• The Race To Issue Special Dividends

    What do Wal-Mart, Las Vegas Sands, and Whole Foods have in common? They are all in a hurry to issue a special dividend to shareholders before the fiscal cliff leads to higher tax rates on investment income.


    According to this CNBC video above, companies who choose to pay a special dividend are showing that they are thinking of their shareholders and may get rewarded for doing so.


    For discussion:


    ·       Why would higher impending tax rates lead companies to issue special dividends now?


    ·       If an investor wanted to buy companies that are likely to pay a special dividend, which types of companies are good bets? Which ones are not?


    ·       Does a special dividend now mean that a dividend cut is likely in the future?




  • Copper: The Law of Supply and Demand

    Copper cash seller and settlement price 30/11/09-30/11/12,

    Source: London Metal Exchange, http://www.lme.com/copper_graphs.asp



    What determines the price of a commodity? Trading? Speculation? Exchanges?


    The answer is supply and demand, and in copper markets, supply may have trouble meeting demand.


    From a recent Bloomberg article (Sim, 29 Nov):


    Copper supply shortages will extend into the first half of next year as an accelerating Chinese economy more than doubles the pace of growth in global consumption even as mines extract a record amount of metal.


    Demand will outpace supply by 316,000 metric tons in the first six months, more than all copper in London Metal Exchange warehouses, before a surplus emerges in the second half, Barclays Plc estimates. Production has lagged behind consumption since 2010, according to the International Copper Study Group. The metal may average $8,300 a ton in the second quarter, 5.1 percent more than now and the most in a year, according to the median of 21 analyst and trader estimates compiled by Bloomberg.


    According to this article, China “uses 41 percent of the world’s copper.”  So growth in the Chinese economy translates into increased demand for the metal.


  • Home Equity Loans on the Rise


    Back in the days when housing prices were rising, consumers happily borrowed against the equity in their homes and went shopping. According to Bloomberg Businessweek (Howley, 26 Nov 2012):

    Americans had used their homes like credit cards to go on spending sprees during the 2000 to mid-2006 real estate boom, tapping their equity to buy cars, televisions and luxury cruises. Consumers used about $677.3 billion, or about $113 billion a year, from home equity loans for consumer spending, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.

    Today, after years of declining lending, Heloc originations will rise in 2012 and are expected to rise further in 2013. As the housing market recovers, consumers are expected to spend money, “fueling purchases of goods like televisions and refrigerators” which in turn helps boost the economy.

    For discussion:

    What are some economic effects of increased home equity lending?


  • Holy Market Value, Batman! What's the Batmobile Worth?

    The original batmobile will be sold at auction in January. This one of a kind creation is the original vehicle made for the TV show in 1966. It was based on a Ford Motor concept car and cost $15,000.


    Because this is a unique item and may attract collectors, no one is sure what the fair market price will be.


    For discussion:


    ·       What is the book value of this asset?


    ·       What methods might an appraiser use to determine the fair market value of this asset?


  • How The Banks Manipulated Libor

    Questions about the ethics surrounding LIBOR, the London Interbank Offer Rate, have been raised as early as 1986. Back then, the Chicago Mercantile Exchange (CME) was considering adopting LIBOR as the benchmark rate for its popular Eurodollar futures contract. But Marcy Engel, a lawyer with Salomon Brothers, pointed out the flaw with this plan.


    From the Reuters article (Mollenkamp, Ablan, and Goldstein, 20 Nov 2012):


    The problem with the CME’s plan, as Engel saw it: The banks that set the rates in London daily were also able to take positions in the CME’s Eurodollar contract. In her letter to the U.S. Commodity Futures Trading Commission, she said tethering the futures contract to Libor “might provide an opportunity for manipulation” of the interest rate. A “bank might be tempted to adjust its bids and offers…to benefit its own positions.”


    The article goes on to describe how the manipulation that Engel feared became commonplace within a few short years. The Eurodollar futures contract was a “breakthrough contract” because it allowed banks to hedge the risks they faced on their interest rate swaps. The problem arose when the CME made the switch from their own calculation of the interest rate benchmark to Libor as the benchmark, opening up the possibility of gaming the system.


    For discussion


    According to the Reuters article above, how did the interest rate manipulation take place?


  • Credit Invisible? Now There's Hope

    For those with thin or no credit histories, new loans are out of reach. Not all of those in this pool are poor credit risks. Some are simply younger borrowers, immigrants, or those who choose to operate on a cash basis.


