• Less Debt but Poorer Prospects: The Case of Young Adults

    According to CNN Money, young adults under the age of 35 have less debt than they did 10 years ago, but not because they are wise beyond their years.

     

    From the article:

     

    The center found that young adults' debt levels dropped nearly 14% between 2001 and 2010, while rising 63% for those age 35 and older, according to a recent Pew study.

     

    …One reason for the decline is the weak job market, especially for the young. Their unemployment rate was more than 2 percentage points higher than their older peers in 2010 and 2011, according to federal labor statistics. Many of those lucky enough to have employment either make less than they expected or are concerned about getting laid off.

     

    (read the full article here)

     

    So apparently, young people have less debt, but not because they don’t want to borrow. They have less debt because they can’t borrow.  And according to the CNN article, “That’s not a good thing.”

     

    For discussion:

     

    What are the likely to be the long-term effects of young adults having less debt than a decade ago? What are the likely positive outcomes? What are the likely negative outcomes?

     

  • Should You Buy Groupon Shares?

    I know some people that have used a Groupon deal. But not many.

     

    Analysts upgraded the stock and Wall Street seems to love the stock, in spite of the fact that the company is struggling to make money. The stock, in fact, is trading well below its IPO price. Apple, on the other hand, is profitable and is sitting on cash, but seems to be out of favor with investors.

     

    For discussion:

    Would you buy Apple stock? Groupon stock? Why or why not?

     

  • U.K. Downgraded by Moodys

    Moody’s Investors Service announced today that it has downgraded the credit rating on the U.K from Aaa to Aa1. From the press release:

     

    The key interrelated drivers of today's action are:

     

    1.     The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;

     

    2.     The challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament;

     

    3.     And, as a consequence of the UK's high and rising debt burden, a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016.

     

    For discussion

     

    According to this Bloomberg article, what happened to the British pound following the Moody’s announcement?

     

    How do investors typically react to such downgrades? How did they react to the downgrade of the U.S and France?

     

  • Time To Buy Real Estate

    According to this CNBC interview, the time to buy real estate is slipping away. Inventory is shrinking while interest rates remain at all-time lows.

     

    Given a choice between a new home and a new investment property, real estate expert Barbara Corcoran recommends the investment property. “It’s probably the only sector of the market that has still not turned the corner.”

     

    For discussion:

     

    Based on this interview, what is the difference between the U.S. real estate market in the north east compared with the west? Why does this disparity exist?

     

  • What is the Goal of the Firm?

    For years, business schools have been teaching that the goal of the firm is to maximize shareholder wealth. Some call this “shareholder capitalism.”

     

    For firms seeking to please their owners (i.e. their shareholders), the question of social responsibility eventually comes up. Should managers do the right thing and sustain the environment, take care of their employees, protect consumers? Should they do the right thing because it will be profitable in the end, or should they do the right thing even if it is costly?

     

    This is the question raised in a recent Harvard Business Review blog (McNulty, 18 Feb 2013).

     

    The deeper question for leaders is which is the cart and which the horse? Does one pursue social responsibility because it is profitable, or does one endeavor to be profitable with a business model that explicitly incorporates some version of social responsibility? Does it matter?

     

    … Profit or cost-savings as the primary motive has an obvious weakness: as soon as it becomes more profitable or less costly to do something that is not socially responsible, one would expect the company to pursue that path. A central tenet of those who advocate for shareholder capitalism is that profit should be the only goal of a business: a firm's only obligation is to generate returns for its shareholders. Under this logic, the only reason to pursue a social goal is the belief that there will be a positive financial return associated with that activity.

     

    For discussion

     

    In your opinion, what is the correct goal of the firm? How should social responsibility fit into this goal?

     

    Do you think the motivation for social responsibility is important? In other words, if a firm makes socially responsible choices, do you think it matters why they make such choices?

     

     

  • Lease or Buy?

    Financially, it often makes more sense to buy a car than to lease one. But for those who do lease new cars, deals exist at times to let you trade in the car early. Sometimes, dealers want you to turn in your lease early because it helps them manage their inventory. When they do, they use “pull-ahead” lease deals, usually within 90 days of the end of the lease, to convince consumers to trade in the old lease on a new one.

     

    From an article on Lifeinc.com (Weisbaum, 18 Feb 2013):

     

    “If they’re trying to get rid of excess vehicles, pulling in leases ahead of schedule is a good way to keep their customers and possibly get them into the models they need to move,” Hall explained. “It could also be to get certain types of vehicles to auction at a more attractive time of year.”

     

    For example, they don’t want a bunch of convertibles to come back in the middle of winter because they’re harder to resell. So they might try to pull them in ahead of schedule.

