• Is Small Business Picking Up?

    Marty Mucci is the President and CEO of Paychex, the leading payroll processing company for small businesses. In this interview, he describes how his company is processing more checks per payroll, and how this is a good sign that the economy is improving. The improvement is coming from housing in some areas of the country like Florida, but other sectors are still slow to gain momentum.


    For discussion:


    How would the earnings of Paychex be an economic indicator?


  • Popular Long-Term Callable Notes

    Equity-linked notes are bonds with returns that are tied to stocks. Rather than a traditional bond with a fixed coupon rate, these bonds are risky in the sense that the coupon rate can go up or down with the stocks they are tied to.


    According to Bloomberg (28 Mar 2013):


    U.S investors are betting soaring stocks can deliver higher yields through structured notes that potentially expose them to large losses and lock up capital for as long as 20 years.


    Sales of equity-linked securities that mature in 10 years or more and can be redeemed early surged to $301.2 million in the first quarter, according to data compiled by Bloomberg. Banks issued less than one-eighth as many notes, $35.5 million, the year before.


    (read the full article here)


    The equity-linked notes described in the article involve long-term bonds with maturities of 10 years or longer but can be called early by the issuer.


    For discussion


    What risks do investors in these long-term callable notes face?


    How are these notes similar to reverse convertible notes? (For more information about reverse convertibles, see this prior blog post)


    Why are investors buying these securities?


  • Venture Capital Doesn't Always Win

    Some gamblers are happy to talk about their winnings, but rarely mention their losses. This seems to be true of some venture capitalists as well. When they win, they win big. Five times, 10 times, or even 100 times investment. But losses come too. This article in CNN Money (28 March 2013) describes what happens when things don’t work out as planned:


    The first is the "slog it out" scenario. This one is in many ways the most painful. It means that there is a business that can be built, but it won't be one that makes the VCs much money, and because it takes so much time and money to "slog it out," it doesn't make the entrepreneur much money either. And in many cases, the entrepreneur chooses to leave, and the company has to recruit outside management to operate the business.


    The second scenario is "hit the wall." In this scenario, the company runs out of cash, and there is no more coming from the investors. The company cannot sustain itself and one of two things happens. There is a fire sale or an acqui-hire, or there is a shutdown.


    For discussion:


    What is venture capital? What kinds of businesses do VC funds invest in?


  • Debit Cards Are Here Again

    Banks thought that regulation that would allow banks to charge for the use of debit cards would lead to a decrease in debit card issuance. But that hasn’t happened.


    According to a recent article by Time (28 March 2013):


    After an initial retrenchment, banks now are marketing debit cards as aggressively as ever. They’re even adding back debit card rewards programs, which many had discontinued in anticipation of the hit the regulations would deliver to their bottom lines.


    New Federal Reserve data shows that the caps on interchange or swipe fees are working as intended. The average fee — the amount card issuers (banks) charged to merchants for each card swipe — dropped to 24 cents from 50 cents before the legislation took effect in 2011. CardHub.com crunched the numbers and estimated that big banks are losing about $8 billion a year as a result.


    (read the full article here)


    For discussion:


    According to the letter to the Federal Reserve, why are debit cards so important to financial market participants?


    Why were bankers so opposed to the regulation?


    What has the outcome been since the regulation has passed?


  • Is Goldman Sachs a "Person?"

    Sounds like a scene from a futuristic movie. Big corporations running the country instead of elected officials.


    Well, that’s the scene facing Goldman Sachs, dubbed by investors “Government Sachs” for its political involvement. According to Bloomberg (25 March 2013):


    Harrington Investments Inc. President John Harrington submitted the proposal last year, saying the $6.39 million in 2012 political contributions from the firm’s employees risks doing more harm to its reputation. He said the bank should explore running for office, using a U.S. Supreme Court ruling that corporations have similar political rights to individuals.


    “It would be less damaging to the integrity of our political system and our company, for our corporation to directly run for office as a person under federal or state law, than to continue in the current form of political participation,” Harrington wrote in the proposal.


    Goldman Sachs said in a letter to the SEC that it “currently has no involvement, never has had any involvement, and has no plans to become involved in the business of running for political office.”


