• Which Sectors Have The Best Earnings Growth?

    Which sectors have the highest earnings growth?


    According to this Bloomberg video, retail leads the pack with 17.4% earnings growth while tech and telecom are shrinking.


    For discussion:


    How should a high earnings growth rate impact the share price of a company’s stock?


    Which financial ratios will be most impacted by an increasing or a decreasing earnings growth rate?


  • How Would a Government Shutdown Impact You?

    Would a government shutdown affect you? According to this CNBC report (28 Sep 2013), a government shutdown would affect some people, but others are not likely to be impacted.


    Those who are expected to continue with business as usual:

    1.    Air traffic controllers would stay on the job

    2.    The State Department would continue to process visas and passports

    3.    Social security and Medicare would continue to get paid

    4.    Mail would continue to be delivered

    5.    NASA would continue to support the International Space station and the National Weather Service would continue to track storms.

    6.    Homeland security would continue

    7.    Federal prisons would continue to operate

    8.    And, of course, Americans would continue to pay taxes


    Those who would be affected by a government shutdown:

    1.    Federal courts would only operate for about 10 more business days

    2.    National parks and monuments would close

    3.    NIH and CDC would be limited

    4.    FDA would reduce routine safety inspections

    5.    Head Start grants would not be renewed

    6.    WIC would shut down

    7.    FHA would stop underwriting new loans

    8.    Active duty military would get paid late

    9.    OSHA inspectors would stop inspections


    This would not be the first government shut down. According to CNBC (27 Sep 2013, AP), “There have been 17 government shutdowns since 1976, ranging in length from one to 21 days. None has caused a market meltdown.”



    For discussion:


    According to the CNBC article, why might Wall Street’s shutdown fears be overblown?



  • Federal Housing Administration Needs Cash

    In this video, CNBC reports that the Federal Housing Administration (FHA) will draw $1.7 billion from the U.S. Treasury.


    According to FHA Commissioner Carol Galante, “This amount is higher than the estimate because of a decline in FHA endorsement volume.” In other words, the FHA is not getting as much business as it used to get because of higher mortgage rates and higher loan fees.


    For discussion:


    What is the mission of the FHA (www.fha.gov)?


    According to this ABC News article, why is the FHA in need of so much cash?


  • Bloomberg Poll Shows Most Americans Favor Targeted Budget Cuts to Reduce Government Spending

    According to a recent national poll by Bloomberg, “Americans by a 2-to-1 ratio disagree with President Barack Obama’s contention that Congress should raise the U.S. debt limit without conditions.”


    From the article (Davis, 26 Sep 2013):


    Instead, 61 percent say that it’s “right to require spending cuts when the debt ceiling is raised even if it risks default,” because Congress lacks spending discipline, according to a Bloomberg National Poll conducted Sept. 20-23.


    That sentiment is shared by almost three-quarters of Republicans, two-thirds of independents, and a plurality of Democrats. Just 28 percent of respondents backed Obama’s call for a clean bill that has no add-on provisions.


    (See the graphical results of the Bloomberg survey here)


    Can the government avoid a shutdown? Some say no. If the government does shut down, the cost to the nation will be high. According to the NY Times (Lowrey, 25 Sep 2013), the drop-dead date is October 17. “On that day, unless Congress were to raise the debt ceiling, the Treasury would have only $30 billion cash on hand, putting the United States on the precipice of an unprecedented default, the department said on Wednesday.”



    For discussion:


    How large is the U.S. long-term debt? What are the possible repercussions of a default by the U.S. government?

  • How to Build a Good Credit Score

    Watch this Khan Academy Video Here


    Khan Academy has been tremendously successful. From calculus to chemistry to history, their videos have helped students around the world.

    Now Bank of America has teamed up with Khan Academy to offer online courses in financial literacy. The video here shows how to build and keep good credit. In a very engaging way, the makers of this video show how easily we can get behind on credit card payments and eventually get into trouble.

    For discussion:

    ·        What is a FICO score and how can a low score affect you?

    ·        How do you build a good credit score? What are the five things you should know about credit scores?

    ·        How can you find your credit history and your credit score?


  • As Operational Risks Rise, Credit Ratings Could Fall

    In financial markets, we’re used to discussing credit risk and interest rate risk, but we haven’t talked about operational risk as much as we have lately. The rise of algorithmic trading has increased the risk that “glitches” lead to significant losses for market participants. And ratings agencies have taken notice. According to Bloomberg, S&P reported that “debt ratings could be reduced in the next few years because of damaged reputations” (Mamudi, 19 Sep 2013).


