• NYSE Reopens After Sandy

    The New York Stock Exchange.  The symbol of New York and free markets is back in business after being shut down by Hurricane Sandy. Mayor Bloomberg rang the opening bell, and though not all trades are going through the exchange, business seems to be back.   

     

    According to Bloomberg Businessweek (31 Oct 2012):

     

    NYSE Euronext, on backup power after Hurricane Sandy flooded parts of Lower Manhattan and cut electricity, announced yesterday that trading would resume. It planned to operate the floor with at least 100 designated market makers and floor personnel, Larry Leibowitz, the chief operating officer, said in a phone interview yesterday. The exchange will run on backup power tomorrow and the next day, Niederauer said.

     

                (read the full article here)

     

    For discussion:

     

    According to this article, how are trade orders sent to the NYSE? How are these trades impacted by the power problems from Hurricane Sandy?

     

  • Debt: Didn't We Know Better?

    Anyone can get sucked into a debt-filled lifestyle. Even the brightest among us.

     

    According to Time Magazine’s Dan Kadlec (25 Oct 2012):

     

    It’s widely accepted that unscrupulous bankers tricked unknowing consumers into loans they could not afford, leading to the financial crisis. No doubt, plenty of that occurred—underscored Wednesday with a $1 billion federal suit against Bank of America’s mortgage arm Countrywide Financial.

     

    But it turns out the “victoms” were not, by and large, unsophisticated rubes. A new study finds that highly educated Americans were most likely to take on unmanageable debt in the pre-crisis years. What’s more, gross personal financial mismanagement occurred across the population and not just in the mortgage market and not just among the unsophisticated.

     

    So who’s to blame for our financial mess? According to the research by Hanna, Yuh, and Chatterjee, maybe we should point a finger at ourselves.

    For discussion:

     

    According to the Time Magazine article, at what level of debt is personal bankruptcy most likely to occur?

     

    What are some possible explanations for the levels of debt incurred by highly educated individuals?

     

  • What's The Volatility Smile?

    What’s The Volatility Smile?

     

    Risk in the stock market—that is, volatility—is very important to investors.  According to options pricing theory, risk measured by the standard deviation of stock returns should be known and constant across time.  But in reality, it is anything but constant.

     

    Options give us a way to extract the implied volatility that is currently priced into the market.  Rather than plugging historical standard deviations into the Black-Scholes model to calculate the price of an option, we can take the option price as given and then work backwards to determine what that means for volatility.

     

    Turns out that when options are at the money, implied volatility is at its lowest. But when options are deep in-the-money or deep out-of-the money, volatility is much higher, leading to a smile on the chart.  

     

    For discussion:

     

    Based on this Bloomberg video, why does the volatility smile exist?

     

  • Earnings Miss the Mark at Apple

    It’s not just a company’s earnings that affect its stock price. It’s what a company earns compared to what it was expected to earn.

     

    Apple reported Thursday that net income increased to $8.2 billion ($8.67 per share) from $6.6 billion a year ago. Revenue was also up 27 percent, but not enough apparently. According to this article from CNBC:

                    

    Analysts had expected the company to report earnings excluding items of $8.75 a share on $35.8 billion in revenue, according to a consensus estimate from Thomson Reuters.

     

    The results came as Apple heads into the crucial holiday season, when competition in the smartphone and tablet market will reach fever-pitch, with Apple pitting a new phone and iPads against Amazon. and Google Android devices.

     

    Though Apple shipped more iPhones than analysts expected, it sold fewer iPads. Having sold “more than 100 million iPads since the device debuted in April 2010,” Apple is not likely to disappear anytime soon. But how will it fare against the Android market or the Windows 8 market

     

    Only time will tell.

     

  • Is Microsoft a Sell or a Buy?

    Will Windows 8 be a game-changer for Microsoft (ticker: MSFT)?

     

    Maybe, but according to this CNBC video, technical analysis suggests that MSFT is a sell, not a buy. The analyst shows several charts where MSFT stock moved to a “lower high” and then “broke through a key support level.”

     

    However, according to fundamental analysis the stock is going higher because earnings will increase with the new products that are coming out.  Furthermore, the dividend yield is about 3%.

     

    For discussion:

     

    What is technical analysis? If investors can earn an abnormal return based on technical analysis, then which form of the Efficient Market Hypothesis (EMH) would be violated?

     

    What is fundamental analysis? If investors can earn abnormal returns based on fundamental analysis, then which form of the Efficient Market Hypothesis (EMH) would be violated?

     

    According to this video, what do these analysts suggest is the target price for Microsoft stock?

     

  • Insider Trading

    The strong form of the efficient market hypothesis (EMH) says that all information, including inside information, is fully reflected in the current price of an investment.  If the strong form of the EMH held true, then no one could earn abnormal gains from insider trading.