    For discussion


    What is the goal of the firm?


    Would the proposal by Mr. Harrington (see the letter to the SEC) be consistent with the goal of the firm?


    Is Goldman Sachs’ decision the right decision for shareholders?


  • Vote In CNBC's Money Madness

    CNBC is running a different sort of March Madness. The current race is between General Electric and Wells Fargo. According to their sources, GE could gain 20 percent over the next year while Wells Fargo could increase up to 15 percent.


    From the CNBC article (22 Mar 2013):


    De Gan told CNBC's "Squawk Box" Friday that the proceeds from GE's sale of the rest of NBC Universal it still had owned to Comcast could be used for a stock buyback and/or a dividend increase later in the year. He said he's also encouraged by CEO Jeff Immelt's recent comments that could open the door to a spin-off of the GE Capital business.


    (Read the full article here)


    Wells Fargo is described by the analyst as one of the highest quality banks. With potential increase in the dividend and an ability to fund its assets more cheaply than peers, the case for Wells Fargo is strong.


    So which would you choose? Go on Facebook and vote.


    For discussion:


    According to the analyst interviewed on the CNBC video, why would a spinoff of GE’s financial business be a good thing?



  • Protecting Auto Loan Borrowers

    The Consumer Financial Protection Bureau (CFPB) announced Thursday that it is looking into discriminatory auto loans that are costing minority borrowers “tens of millions of dollars in consumer harm each year.”


    From the CFPB press release:


    “Consumers should not have to pay more for a car loan simply based on their race,” said CFPB Director Richard Cordray. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”


    When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third party lender. The dealer plays a valuable role by originating the loan and finding financing sources. In this indirect auto financing process, the lender usually provides the dealer with an interest rate that the lender will accept for a given consumer.


    Indirect auto lenders often allow the dealer to charge the consumer an interest rate that is costlier for the consumer than the rate the lender gave the dealer. This increase in rate is typically called “dealer markup.” The lender shares part of the revenue from that increased interest rate with the dealer. As a result, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases. Research indicates that markup practices may lead to African Americans and Hispanics being charged higher markups than other, similarly situated, white consumers.


    One solution is to offer dealers a flat fee instead of a markup, but according to American Banker magazine (Witkowski, 22 Mar 2013) competition would be hurt and automobile costs would rise. Further, though many agree with anti-discrimination rules, they do not have much confidence in the CFPB’s research methodology.


    For discussion:


    How do you respond to the argument that individuals who face discriminatory pricing at the car dealership can simply go to a bank and apply for a loan directly and bypass the dealer pricing?

  • Garage Sale Bowl Worth $2 Million

    Imagine everyone’s surprise when a bowl purchased at a garage sale for $3 turned out to be a 1,000 year old piece of Chinese pottery worth $2 million.


    As is often the case in the world of arts and antiques, market value is a tricky thing. An asset is worth what someone is willing to pay. And many antiques are purchased for sentimental value, not for investment value, so the “market” may not even be relevant.


    In this case, however, the asset is not trading at some vague sentimental value. It is a nearly priceless item, and the bidder was willing to pay quite a high price. Presumably, this buyer knows what this item is worth.  


    For discussion:


    How might an investor estimate the value an asset?


  • NFL Investments

    The NFL is looking for opportunities to generate some revenues. So it has formed a $32 million strategic investment fund and has turned to private equity firm Providence Equity Partners to look for investment opportunities in the sports, media, and technology fields.


    According to the Wall Street Journal (18 March 2013):


    Paul Salem, senior managing director for Providence, said Providence and the NFL foresee spreading the funds across several different investments, targeting companies with a need for $25 million to 50 million in exchange for significant equity.


    The NFL is flush with cash at the moment, having recently signed a series of TV deals worth more than $30 billion. However, those deals lock in payments that now account for about half of the league's annual gross. With costs rising and ticket and luxury suite sales largely stagnant, the league has to look outside its own operations for additional growth.


    For discussion:


    What is a private equity firm? How do these investment firms earn their profits?


  • Will Apple Announce a New Dividend?