    This Wall Street Journal interview shows that new metrics are now being used to determine credit risk. Alternative sources of data can now be reported by the reporting agencies—data such as utility and rent payments, how often you move, the type of job you have. 


    For discussion:

    How are these alternative credit risk metrics good proxies for credit risk?

    What are some of the risks to lenders in relying on these measures?

    How might racial profiling become an issue for these lenders?


  • Contagion or Interconnectedness: Which One Lead to the Financial Crisis?

    The Committee on Capital Markets Regulation (CCMR) released a study on November 20 that showed the financial crisis to be the result of contagion, not interconnectedness. 


    From the press release:


    The study engages in a detailed analysis of interconnectedness (i.e., the linkage between financial institutions) in the context of the failure of Lehman Brothers in October 2008 and concludes that interconnectedness was not a major cause of the recent financial crisis.


    The study continues with a discussion of financial contagion (i.e., run-like behavior that spreads from the perceived failure of a financial institution to other financial institutions) and an analysis of possible solutions to contagion. The study highlights that a distinguishing feature of contagion is its ability to spread indiscriminately among firms in the financial sector and notes that contagious runs can occur even if there are no direct linkages to the original institution (i.e., even in the absence of interconnectedness).


    The study finds that contagion and short-term funding are the culprits. The study further outlines potential solutions.


    For discussion:


    What are the seven solutions listed in the press release?


  • Where Have All the AAA-rated Government Bonds Gone?

    France lost its prized AAA credit rating Monday when Moody’s Rating Agency downgraded French government bonds to AA1.


    From the Moody’s announcement (read the full announcement here):


    Moody's decision to downgrade France's rating and maintain the negative outlook reflects the following key interrelated factors:


    1.) France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.


    2.) France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.


    3.) The predictability of France's resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France's exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.


    Moody’s is not the first rating agency to downgrade France. Standard and Poor’s downgraded the rating to AA+ in January, so this action by Moody’s comes as no surprise.


  • Credit Card Delinquencies Rise

    The proportion of credit card borrowers who were 90 days or more delinquent increased in the third quarter of 2012 to 0.75%. This national delinquency rate is higher than it was a year ago when it was 0.71% in the third quarter of 2011.


    Though the rate is slightly higher, experts are encouraged because the pattern seems to be seasonal, just like last year.


    From the TransUnion press release on MarketWatch (19 Nov 2012):


    "Credit card delinquencies are following a pattern similar to what we observed in 2011, with declines in the first two quarters of the year followed by an increase in the third," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "That seasonal consistency is encouraging. Credit card debt trends in 2012 also are mirroring 2011, with a decrease in the first quarter followed by two increases over the next six months. With both delinquencies and debt levels remaining quite low relative to historical norms, we are confident in the continued stability of credit card usage patterns in the short term."


                (Read the full press report here)


    For discussion:


    What is the average amount of credit card debt per borrower? Based on an APR of 15% with monthly payments of $100, how long would it take to pay off this debt?


  • Are All OTC Derivatives Equally Risky?

    While some derivatives such as futures are traded on organized exchanges, others such as foreign exchange swaps and forwards as well as currency swaps are traded over the counter (OTC).


    The Dodd-Frank Wall Street Reform and Consumer Protection Act addresses the risks associated with the OTC market and requires that derivatives contracts trade on organized exchanges and be cleared through a central clearing house.


    However, the U.S. Treasury announced on Nov 16, 2012 that these requirements would not apply to foreign exchange (FX) swaps and forwards. From the press release:


    The FX swaps and forwards market is markedly different from other derivatives markets. Existing procedures in the FX swaps and forwards market mitigate risk and help ensure stability. While central clearing requirements will strengthen the rest of the derivatives market, the potential benefit is reduced in the FX swaps and forwards market because existing practices already help limit risk and also ensure that the market functions effectively.


    Not everyone is happy about this decision.


    From a recent N.Y. Times editorial (19 Nov 2012):


    Under the exemption, foreign exchange swaps and forwards will not have to be cleared, a process that reduces the risk that one party to a transaction will not be able to pay. Nor will they have to be traded on an exchange, which helps to ensure that investors, taxpayers and regulators can stay on top of emerging dangers. The derivatives would have to adhere to other Dodd-Frank rules, including business conduct standards. But there is no substitute for clearing and exchange trading. So unless the Treasury reverses course, these deals will not be fully regulated until a future crisis forces the issue.




