• The Life of a Young Investment Banker

    Work conditions for investment bankers may be getting better. For years, the industry has been known for long days and nights where personal lives take a back seat to work. But in a recent attempt to shift corporate culture, “Goldman Sachs is encouraging its junior investment bankers to take weekends off,” according to CNN Money (Petroff, 30 Oct 2013).


    From the article:


    The investment banking industry recently came under scrutiny after an intern working at Bank of America (BAC, Fortune 500) in London died in August amid reports he had worked three nights in a row.


    Goldman Sachs' Zurich office was also investigated last month by Swiss labor authorities after a complaint lodged by an employee group suggested the investment bank had run afoul of strict Swiss labor laws related to tracking workers' hours.


    (read the full article here)


  • Wanted: High Frequency Traders

    The Singapore Exchange Ltd. (SGX) is seeking high-frequency traders. According to Bloomberg (Burgos 27 Oct 2013):


    “We will pursue high-frequency trading once we have circuit breakers and other policies in place,” he said. “That will enhance the liquidity and quality of the Singapore market.”


    High-frequency traders facilitate the majority of U.S. equity transactions, where computerized firms have ample opportunity to profit from fleeting price discrepancies because transactions take place on more than 50 venues. Singapore isn’t as fragmented, which keeps computer traders away. Credit Suisse Group AG and Tabb Group LLC said the city’s relatively high trading and clearing fees also deter those firms.


    For discussion:


    What is high-frequency trading?


    According to another Bloomberg article (Michaels, 2 Oct 2013), what are some of the problems associated with high-frequency trading?

  • Pension Funds Win With Private Equity

    This Bloomberg video shows that pension funds are earning strong returns by investing in private equity. On average, private equity returns 10% per year for investors, so pensions don’t have to pick the top private equity firms in order to win. However, those that do are able to earn more than 10% per year from this asset class.


    For discussion:


    What is private equity? Why do you think the returns are so high?


    According to this video interview with Goldman Sachs, what are some of the trends in the private equity industry?


  • Rise of the Investor-Landlords

    The home rent v. purchase decision used to be less confusing. If you (a) had saved enough for a downpayment, (b) planned to live in the house long enough to see the value of your investment rise, (c) enjoyed relatively untarnished credit, and (d) could afford the running costs of maintaining a house, then homeownership seemed like a reasonable decision. For those who did not plan to live in the house very long, were not able to maintain the property, or simply did not have the downpayment or credit score, then renting was the only option.


    Today, that decision faces a new wrinkle. A Bloomberg article based on a recent report by RealtyTrac shows that institutional investors accounted for 14 percent of sales of single family homes in September, the highest level since 2011 when the data began to be collected. At first glance, this seems like good news for the housing market. Demand by investors is helping lift home prices and could lead to an economic rebound. But there’s a dark side to this increase in investor demand.


    From the Bloomberg article (Howley, 24 Oct 2013):


    “Both investors and traditional buyers are trying to snap up cheap homes before prices go higher, but the investors have the advantage of paying cash and not having to go through a convoluted mortgage process,” said Michael Hanson, a former Federal Reserve economist now working for Bank of America Corp. in New York. “People are being bid out of some markets because of investor demand.”


    … “The pendulum is swinging too far from the direction we saw during the run-up to the mortgage crisis,” Blomquist said in an interview. “Then, we tried to make everyone an owner. Now, we have people who have the income to pay a mortgage and have the desire to own a home who are stuck being renters.”


    For discussion:


    What advantages do institutional investors enjoy that individuals do not have when it comes to buying a house?

    Why do you think institutions like hedge funds and private-equity firms are interested in buying single-family homes?


  • What Are Whirlpool Shares Worth?

    Strong sales drove the share price of Whirlpool up, which is a surprise after a bearish Wall Street Analyst report that suggested sales may be sluggish going forward.


    Shares closed at $130.97 on October 21 but opened at $145.76 today.


    So according to this video, maybe investors should take Wall Street estimates with a grain of salt.


    For discussion


    Which is more important in determining the value of a company’s stock: earnings announcements or earnings expectations?

