• Are Commodities Poised to Rally in 2014?

    Photo: Chicago Board of Trade corn pit, 1993. by Jeremy Kemp courtesy of Wikipedia. Available at http://en.wikipedia.org/wiki/File:Chicago_bot.jpg

     

     

     

     

    The New Year is expected to bring good news for metals and commodities investors. According to this Bloomberg article (Kolesnikova et al., 24 Dec 2013):

     

    Average annual prices for 15 of 23 non-energy commodities from aluminum to sugar will be higher than now, according to estimates from as many as 26 analysts compiled by Bloomberg. Corn may rise as much as 20 percent, platinum 23 percent and nickel 19 percent, based on the median of trader and investor forecasts in a survey that asked as many as 59 respondents to predict next year’s peak price for each of 15 raw materials.

     

    … “It’s a good time to come into commodities,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. “This is the first time in the recovery that we’ve had simultaneous positive and accelerating growth in the U.S., Europe, Japan and the emerging world all at the same time. That’s a pretty big demand change. But until people kind of pick up on the fact that commodities can come back, you’ll still see some people sticking a little more to stocks.”

     

    For discussion:

     

    What are some of the factors that drive values in commodity markets?

     

    What are some investment vehicles you can use to invest in commodities?

     

    If you had to choose one commodity in which to invest in the New Year, what would it be and why?

     

     

  • Derivatives, Financial Regulation, and the CFTC

    In a recent interview with Knowledge @ Wharton, outgoing Chairman of the Commodity Futures Trading Commission (CFTC) describes the derivatives market and the regulation that seeks to prevent harm to financial markets.

     

    From the interview:

     

    Knowledge@Wharton:   …You are involved in one of the most intense debates of your entire career at the Commission. You are also overseeing a market of derivatives that is somewhere between $400 trillion and $600 trillion or $700 trillion dollars. Could you talk about what this latest intense debate is about? It has to do with overseeing overseas derivatives and getting them, or not getting them, onto an exchange?

     

    Gensler: Well, let me start by saying these financial contracts called derivatives or swaps were at the center of the 2008 crisis and eight million people lost their jobs in that crisis. And large businesses, like the insurance company AIG — we Americans, as taxpayers, bailed them out because they were so interconnected with the rest of the economy through the unregulated swaps marketplace. That’s what this is about — insuring that there is transparency in the markets, insuring that large financial firms have the freedom to fail rather than each of us Americans putting our hard-earned dollars in to bail out those businesses.

     

    AIG, you might remember, had a large swaps business, which actually was run overseas. Their far-flung operations nearly brought down our U.S. economy. This most recent debate about the cross-border application was to insure that our laws are not strictly territorial, but that they actually will cover the far-flung operations — the branches and guaranteed affiliates of U.S. financial institutions. And we’ve been successful. Congress gave us those authorities and our Commission voted up guidance in July to do that.

     

    Read the edited transcript or listen to the interview here

     

  • What Type of Behavioral Investor Are You?

    This past year, Morningstar did a monthly series of articles called, “Building Better Clients by Understanding Investor Types”.  According to the author of the December article (Pompian, 19 Dec 2013), there are four types of investors:

     

    1.    The Preserver

    2.    The Follower

    3.    The Independent

    4.    The Accumulator

     

    From the December article describing the Accumulator investor type:

     

    At their core, Accumulators are risk takers and firmly believe that whatever path they choose is the correct one. Unlike Preservers, they are in the race to win--and win big. Unlike Followers, they rely on themselves and want to be the ones steering the ship. And unlike Independents, they usually dig down to the details rather than forge a course with half the information that they need.

     

    Unfortunately, some Accumulators are susceptible to biases that can limit their investment success. For example, Accumulators may be too confident in their abilities. Because they are successful in business or other pursuits, why shouldn't they be successful investors? And overconfidence sometimes leads them to think they can control the outcome of investing, despite the fact that it is full of unknown risks.

     

    (Read more: http://www.morningstar.com/advisor/t/85232535/advising-the-accumulator-client.htm#ixzz2oiNenH97)

     

    For discussion:

     

    Use the link to the article above as well as the following three links to identify the characteristics of each of the four investor types. What potential pitfalls do they face when it comes to investing?

     

    ·       The Accumulator

     

    ·       The Independent

     

    ·       The Follower

     

    ·       The Preserver

     

    Based on these articles, what type of investor are you? How might that knowledge influence how you invest in the future?

     

  • What Financial Plans Are On Your List of New Year’s Resolutions?

