• Systemically Important Financial Institutions or SIFIs

    We hear plenty about banks that are too big to fail. Should they be allowed to fail? Or should they be bailed out by the government.


    This video describes the four Cs: that is, the four characteristics that define whether a bank is a “systemically important financial institutions” or SIFI.


    The four Cs that identify a SIFI are:


    1.   Contagion

    2.   Correlation

    3.   Concentration

    4.   Context


    For discussion


    What do each of these characteristics mean?   


    Can you identify which banks would be considered too big to fail?


  • Low Mortgage Rates Boost Home Sales

    Photo: source http://freddiemac.mwnewsroom.com/press-releases/mortgage-rates-at-or-near-all-time-record-low-otcqb-fmcc-1010806



    Mortgage rates are at record lows, according to CNN Money and Freddie Mac. And the low rates are boosting home sales to the highest levels we’ve seen in years.


    The CNN article reported that the 15-year fixed rate was 2.61% and 5/1 ARMs were at 2.58%.


    According to the Federal Home Loan Mortgage Corp (FHLMC or “Freddie Mac”) press release of April 25, 2013:


    The housing market is getting a boost with mortgage rates hovering at or near record lows. For instance, existing home sales averaged an annualized pace of 4.94 million over the first three months of this year, the most since the fourth quarter of 2009. More impressively, new home sales topped 424,000 during the first quarter, which was the strongest since the third quarter of 2008. The sales pickup is helping to support house-price gains. For instance, the Federal Housing Finance Agency reported that February marked the thirteenth consecutive month that it has recorded an annual rise in its U.S. house price index, which rose by 7.1 percent in the twelve months through February, the most since May 2006. Even with these gains, this U.S. index is still 13.6 percent below its peak set in April 2007."


  • System Failure at the CBOE

    Anyone who runs the sound system for a meeting knows that as long as technology works, no one notices. But the minute something is delayed or goes awry, all eyes are on the sound tech.


    All eyes were on the Chicago Board of Options Exchange (CBOE) yesterday when a computer malfunction prevented the exchange from opening the trading floor for several hours. With nothing to do but wait, traders sat in their booths and made small talk.


    From the CBOE press release (25 April 2013):


    This morning, a system issue delayed the opening of options trading at Chicago Board Options Exchange (CBOE) from 8:30 a.m. until 11:50 a.m. CT. Trading at C2 Options Exchange (C2), CBOE Futures Exchange (CFE) and CBOE Stock Exchange (CBSX) opened as scheduled. The malfunction that impacted CBOE was an internal systems issue and not the result of any outside influence. The issue, which affected validation of certain orders and the communication of cancel/fill reports, has been corrected.


    Technology is great when it works, but in financial markets, every glitch is costly. According to the NY Times (Creswell & Protess, 25 April 2013):


    The system failure was the second example this week of technology intruding into trading in the United States. Earlier this week, a false tweet from The Associated Press that reported explosions at the White House caused the Dow Jones industrial average to plunge nearly 150 points in two minutes. The markets rebounded quickly after the A.P. said its Twitter account had been hacked.


    It also comes on the heels of the botched stock market debut of Facebook last May, as well as a blowup at Knight Capital that rattled the markets and nearly toppled the firm.


    For discussion:


    What is an exchange? How does an exchange operate?


    Should the SEC get involved in these system failures or let the exchanges handle them?


  • Good News for Cabela's Stock

    Cabela’s stock is up on sales of guns and ammo. Earnings rose 24 percent, but without guns and ammo, earnings were up only 9 percent.


    Are guns alone driving earnings? According to Matt Nemer of Wells Fargo, interviewed here, sales in other categories are up, and some of those categories are unrelated to gun sales.


    For discussion:


    Do you think this is a good time to buy Cabela’s stock? Why or why not?


  • Apple Cash

    Photo of Apple Retail Store, 3rd St. Promenade, Santa Monaca courtesy of www.apple.com



    Apple announced yesterday that it is scheduling cash outflows to the tune of $100 billion. More specifically, it is planning to deliver cash to shareholders through dividends and share repurchases.