    How do equity analysts determine their target prices and expectations?

  • How Entrepreneurs Find Capital

    A recent article in Entrepreneur magazine (Hills, 21 Oct 2013) lists several ways to finance a startup.


    First, bank loans—but not necessarily from commercial banks. Instead of large, money center banks, community banks may be the route to take.


    From the article:


    Since many community banks avoided the housing crisis, they’ll often have money to lend without the same standards as national banks. Local small businesses are finding success with community banks if they can convince lenders they’ll make a profit and pay back the loans.


    You might also tap a credit union for available funding. As nonprofit organizations, credit unions may offer better lending terms for borrowers than commercial banks.


    (Read the full article here)


    Other methods of financing a small business include government assistance and crowdfunding. The Small Business Administration (SBA) backs loans from banks to qualified small businesses. Finally, crowdfunding involves raising capital from ordinary investors and bypassing investment banks. The investors provide the startup cash and, in exchange, receive some rewards such as products or other incentives from the startup.


    For discussion:


    According to this ABC News article, what is the recent change to crowdfunding rules? How will this new form of crowdfunding differ from the financing offered through sources such as Kickstarter.com?



  • Google Shares Win Big

    Google shares topped $1,000 per share this week. That’s a far cry from the original price of $85 IPO price of the shares back in 2004. Some analysts think the stock can go higher still.


    Google is one of only two stocks that hit the $1,000 mark. According to CNN Money (Rooney, 18 Oct 2013):


    Google is the second blue chip tech company to recently top $1,000 a share. Online travel site Priceline (PCLN, Fortune 500) became the first S&P 500 company to hit a four-digit stock price last month. Its stock is currently hovering around $1,050.

    At $1,000 a share, Google is trading at about 19 times 2014 earnings estimates. But those estimates are likely to be raised in light of the company's recent results. Deutsche Bank, for example, hiked their full-year earnings outlook to $54.30 a share. The current consensus is for Google to earn about $51 a share.

    By comparison, Yahoo currently trades at nearly 20 times next year's earnings estimates, even though it's still a turnaround story. Facebook, which is growing more rapidly than Google, is trading at nearly 55 times earnings forecasts for 2014.

  • Can Hedge Funds Beat the Market?

    The hedge fund industry is criticized for not beating the market, but according to SkyBridge Capital founder Anthony Scaramucci, that’s to be expected. He suggests that the hedge fund industry is like all industries: large number of mediocre players alongside a few stellar performers.


    Is it possible that, on average, most hedge funds are average?


    For discussion:


    What is a hedge fund? How does a hedge fund differ from a mutual fund?


    What does the efficient market hypothesis (EMH) suggest about trying to beat the market?  


  • And the Prize Goes To...

    The 2013 Sviriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Eugene F. Fama and Lars Peter Hansen of the University of Chicago and to Robert J. Shiller of Yale University. The prize was awarded for their work on asset pricing.


    From the press release:


    Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.


    If prices are nearly impossible to predict over days or weeks, then shouldn’t they be even harder to predict over several years? The answer is no, as Robert Shiller discovered in the early 1980s. He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.


    One approach interprets these findings in terms of the response by rational investors to uncertainty in prices. High future returns are then viewed as compensation for holding risky assets during unusually risky times. Lars Peter Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing. Using this method, Hansen and other researchers have found that modifications of these theories go a long way toward explaining asset prices.


  • The Present Value of an Athlete

    How do you put a value on an investment? In finance, we learn that the price for any investment is the present value of future cash flows. So as long as we know the size, timing, and risk associated with future cash flows, then calculating a present value is not terribly tricky.


    We’ve placed values on physical assets like commodities and real estate and we’ve placed values on financial assets like stocks and bonds. Now we’re valuing investments that don’t quite fit into either category, but we can apply the same logic. As long as we can estimate the size, timing, and riskiness of the future cash flows, we can find today’s market value.


    Look at an athlete’s career, for instance. Future cash flows are sizeable, and the timing is fairly predictable—though risky due to the possibility of injury. And now an investment in an athlete’s future cash flows is feasible, thanks to Wall Street.