     

    With the New Year just around the corner, many of us are considering our New Year’s Resolutions. And though diet and exercise plans are probably top on many lists, the New Year is an opportunity to revisit our financial plans as well.

                           

    Researchers call it the “Fresh Start Effect” and have found it is a powerful motivator to change behaviors.

     

    From a recent ThinkAdvisor article (20 Dec 2013):

     

    While many people start out gung-ho with diets and exercise, many of them don’t last all that long. On the other hand, even a single financial planning decision such as committing a set sum from a paycheck to a retirement account has much longer-term implications, Milkman said.

     

    “Compared to gyms and diets, all you need to do when you make a financial decision is to make one choice on one day for a long-term change,” she said.

     

    As such, it would be greatly beneficial for financial planners struggling to get their clients on track to figure out which landmarks other than New Year’s Eve are important to them, Milkman said.

     

    “Let’s say an advisor contacted someone right before or right after their 40th birthday and said, ‘This is a milestone event and a time to step back and think about your financial plan.’ It would surely excite their clients and be a great moment to get them to commit to an important financial decision,” she said. “We know that there’s a huge inertia surrounding financial decisions and people neither take those decisions quickly nor make changes to them very quickly. We think that based on this research, more people may be willing to take financial decisions on landmark dates, so this has a natural implication for financial planning.”

     

    For discussion:

     

    What single change can you make to your financial plan in 2014?

     

  • Trading Places: A Classic

    Trading Places, the classic comedy with Dan Aykroyd and Eddie Murphy, turned 30 this year.  In this Bloomberg interview, Aykroyd recounts his experience with the film and what has changed since then.

     

    For discussion:

     

    How did the characters in the movie make money in Frozen Concentrate Orange Juice?

     

  • Are You Listening to Good Financial Advice?

    A recent survey showed that young people age 18-34, also known as Millenials or Generation Y, are more likely to listen to financial advice than older generations.

     

    A recent article in ThinkAdvisor (19 Dec 2013) cites a survey from TIAA-CREF of 1,000 American adults, 28% of which were Gen Y. According to the article, most Gen Y respondents welcomed financial advice and were likely to change their financial habits based on the advice received.

     

    An example of good financial advice from Amy Podzius, a financial consultant at TIAA-CREF:

     

    Podzius pointed out, for example, that for every 10 years someone delays saving, he’ll need to save three times as much to catch up. Say that person contributes $1,000 per year into an IRA every year from age 20 to age 30, and contributes no more. At a 7% average annual return, his account will be worth $168,515 at age 65.

     

    But if he waits until age 30 to start saving, he will need to contribute $1,000 per year for 35 years at the same average return to reach an account value of $147,914 at age 65.  “If money is tight, setting aside even small amounts now will likely reap large rewards over time,” Podzius said.

     

  • Event-Driven Mutual Funds

    Once upon a time, in financial markets with homogenous expectations and full information, we found that investors do best when they choose a basket of securities that represents the entire investable “market.” And so, modern portfolio theory launched a ginormous industry of indexing.

     

    Index funds are everywhere today. From the S&P Depository Receipt (SPDR or “spider”), to the Vanguard 500 or the T. Rowe Price Equity Index 500 fund—each of these passive investments offers investors the opportunity to mimic the U.S. broad market index known as the S&P 500.

     

    Some investors disagree, and choose actively managed funds as a way to “beat” the market.

     

    Fidelity Investments is offering investors a new kind of mutual fund: the event-driven mutual fund.

                                                                                  

    From Reuters (Mclaughlin, 18 Dec 2013):

     

    Fidelity's two event-driven funds will look to capitalize on moves such as a company being deleted from an index or added to it. These events typically trigger automatic selling and buying by funds designed to follow a particular index.

     

    …The Fidelity event-driven funds also will look to uncover mispriced stocks caused by special situations such as spin-offs, mergers and acquisitions, reorganizations and proxy fights, said Joseph DeSantis, chief investment officer of Fidelity's equity group.

     

    For discussion:

     

    What is modern portfolio theory and what does it suggest about index investing?

     

    What is the difference between passive investing and active investing?

     

    According to the article above, what are some of the benefits of these event-driven funds?

     

  • What To Do If You Suspect Your Credit Card Was Compromised

    In light of the recent hacking scare at Target, consumers are right to be a little leery of credit card and debit card fraud.

     

    This CNN Money video lists four steps to protect your credit if you think your credit may be compromised.

     

  • Risks Introduced by High-Frequency Trading

    This week, the Treasury Department stated that though threats to the financial system are not what they were a year ago, some dangers remain.