    1.    According to this 2010 Foreign Exchange Committee letter, what are (a) foreign exchange swaps, (b) foreign exchange forwards, and (c) currency swaps?

    2.    What is “settlement risk” and why is this considered to be a key risk in FX forwards and swaps?

    3.    Based on the U.S. Treasury press release, what are the arguments in favor of exempting FX forwards and swaps from central clearing and exchange trading requirements?

    4.    Based on the N.Y. Times editorial, what are the arguments against this exemption?


  • NYSE Faces Computer Issues

    A computer glitch led to halted trading on the New York Stock Exchange as the Big Board canceled closing auctions on 216 stocks.


    According to Bloomberg (13 Nov 2012):


    While the fragmentation of American equity markets over the last decade left dozens of other venues to trade those NYSE- listed securities during the day, the elimination of Big Board closing auctions was potentially a bigger disruption since the vast majority of orders seeking the official closing price are sent to the exchange to participate in the day-end process. The auction, which collects orders to determine a final price for a security, is important to fund managers and brokers who are obliged to buy and sell at that level.


    This computer problem is one of several computer related issues to affect financial markets in recent years. Earlier this year we saw Knight Capital’s trading error, and computer related issues plagued Facebook’s IPO and others. 


    For discussion:


    ·       What happened after the NYSE disruption on Nov 12?


    ·       Why is a market disruption like this so important to market participants?


    ·       What do the terms “price discovery” and “market quality” mean? How does liquidity impact both of these?



  • Is the Federal Housing Administration Running Low on Funds?

    The Federal Housing Administration may be running out of money.


    According to today’s press release of its annual report to Congress by the U.S. Department of Housing and Urban Development (HUD):


    The independent study found that as the housing market continues to recover, the capital reserve ratio of the MMI Fund used to support FHA’s single family mortgage and reverse mortgage insurance programs fell below zero to -1.44 percent. This represents a negative economic value of $16.3 billion. This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury. The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the President’s FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September.


    According to this NY Times article (14 Nov 2012), “Capital reserves are kept to cover future losses. Outsiders have questioned whether the agency would someday need an infusion from Treasury if its reserves are insufficient.”


    With one out of every six F.H.A. loans being 30 days or more delinquent, the agency may indeed be in trouble.

    For discussion:

    What is the FHA and what role does it play in the mortgage market?



  • What Did Banks Do with TARP Funds?

    Remember all that government relief money that went to banks through the Troubled Asset Relief Program (TARP)? Well, a recent study by the Small Business Administration found that the money did little to encourage small business lending.


    According to CNN Money (14 Nov 2012):


    The study, which was done by Rebel Cole, a professor at DePaul University, looked at banks that got money from the government in 2008 and 2009 through the Troubled Asset Relief Program, and banks that did not. What Cole found is that the banks that got TARP not only didn't use the money to boost lending, they actually cut their lending, at least when it came to small businesses, and that drop was larger than at banks that didn't get TARP.


    The article notes that this is not too surprising. First, giving money to banks doesn’t guarantee more loans of any kind. Second, the key recipients of the TARP money were large banks. And large banks are not the primary lenders to small businesses. 


    Still, the report raises some eyebrows.


    For discussion:


    What was the Troubled Asset Relief Program?

    Why was it controversial?

    Was TARP successful?


  • How Risky Are Prepaid Cards?

    For those who can’t get or don’t want a traditional bank credit or debit card, prepaid cards seem to be the answer. Available at Wal-Mart and other retailers, these cards allow customers to load cash onto a card and use “plastic” when credit or debit cards are tough to get.


    Though these cards offer several benefits, they are not without risks of their own. Because they are not tied to a specific checking or savings account, they may not be FDIC insured. So if the card provider goes bust, you may not be able to get your hands on your own money. Another risk is protection if the card is lost or stolen. With traditional debit and credit cards, federal law protects the consumer from loss. However, these liability limits do not apply to prepaid cards.


    Still, the benefits of prepaid cards have made this a $57 billion industry with projections that it will grow to $167 billion by 2014.  (Read the full article here)


    According to the Consumer Financial Protection Bureau (CFPB):


    Much of the growth in the prepaid market is coming from consumers who are using the prepaid card as an alternative to a checking account. The largest prepaid card program manager in the United States reported that funds directly deposited onto its prepaid cards increased by nearly 70 percent from 2010 to 2011. And the second largest prepaid card program manager reported that 42 percent of their customers had direct deposit linked to their accounts at the end of 2011.