     

    Today, Rajat Gupta, a highly respected Wall Street professional, was sentenced to two years in prison for insider trading.  According to the AP article published by CNBC (24 Oct 2012):

     

    Rajat Gupta, 63, of Westport, Conn., was sentenced by U.S. District Court Judge Jed Rakoff, who also ordered him to pay a $5 million fine. The Harvard-educated businessman long respected on Wall Street was one of the biggest catches yet for the federal government in its five-year crackdown on insider trading that has so far resulted in 69 convictions.

     

    Considered the “biggest insider trading case in history,” the conviction of Gupta et. al. shows that markets are not efficient in the strong form.  Weak form or semi-strong form, maybe, but not the strong form.

     

    For discussion:

    • What are the three forms of the Efficient Market Hypothesis?
    • What is Rajat Gupta guilty of doing? How much were the profits earned by him and his friend, Rajaratnam?
  • Isis Mobile Wallet to Launch Monday

    Soon, paying for purchases with a chip in your smartphone will be easier for many consumers. According to Computerworld (Hamblen, Oct 17, 2012), “The Isis mobile wallet network will launch Monday in Salt Lake City and Austin, Texas.”

     

    From the article:

     

    All the phones are NFC-ready, meaning they contain an NFC (near field communications) radio chip that communicates with an NFC terminal for making payments using a smartphone, Isis said.

     

    Isis previously confirmed a number of retailers, gas stations and transit providers that will be equipped to handle the NFC payments. The NFC phones also contain special security, known as a "secure element" inside, which protects a customer's credit card information. There has been a debate between banks and other parties to mobile commerce as to whether the secure element should remain in the phone -- either on a SIM card or embedded in the phone's core -- or be should located in the cloud.

     

    Isis is a consortium made up of Verizon Wireless, AT&T and T-Mobile. Noticeably absent is Apple as it has decided not to include the NFC chip in the iPhone 5.  Instead, Apple relies on its own system called Passbook.

     

    For Discussion:

     

    Why is the adoption of the NFC chip likely to be slow in the U.S.?  

     

    What are the risks and benefits associated with this payment method?

     

  • BB&T Plans to Hire

    Unemployment and bad news are everywhere, so it is a breath of fresh air to read this announcement by BB&T Corp that it will create 1,700 new jobs over the next five years in North Carolina. According to CBS Moneywatch (Oct 17, 2012):

     

    The bank said Tuesday that it has signed a seven-year sublease to take over a former American Express Co. call center in Greensboro.

     

    The company says its Triad Corporate Center eventually will have up to 2,500 employees, mostly working in back office, administrative and support functions.

     

    The company says it will begin moving into the new location by the end of the year, with up to 100 employees.

     

    Just yesterday, BB&T reported third quarter net income of $469 million, up 28% from third quarter 2011.  From the Oct 18 press release:

     

    "We are pleased to report very strong results for the third quarter," said Chairman and Chief Executive Officer Kelly S. King. "BB&T's performance benefited from a 5.3% annualized increase in net interest income compared to the last quarter, a 63% increase in mortgage banking income and continued improvement in credit costs. The net interest margin remained strong at 3.94%.

     

    For discussion:

     

    What are the factors that drive profitability at a bank? What actions can a bank take to improve profitability for the shareholders?

     

  • Bond Opportunities

    Bonds offer opportunities, according to portfolio manager Dan Janis, in particular, high-yield U.S. bonds and emerging market bonds in the Philippines and Korea.   

     

    The risks include:

     

    ·        Interest rate risk

    ·        Credit risk

    ·        Currency risk

    ·        Liquidity risk

     

    For Discussion

    Based on this video, what are some of the opportunities present in the bond sectors they’ve identified?

     

    What are the definitions of the four risks identified above?

     

  • A Bank By Any Other Name...

    What is a “bank?”

     

    Traditionally, a bank is an institution that accepts deposits and lends money. These services have always been provided by commercial banks while investment banks focus on underwriting and selling stocks and bonds.

     

    Today, however, nonbank banks are beginning to compete for the business. Monday, Wal-Mart announced that it has teamed up with American Express to provide low-income consumers access to pre-paid cards and debit accounts.

     

    From the NY Times (October 8, 2012):

     

    Prepaid cards work much like debit cards, except that they are not tied to a traditional, regulated bank account. The cards are part of a larger strategy by lenders to tap into the so-called unbanked or underbanked population—customers who use few, if any, bank services. Such people are considered a $45 billion market, according to the Center for Financial Services Innovation, which provides advisory services.

     

    Wal-Mart is not alone. Google recently announced that it would offer loans to business in the UK and Amazon would begin lending to small businesses through lines of credit.

     

    According to US News and World Report (Oct 10, 2012):

     

    No longer are banks the sole proprietors of credit and other financial tools. Big companies with experience operating in the increasingly fast-paced and complex digital world are wading further into financial services, attracting everyone from credit-hungry small business owners to consumers looking to escape fee-heavy big banks.