    According to the NY Times (Wingfield, 23 April 2013)


    The move to renew investors’ love affair with Apple’s stock came as the company announced its first profit decline in a decade. Apple said its net income fell 18 percent in its fiscal second quarter, as one of the most successful technology franchises in recent years, the iPhone, showed signs of slowing and other, less profitable products began to make up more of its sales.


    The rarity of Apple’s profit decline, which was expected, underscores how one of the most remarkable winning streaks in business has come to an end, at least for now. Investors have battered the company’s stock for months, sending its shares down from their peak of more than $700 last year as warning signs began to emerge about its growth prospects.


    In regular trading on Tuesday, Apple shares rose nearly 2 percent to close at $406.13, but they fell slightly in after-hours trading as investors digested the quarterly earnings news and Apple’s plan to return cash to shareholders. One thing that spooked investors is that Apple told them to expect little to no sales growth in this quarter.


    For discussion:


    What impact do you think the cash flow to shareholders is likely to have on the company?



  • Wall Street Ethics

    Wall Street gives us lots of examples of what not to do. Not everyone is guilty of bad behavior, but those who are get plenty of attention.


    Take Anastasios Belesis, for instance, the founder of John Thomas Financial Inc. Jonathan Weil of Bloomberg (18 April 2013) reports:


    This week, the Financial Industry Regulatory Authority accused Belesis and John Thomas Financial of front-running customers’ trades in a penny stock called America West Resources Inc. (AWSRQ) The Securities and Exchange Commission last month accused Belesis and his firm of fraud in a separate matter. They have denied any wrongdoing and said they would defend themselves.


    According to Finra, the website AwesomePennyStocks.com on Feb. 23, 2012, sent an e-mail telling subscribers that it soon would be issuing a new tout. Finra said the e-mail “appeared to ‘accidentally’ identify the pick” as America West, which sent the stock up more than 600 percent to $1.80 in less than an hour. About 15 John Thomas customers called in sell orders. Then things got ugly.


    Finra said Belesis prevented employees from executing most of the sell orders -- and even threatened some of his brokers. That same day, the firm sold more than $1 million of its own shares in America West, a Salt Lake City-based coal company that had been an investment-banking client. The stock soon crashed.


    For discussion:


    What is front-running? What does the CFA Institute Code of Ethics say about front-running?


    What are some other ethical violations that investment professionals must guard against?


  • How Can Small Businesses Manage Currency Risk?

    Photo by Bradipo, available under Creative Commons license http://www.flickr.com/photos/bradipo/1435739708/



    A firm doesn’t have to be a large multi-national corporation to be faced with currency risk. Even small businesses must manage their currency exposure, and some are turning to financial derivatives to do it.


    According to the NY Times (Sataline, 17 Apr 2013):


    As more small companies conduct business overseas, owners are learning that volatile exchange rates can cut into profits. More of these businesses are using banks and international payment companies and creating risk management strategies that mimic those of large concerns.


    The article offers several tips for managing currency risk, including:


    1.      Asking the overseas vendor to extend the quote period

    2.      Seeking the services of smaller currency traders rather than working with the big banks.

    3.      Using forward contracts to lock in the transaction price

    4.      Insisting on dealing only in U.S. dollars, even when that means paying a higher price at times.


    For discussion:


    For each of the currency exposure tips above, what are the benefits and limitations?



  • Are Young People Preparing for Retirement?

    Most Americans are not prepared for retirement.


    The good news is that young people are “getting the message” and are starting early to save for retirement. Those who begin in their twenties, and maybe even in their thirties, are probably able to set aside enough to retire comfortably. Those who wait until their late forties and maybe even their fifties will be in a race against time.


    The bad news is that young people don’t trust the stock market, and that means they may be missing out on potential returns. Living through the “Great Recession” may have colored their vision enough to cause them to avoid investing in stocks which could result in a shortfall at retirement.


    For discussion:


    If you’re still a college student, what proportion of your paycheck do you hope to save when you graduate?


    How comfortable are you with investing your retirement savings in the stock market?