    For discussion:


    Who are the typical users of prepaid cards?

    What are the benefits of using a prepaid card?

    What are the costs associated with using a prepaid card?


  • Capital Budgeting: Starbucks Agrees to Acquire Teavana

    Back in the 80s, Starbucks did an amazing thing for coffee. Today, Cappucinos, lattes, and frappucinos have become commonplace on every street corner and in every airport. Who could have imagined consumers willing to pay $5 for a cup of coffee?


    Now Starbucks is trying to repeat this success with tea.


    According to the NY Times (14 Nov 2012):


    The coffee colossus agreed on Wednesday to buy Teavana, a publicly traded seller of high-end teas, for $620 million in cash. The deal is Starbucks’ biggest takeover to date, more than six times bigger than its acquisition of Bay Bread earlier this year.


    Under the terms of the transaction, Starbucks will pay $15.50 a share, an enormous 53 percent premium to Teavana’s closing price on Tuesday.


    Now it appears that tea –— specifically Teavana’s loose-leaf offerings is the next major field to conquer. Starbucks estimates the tea market at about $40 billion and growing by double digits. It already has a presence in the sector at the slightly lower end with its Tazo brand.


    Though Teavana currently sells only premium bulk teas, Starbucks plans to add tea bars, similar to the coffee bars that are so popular today.


    From the joint press release:


    We believe the tea category is ripe for reinvention and rapid growth. The Teavana acquisition now positions us to disrupt and lead, just as we did with espresso starting three decades ago,” said Howard Schultz, Starbucks chairman, president and ceo. “Teavana’s world-class tea authority, coupled with the romance and theater of the retail experience that is the heart and soul of Starbucks heritage, will create a differentiated customer experience and business opportunity that delivers immediate value to shareholders. This complements our existing Tazo brand and gives us the unique opportunity to create a two-tiered market position.

  • Blackberry Lives Again

    You just never know…


    Just when we thought Research in Motion (RIM), the maker of Blackberry, was dead, done, kaput, it rises from the ashes.


    According to this short video, Apple shares have declined by 20% from their all-time high despite the introduction of the iPhone 5 and the iPad Mini.


    Blackberry on the other hand has nowhere to go but up, and up it has gone. The price of RIM has risen by 20%.


    For discussion:


    Would you buy Apple stock (ticker AAPL) or RIM shares (ticker RIMM)? Why or why not?


  • Credit Rating Agencies Under Fire Again

    Standard and Poor’s is under fire again.


    According to the NY Times (8 Nov 2012):


    This week in Australia, a federal judge found that Standard & Poor’s was liable for issuing the top investment-grade rating of AAA for a product she described as a “grotesquely complicated” piece of financial engineering. In her opinion — which at 623,000 words was about 20 percent longer than “Les Misérables” — Judge Jayne Jagot meticulously traced how S.& P. came to issue a top rating, concluding that no “reasonably competent ratings agency” would have awarded it.


    The ruling, if it stands on appeal, would cost the rating agency only about $14 million, a relatively insignificant amount. But the danger to the firm’s reputation — and the fact that the ruling could prompt other suits — potentially could be much greater.


    The ratings agencies have so far been able to claim free speech. After all, the opinions they state are their own. They never asked investors to make decisions based on the ratings they issue.


    Looks like the judge isn’t buying that argument.


    For discussion:


    Do you think that ratings agencies should be held responsible for losses incurred by investors?


  • Fundamental v. Technical Analysis: Starbucks v. Green Mountain Coffee

    Green Mountain revealed a new cappuccino maker to compete with Starbucks coffee. Based on fundamentals, it may be too soon to tell. Reaching brand-loyal consumers just as holiday spending heats up is good business, but according to the fundamental analyst in this video, “The devil is in the details.” 


    In terms of technical analysis, Starbucks takes the lead. Green Mountain is down 80% in recent years while Starbucks looks like it has been trending up.


    For discussion:

    What is fundamental analysis? What is technical analysis? Which do you think is more valuable?


  • Investing in Farmland

    According to this article in Institutional Investor (Nov 8, 2012), farmland is the next great investment. 


    From the article:


    So farmland is an uncorrelated, cash-flow-generating asset that will appreciate as the global population grows (which it will) and demands more food (which it will). That seems a pretty sound bet to me! (And for those of you that need to see a track record before you'll commit to buying your own groceries, over the past four decades US agriculture has outperformed stock and bond markets. Boom: Track record.)