     

    For discussion:

     

    What are the benefits and risks of retailers like Wal-Mart and Amazon entering into the financial services industry?

     

  • Citibank CEO Says Goodbye

    Since taking the reins of Citibank in 2007, CEO Vikram Pandit has been trying to right the ship.  Today he announced the end of the road.

     

    According to CNBC (Cox, 16 Oct 2012):

     

    Pandit shocked the Street with the announcement before the market opened that he would be leaving the company after nearly five years. (Read More: Pandit Reportedly Forced Out at Citigroup)

     

    In an interview, Pandit denied he was forced out, saying it was his decision and felt it was time to leave now that Citi's operations had stabilized.

     

    He also denied that pay was the center of a disagreement he had with the board.

     

     

     

     

  • Cyber Warfare and Wall Street

     

    Cyber Warriors, prepare for battle.

     

    According to Secretary of Defense, Leon Panetta, the U.S. is facing a growing threat of cyber-attack. With the risk that hackers can attack the U.S. infrastructure by taking out the power grid or derailing trains, Mr. Panetta is calling on U.S. businesses to join in the fight to protect America.

     

    We’ve already seen the effects in the financial industry. Recent attacks on bank computer systems has shown us that Wall Street is a target.

     

    Cyber warfare is a new battle for a new era, and the financial system must prepare itself.

     

  • Banks and the Legal System

    A jurisdictional tangle that boggles the mind

     

    Arthur Burns, 1974

    Former Fed Chairman

     

     

    The dual banking system in the U.S. is mind boggling. This recent article in The Economist (13 October 2012) looked at how many entities are responsible for bank oversight, and the answer is “a lot.” 

     

    From the article, the list of entities that investigate and prosecute financial firms includes:

     

    ·        The Securities and Exchange Commission (SEC)

    ·        The Commodity Futures Trading Commission (CFTC)

    ·        The Office of the Controller of the Currency (OCC)

    ·        The Federal Deposit Insurance Corporation (FDIC)

    ·        The Department of Justice (DoJ)

     

    And the list goes on.

     

    Banks must maintain a league of lawyers to handle the paperwork. Given the financial scandals that seem to hit markets with some regularity, bank legislation is to be expected. But at what cost?

     

    For discussion:

     

    What are the primary regulators for state banks, national banks, and bank holding companies? What types of activities do these regulators control?

     

    What are the benefits and limitations of bank regulation?

     

     

     

     

  • U.S. Treasuries: A Bad Idea

    U.S. Treasury bonds are once again out of favor with one of the most well-known bond investors in the world. Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO) wrote recently that that he has reduced his holdings of U.S. government debt to 20 percent of assets. 

     

    According to Bloomberg (Walker, 10 Oct 2012):

     

    Gross wrote in his monthly investment commentary last week that the U.S. will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows, saying the nation “frequently pleasures itself with budgetary crystal meth.” Mortgages have accounted for 50 percent of the fund holdings since January as Gross correctly bet the Federal Reserve would announce a new round of monetary stimulus using the securities.

     

    Mr. Gross preached the same message back in 2011 and dropped U.S. Treasuries from the portfolio. Unfortunately, his fund significantly underperformed other funds and he decided to return to U.S. Treasuries once again.

     

    For discussion:

     

    What risks do investors face when they buy U.S. Treasury bonds?

     

    What factors should you consider before you buy bonds?

     

  • The Art Institute of Chicago Issues Muni Bonds

    Municipalities are struggling to pay their pension bills.  But in this environment of low interest rates, some are trying to borrow their way out of trouble. One such municipality, the Art Institute of Chicago, “the home of paintings by Henri Matisse and Pablo Picasso, is selling about $100 million of taxable and tax-exempt bonds partly to shore up unfunded pension obligations” (Chappatta, Bloomberg Oct 9, 2012)

     

    From the Bloomberg article:

     

    The institute joins municipalities across the U.S.—including Chicago and Illinois—that are struggling to cope with growing retiree benefit costs. Funding for state retirement plans fell for a fourth straight year in 2011 to 71.7 percent, according to data compiled by Bloomberg, as insufficient contributions and inadequate investment gains overcame cuts by more than 40 legislatures to benefits since 2007.

     

    With interest rates in the $3.7 trillion muni market near their lowest level since the 1960s, “the current low-yield environment presents a very favorable opportunity for the Institute to refinance its debt and to re-examine its capital structure,” Erin Hogan, director of public affairs at the museum, said in an e-mail. “We are hoping for strong demand for the bonds.”

     

    For discussion:

     

    What are municipal bonds? How risky are they for investors?