  • Volatility and the Stock Market


    Technical analysts are watching market volatility for a sign that uncertainty is back. The CBOE’s VIX index is a measure of implied volatility and CNBC reports that investors are buying call options on the VIX and expecting the VIX—that is, volatility—to go higher in the days and months to come.


    From the article:


    "We saw a huge spike in call buying on the VIX, the most in a while," said Ryan Detrick, senior analyst at Schaeffer's Investment Research. "That's not what you want to hear (because it usually happens) right before a big pullback."


    The last time call options activity hit this level, on Jan. 13, 2010, it preceded a 9 percent stock market drop that happened over just four weeks, triggered in large part by worries over the ongoing European debt crisis.

    (read the full article here)


    The idea is that rising volatility signals a drop in the stock market may be coming soon. That’s what happened the last time volatility was this high.



  • Will Capping Retirement Savings Help or Hurt?

    In an effort to improve government revenues, President Obama is proposing a $3 million cap on retirement plan savings.


    Will this cap prevent people from saving for retirement? The argument is that it will do just that and cost the government more in the long-run.


    However, not everyone is complaining. According to Bloomberg (15 April 2013):


    Obama’s 2014 budget plan, unveiled April 10, includes a proposal to cap at about $3.4 million tax-preferred retirement accounts such as IRAs and 401(k)s. That would encourage wealthy savers to put more cash into insurance -- whose death payouts are typically exempt from federal taxes -- and annuities, where taxes are deferred, said Walter White, chief executive officer of Allianz SE (ALV)’s North America life business.


    For discussion:


    What are arguments for and against this proposed retirement plan cap?


    How many people would this cap affect?




  • Have Low Interest Rates Led to Economic Growth?

    Money is cheap these days. But we’re not sure that cheap money is doing us any good.


    The Economist magazine sums it up nicely. From the article in the 6th April 2013 edition:


    Businesses and investors are still adjusting to this new world. Big companies have taken the opportunity to borrow in the bond markets, locking in cheap financing for years to come. But the cheap money has not led to the growth-igniting investment spree the monetary policy was designed to encourage. There are some signs of an economic revival in America. But the prospects elsewhere are bleak; Europe’s purchasing managers’ index for March showed a further fall in manufacturing activity while unemployment reached 12%, the highest since euro-area data were first compiled in 1995. In such a world monetary policies are likely to stay loose—even though, in their desperate search for yield, investors are rediscovering a worrying appetite for the kind of structured debt products that many thought had disappeared for good after 2008.


    Low interest rates were supposed to spur economic growth. People and businesses were supposed to borrow and then spend the cheap money on goods. New projects, new homes, lots of stuff. And while times are good for borrowers, investors aren’t particularly happy with their choices. Low interest rate investments make ever riskier investments look attractive.


    For discussion:


    Based on this article and other research, what impact have low interest rates had on the economies of the U.S. and Europe?


  • Digital Currency of the Future

    This week alone, the bitcoin digital currency went from $266 to $100. Earlier this year it was worth $13.51.


    The volatile digital currency has seen its ups and downs, but is currently being accepted by merchants as legitimate payment. According to Time magazine (12 April 2013):


    The technicalities of the Bitcoin system are complex, but to make this online currency more successful than previous versions, the designers overcame two key challenges. First, to prevent counterfeiting, they attached a history of transactions to each currency unit – but allowed users to keep their transactions nearly anonymous. Counterfeiting is hard because fake Bitcoins would need an authenticated history to pass muster.


    Second, they strictly controlled the supply of Bitcoins outstanding — thereby saving it from the disastrous fate of, for example, the paper currency known as assignats that were issued during the later stages of the French Revolution. Initially, assignats were backed by land and buildings that had been seized from the Church. If the French Government had issued only enough assignats for that property, there would have been plenty of assignats to spend until the property was disposed of. But the Government liked having extra money and didn’t cancel the assignats as the property was sold. In fact, France kept printing more, and within five years there was very serious inflation.