    From the article:


    U.S. markets became more complicated after the SEC’s Regulation NMS was implemented in 2007, fragmenting equities trading across more than 50 venues. Coupled with faster and more sophisticated use of computers, it has created conditions where one market’s fault can shut all venues at once.


    “While technology is becoming more sophisticated and trade execution more efficient, this also increases the complexity of exchange operations,” Roman said in the report. “In our opinion, faster trade speed and greater interconnectivity are amplifying the impact of operational glitches when they occur.”


    Besides Nasdaq’s shutdown last month, other recent glitches include Singapore Exchange’s April malfunction that delayed derivatives trading for about three hours and Bats Global Markets Inc.’s inability to get its own stock trading following the company’s March 2012 initial public offering.

    (read the full article here)


    For discussion:


    What is operational risk? How can exchanges, financial institutions, and regulators protect financial market participants from losses associated with operational risk?


  • What's Warren Buffett's Top Tip?

    Warren Buffett, the billionaire CEO of Berkshire Hathaway, offered this investment advice to Georgetown University students: invest in Benjamin Graham’s classic book, The Intelligent Investor.

    According to this USA Today article (Waggoner, 19 Sep 2013):

    Buffett also advised students to stick with companies and industries that they know. "The most important thing is deciding what industries you can be right about," he said. Bill Gates couldn't convince him about computers, he said, but he did understand that people would continue to chew gum and drink soft drinks. "I'll stick with chewing gum," he said. "It's a terrible mistake to think you have to have an opinion on everything."

    Buffett's optimism was clear throughout. "If you look at the twentieth century, with two wars, the Spanish influenza, and the Great Depression, and the Dow went from 66 to 11,497. With all those terrible things happening, America works."

    Well known for his value style of investing, Buffett looks for good companies selling at low prices—his formula for success.

    For discussion: 

    What is the difference between a “value” stock and a “growth” stock?

    According to this working paper by Aswath Damodaran (2012), what are the different styles of value investing? What does the evidence suggest regarding the performance of value investors compared to other investors?

  • Can Bank Risks Be Avoided?

    Banks face risk. That’s how they transform short-term, riskless, liquid deposits into long-term, risky, illiquid loans. This asset transformation process allows ordinary savers like you and me to park our cash in an account and access that cash anytime we want. It also allows homeowners and other borrowers like me to buy assets now rather than wait years to accumulate enough money to buy our houses with cash.


    This industry is like no other: highly regulated because of a high level of public trust.


    That brings us to the questions that constantly face banking regulators:


    ·        Should banks be bailed out?

    ·        Should we rely on Federal Deposit Insurance (FDIC)?

    ·        Can a bank be too big to fail?

    ·        How can we avoid future bailouts?


    A recent editorial in Bloomberg (McCardle, 19 Sep 2013) explains why banks, with their natural mismatch in assets and liabilities, should be rescued:


    This creates a vulnerability at the heart of modern banks: If too many depositors try to turn their bank accounts into cash at the same time, the bank will be insolvent, because it cannot liquidate the mortgages fast enough to pay the depositors. And when are you most likely to get a flood of people trying to empty their accounts? When they think the bank is insolvent. So people who fear that their bank will go bust can actually produce that result, even if the bank is perfectly sound. Worse, if that bank fails, customers at other banks may panic, triggering a nationwide collapse.


    This is unique to finance. That's why I didn’t support the bailout of General Motors Co.: As I put it at the time, if GM went bankrupt, my mini was still going to start the next morning when I put the key in the ignition. And the best way to stop a bank panic seems to be throwing money into the system. So I'm a great fan of the Federal Deposit Insurance Corporation. Ultimately, shoveling money into the banking system, almost indiscriminately, was the right thing for the government to do -- especially since, as it turns out, we made money on those investments.


                (read the full article here)


    For discussion:


    Could a banking system be structured to avoid the need for government bailouts? Why or why not? How might such a system be designed?


  • Trulia Shares Benefit From Housing Recovery

    Housing stocks are benefiting from the recovery of the housing market.  And that includes stocks like Zillow and Trulia that provide database support to the housing industry.This CNN Money video compares Trulia (TRLA) to Zillow (Z).


