build Wealth

    Buy what thou hast no need of, and ere long thou shalt sell thy necessaries. . .

    ~ Benjamin Franklin, The Way to Wealth (1758)

     

    What is the secret of gathering wealth?  Benjamin Franklin tried to tell us in Poor Richard’s Almanac that “A penny saved is twopence dear” (you may have heard it as “A penny saved is a penny earned”).  Savings, investment, patience.  All secrets of financial success. 

    In this article by CNN Money, the top 10 ways that wealthy people build their fortunes include:

    ·        Take some risk

    ·        Hunt for bargains

    ·        Don’t follow the crowd

    ·        Practice patience

    ·        Live with less house

    ·        Be an entrepreneur

    For discussion:

    1.      How much money would you have to retire at age 60 if you start saving $1,000 every year from the time you are 20 years old, and you can invest it at 6% per year? What if you start when you are 40 years old?

    2.      How much would you have if you save $2,000 a year? What about $4,000 per year?