    According to the NY Times (Lattman and Eder, 17 Oct 2013):


    On Thursday, a start-up company announced a new trading exchange for investors to buy and sell interests in professional athletes. Backed by executives from Silicon Valley, Wall Street and the sports world, the company plans to create stocks tied to an athlete’s financial performance.


    After considering a number of possibilities for its inaugural initial public offering, the company found a charismatic candidate in Arian Foster, the Pro Bowl running back of the Houston Texans. Investors in the deal will receive stock linked to Mr. Foster’s future earnings, which includes the value of his playing contracts, corporate endorsements and appearance fees.


    For discussion:


    What do you need to consider before you invest in an athlete like Foster? Do you think investors will be interested in such an investment? Why or why not?


  • Ignore the Dow

    Unlike a value-weighted index, a price-weighted index is easily pushed around by the component stocks with the highest share prices. But a high share price is not terribly relevant if the firm only has a handful of shares outstanding. In a price-weighted index, the higher priced shares would dominate the index, even if the higher priced shares belong to a smaller firm.

    The Dow Jones Industrial Average (DJIA) is a price-weighted index while the S&P500 is a value-weighted index. This CNN Money video points out several reasons NOT to pay attention to the Dow, and yet millions use this index to assess the “market” every day.

    For discussion:

    How do you calculate the market value of a firm’s equity?

    What other reasons are given for investors to disregard the DJIA?

    In this video, which stocks caused the DOW to drop? What is the reason for their decline?

  • What Should We Expect This Week?

    Positive earnings move stock prices up and negative earnings drive prices down. Or so you’d think…


    The real news is whether the earnings are as expected by investors. Announcing positive earnings may not be enough if the earnings are not as high as investors were expecting them to be.


    According to this CNBC article entitled, “Why this could be an awful week for earnings,” (Rosenberg, 13 Oct 2013):



    A huge week for earning is coming up, with companies as diverse as Coca-Cola, Bank of America, Google and GE revealing how much they earned in the third quarter. And some traders worry that the results won't be good.


    "To me, 'negative' is probably the word that comes to mind when I look through this week," said JIm Iuorio, managing director of TJM Institutional Services and a CNBC contributor.


    As of Friday, 31 S&P 500 companies have reported, and 55 percent of those have beaten earnings estimates, according to Thomson Reuters I/B/E/S. On the revenue side, 52 percent have beaten estimates.


    And in fact, despite concerns about revenue and earnings growth, S&P 500 operating earnings per share for the third quarter are expected to post a record—and the third record in a row, according to S&P's Howard Silverblatt.


    For discussion:


    What is driving the pessimism towards earnings announcements? How would that influence your decision to buy or sell stocks this week?





  • What's Next For the Market?

    According to Don Luskin of Trend Macro, not everything is the next Lehman. Not every crisis has to be systemic and lead to contagion. Phil Orlando of Federated Investors agrees in the long-term, but is not necessarily as optimistic in the near term.


    For discussion


    What reasons does Mr. Orlando give for his lack of short-term enthusiasm for the market? Do you agree or disagree? Why?


  • Which Bonds Are Better? U.S. or Norway?

    A recent MarketWatch article (Arends 10 Oct 2013) lists five countries with debt safer than U.S. Treasuries.


    The formerly “risk-free” bonds issued by the U.S. government are now comprising 89% of gross domestic product. German debt, on the other hand, is 56% of GDP.


    Arends cites the IMF and lists these countries that are safer still:


    New Zealand (debt 29% of GDP)

    Australia (13%)

    Denmark (10%)

    and Norway which is running at a surplus (i.e. debt is –175% of GDP)


    From the article:


    Every grandma and widow and orphan and pension fund relies on “risk-free” Treasury bonds for the basis of their portfolio. It’s the Greenwich Mean Time of finance, the law of gravity, the assumption that the sun will rise in the east.


    So much for that.