     

    From Bloomberg (Klimasinska, 17 Dec 2013):

     

    “Given these volumes, high-frequency trading poses several potential financial stability risks, suggesting that closer monitoring may be warranted,” the office said in the report. Under some scenarios, “high-frequency trading systems may obscure price discovery, exaggerate illiquidity, increase volatility, and contribute to extreme price changes.”

     

    The office, set up as a part of the Dodd-Frank Act of 2010 and run by former Morgan Stanley chief U.S. economist Richard Berner, focuses on identifying and monitoring the stability of the U.S. financial system.

     

    For discussion:

     

    What is high-frequency trading?

     

    What is price discovery?

     

    How might high-frequency trading lead to illiquidity and volatility?

     

  • No Good Very Bad Year for Bond Funds

     

    source: U.S. Treasury Yield Curve from http://www.bloomberg.com/markets/rates-bonds/

     

     

    All the talk of Fed tapering its bond buying program has led to one of the worst years for bond funds.

     

    According to CNN Money (13 Dec 2013):

     

    This is the first time in nearly a decade that investors have taken more money out bond funds than they've put in -- and it tops the previous record from 1994 when investors withdrew almost $63 billion. That year, the 10-year Treasury yield rose from just under 6% to over 8%. (Bond yields rise when investors are selling bonds and pushing prices lower.)

     

    Rising interest rates have also been the catalyst for the rush out of bonds this year.

     

    "The 'taper talk' that started in May proved to be a huge inflection point for the credit markets," said CEO of TrimTabs David Santschi, referring to Federal Reserve chief Ben Bernanke's hints that the central bank could begin to scale back, or taper, its $85 billion a month in bond purchases.

     

    For discussion:

     

    What happens to the value of existing bond investments when rates are expected to rise?

     

    As an investor, what types of investments would you choose in light of rising interest rates?

     

  • Estimating Growth

    A student of finance knows that to properly estimate the value of a company, one must estimate the rate of growth of the firm. Such an estimate is not easy to find. Use an overly optimistic growth estimate, and you’ll pay too much for a share. But if you rely on an overly pessimistic growth estimate, you may miss out on an investment opportunity.

     

    In this Bloomberg video, Airbus CEO Fabrice Bregier talks about his growth estimate for the future of Airbus.

     

    For discussion:

     

    Why is the growth estimate so important when valuing a firm? Do you agree or disagree with Mr. Bregier’s estimate? Why?

     

  • Fed Tapering and Market Volatility

    Photo of Federal Reserve Washington D.C. by Dan SmithRdsmith4 (Own work) [CC-BY-SA-2.5 (http://creativecommons.org/licenses/by-sa/2.5)], via Wikimedia Commons

     

     

     

    A popular topic in the financial news is the potential impact of the Fed tapering. According to this CNBC article, “No matter what the Federal Reserve does, traders expect a volatile week ahead.”

     

    From the article (Domm, 13 Dec 2013):

     

    At its meeting Tuesday and Wednesday, the Fed is expected to discuss removing some of the extreme stimulus it has provided because the economy is improving and its continuous asset purchases may no longer be helping. Whether it acts to slow those purchases is yet to be seen, but that Fed watchers and traders are so widely divided on what it may do raises the odds for a volatile market reaction.

     

    For discussion:

     

    What is the expected market reaction if the Fed announces it will begin to “taper” its expansionary monetary policy? What is the expected market reaction if the Fed does nothing?

     

  • Housing Market Predictions for 2014

    This CNBC video shows predictions for the housing market for 2014.

     

    The highlights:

     

    1.    Home sales will rebound

    2.   Home prices will continue to rise, but not as steeply

    3.   Rents will rise

    4.   Investors will not leave the market

    5.   Mortgage rates will rise

     

  • The Next Best Way to Generate Cash Flow

    photo courtesy of Sears Holdings Electronic Media, available at http://searsmedia.com/tools/gallery/locations.jsp

     

     

     

    What should you do if you have good assets, but not enough income? Sell some of your assets, naturally.

                  

    That’s what Sears is doing.

     

    From the NY Times (Abrams, 6 Dec 2013):

     

    Sears Holdings, the struggling retailer run by the hedge fund manager Edward S. Lampert, said on Friday that it had filed to spin off its Lands’ End business by distributing shares to investors.

     

    … Sears acquired Lands’ End in 2002 for $1.9 billion. The spinoff of the company would follow Sears’s sale of another business, Sears Home and Outlet Stores. The company may still try to find a buyer for Sears Auto Centers. Some analysts have contended that the company would continue a liquidation process that could include Kenmore and Craftsman, two brands named as possible targets, as well as some of the company’s real estate holdings.

