• Financial Predictions for 2013

    CBS Moneywatch’s Allan Roth published his 3 financial predictions for 2013 and the associated probabilities that they will be correct. 

                   

    Here’s a summary:

     

    ·        70% probability that stocks will rise.

    ·        90% probability that bonds will earn below their historical average

    ·        99.9% probability that investors will be late to the game.

     

    From his description of prediction #3, Roth writes:

     

    I predict money will pour into whatever asset class or sector of the stock market is getting its 15 minutes of hotness. How can I be so sure? History and human nature.

     

    His logic is consistent with this recent article on TheStreet.com (Kass 12/26/12) that suggests that investors have a “near-obsession in overtrading.”

     

    From the the Street.com article:

     

    As a society, we have grown increasingly impatient. The media (and for that matter our society) increasingly emphasizes short term over long term and instant gratification over building value through intermediate-/long-term value. Today, we even communicate more briefly than ever in staccato-like form via tweets of under 140 characters on Twitter and the acronym soup of instant messaging. How-to-profit books, teaching us how to gain money and fame quickly, outsell more thoughtful investing books such as Benjamin Graham's The Intelligent Investor. All of these pressures (in the pursuit of instant riches) contribute to excessive trading by individuals.

     

  • Good News for MBAs in 2013

    According to the Graduate Management Admission Council, the publisher of the GMAT business school entrance exam, demand for MBA grads is expected to be higher in 2013.

     

    From the 2012 Year-End Poll of Employers, the highlights from the 2012 Report are:

     

    ·        Hiring Projections Looking Up for 2013. A greater percentage of employers reported plans to hire various candidate types next year compared with actual hiring in 2012.

     

    ·        Salaries in 2013 Expected to Increase at or Above Inflation Rate. A majority of responding employers plan to increase annual base salary for new hires either at or above the rate of inflation.

     

    ·        Internships Plentiful for MBAs. 85% of employers offer internships to graduate business students and 65% intend to offer MBA internships in 2013.

     

    While this is all good news for those pursuing a graduate degree in business, the cost of an MBA is still daunting. Bloomberg BusinessWeek reports that the cost of an MBA from the top 10 programs is “well north of $100,000….” That’s a steep entry ticket.

     

  • Five Days To the Fiscal Cliff

    Five days and counting.

     

    The fiscal cliff is just days away, and no one knows just what our elected officials will do. Will they find a way to avoid the tax hikes and the spending cuts, or will they allow the country to hit both at the same time?

     

    Though we don’t know what lies ahead, perhaps the stock market will present us with a buying opportunity. That is if the fiscal issues are eventually resolved.

     

  • Federal Government Seeks to End Muni Bond Tax Exemption

    Photo source: http://beginnersinvest.about.com/od/eesavingsbonds/tp/Series-EE-Savings-Bond-Guide.htm

     

     

    The Federal government is looking for cash, and a proposal to tax the interest on municipal bonds has state and local governments worried. Currently, the interest earned on municipal bonds is exempt from federal income tax. This means that investors are willing to buy bonds that offer less return because they will not have to pay taxes on the earnings. Lower interest means that state and local governments can borrow money cheaply. All that may be coming to an end soon.

     

    The current proposal is to set a cap on the amount of interest that wealthy individuals can earn tax-free. Other proposals suggest that all interest earned on municipal bonds should be taxed, not just the interest earned above a cap. And even worse, some propose that the tax would be applied to all existing bonds not just newly issued bonds. In other words, no grandfathered tax exemptions would be allowed.

     

    From the NY Times (Walsh, 19 Dec 2012):

     

    “This is the most serious threat to tax-exempt bonds since Roosevelt, in the late 1930s, tried to repeal the exemption across the board,” said John L. Buckley, a professor of taxation at Georgetown University and former chief counsel to the House Ways and Means Committee.

     

    At present, the federal government forgoes about $32 billion a year in taxes by exempting the interest that investors earn from municipal bonds.

     

    With municipalities already struggling financially, a change in the tax exemption could not come at a worse time.  If investors can't get the tax exemption, then they will require interest rates on muni bonds to be comparable to interest that can be earned on taxable bonds.  Therefore, taxing the rich may effectively become a tax on state and local governments to support the expenses incurred by the Federal government.

     

     

  • NYSE: The End of an Era

    In 1792, the twenty-four signers of the Buttonwood Agreement met to determine the rules for buying and selling stocks and bonds. In 1817, they named themselves the New York Stock & Exchange Board, and that organization has since become one of the most widely recognized names in financial markets: The New York Stock Exchange or NYSE.

                     

    Today marks the beginning of a new era. On December 20, 2012, the New York Stock Exchange agreed to be acquired by the Intercontinental Exchange headquartered in Atlanta with offices around the world. From the NYSE press release today:

               

    ATLANTA and NEW YORK and PARIS, December 20, 2012 – IntercontinentalExchange (NYSE: ICE), a leading operator of global markets and clearing houses, and NYSE Euronext (NYSE: NYX), the preeminent global equity, equity options and fixed income derivatives market operator, today announced a definitive agreement for ICE to acquire NYSE Euronext in a stock-and-cash transaction. The acquisition combines two leading exchange groups to create a premier global exchange operator diversified across markets including agricultural and energy commodities, credit derivatives, equities and equity derivatives, foreign exchange and interest rates. With leading clearing capabilities, the combined company will be well positioned to deliver efficiencies while serving customer demand for clearing and risk management globally.