     

    There are two types of pull-ahead offers: those offered by the manufacturer (or its finance company) and those from the dealer.

    “If the car company is funding it, then it’s really doesn’t cost the consumer anything,” Anwyl explained. “They’re basically eating the cost of paying for those last few months. So it’s an extra incentive to the consumer and it could make a lot of sense.”

     

    For discussion:

     

    Read the ConsumerReports.org article available here. Under what circumstances would it be wise to lease a car? Buy a car?

     

     

  • Kraft Profits Down but Shareholders Aren't Frowning

    Kraft foods experienced a 72% decline in profits and an 11% decline in sales, but investors don’t seem to be worried. The stock price has risen about 4% this year.

     

    The losses seem to be the accounting result of the spin-off into the new Kraft and Mondelez International. The new Kraft keeps Jell-O, Kool-Aid, and Kraft macaroni and cheese among other brands. Mondelez holds the snack foods like Nabisco cookies, Cadbury chocolate, and Chiclets gum.

    All in all, investors seem to be satisfied with the split and appear to be unfazed by the temporary losses.  

     

    (Read more here at Barron’s)

     

  • SEC Obtains Court Order to Freeze Potentially Illegal Gains

    In a statement today, the U.S. Securities and Exchange Commission (SEC) announced that it has obtained a court order to freeze the assets of a trading account in Switzerland and prevent unknown traders from moving $1.7 million in profits out of the account.

    From the press release:

    In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.

    “Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.

    For discussion:

    • Is all trading by corporate insiders illegal?
    • What is material nonpublic information?
    • Who is an insider?
    • When is it illegal for insiders to trade? When is it legal?

     

  • On-Shore Tax Haven

    A recent article in The Economist looks at offshore tax havens that are not necessarily offshore. Take Delaware, for example. Or Miami. Or the City of London.

                    

    From the article (16 Feb 2013):

     

    The archetypal tax haven may be a palm-fringed island, but as our special report this week makes clear, there is nothing small about offshore finance. If you define a tax haven as a place that tries to attract non-resident funds by offering light regulation, low (or zero) taxation and secrecy, then the world has 50-60 such havens. These serve as domiciles for more than 2m companies and thousands of banks, funds and insurers. Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.

     

    Not all these havens are in sunny climes; indeed not all are technically offshore. Mr Obama likes to cite Ugland House, a building in the Cayman Islands that is officially home to 18,000 companies, as the epitome of a rigged system. But Ugland House is not a patch on Delaware (population 917,092), which is home to 945,000 companies, many of which are dodgy shells. Miami is a massive offshore banking centre, offering depositors from emerging markets the sort of protection from prying eyes that their home countries can no longer get away with. The City of London, which pioneered offshore currency trading in the 1950s, still specialises in helping non-residents get around the rules.

     

    (read the full article here)

     

    For discussion

     

    Would you boycott a company that tries to minimize its tax bill? Why or why not?

     

     

  • Marriage in the Clouds: US Air and American Airlines

    US Airways and American Airlines announced today that a merger has been approved by the boards of directors of both companies. (read the full press release here)

                       

    According to Bloomberg (Schlangenstein, Feb 14, 2013):

     

    “With the combination of American and US Airways, it’s creating a third, very strong competitor to United and Delta who have already gone through similar consolidation,” Parker said at a news conference at Dallas-Fort Worth International Airport near American’s headquarters. “You’re left with a very competitive, but much more rational business model.”

     

    The merger will produce annual savings and new revenue totaling more than $1 billion by 2015, the airlines said. The dealmaking set in motion almost eight years ago when Parker led America West Holdings Corp. into a tie-up with US Airways will now leave American, United and Delta as the only U.S. carriers with full-service cabins and trans-oceanic routes.

     

    The combined company will have equity worth $11 billion, making it the largest carrier in the world.

     

    For discussion:

    What happened to the shares of US Airways after the announcement? What about the shares of AMR?

     

    What are the benefits of this merger and how do you expect the merger to impact the share price going forward?

  • Have You Taken a Break From Facebook Lately?

    According to this video, over 60% of users polled by the Pew Research Foundation have said that they’re taking a break from Facebook. Are they tired of wasting their time online, or have they simply shifted their attention to Twitter or other social media?

    FaceBook shares have struggled ever since they debuted in May. The shares were initially launched at $38/share but are trading at about $28/share today.

                

    Maybe the market knew what it was doing all along. Share prices rise when companies make money, and with no clear path to profits, FaceBook shares have simply drifted lower.

     

    For discussion:

    What do you think is the future of FaceBook? Would you invest in FaceBook shares? Why or why not?

     

  • Venezuela Devalues Currency to Fix Woes

    Venezuela is facing economic problems including a fiscal deficit and a shortage of goods. The solution, it seems, is to devalue its currency, the bolivar. 