    Unlike assignats, Bitcoins have no backing at all. What they do have, however – and what has turned out to be more important – is a formula limiting the growth of the supply outstanding. Over time the formula for the Bitcoin supply actually reduces the amount of new currency added to the system. And the new Bitcoins are not created by fiat, but in exchange for valuable labor: They are paid to computer hobbyists who monitor the Bitcoin system to keep it running and prevent counterfeiting.


    (Read the full article here)


    For discussion:


    Why is this currency likely to be very volatile?


    Do you think these online currencies can seriously compete with government-backed currency?


  • Hedge Fund Transparency

    Hedge fund managers who are compensated for beating their prior returns have incentive to make their prior returns look worse than they were.


    A recent study from the Oxford-Man Institute of Quantitative Finance found that many hedge fund managers revise their prior performance figures, often making “performance look worse than originally stated” (Economist, 6 April 2013).


    From the article:


    …Two-thirds of funds charge performance fees only if they are at or above their highest valuations. Eager to bring forward the time when they can charge fees again, such managers have an incentive to belittle past returns. Indeed they are the most avid revisers, knocking an average 0.62% off the numbers.


    In contrast, funds with no need to beat past high-water marks typically inflated their first submissions by 0.4%, making them look more successful to prospective buyers.


    For discussion


    What solution seems most reasonable to increase the transparency in the hedge fund market? Should there be transparency in the hedge fund market at all?



  • The STOCK Act: The “Stop Trading on Congressional Knowledge” Act

    Is it insider trading to gather political intelligence and then trade firms whose stocks will react to whatever is happening in Washington?


    Efforts are underway to stop political insiders from reaping financial gains based on their political intelligence. However, any laws that try to define illegal behavior would be difficult, maybe impossible, to police.


    According to the NY Times (8 April 2013):


    “Well-timed” trading before a public disclosure of material information has all the hallmarks of insider trading. The problem is that the imprecise rules governing insider trading are an ineffective means to regulate how political intelligence firms gather, analyze and selectively disseminate such information to their clients.


    Political intelligence has become a hot topic these days because of its potential to move markets. Last week, The Wall Street Journal reported about an investment firm in Washington that correctly predicted a decision by the government about reimbursement of Medicare costs; that information led to a jump of more than 6 percent in the shares of health insurers before the close of trading.


    While that certainly looks questionable, trying to regulate firms that seek government information is difficult because of the lack of a definition of what constitutes “political intelligence” that would distinguish it from the ordinary analysis of governmental operations.


    For discussion:


    According to the report issued by the Government Accountability Office cited in the NY Times article above, why would it be difficult to apply insider trading rules to any trading associated with political intelligence?


  • Litigation finance: Investing in Lawsuits

    An investment is anything with a promised stream of cash flows. And lawsuits promise cash flows…someday. Problem is that lawsuits cost money and take lots of time.


    Litigation finance comes to the rescue. These little known investment firms buy the promised stream of cash flows from those involved in lawsuits and wait to reap the rewards.


    From a recent NY Times article (Alden, 8 April 2013)


    The prospect of double-digit returns has lured some prominent lawyers to set up litigation finance firms in recent years, bankrolling plaintiffs in exchange for a slice of the potential winnings. Some can invest in defendants as well, by advancing legal fees and then collecting a return if the case is successful. Such deals are not loans; if cases are not successful, the investors lose their capital.


    In a related article in 2012:


    When it comes to legal spats, companies often loathe having to spend millions of dollars on legal fees while waiting months for a case to drag through courts. But to Wall Street, lengthy litigation is a growing investment opportunity.


    Once considered taboo in the legal profession, the practice of litigation finance is enticing more corporate lawyers to become investors, bankrolling lawsuits in exchange for a piece of the potential winnings.


    For discussion:


    According to the articles cited above, why would litigation funding be criticized?


    How would investors place a value on the investments of litigation finance firms?



  • When to Buy Call Calendar Spreads

    This CNBC video presents a trading strategy called a call calendar spread. The stock in question is MasterCard, which the commentator says is expected to trade higher, but not immediately. The strategy involves sell shorter dated call option and buying a long dated call option.  For example, sell May calls and buy July calls with the same strike price.


