• Should Banks Trade Physical Commodities?

    Bank commodity trading shops have come under increasing criticism by regulators and by the public. Blamed for “distorting markets,” banks are accused of “hoarding commodities and driving up prices” (Hargreaves, 23 July 2013).

     

    In response, JP Morgan announced that it is getting out. In a surprise statement on Friday, the bank announced that it is getting out of the physical commodity business altogether.

     

    According to CNBC (26 July 2013):

     

    After spending billions of dollars and five years building the banking world's biggest commodity desk, JPMorgan said it would pursue "strategic alternatives" for its trading assets that stretch from Baltimore to Johor, and a global team dealing in everything from African crude oil to Chilean copper.

     

    Also from the article:

     

    Pressured by tougher regulation and rising capital levels, JPMorgan joins other banks such as Barclays and Deutsche Bank in a retreat that marks the end of an era in which investment banks across the world rushed to tap into volatile markets during a decade-long price boom.

     

    But JPMorgan is the first big player to exit physical commodities entirely and attention will now turn to Morgan Stanley and Goldman Sachs, which face similar pressures.

     

    For discussion:

     

    What are the arguments to allow banks to continue trading in physical commodities? What are the arguments against?

     

  • Houston, We Have a Libor Problem

    Houston joins a handful of U.S. cities that have sued big banks for damages caused by Libor manipulation. According to Bloomberg (25 July 2013):

     

    Houston, the fourth-largest U.S. city, is one of the biggest to sue on rate-fixing allegations. The Texas city seeks unspecified damages for both receiving artificially low interest and paying artificially high rates on municipal investments dating back six years, according to a complaint filed today in federal court in Houston.

     

    “The complaint specifically notes three examples of transactions in which the Libor manipulation was detrimental to the City of Houston,” Richard Mithoff, Houston’s lawyer, said in an e-mailed statement. “Damages to the city resulting from this global interest rate manipulation could be substantial.”

     

    The banks named in the suit include Bank of America, Barclays, and Citigroup.  

     

    For discussion:

     

    What were the big banks accused of regarding Libor? Why does the manipulation of Libor lead to damages at clients such as the City of Houston?

     

  • What The Big Mac Tells Us About Exchange Rates

    Market prices of substitutable goods should be the same all over the world after taking exchange rates into account. This concept is known as purchasing power of parity, and it is explained in this video interview from CNBC.

                                                                                         

    The guest, Mr. Richard Davies, explains that the price of one common good—the Big Mac—is compared across the world by The Economist, and this Big Mag Index shows that indeed the price is not the same in different countries.

    For discussion:

     

    What is the current price of the Big Mac in London?

     

    What can we learn about inflation from this index?

     

  • Miami In Trouble with SEC

    Photo of downtown Miami by UpstateNYer (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

     

    The City of Miami is in hot water. It has been charged by the Securities and Exchange Commission (SEC) with securities fraud.

    From the CNNMoney article (O’Toole, 19 July 2013):

    The SEC said Michael Boudreaux helped falsify Miami's financial reports for the 2007 and 2008 fiscal years and lied about the city's finances in a series of 2009 bond offerings worth $153.5 million. Boudreaux allegedly orchestrated the unlawful transfer of nearly $38 million out of Miami's capital improvement fund in order to mask deficits in the city's general fund.

    The SEC sanctioned Miami for similar conduct in 2003. The case marks the first time the agency has alleged repeated wrongdoing by a city subject to a previous cease-and-desist order.

     

    For discussion:

    What impact is the SEC action likely to have on the city of Miami and its citizens?

     

  • The Trouble With Detroit

    Wednesday, Detroit filed for bankruptcy. Thursday, a Michigan judge ruled that Detroit was rushing into bankruptcy and must withdraw its petition.

     

    According to Bloomberg (McArdle, 19 July 2013):

     

    But notwithstanding the judicial ruling and attempted procedural trickery, Detroit faces an ugly and unyielding truth: It can’t pay its debts and obligations. The city’s financial condition has been weak for decades, and over the last 15 years, it has collapsed. Since peaking in 1950, the population of the city has fallen by more than half; what’s left is poor, with a median household income of only $27,862. Unfortunately, Detroit still has the size and government benefits structure of a much larger, more prosperous city. Something has to shrink.

    For discussion:

     

    What are the some potential solutions for fixing Detroit’s financial troubles?

     

    What are the potential consequences for the citizens of Detroit if the bankruptcy eventually is approved?

     

  • The New Terrorism: Financial Cyber Attacks

    A recent NBC News story reports that cyber-crime affected about half of the world’s securities exchanges last year.

     

    From the article:

     

    Among the exchanges surveyed, 53 percent said they experienced a cyber attack last year. The most common forms were Denial of Service attacks, which seek to disrupt websites and other computer systems by overwhelming the targeted organizations' networks with computer traffic, and viruses.

     

    Other forms of cyber-crimes reported by the exchanges included laptop theft, website scanning, data theft, and insider information theft. None of the exchanges reported financial theft as part of the attacks.

     

    (read the full story here)

     

    In banking, operational risks are the “Risks associated with operational failures stemming from events such as processing errors, internal and external fraud, legal claims, and business disruptions have existed at financial institutions since the inception of banking” (FDIC Supervisory Insights).

     

    Financial institutions have always faced the risk that systems would go awry and cost then money. And now these risks are more pronounced in the current electronic era.

     

    For discussion:

     

    According to the FDIC article, what are some examples of operational risk?

     

    How can financial institutions protect themselves and their customers from operational risks in general and cyber-attacks in particular?