    He describes the risk of default by the U.S. as “non-trivial.” In other words, it now exists—it’s real. And yet despite that risk, the rate paid by the U.S. to borrow is lower than the rates paid by Australia and Norway.


    Go figure.


    For discussion:


    The article discusses CDS issued on U.S. debt trading at 40 basis points. What is a CDS and what does this imply about the U.S. Treasury?


  • The U.S. Banking Landscape

    The U.S. banking system is rather unique. Thousands of banks, most of which are small, community banks, dot the American landscape. The question is always raised of whether we need so many small banks. After all, wouldn’t larger banks enjoy economies of scale and produce the same financial services at lower cost?


    Community banks serve a noble purpose by providing liquidity for small businesses that otherwise might fall through the cracks. With their personalized service, these small banks have a knack for evaluating credit risk of small businesses in ways that large banks with their transaction-based data would miss.


    Citing a recent academic study by DeYoung et al (2012), this Bloomberg Businessweek article (Greeley, 10 Oct 2013) points out this:


    Loans between rural banks and rural borrowers, the study found, were only 70 percent as likely to default as those between urban banks and urban lenders. The numbers get even better for what the authors call “hyper-rural” banks and borrowers. And when the bank and borrower are in different rural markets, the default rate rises. It’s not that rural loan officers are generally smarter, or rural borrowers more trustworthy. It’s that when people know each other, loan performance improves.


    “These findings may also help explain why small banks, and small rural banks in particular, continue to exist in the U.S. in disproportionate numbers,” the report concludes, “and are able to operate successfully at less than efficient scale.


  • Buy or Sell Treasuries Now?

    In this CNBC interview, Co-CIO of PIMCO Bill Gross says that PIMCO is buying U.S. Treasury bills in spite of the threat of U.S. default. Unlike Fidelity money market funds, PIMCO sees the current values of U.S. debt as a buying opportunity.


    For discussion:


    What does it mean for a money market mutual fund to “break the buck?” Why might a technical default of even a few hours cause a money market fund to break the buck?


  • Will the U.S. Default? Moody's CEO Says Not Likely

    In this CNBC interview, Moody’s CEO Raymond McDaniel says that it is “extremely unlikely” that the U.S. Treasury will default on U.S. government debt.


    As Mr. McDaniel says, it feels like we’ve “seen this movie before” which may be giving the American public a false sense of security that all will be resolved.



  • Do Banks Bear Responsibility in a Ponzi Scheme?

    The New York Times reported last week (Norris, Oct 3 2013) about regulators going after banks for not noticing a Ponzi scheme passing through their accounts.


    In the past, the attitude has been “See no evil, face no liability.”


    From the article:


    That is why a joint regulatory action filed last week by the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network, a part of the Treasury Department, seems so noteworthy. TD Bank, an American subsidiary of Canada’s large Toronto-Dominion Bank, agreed to pay $52.5 million to settle accusations that it had helped a Florida lawyer named Scott W. Rothstein commit one of the more brazen Ponzi schemes of recent years.


    It is not clear, however, whether this represents a new attitude on the part of regulators to try to force banks to pay attention to possible Ponzi schemes — just as the Patriot Act requires them to monitor possible terrorist financing — or whether it is an isolated response to a particularly egregious case. Certainly the regulators had evidence, much of it provided by Mr. Rothstein in an effort to minimize his sentence, suggesting that one or more bank employees knew they were helping him deceive investors.


    If regulators do not go after banks, the banks are usually home free. Some bankruptcy trustees for collapsed Ponzi schemes have tried to sue banks to recover money for defrauded investors only to have judges rule that because the trustee is standing in the shoes of the fraudster, such suits are not permitted. But when investors try to sue the banks, they can run up against rules limiting class-action suits and a Supreme Court decision saying that only the government — not victims — can bring suits contending that a bank, or anyone else, aided and abetted a fraud.



    For discussion:


    What is a Ponzi scheme? Why is it so noteworthy that regulators may pursue banks who may have had knowledge of such schemes?


  • Bankers Warn of Consequences to Government Default

    “Compared to Washington, Bankers now seem like they have their act together.”