     

     

  • The Secret to Ferrari's Success

    How does a company maintain its value? By maintaining the value of its product.  According to Ferrari Chairman, Luca Cordero de Montezemolo, three key factors contribute to the value of this Italian luxury car producer:

     

    1.     Innovation. New ideas, new technology, new models.

    2.     Global brand. Though the U.S. is its largest market, Ferraris can be found in 60 different countries.

    3.     Exclusivity. Limited production maintains the luxury car’s value in the secondary market.  In other words, demand outpaces supply.

     

    The irony, of course, is that a country embroiled in the European financial crisis is still producing luxury brands like Ferrari.

     

  • Ethan Allen Celebrates 80 Years

     

    Despite the “doom and gloom” in the outlook for manufacturing in America, Ethan Allen is celebrating its 80th anniversary of manufacturing in the U.S.  According to CEO Farooq Kathwari, “To be an 80-year old company, ... you have either reinvented by accident or by plan. We of course have been reinventing by plan.” And that requires constant investment and reinvestment.

    For discussion:

    In the video, the interviewer compares a $399 couch from IKEA with a $1,699 couch from Ethan Allen. In your opinion, is this a fair comparison and how can Ethan Allen compete against such pricing?

     

  • Municipal Bonds Popular Among Banks

    Municipal bonds or “munis” are bonds issued by state and local governments and are popular investments for banks these days according to a recent report by the Bond Buyer newspaper. 

     

    From the article (Ramage, 21 Sep 2012):

     

    Municipal Market Advisors says that banks are on track to become the third-largest aggregate holder of municipal securities by year-end. For banks, munis represent investments that are “mostly safe, pay a good coupon, and imply local investment,” said Matt Fabian, a managing director with the independent research firm.

     

    Fabian said that, given current economic conditions, banks now see fewer opportunities to lend in more traditional ways — i.e. mortgages, industrial loans, etc.

     

    (Read the full report here)

     

    Households own the most municipal bonds, but their holdings of munis have been dropping relative to the holdings by banks. After the Tax Reform Act of 1986, banks lost some of their tax exemption associated with buying municipal bonds. But new legislation in 2009 has made munis attractive to banks again. 

     

    For discussion:

     

    What is the difference between “revenue” municipal bonds and “general obligation” bonds? Which are considered less risky for investors?

     

  • Investors Still Willing to Lend to Portugal

    The ability to borrow money is a privilege that Portugal is not taking for granted.  With debt maturing in September 2013, Portugal was soon going to need to find the cash to repay the debt without relying on its European neighbors.  And it looks like the cash is here.

     

    According to Bloomberg Businessweek (Lima, Oct 3 2012), the Portuguese debt agency successfully traded 3.76 billion euros of its 2013 debt for 2015 debt. 

     

    From the article:

     

    The agency bought 3.76 billion euros ($4.86 billion) of bonds due in September 2013 with a yield to maturity of 3.1 percent in exchange for the same value of securities maturing in October 2015 with a yield to maturity of 5.12 percent, the Lisbon-based IGCP said today. Before today’s bond exchange, the notes due in 2013 had 9.6 billion euros outstanding.

     

    This event is considered by some to be a milestone for Portugal because it proves that investors are willing to lend money to the government.  

     

    For discussion:

     

    What is Portugal’s credit rating?

     

    What was the yield on the 2013 debt that Portugal redeemed? What about on the 2015 debt that Portugal issued?

     

  • Who Do CFOs Want To Hire?

    Attention students: are you the kind of employee that CFOs want to hire?

     

    In a recent article on CFO.com (Provost, Oct 3 2012), finance chiefs described the skills they seek in the folks they hire:

     

    “You have to have a team capable of making sure the controls and the complexity of accounting are there,” he said. But the finance chiefs also said that hiring people who can work independently without micromanagement and yet aspire toward team success is critical.

     

    In making strategic hires, Knapp, who has led the finance team at CareerBuilder since March 2003, when he joined the huge employee website after six years at Cars.com, looks for people whose leadership qualities are so strong that they come with their own set of followers.

     

    Read the full article here

     

    The moral of the story is this: being skilled in finance and accounting is a minimum hurdle to cross. Being a leader—the kind of leader that motivates teams to accomplish the task—gets you noticed.

     

    For discussion:

     

    What are some ways that finance and accounting students can develop leadership skills while at university?

     

    What are characteristics of strong leaders in finance? What about ineffective leaders?

     

  • Saving on a Seasonal Salary

    How can you save money if you’re seasonally employed? Same way you save money on a steady income.

     

    According to this CNN Money video, the trick is to determine how much of your annual salary you need to meet your expenses and what proportion you need to save for retirement. Then, when the uneven paycheck arrives, you set aside a fixed percentage, no matter how many or how few dollars that turns out to be.

     

    For discussion:

    Why might seasonal employees feel that they cannot save any money?

     

    What other advice or tips can you offer to seasonal employees to help them save for retirement?