    The idea is that the short term call will expire out of the money but allow you to collect the premium from the sale of the option. Then the long term call option becomes in the money eventually. This is a way to take advantage of an expected increase in the value of MasterCard’s stock but at a cheaper way than simply buying the stock outright or going long a call option.


    For discussion:


    What are the risks associated with this strategy?


  • The Baseball Card Worth Millions

    Only 44 cards are known to exist today. This Honus Wagner baseball card from 1909 was stopped in production because Honus didn’t want kids to have to buy cigarettes to get his card. This card sold for $1.62 million in 2008, and was expected to sell at auction for over $3 million but had reached just over $1.5 million as of Thursday evening.

    Read more here


    For discussion


    What do you think this baseball card is worth? It is a good investment? How would you determine its value?


  • Investing in SeaWorld

    How would you like to own a share of SeaWorld? Maybe you can.

    Blackstone Group is the current owner of SeaWorld, but Bloomberg reported yesterday that SeaWorld may be undergoing an initial public offering (IPO) of its shares soon.


    From the article (Alesci, 3 April 2013):


    The IPO would be at least the second for a Blackstone portfolio company this year as the world’s largest buyout firm takes advantage of investor optimism, which has buoyed equity markets to record highs. Blackstone peers such as Apollo, Carlyle Group LP and Warburg Pincus LLC also are readying holdings for public debuts as they begin to exit some of their biggest investments.


    …Blackstone took control of SeaWorld after agreeing in 2009 to buy Anheuser-Busch InBev NV’s (ABI) amusement-park business in a deal then valued at as much as $2.7 billion. The company operates almost a dozen amusement parks in states such as Florida, California and Texas and competes with Walt Disney Co. (DIS) and Six Flags Entertainment Corp. (SIX)


    For discussion:


    According to the Bloomberg article, how does SeaWorld compare financially with its peers?


    In your opinion, are amusement parts good investments? Is SeaWorld a good investment?




  • Where are the Women in Finance?

    Few women make it to top management, especially in finance. Those that have can teach the next generation.  According to Irene Dorner, chief executive of HSBC, USA, the women who have made it to the top could be better role models for younger women who are competing in a male world.


    According to the NY Times (Sorkin, 2 April 2013):


    Ms. Dorner and her peers in the upper echelons — like Ruth Porat at Morgan Stanley, Joan S. Solotar of the Blackstone Group, Edith W. Cooper of Goldman Sachs and Cecelia Stewart of Citigroup — are the latest generation of women making it in a man’s world.


    Isabel Benham, who started her career as a bond analyst in 1934, was so worried about being taken seriously that she initially signed her reports using her first initial and middle name, “I. Hamilton Benham.” When Muriel Siebert became the first woman to own a seat on the New York Exchange in 1967, the Big Board had only men’s bathrooms. “Not since I was a baby had so many people been so interested in my bathroom habits,” she declared in her memoir.


    Ms. Dorner, who started her career in 1982 as an in-house lawyer at the merchant banking arm of Midland Bank, recounted a gathering several years later at a bar with a group of male colleagues, who she said made misogynistic comments.


    “It just was anachronistic — it was awful,” Ms. Dorner said. But “I didn’t complain. I, of course, ended up being the only woman there, and I have to say I had the most miserable day.”


    For discussion:


    What do you think is the explanation for the gender imbalance at the ranks of top management in finance? Is this something that financial institutions should address? If so, how?  


  • Exchange-Traded Bonds

    The traditionally over-the-counter (OTC) bond market may become a more exchange traded market in the future. At least that is what Nasdaq is hoping for.


    According to the NY Times (Popper, 1 April 2013):


    The parent company of the Nasdaq stock exchange said Tuesday that it would buy the electronic bond-trading platform eSpeed for $750 million, amid consolidation in the industry.


    The Nasdaq OMX Group, which is acquiring eSpeed from BGC Partners, a spinoff of Cantor Fitzgerald, is moving to diversify and expand its reach. Like other exchange operators, Nasdaq is dealing with a decline in stock trading activity.


    Trading over the counter means that bond markets often lack transparency. This could all change if more trades are executed on organized exchanges.