    ~Rob Blackwell, Washington Bureau Chief in video interview with American Banker




    A recent American Banker article (Borak, 2 Oct 2013) reports that the nation’s top bankers including Brian Moynihan, Bank of America Corp. CEO and Lloyd Blankfein, CEO of Goldman Sachs, met with President Obama to discuss the consequences of a government shutdown and default.


    "There's precedent for a government shutdown," said Blankfein. "There's no precedent for default. We're the most important economy in the world. We're the reserve currency of the world. Payments have to go out to people. If money doesn't flow in, then money doesn't flow out. So we've really never seen this before and I'm not really anxious to be a part of the process that witnesses it."


    Both chief executives made clear that the conversation with White House officials did not address what the solution would be, which is in the hands of Congress, but rather the implications of the current fiscal crisis facing the U.S. They also noted they have met with Republican leaders on the issue as well.


    This video interview below describes bankers as emerging heroes rather than the villains they've portrayed most recently. 

  • S&P Chief Global Economist Takes Stock Five Years After The Great Financial Crisis

    A recent report by Paul Sheard, S&P Chief Global Economist and Head of Global Economics & Research, says that the global economic situation could have been a lot worse. The report sounds cautiously optimistic:


    From “Taking Stock Five Years On From The Great Financial Crisis”:


    Five years after the global financial system came to the brink of collapse and the global economy was plunged into recession, the global economic outlook look relatively good. Radical policy interventions helped to stave off another Great Depression, most economies have been expanding since mid-2009, and most emerging markets, led by China, after absorbing the shock of an export demand collapse, have managed to continue to grow at a decent clip. Things could have been a lot worse. And after five years of balance sheet adjustment and policymakers internalizing and attempting to institutionalize the lessons of the crisis and what caused it, the outlook for the next five years looks significantly better than the last.




    ·        Five years on, the financial crisis continues to cast a long shadow--on economic activity, on policy settings, and on institutional frameworks.


    ·        Major economies are still operating well below full potential, major central banks are still operating close to the zero interest rate boundary, deep in QE territory, and government finances continue to be strained.


    ·        U.S. growth is set to step up a notch; the eurozone, struggling with design flaws, is emerging from its second post-crisis recession; Japan is making a belated attempt to reflate but will likely fall short; and China looks set to register around 7% annual growth.


    ·        Major global risks to the downside have attenuated, but remain. They include a re-eruption of the Eurozone crisis, a potentially self-inflicted fiscal accident in the U.S., and a sharp pull-back in investment growth in China. Japanese reflation would be a positive surprise.


    ·        The risk for the Fed is not so much that unwinding QE and zero interest rate policy derails the recovery as that signs it might do so stymies its very attempt to unwind


    (Read the full report here)


  • U.S. Postal Service Default Unrelated to Government Shutdown

    The United States Postal Service is in financial distress, and it has nothing to do with the Federal government shutdown. The USPS is not funded by taxpayers and must make ends meet without government help. And though it is supposed to operate like a private business using revenues to pay expenses, the USPS suffers under the weight of government restrictions in stamp prices and government requirements to “pre-fund” retirees’ health care.


    The burden is so large, in fact, that the U.S. Postal Service has defaulted on the $5.6 billion it was supposed to set aside for the retiree health care fund.


    According to CNNMoney (Smith, 1 Oct 2013):


    Postal officials have long complained about a Congressional mandate that requires them to set aside billions of dollars for a retiree health care fund each year. The Postal Service also defaulted on these prefund payments last year. In fiscal year 2012, the Postal Service lost a total of $15.9 billion, including $11.1 billion in defaulted payments that it owes to prefund health benefits for retirees.


    But Postal officials point out that other federal agencies aren't required to prefund for retirees this way.


    In addition, the Postal Service hit its debt limit last year, which means that it cannot borrow any more money from the U.S. Treasury.


    The Postal Service plans to cut 150,000 workers through 2015, and recently proposed a price hike for stamps. But officials have said that the crisis won't go away until Congress makes the prefund requirement disappear.