     Investing in farmland means everything from buying and operating your own farm to buying and leasing the land to a farmer.  Each option comes with its own rewards and risks, of course. 


    At the end of the day, investing in farmland may require an investor to get his or her hands dirty, and that is the great deterrent. But as this article shows, institutional investors are starting to create farmland investments.


    For discussion:


    What does it mean that farmland is an “uncorrelated, cash-flow generating asset?”


    What are the benefits of adding an uncorrelated asset to an investment portfolio?


  • The Next U.S. President: Futures Markets Were Right

    Opinion polls leading up to the November 6 election had Obama and Romney tied and some even suggested that Romney might be the winner. However, real money told a different story.


    Betting on the outcome of the presidential election was active at Intrade and the Iowa Electonic Markets (IEM). These two markets and others allow you to bet real money on who would be the next U.S. president. And these markets told a different story than the polls were telling.


    According to this article by Professor Lucey (Saturday, Nov 3 in the Irish Examiner):


    Keynes had it right when he noted the market was in some ways akin to a beauty contest in a Sunday newspaper — the object is not to pick the face one finds the most beautiful, but the face one thinks other people will find most beautiful.


    Using this approach we can look at real money markets, both betting and futures markets, on the US election.


    Predictive markets like Intrade had a 65% probability that Obama would win. 


    From the article:


    However, the remarkable thing about these is that they appear to have good predictive power not just immediately prior to the poll, but in the months prior. Recent research has indicated that the predictive power of these markets is greater than opinion polls held three-four months in advance. And these suggest Obama will win.


    They were right.


    For discussion:


    What are the Iowa Electronics Markets futures contracts?


    Why do such futures markets and other betting markets exist?


    Can you think of a business that could use these contracts to hedge a risk of some sort?


  • Junk Bonds Get Riskier

    With rates near zero, investors are looking to junk bond markets to find yield. And according to this editorial in the NY Times, “Junk bonds are getting junkier.”


    From the editorial:


    Demand for junk bonds has soared this year, as both institutional and individual investors have sought higher yields in a near-zero interest rate world. As demand has risen, ever shakier companies have been able to find buyers for their debt, leading to a decline in recent weeks in the average credit rating of junk-bond-issuing companies.


    One disturbing trend among junk bond issuers is a new “optional interest payment” clause. Such a clause allows the issuer to skip an interest payment as needed without being forced into bankruptcy. A get-out-of-jail-free card, so to speak.


    According to the article, this is “risky business.”


    For discussion:


    What is a good reason for a company to issue junk bonds?  What is a bad reason?


  • How Do You Define Risk?



    How do you define risk? Is it the possibility of losing money? Maybe risk isn’t necessarily the possibility of loss; maybe it is just the possibility of not earning enough to cover your expenses. Or maybe it is simply now knowing what’s ahead.


    All of these are definitions of risk. In finance, one of the more widespread measures of risk is volatility.


    This short Bloomberg video describes the sentiment towards risk in the market today.


    For discussion:


    What statistical measures capture risk?


  • Why Buy Netflix?



    Carl Icahn bought 10% of Netflix, but it’s hard to tell what he’s planning. Is he hoping for an acquisition that will raise the value of Netflix shares? According to this Bloomberg video, an acquisition is not likely for two reasons:

    (1)   the price of content could go up , and

    (2)   the customer base is not necessarily loyal.

    So if an acquisition is not on the horizon, Mr. Icahn must be expecting the share price of Netflix to increase by its own strength alone.


    For discussion:

    In your opinion, is Netflix a good stock to buy? Why or why not?


  • Banks Warm Up to Exchange Traded Derivatives

    Big banks are starting to accept the idea of trading derivatives on organized exchanges. Up to now, the over the counter market has been their playground.


    According to Reuters (Oct 31)


    Many of the world's largest banks that dominate the $648 trillion privately traded derivatives markets have been resistant to attempts to launch competing listed products, in order to protect lucrative profits associated with their effective oligopoly in over-the-counter credit, interest rate and equity derivatives markets.


    That mentality, however, is starting to change as the markets evolve in the face of new international rules that will increase margin requirements against over-the-counter contracts, making them more costly to trade


    (read the full article here)


    For discussion:


    What are the benefits and limitations of trading on the over-the-counter markets?


    What are the benefits and limitations of trading on organized exchanges?