     

  • Data at the Speed of Light

    Co-location: placing computer servers as close as possible to the source of data so that trading delays are as small as possible. Stock exchanges have realized that trading firms eager to be the first to trade are willing to pay for office space close to the action. While that makes sense when it comes to stock exchanges, one little-mentioned source of data is Washington D.C.

     

    According to this CNBC article (Javers, 12 July 2013):

     

    The most high-profile of these is the Labor Department's employment report, disclosed monthly at that agency's Constitution Avenue headquarters. The Federal Reserve announces Fed funds rate changes to reporters in a room in the basement of the Treasury building on Pennsylvania Avenue. Just around the corner, the Commerce Department regularly spits out a passel of economic indicators. And the Department of Energy puts out natural gas inventory data from its building on the other side of the National Mall.

     

    All that information is generated within just a few square miles, but instantly affects markets trading around the world. And that presents a business opportunity for the Denver-based data center company CoreSite, which operates a facility where traders can install so called "co-located" computers right in the heart of Washington. The idea: Get access to federal data milliseconds faster than those traders waiting patiently for it to travel at the speed of light up fiber optic lines to markets in New York, New Jersey and Chicago.

     

    (Read the full article here)

     

    For discussion:

     

    What is high-frequency trading? Why would “co-location” be profitable for high-frequency traders?

     

  • Barnes & Noble On Shaky Ground

    With CEO William Lynch out, Barnes & Noble Booksellers is on shaky ground. With Nook sales sliding and the internet driving book sales out of brick-and-mortar bookstores, investors are questioning Barnes & Noble’s future.

     

    For discussion

    What are some ways for Barnes & Noble to maximize the value of the firm?

     

  • Bear Flattening of the Yield Curve

    A yield curve graphs the relationship between the term to maturity and the yield to maturity for bonds. The U.S. Treasury yield curve is widely watched, and it is normally upward sloping, which means that long-term rates are normally higher than short-term rates.

     

    In this video, Mr. Rice explains that a flattening of the yield curve can have positive (bull) or negative (bear) implications for the market. If short-term rates rise while long-term rates remain stable, then the market interprets this as potentially bad news for businesses who will need to borrow money.

     

    For discussion:

     

    Why did the jobs report lead to a bear flattener?

     

    What is a bull flattener? How does the market interpret a bull flattening of the yield curve?

     

     

     

     

  • Which Are More Important--Earnings or Expected Earnings?

    CNBC recently reported findings of FactSet senior analyst, John Butters, that firms who issue negative earnings guidance experience a share price drop of 1.2% at the preannouncement but some experience a small increase in price despite the negative news. On the other hand, his research suggests that firms that issue positive earnings guidance experience a 3.2% increase on average, much higher than the corresponding decline on negative guidance.

                       

    From the article:

     

    So if earnings fall in a forest, but investors pretend they don't hear it, does it make a sound?

     

    "I think it's probably a matter of sentiment," said Brian Stutland of the Stutland Volatility Group. Given the interest rate environment, "If there's any kind of growth, it's worth it to be invested in stocks rather than a 10-year Treasury note over the next 10 years."

     

    To Stutland, investors are desperately listening out for good news — and more or less ignoring the bad. "Even if a company lowers their outlook to negative, as long as it's still net positive, you'll still want to own the stock," he said. "And if there is any prospect of good news that there is going to be growth, that gives you a reason to buy the company."

     

    (read the full story here)

     

     

    For discussion

     

    What is the difference between earnings and earnings’ expectations? Why would one move stock prices more than the other?

      

     

  • The Market Value of a Surprise

    Which is more fun—Christmas presents or the anticipation of Christmas presents?

    If you’re a high net worth individual, then you can have Christmas every month. At a low monthly price of £1,200 you can get the “Premium Box” delivered to your home. Or for £100,000 per year, you can receive the “Infinity Box.”

     

    The upside? The surprise.

     

     Subscribers have no idea what is in the boxes until they open them, as all the gifts are chosen by "expert consultants".

     

    According to iVIP: "Each box will contain new, unique, exclusive, or limited edition items scoured from around the globe; hand-curated, highly-coveted items from labelled goods to literature, tablets to telescopes, lovingly personalised, packaged, and posted to you.

     

    "Premium Boxes will contain anything from wine to watches, pocket squares to designer frames, Polaroid cameras to playing cards, signed literature to hand-painted artwork; the eclectic, the esoteric, the unknown

     

    "Infinity Boxes will contain the rarest and most desirable objects in existence, from fine art to fine wine, culinary excellence to experiential ecstasy, sourced from around the world."

     

    (Read the story from The Telegraph here)

     

    The downside? No returns.

     

    For discussion

     

    How would one determine the “fair price” of this investment?

     

  • How Many Gadgets Do You Need?

    The average American home has more than twice as many Internet-connected devices as people, the NPD Group reports. And annual household spending on electronics last year was up 36% over 2011, to $1,312, the Consumer Electronics Association says.

     

    Tate, CNN Money, 3 July 2013

     

     

    The article above describes the state of many American homes today.

     

    On a recent family trip, we took 3 laptops, 2 iPods, 2 iPhones, 2 android phones, 2 kindles, and 2 android tablets. That’s 13 internet-connected devices for a family of four, and that doesn’t include the devices that stayed home (though there weren’t many to leave at home after that suitcase-full).

     

    We live in a gadget-dominated world, but there are ways to spare the family budget. According to the article, some tips include (a) choosing second best over top of the line and (b) putting old models to good use.

     

    For discussion:

     

    What is the median family income in the U.S. today? What proportion of the family income is spent on electronics and related service contracts?

     

    What tips can you offer to a budget-conscious family regarding spending on electronics?