    Trulia CEO Pete Flint claims that the firm is more than just a database of housing values. The company seeks to provide all kinds of data and software for real estate agents and allow them to connect with consumers.


    For discussion:


    What is the trend in Zillow shares and Trulia shares over the last month? The last six months?


    What does that suggest about the housing market in general? What does that suggest about the economy?


  • Microsoft's $40B Share Buyback Announcement

    Microsoft has announced a $40 billion stock buyback and an increased dividend. This Bloomberg interview explains why that doesn’t seem to be doing the share price any good.


    According to the video, the dividend has continued to grow while the stock price seems stuck at its current level, having only grown by 15% over the past 6 years. This puts Microsoft dangerously close to being a “value” stock, which isn’t what a tech company strives to become.


    For discussion:


    What is the purpose of a share buyback? What impact does an announcement that the company will be repurchasing its shares normally have on the stock price?


    Are companies required to follow and actually buy the shares that they announce in a share buyback?


  • How One Hedge Fund Profited During the Financial Crisis

    A lot of people lost money during the financial crisis, but not everyone. Hedge fund manager Marc Lasry, Chairman and CEO of Avenue Capital, made a bundle of money, and explains howin the video interview below.

    In hindsight, buying low sounds easy enough but when the next price is lower still, it takes guts to keep buying. Described as “catching falling knives,” the sensation of acquiring assets that are worth less just moments after the purchase “doesn’t feel good,” as he puts it.


    For discussion:


    In your opinion, how were Mr. Lasry and Avenue Capital able to earn the tremendous profits they earned on distressed debt during the financial crisis?


  • The World After Lehman

    September 15th, 2013 marks the five year anniversary of the day that Lehman died. The events in 2008 were dramatic. This investment bank that had survived the U.S. Civil War, two world wars, and the Great Depression was unable to weather the financial crisis that began in 2007.


    source: The Economist http://www.economist.com/news/finance-and-economics/21586333-five-years-charts

    The events surrounding the end of Lehman have changed the face of the financial services industry.


    From the Economist (14 Sep 2013):


    The world of banking has changed dramatically, if not radically, in the five years since September 15th 2008, the day Lehman Brothers went bust. American and European banks used to dominate the list of the world’s biggest banks (see chart 1); the Chinese have since scaled the charts. The balance-sheets of Europe’s behemoths have got quite a bit smaller (chart 2); consolidation has made America’s giants bigger than ever. Western banks are generating much lower returns on equity than they did in the years before the crisis (chart 3), in part because the industry is being forced to fund itself with higher levels of equity than in the past (chart 4)…




    For discussion:


    What are some of the “lessons learned” according to this Boston Globe article?


  • Disney's Share Repurchase

    This week, Disney announced it is buying back its shares and returning cash to shareholders. The market greeted the news happily and sent the stock higher as a result.


    The amount of the buyback is between $6 and 8 billion, which is about 5% of Disney’s market share. It’s not nearly as large as Apple’s record $16 billion buyback

    For discussion:


    What happened to Disney’s share price at the announcement?


    What does a buyback signal about the firm?


  • The SEC and Our Stock Exchanges

    I just finished reading a 4-book series of novels about an upper-middle class American family who lives through a major power outage. Not some ordinary power outage—this one kills all electronics across the world for a full year. It got me thinking. What would we do without our computers or telephones or cars or electricity…


    The Securities and Exchange Commission (SEC) chief Mary Jo White may have been thinking along the same lines. According to Reuters (12 Sep 2013), “U.S. stock exchanges agreed with regulators on Thursday to reforms including a "kill switch" to stop trading during emergencies, after a software glitch with Nasdaq's stock quote processor last month led to a three-hour trading halt.”


    The SEC press release today discussed the meeting between Chair White and exchange leaders and members of FINRA, DTCC and the Options Clearing Corporation.


    From the press release:


    “In short order, I also want those at the meeting – with the input of other market participants – to identify a series of concrete measures designed to address specific areas where the robustness and resilience of market systems can be improved, including the systems that were at the core of last month’s trading interruption.  The investing public deserves no less.”


                (read the full press release here)



    For discussion:


    What happened on August 22 when NASDAQ experienced a trading glitch?


    Why is the SEC so interested in ensuring that this doesn’t happen again?


  • Twitter's Latest Tweet

    I don’t tweet. I don’t follow anyone else’s tweets either. But I must be alone in my Twitter-less existence, because it seems like everyone is communicating clever thoughts in 140 characters or less.