     

  • How to Raise Money for a Great Idea

     

     Have a great idea but need a little cash to get started? Try crowd funding.

    Jake Bronstein did it. Bronstein started Flint and Tinder to sell men’s underwear that are 100% made in America, and he used Kickstarter.com to raise the money he needed. He was looking to start by selling $35,000 worth of underwear. He ended up about $300,000 worth of product to 5,578 buyers, but discovered that he may not turn a profit, in spite of the sales.

     

    After dipping into his personal savings, Jake Bronstein’s made a go of it. Today, Flint and Tinder is an online store with sales increasing week after week. Turns out there is a market for made in America men’s underwear. Kickstarter.com was a way to find the market.

     

    For discussion:

     

    What is crowd funding? How does Kickstarter.com compare with other types of crowdfunding sources?

     

  • The Impact of the Fiscal Cliff on Business Investment

    The fiscal cliff.

     

    Washington is at a crossroads, and no one wants to budge. Over $500 billion in tax increases and spending cuts are scheduled to take effect in January 2013,  and no one can find a way to stop them.

     

    According to CNN Money (14 Dec 2012)

     

    Why are taxes going up? Primarily because more than a decade's worth of "temporary" tax cuts and one-year tax "fixes" are expiring. These are measures that lawmakers passed, then renewed time and again.

     

    No one really believed the tax cuts were temporary. But by categorizing them as such, lawmakers made them look less expensive and easier to pay for.

     

    Couple the tax increases with the high cost of government health care spending, and we have a recipe for fiscal disaster. A fiscal cliff, if you will.

    Video discussion:

     

    ·        How is the approaching fiscal cliff affecting business investment and hiring decisions?

     

    ·        What is the impact of the fiscal cliff on consumer sentiment?

     

    ·        What can the Federal Reserve do to offset the fiscal cliff, if it happens?

     

    ·        Is the fiscal cliff likely to be costly in the short-term? In what ways?

     

    ·        According to Mr. Bernanke, what is the best thing the government can do in response to the fiscal cliff?

     

  • A Return to $250,000 FDIC Insurance

    The FDIC’s Transaction Account Guarantee (TAG) Program is about to come to an end. Efforts to extend the December 31, 2012 deadline have failed.

     

    From the FDIC’s website:

    NOTICE OF EXPIRATION OF THE TEMPORARY FULL FDIC INSURANCE COVERAGE FOR NONINTEREST-BEARING TRANSACTION ACCOUNTS

    By operation of federal law, beginning January 1, 2013, funds deposited in a noninterest-bearing transaction account (including an Interest on Lawyer Trust Account) no longer will receive unlimited deposit insurance coverage by the Federal Deposit Insurance Corporation (FDIC). Beginning January 1, 2013, all of a depositor’s accounts at an insured depository institution, including all noninterest-bearing transaction accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount ($250,000), for each deposit insurance ownership category.

    For more information about FDIC insurance coverage of noninterest-bearing transaction accounts, visit: http://www.fdic.gov/deposit/deposits/unlimited/expiration.html

    The idea is that we are out of the woods in terms of financial crisis, so extreme measures like unlimited deposit insurance are no longer needed. However, one unintended consequence could be that smaller banks may suffer. 

     

    From CNN Money (13 Dec 2012):

     

    The fear is that businesses will search for a safer place to park their dough -- and that could mean flight from small banks to large ones.

     

    Businesses heading to larger banks could deal a self-inflicted wound. Small businesses traditionally rely more on community banks for lending, and the less money a community bank has in deposits, the less it can lend.

     

    It's a shift smaller banks worry about. After all, there's still a perception that major institutions like JPMorgan Chase and Bank of America are too big to fail and would receive a government bailout in tough times.

     

    For discussion:

     

    According to the CNN Money article cited above, which banks have received the greatest benefits from the TAG program?

     

    What are the likely effects on banks once the TAG program ends?

     

     

  • The Pros and Cons of Leverage

    Is financial leverage—that is, the use of debt to pay for purchases—a good thing? For many of us, leverage allows us to take advantage of opportunities we would otherwise have to pass up. Mortgages allowed most of us to buy our first houses. Car loans allow many to buy a car.

    Likewise, companies use leverage to expand and increase profits. Unless they become strapped for cash…in which case, leverage becomes a burden.

    According to this Harvard Business Review article (Firestone, 10 Dec 2012):

    Most of us have an optimistic bias and prefer to think that leverage will expand our existing abilities rather than saddle us with a persistent burden of heavy cash outflows. No one buys a house or invests in a business thinking that it will go down in value. During periods of strong asset growth, the common association of "leverage" becomes too one-sidedly positive (although the fallout from the recent recession may have moved popular bias too far in the other direction). The key to using leverage successfully is common sense, realistic assumptions, and a clear-eyed understanding of the risks.