    Speculation that Apple could be announcing a new dividend comes at the anniversary of Apple’s reinstated dividend. Last year at this time, Apple announced that it would begin paying a dividend after 17 years of no cash outflows to shareholders. After that announcement, the stock reached a high of over $700 per share, but has since seen a decline to under $450 per share.


    A dividend could change investor demand for the stock and lead the stock price higher.


    But then again, it might not change anything.


    For discussion


    Based on these interviews on this CNBC video, what are the reasons to buy Apple stock now? What are reasons not to buy?


    What is the PE ratio of Apple? Does the PE ratio indicate that Apple is a “buy,” “sell,” or a “hold?”




  • Is the Gold Fixing Fixed?

    The Wall Street Journal reported recently that the Commodity Futures Trading Commission (CFTC) is investigating how the price of gold and silver are set. According to CityWire Money (14 March 2013):

    Currently five banks – Barclays, Deutsche Bank, HSBC, Bank of Novia Scotia and Société Générale – meet twice a day in London to set the price for gold. The latter three banks also meet to set silver prices. 

    Gold has been seen as a safe haven in the turbulent market conditions, with its price breaking records, coming within touching distance of the $1,800 mark last October. 

    While the CFTC has not launched a formal probe, the news comes in the wake of the Libor investigation, which resulted in heavy fines for Barclays, Royal Bank of Scotland and UBS for rigging interest rates


  • AT&T Considers Raising Cash

    Cash can be generated by a company’s assets in one of three ways. First, the old-fashioned way—operating cash flow—the lifeblood of a business. A second way is the change in net working capital, as changes in inventory, accounts payable, and accounts receivable are not reflected in the operating cash flow. A final way to generate cash flow (or experience a cash outflow) is the change in fixed assets. To buy fixed assets is an outflow, but to sell fixed assets is a source of cash.


    This third way is what AT&T is talking about. According to Bloomberg (15 Mar 2013):


    We’ve seen others in the industry sell noncore assets, and if we wanted additional flexibility, that could be an option for us too,” Brad Burns, a spokesman for Dallas-based AT&T, said in an interview. “In all cases, our decisions are driven by what’s right for the company and for our shareowners. So in that sense, nothing’s off the table.”


    AT&T’s remarks follow speculation by analysts that the company is working on unloading some of its assets, especially its wireless towers. Finding a buyer for the towers could raise about $5 billion in cash, based on the value of similar transactions by T-Mobile USA and other companies, estimates Jonathan Atkin, an analyst at RBC Capital Markets LLC. In these transactions, the carrier typically leases back antenna space from the buyer so that its network isn’t affected.


    “AT&T is actively considering the monetization of its tower assets in a similar fashion to several of its peers in the wireless industry,” Atkin said in a note yesterday.


    For discussion:


    What does it mean if a firm has negative cash flow from assets (i.e. negative free cash flow)? What about positive cash flow from assets?



  • Should Banks Be Required to Have More Capital?

    Banking is unique in its heavy use of debt. No other industry is quite like it. And calls to increase bank capital and reduce debt are often met with resistance.


    According to a recent article in Time (Matthews, 14 Mar 2013)


    One reason banks rely so heavily on debt is that the federal government encourages cheap lending to banks. For instance, anybody who has a savings account is technically lending their savings to the bank at extremely low interest rates. And the reason we accept such low interest rates is that 1) we can withdraw our money at any time, and 2) our deposits are guaranteed by the FDIC up to $250,000.


    Then there’s the implicit guarantee given to large banks by the federal government: The bond market has increasingly come to believe that, in the event of a financial crisis, large banks will be rescued by the federal government, either through direct cash infusions or Federal Reserve lending. This belief effectively subsidizes the industry because it allows banks to borrow much more cheaply in the bond market than they otherwise could, making equity funding proportionately less attractive.


    (Read the full article here)


    For discussion:


    What are the arguments for and against requiring higher capital for banks?


  • Big Banks Small Capital

    Of all the big banks, investment banks fared the worst as shown in the results of the stress tests that were released today. Morgan Stanley and Goldman Sachs were at the bottom of the big banks with under 6% capital compared with Citigroup with 8.3% and Wells Fargo with 7.0%.


    For discussion:


    What does it mean for a bank to undergo a “stress test?”