     

    According to Bloomberg (8 Feb 2013):

     

    Venezuela devalued its currency for the fifth time in nine years as ailing President Hugo Chavez seeks to narrow a widening fiscal gap and reduce a shortage of dollars in the economy.

     

    The government will weaken the exchange rate by 32 percent to 6.3 bolivars per dollar, Finance Minister Jorge Giordani told reporters today in Caracas. Companies with operations in Venezuela, including Colgate-Palmolive Co., Avon Products Inc. and MercadoLibre Inc., fell on the announcement.

     

    … A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-term term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports.

     

    For discussion:

    How would a devalued currency help the economic situation in Venezuela?

     

    Why would the share prices of companies who do business in Venezuela decline on the news?

     

     

  • German Called, And It Wants Its Gold Back

    According to this CNN Money video, Germany has announced that it wants 300 tons of its gold back. The gold is currently being held underground at the NY Federal Reserve Bank. Fearing an invasion from the Soviet Union during the Cold War, Germany began storing gold here. But over the next several years, the gold will be moved out of the U.S. and back to Germany.

     

    Of course, tempting as this may be for a heist a la Die Hard, anyone attempting to intercept this shipment won’t get far.

     

  • Bad Credit Ratings Hurt Job Prospects

    Many job applicants have been turned down for jobs after employers check their credit reports. Sometimes the bad credit is due to hard times facing someone who is unemployed. Other times, the bad credit is nothing more than an error.

     

    According to CBS MoneyWatch:

     

    What many job applicants do not know is that credit reports are regularly used in hiring decisions, leaving millions of credit-scarred consumers in a Catch-22. They're broke, so they have credit woes; but those credit woes keep them from getting the work that could cure their ills.

     

    "We know that about half of employers look at credit reports as part of the hiring process," says Amy Traub, senior policy analyst with Demos, a non-profit advocacy group. "If you have poor credit, one of the ways to get out of that is to get a better job. When that road is blocked, you end up in a Catch 22."

     

    For discussion

     

    In your opinion, should employers use credit reports in hiring decisions? Why or why not?

     

    How can you protect your credit report and your chances of future employment?

     

  • Do You Have Enough for Retirement?

    Retiring on $1 million seems impossible, but it’s not.

     

    According to this video, saving is the key. Setting aside $500 per month at 6% annual return will take 40 years to accumulate $1 million.  At $1000 per month, the time drops to 30 years. 

     

    For discussion

     

    Is $1 million enough for retirement? What is the impact of inflation on your savings?

     

  • What Will Happen to Dell Shares?

     

    Dell Inc. announced Tuesday that it will go private by buying out its shareholders for $13.65 or approximately $24.4 billion. (Read the press release here)

                                                                         

    According to Marketplace (Smith, 5 Feb 2013):

     

    Brad McCarty, the director of business development at The Next Web, isn't surprised at the move. In the last five years, Dell's stock price has tumbled.

     

    "People in the market only know them as 'Dude, you’re getting a Dell' guy," McCarty says, referring to an advertising campaign back when Dell was the biggest computer maker in the world. But now consumers are trading their PCs in for tablets and smartphones, and the laptop market isn't what it used to be.

     

    Companies that are publicly traded have their shares listed on stock exchanges and must report their earnings regularly to the shareholders.

     

    According to U.S. Securities and Exchange Commission:

                                                 

    A publicly held company generally means a company that has a class of securities that is registered with the Commission because those securities are widely held or traded on a national securities exchange. When a public company is eligible to deregister a class of its equity securities, either because those securities are no longer widely held or because they are delisted from an exchange, this is known as “going private.”

     

    A publicly held company may deregister its equity securities when they are held by less than 300 shareholders of record or less than 500 shareholders of record, where the company does not have significant assets. Depending on the facts and circumstances, the company may no longer be required to file periodic reports with the SEC once the number of shareholders of record drops below the above thresholds.

     

    (read the full SEC report here)

     

     

    For discussion:

     

    Based on the SEC report, what kinds of transactions can result in a company going private?

     

    What rights do some states offer to shareholders who disagree with the decision to go private? What risk do these shareholders face if they decide to hold on to their shares?

     

     

     

  • Is Buffalo Wild Wings Hot Enough?

    Chicken wings will be popular on Sunday. But they may not be popular enough to help Buffalo Wild Wings’ stock price.

     

    According to the video above, concerns about rising chicken wing prices and slowing sales growth have caused the stock to fall from its high.

     

    For discussion

     

    What financial ratios would you use to evaluate Buffalo Wild Wings stock?

     

    Do you think this is a good stock to buy, sell, or hold?