    The author goes on to describe companies like Orion Pictures and others who got themselves into trouble because some bad luck meant that their cash inflows were not enough to cover their debt payments.

    The moral of the story? Leverage is a tool. But like all tools, when used improperly, can lead to damage.

     

  • Netflix and Fair Disclosure

    The Securities and Exchange Commission requires that material information about publicly traded firms be shared with everyone.  But not on Facebook.  Because that’s not everyone.

     

    In July, Netflix CEO Reed Hastings posted that customers were viewing nearly 1 billion hours of video per month. Because this information was not publicly disseminated in the usual manner through an SEC filing or a press release, the SEC is questioning whether the firm has violated fair disclosure rules.

     

    For discussion:

     

    In your opinion, should the SEC pursue this potential violation with Netflix? Why or why not?

     

  • Possible Negative Interest Rates in Eurozone

    Photo of euro currency by Images_of_money available by Creative Commons license

    The euro fell against the U.S. dollar yesterday after Mario Draghi, the president of the European Central Bank, indicated that negative interest rates were being discussed. 

    From an article in The Telegraph (6 Dec 2012):

    Mario Draghi, the ECB’s president, said the governing council had discussed a cut in overnight deposit rate to below zero for the first time, and was "operationally ready" to do so if needed.

    The comment sent the euro into a nosedive, dropping from $1.3075 to $1.2950 in just two hours. "A negative deposit rate is the mother of all sell signals for a currency," said Hans Redeker, currency chief at Morgan Stanley.

    This discussion of negative interest rates isn’t the only thing driving the price of the euro down. Credit problems in Italy and the rest of the “Club Med” area are spreading to companies.

    For discussion:

    According to the article cited above, what has been the impact of austerity measures in Italy?

    What is the credit condition of the companies in the steel, refining, shipping, cars, and smaller mining groups?

     

  • Chinese Renminbi and the Aussie Dollar

    For the first time in years, the yield on Chinese government bonds is higher than the yield on Australian bonds. 

           

    According to Bloomberg (Karunungan, 3 Dec 2012):

                         

    China’s benchmark notes yield 3.55 percent, 37 basis points more than similar-maturity debt in Australia, compared with 71 basis points less in March. The average discount since Bloomberg started compiling data on yuan notes in early 2003 is 155. Schroders Plc (SDR) said it cut exposure to Australian dollars in favor of China’s currency, while Commonwealth Bank of Australia said the yuan is a good hedge against volatile global markets.

     

    The yuan has climbed 18.7 percent against the dollar in the past five years, just shy of the 21 percent gain in the Australian dollar, supporting Premier Wen Jiabao’s bid to shift the economy’s focus to domestic consumption from exports. The Aussie rose 0.4 percent this quarter, lagging the yuan’s 1 percent advance, as the Reserve Bank of Australia cut interest rates this week, for the sixth reduction in 14 months.

     

    Higher bond yields lead to higher demand for Chinese currency. According to the article, “Schroders Plc (SDR) said it cut exposure to Australian dollars in favor of China’s currency, while Commonwealth Bank of Australia said the yuan is a good hedge against volatile global markets.”

     

    For discussion:

     

    What is the current exchange rate of the Australian dollar against the U.S. dollar? What about the Chinese Renminbi against the U.S. dollar? How are these exchange rates impacted by differences in interest rates in the two countries?

     

     

  • What Do China and the U.S. Have In Common? Capitalism.

    China and America have more in common than they may realize. Both economies claim a form of capitalism and both face some economic struggles. The U.S. version of capitalism is market-based where individuals have the right to fail or succeed. China, on the other hand, operates under a state-led form of capitalism and a more authoritarian regime.

                     

    According to Huang (Bloomberg, Dec 5, 2012), China and the U.S. face similar struggles despite their differences.

     

    For example, income disparity—that is, the gap between rich and poor—is present in both economies. From the article:

     

    The dominance of China’s state-owned banks and enterprises through Communist Party connections exacerbates disparities and encourages corruption. But crony capitalism and dollar politics in the West can be just as pernicious as state capture in China. Both favor well-connected insiders over entrepreneurial outsiders.

     

    Another issue both economies must face is the regulatory structure. From the article:

     

    The financial sector is where weak regulatory regimes pose the greatest risks to both systems. Mergers have only increased concentration in the U.S. and the risk of too-big-to-fail corporations. China’s state-led approach in banking has its own problems, including the generation of quasi-fiscal deficits and lending practices that fuel speculative property bubbles and risky shadow lending.

     

    The Bloomberg article goes on to point out several other common issues faced by both forms of capitalism. In the end, we can conclude that perhaps the two governments have more in common than they realize.

     

    For discussion:

     

    In what ways are the U.S. and China similar and in what ways do these economies differ?

     

  • How to Beat the Stock Market

    Timothy and Ethan, two 9-year olds, have beaten the stock market in the SIFMA Stock Market Game.  They started 3rd grade with $100,000 in fake money. They ended the school year with $150,000.

     

    What was their big stock winner? Apple was first and Macy’s was second

     

    For discussion:

     

    What are some of the metrics that Timothy and Ethan used to evaluate their stock purchases?