    Should big banks be broken up into smaller ones that do not offer as many services as the current “one stop shops” offer? Why or why not?


  • The Newly Emerged BRICs

    Brazil, Russia, India, and China—the BRIC nations—are not as exciting as they once were. According to CNBC (13 Mar 2012):


    "The BRIC economies have been the brightest stars of the emerging world since the year 2000, contributing nearly two-fifths of global growth. More recently, they have been sources of disappointment," Mark Williams, chief Asia economist at Capital Economics, said in a report for clients.


    Williams pointed to weakness in each of the countries: Debt is dragging on Brazil; Russia's commodities boom is constrained by weak business investment; India's efforts at modernization and open market reform have waned, and China has not succeeded yet in transforming to a consumer-driven economy.


    But though these emerging markets have emerged, they still may have more growth ahead of them. According to retired Goldman Sachs economist, Jim O’Neill, the founder of the BRIC acronym, “By 2015, the aggregate GDP for the four BRIC countries will probably be bigger than the U.S. So what's going on in BRIC countries will be increasingly the real driver of global GDP” (Zeng, 8 Mar 2013, WSJ).


    For discussion:


    What is the most reasonable outlook for the BRIC countries? Would you invest in these markets? Why or why not?  


  • Bank Transparency at the Vatican

    Photo: by N. Richie, the Vatican November 2012



    For years, the Vatican bank has held its secrets, such as who the account holders are and how much money is in the accounts. This era of secrecy may be coming to an end.


    According to the NY Times (Donadio and Higgins, 9 Mar 2013):


    Founded in 1942 and housed in a small round tower at the foot of the Apostolic Palace, the Vatican bank generally does not give loans but manages deposits and patrimony for religious institutions, clerics and diplomats accredited to the Vatican, who are among the only depositors allowed to hold accounts there.


    During the cold war, the bank was widely seen as a back channel to transfer money to the Eastern Bloc to help end Communism, and today the Vatican uses the bank to help it operate in sensitive areas like Cuba and China, Vatican experts say.


    But largely because of the Vatican’s reluctance to reveal its account holders to outside authorities—and especially to subject itself to scrutiny of past transactions—suspicion has swirled for years about whether some of its accounts had ties to organized crime or Italian political slush funds.


    For discussion:


    Should the Vatican comply with international banking standards? Why or why not?


    What are the consequences for the Vatican bank if it does not adhere to international banking standards?


  • McDonald's Investors Still Lovin' It


    McDonald’s is still a winner. Though same store sales were down from a year ago, investors were still lovin’ it. The decline in same store sales was not as bad as expected, and when we account for a 28-day month this February compared with a 29-day month last year, then sales are not really down much at all.


    For discussion:


    Would you buy shares of McDonald’s? Why or why not? 


  • Banking Under African Skies

    Banking expansion in Africa is potentially lucrative as many adults do not hold a formal bank account.


    According to the Economist (2 March 2013)


    Across sub-Saharan Africa as a whole only about a quarter of adults have accounts at formal financial institutions, and only 3% have credit cards. The challenge is finding a way profitably to reach the rest.

    Bankers typically think of markets as being ready to take off once GDP per-person reaches about $10,000, a level at which it becomes profitable to start building branches and opening accounts. Yet technology such as prepaid cards and mobile banking may be lowering that hurdle rate.


    (read the full article here)


    To expand into untapped markets, banks can either acquire existing banks or they can build “de novo.” Both have their benefits and limitations. A third way of accessing African markets is to help governments sell bonds and establishing banking relationships with the largest corporate clients.


    What the article fails to mention is whether African markets are likely to embrace a Western-style banking system. Will the average household trust the bank to safekeep savings? Or is hiding valuables in the mattress tried and true?


    For discussion:


    What are the benefits and limitations of the three ways of entering the African banking market?


  • Boring is Beautiful

    Investors are looking for slow and steady investments, and they are finding companies like Proctor & Gamble, Coca-Cola, and General Electric. According to this CNNMoney article, these consumer staples are “bond substitutes” and give investors a place to park their money.


    From the article:


    "Investors are looking for bond substitutes," said Jack Ablin, chief investment officer at BMO Private Bank. "In general, boring stocks don't lead the market higher."