    Had I been linked to the tweeting world, I might have read the following message from Twitter:


    “We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.”


    The big question is what the company is worth. Some talk suggests $10-15 billion. Either way, this IPO is likely to generate a lot of interest.


    For discussion

    According to this CNBC video, how does this Twitter IPO differ from the Facebook IPO?


    In your opinion, would Twitter be a good investment? Why or why not?



  • The Goal of the Firm ... Continued

    If only we didn’t have so many customers, then we wouldn’t have so much paperwork to do. 

    ~ Anonymous, 1990


    In this post, we’ll continue exploring the goal of the firm. Yesterday I posted about a family business where the shareholders—i.e. the family—ran their business their way.

    One opinion in the Washington Post (Pearlman, 6 Sep 2013) is that the goal of the firm should not be to maximize shareholder wealth.  From the article:

    The funny thing is that this supposed imperative to “maximize” a company’s share price has no foundation in history or in law. Nor is there any empirical evidence that it makes the economy or the society better off. What began in the 1970s and ’80s as a useful corrective to self-satisfied managerial mediocrity has become a corrupting, self-interested dogma peddled by finance professors, money managers and over-compensated corporate executives.

    (read the full article here)

    The article suggests that the goal of maximizing shareholder wealth is the root of all kinds of evil. If the corporation were to somehow keep its owners in line and show them who’s boss, then we’d get greed, corruption, and earnings manipulation under control.

    As a finance professor, I’d like to point out where I respectfully disagree.

    First, maximizing shareholder wealth and maximizing profits are not synonymous. In fact, I submit that maximizing profits (a short-sighted goal) can lead to suboptimal decisions and lost shareholder wealth.

    Second, what’s good for the company is good for shareholders. “Good” includes treating employees well and selling quality products and not dealing underhandedly with suppliers and competitors. Maximizing the best interests of shareholders does not include lying, stealing, and cheating. That’s never OK.

    And finally, wise owners motivate employees to work hard by encouraging employees to take ownership of the business themselves. That includes sharing profits and offering benefits and building legacy—all the reasons entrepreneurs start and own businesses in the first place.

    I agree that there are other stakeholders, in addition to the shareholders, who should be protected. Employees who invest their lives in a firm, customers who rely on the firm’s product, communities who depend on economic growth from local business. But can we really say that shareholders are not the primary stakeholders? Rather than the quote at the top of this post, maybe we can change it to this:

    If only we didn’t have so many shareholders, then we wouldn’t have so much capital to invest.


    What do you think?

    What are the arguments identified in the Washington Post article against maximizing shareholder wealth?

    Who are the shareholders, and should they be protected?

    Who are the other stakeholders in a firm? What are some ideas for protecting the rest of the stakeholders of a firm?

  • The Goal of the Firm

    Friends of ours run a business that’s been in their family for years. The business is profitable—so profitable, in fact, that they’ve been approached about going public. That is, they’ve been asked by investment bankers to sell shares and invite new owners into the business.


    Our friends have refused. They’ve decided that the business is their own, and they like it that way. They want to run the company as they see fit; they’re not interested in sharing decisions with others.


    And who says they have to?


    It’s their company, and they can do what they want with it. They’re the owners. The shareholders. If they choose to operate their business on a small scale and use it as a means of providing for their family, who’s to stop them?


    So now, let me ask you a question. What is the goal of this firm? What should be the goal of this firm?


    (1) Is their goal to maximize profit? Probably not. On a personal level, they’d maximize profit by selling shares and going public. On a corporate level, they could maximize short-term profit by selling inferior goods, though that would be at the expense of the firm’s reputation.


    (2) Is their goal to minimize costs? Again, probably not. Costs are minimized when a firm chooses not to grow or invest in new projects, and from what I’ve seen of this firm, that’s not the case.


    (3) What about maximizing shareholder wealth? I guess that depends on how you define shareholder wealth. This family has found satisfaction in building a good reputation, providing a family-friendly workplace, and a delivering a quality product. They’ve found that the long-term health of their firm leads to wealth.


    Is it dishonorable to maximize shareholder wealth? Well, let me add this little tidbit. This particular family is ethical and they don’t lie, steal, or cheat. They treat their employees with dignity and deal fairly with their customers. Like all businesses, they could probably earn more money if they wanted to behave badly. But as the owners of their firm, and with their livelihood at stake, they’ve chosen to run the business as they believe a business should be run.