    Ablin said investors have been "coerced" into stocks by record low interest rates. As a result, they have gravitated toward stocks that have bond-like qualities, offering low volatility and healthy dividends.


    For example, Johnson & Johnson currently offers a dividend yield of 3.16% and its stock is up 10% this year. By contrast, the yield on the 10-year Treasury note has struggled to break above 2%.


    "The companies that are leading nowadays are defensive," said Ablin. "These are stocks that are held by nervous investors, not bullish ones."


    (read the full article here)


    For discussion:


    Go to Yahoo finance and determine what the top 10 dividend paying shares right now. Would you invest in these companies? Why or why not?


  • U.S. Attorney General Implies Some Banks Are Too Big To Jail

    U.S. Attorney General, Eric Holder, was asked recently whether his office was delaying charges against some big banks because they are “Too big to jail.” The idea is that the government may be worried about the impact of the accusations on the stability of financial markets.


    Some say that the Attorney General’s response was “stunning.” He did not deny that some bankers were out of reach, but rather suggested that he was concerned that the size of some banks could make guilty parties difficult to prosecute.


  • Motown in Trouble

    With $327 million budget deficit and $14 billion in long-term debt, Detroit faces fiscal crisis and is facing a potential state takeover of its finances.


    Michigan Governor Rick Snyder declared Detroit a state of financial emergency on Friday. According to WXYZ.com:


    The governor has outlined four reasons why he believes an emergency financial manager would be needed.


    First, he says the city overestimated its revenues and spent well beyond its means. Second, he says the city “borrowed massively” to address its deficit and cash flow needs. Third, he says Detroit’s long-term debt has ballooned out of control and could reach up to $14.99 billion. The fourth reason deals with a projection that the city would have a cash deficit in excess of $100 million by June 30, 2013. 


    (Read the full article here)


    For discussion:


    Summarize the Governor’s proposal for the city of Detroit. What will it take to fix Detroit’s financial crisis?


  • Lowe's Stock and the Housing Market

    How do we know that the housing market is recovering?


    Take a look at Lowe’s stock. Though it has benefited from rebuilding after hurricane Sandy, it has also benefited from the boom in construction as homebuilders filed for the most permits for new homes last month.


    Lowe’s is confident that the stock is going to get stronger, and is using this opportunity to buy back shares.


    For discussion:


    What is a share repurchase?


    What does the theory suggest is a reason for a share buyback?


  • Argentina Bond Spreads Widen

    Argentina announced that it would not pay its debt if ordered by a U.S. court. According to a Bloomberg article (28 Feb 2013):


    Speculation is soaring that the South American country will default for the second time since 2001 after Jonathan Blackman, Argentina’s attorney, said the nation would halt payments on its restructured debt before giving into holdouts who refused to accept prior renegotiations. Billionaire hedge fund manager Paul Singer’s NML Capital Ltd., a unit of Elliott Management Corp., is leading the group of investors pressing Argentina to pay them $1.33 billion for their defaulted bonds.


    (read the full article here)


    Spreads on Argentine government bonds due in 2017 have widened by 396 basis points (3.96%) to a yield over 19 percent. Credit default swap rates increased by 1,329 basis points to 6.510 basis points which is “the biggest jump in the world” (Bloomberg, 28 Feb 2013)


    For discussion:


    What is a credit-default swap? What drives the rates on CDS?



  • British Pound Takes a Hit

    Bad news in London has caused the British pound to fall against the U.S. dollar. According to CNBC (1 Mar 2013):


    The pound has already taken a hammering this week, falling to a two-and-a -half year low of $1.5073 against the dollar, after Moody's cut the U.K.'s credit rating last Friday.


    Downward pressure on the pound from further QE could potentially make U.K. Gilts more attractive to investors. However, Bryce warned appetite for the safe haven asset could be waning.


    "Purchases of Gilts by foreigners decreased this month to net purchases of 1.55 billion pounds, following purchases of 15.4 billion pounds last month," he said.


    "This could suggest that a more 'risk-on' environment, combined with the depreciation of sterling, is eroding investors' appetite for Gilts."


    For discussion:

    What factors are likely to influence the demand for U.K. government bonds (“Gilts”) by foreigners?