    Stay tuned for the next blog post about the goal of the firm.


    For now, what’s your opinion?

    ·        What are some alternative goals for a firm?

    ·        For each goal you identify, what positive and negative choices might follow?

    ·        Who are the shareholders, and should they drive the firm’s agenda?



  • Sprint's New Debt

    Sprint Nextel made financial market history this week. On Wednesday, the company issued $6.5 billion of high-yield bonds, which according to the NY Times, is the new record for the “single biggest noninvestment grade offering ever sold directly to investors.”


    From the article (de la Merced, 4 Sep 2013):


    The sale shows that despite concerns about the Federal Reserve raising rates at some point in the near future, debt investors remain interested in buying up new issuances.


    According to Sprint’s press release on Sep 4:


    Sprint Corporation (NYSE: S) announced today that it has priced its previously announced offering of $2.25 billion aggregate principal amount of 7.250% Notes due 2021 (the “2021 Notes”) and $4.25 billion aggregate principal amount of 7.875% Notes due 2023 (together with the 2021 Notes, the “Notes”) each to be guaranteed by Sprint Communications, Inc. The sale of the Notes is expected to be completed on September 11, 2013, subject to customary closing conditions.


    The company intends to use the net proceeds from the offering of the Notes for general corporate purposes, which may include, among other things, redemptions or service requirements of outstanding debt and network expansion and modernization.


    For discussion:


    According to Morningstar, what is the credit rating of Sprint’s debt? What reasons can you find in an internet search for the noninvestment grade rating?


    How do the coupon rates on the new Sprint bonds compare with the rate paid on comparable U.S. Treasury notes? In other words, what is the credit spread on these two new bond issues?

  • LinkedIn Plans to Raise New Equity

    As we learn in corporate finance class, cash inflows can come from a variety of sources: operating cash flows, the sale of fixed assets, issuance of new debt, or the issuance of new equity. And when cash is raised via debt or equity, the firm usually has a project that is in need of a large cash infusion.

    LinkedIn is choosing to issue new equity, but not because it needs the cash for new projects.

    According to Forbes Magazine (Fontevecchia, 3 Sep 2013):

    LinkedIn is offering 4.166 million shares in a secondary offering, which should net the company about $1 billion given the stock’s closing price on August 30, when it changed hands for $240.04. Lead underwriter JPMorgan and its peers will have 30 days to decide whether to buy up to 15% more of common stock, form S-3 filed with the SEC showed.

    Management has no specific intention behind raising capital, rather, it is looking to bolster its financial position, probably taking advantage of an impressive run in the stock; shares in LinkedIn have gained more than 110% this year and have more than quintupled since their 2011 stock market debut.

    For discussion:

    What is the difference between cash flow and net income? Which is more useful when analyzing a firm?


    photo: courtesy of www.linkedin.com

  • Should We Still Buy Equities?

    The more you read financial news, the more paralyzed you may become in terms of investing. Every day brings new challenges, new risks.


    So what should we do? Head for the hills with the shotgun and the dog?


    Not according to this NY Times interview with Mr. David P. Kelly. The answer according to the chief global strategist at J.P. Morgan Funds is to diversify.


    From the article:


    “There are many problems in the economy and in the markets, certainly,” Mr. Kelly said in an interview. Short-term losses could easily be on the way, and they could be painful. “But the answer for a long-term investor isn’t to avoid risk,” he said. “It is to be extremely diversified — and to invest in equities. You’re likely to do much better that way than if you stay out of the markets.”


    Still, he concedes, it’s very easy to make the case that the factors affecting the stock, bond, currency and commodity markets are spectacularly harrowing at the moment.


    ... But in a trenchant summary of the prospects for investing under current conditions, Mr. Kelly said last week that the global economy had improved considerably since the collapse of Lehman Brothers five years ago. The economy is “more balanced” today, he said, with developed countries like the United States regaining strength and the world no longer needing to rely so heavily on growth in countries like China, India, Indonesia and Turkey.


    Most important, relatively low interest rates have made stocks, as an asset class, more attractive than bonds. And he says “this should remain the case” even if interest rates rise over the next few years, as expected.


    For discussion:


    Why does Mr. Kelly make the case that investors in bonds are likely to experience some losses soon?


    What are his arguments in favor of investing in stocks now?