     

    For discussion:

     

    Based on the February 2013 Chairman’s Letter and any information you can gather from the 2012 Sears Holdings annual report (ticker SHLD), what do you feel is the future of Sears? As an analyst, would you issue a recommendation of Buy, Sell, or Hold the stock?

     

     

  • From Clamshells to Bitcoin: What Makes Legal Tender?

    The barter system used by early American colonists left them with no medium to store value. They tried clamshells, tobacco leaves, and other agricultural products, but each had its problems. Finally, after an expensive war of independence from British rule, came the first U.S. currency.                    

    From the BBC report, “The Pre-history of the U.S. Dollar” (Graham, 1 Dec 2013):

    In 1785, the Continental Congress met in New York and on 6 July the dollar was established as the official currency of the new United States of America.

    The Congress decided it would be a decimal system with 100 cents to a dollar. But disagreements among the members of Congress - which even then was divided about the extent to which the federal government should dictate to the individual states - meant that it wasn't until 1792 that a mint was established in America.

    And it was another 70 years - 1862, in the middle of the Civil War - before the US Treasury was able to print dollar bills - black on the front, green on the back, so coloured because of the chemicals used to prevent counterfeiting. And so the dollar (or greenback) as we know it today came into being.

    Today, a new medium of exchange is struggling to take hold. Bitcoin is a computerized payment scheme that is not tied to any government, central bank, or taxing authority.

    This video gives a brief explanation of how Bitcoin works:

     

    For discussion:

    What makes money, money? In other words, can Bitcoin be accepted as a medium of exchange? Why or why not?

    What are the benefits of using Bitcoin? What are the potential pitfalls of using a new currency other than a legal tender like the U.S. dollar?

     

  • How To Beat The Market

    How do you beat the stock market? Just ask Warren Buffet.

     

    According to a recent Bloomberg article (Kennedy, 5 Dec 2013), “Warren Buffett isn’t just a great investor. He’s the best investor, an economic study has found.”

     

    The authors of the NBER study found that Warren Buffett’s Sharpe ratio was nearly twice that of the stock market. The Sharpe ratio is a measure of risk-adjusted return, and is the portfolio’s return in excess of the risk-free rate divided by the standard deviation of returns.

     

    How does he do it?

     

    From the article:

     

    The review of Buffett’s investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares.

     

    The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios—and are high quality, meaning they are profitable and have high payouts.

     

    For discussion:

     

    What is value style versus growth style investing? How would you characterize Buffett’s investment style?

     

  • How to Run a Ponzi Scheme Like a Rockstar

    He was living the rock-n-roll dream. Fast cars, fancy condo, and music videos—all on borrowed money. His band never had a single hit and he didn’t earn any money.

     

    Lights Over Paris lead singer, Robert Mawhinney, convinced banks to lend him millions by showing them falsified financial documents and taking bankers on behind-the-scenes tours of recording studios he didn’t own.

     

    The banks eventually called in the FBI and today Mr. Mawhinney is serving a 7-year federal prison sentence.

     

    For discussion:

     

    What is a Ponzi Scheme? In what ways is this rockstar fraud similar to a Ponzi Scheme?

     

    Who is responsible for the fraud? Robert Mawhinney or the banks that lent him money, or both? Why?

     

     

  • What Will Banking Look Like In 2014?

    Years ago we asked whether consumers would trust internet banking. As e-banking took off, we then asked whether brick-and-mortar banks could compete with e-banks.

     

    Today we know that e-banking is here to stay, so what’s next?

     

    According to a recent article in Bank Systems & Technology (Stine, 4 Dec 2013):

     

    This will be the year corporate mobile and online banking fully comes into its own. Banks are devoting more and more resources to front-end innovation that touches the customer, and the corporate customer is demanding an omni-channel experience. Seamless banking “from anywhere” will achieve a tipping point, so as omni-channel banking continues to grow in the retail channel, look for it to take off in the commercial channel.

     

    For discussion:

     

    What are some of the technological innovations found in banking today compared with 20 years ago? Compared with 50 years ago?

     

    What are some of the benefits and risks associated with technology facing banks today?

     

    In your opinion, will brick-and-mortar banks disappear in the years to come? Why or why not?

     

  • Margin Debt on the Rise

    The amount of borrowed funds used to buy stocks is higher than a year ago.

     

    According to CNBC (Cox, 29 Nov 2013):

     

    Margin debt—a measure of how much market participants are borrowing to buy stocks—has soared to $412.5 billion on the New York Stock Exchange. The number represents a 13.2 percent gain from the beginning of 2013 and is fully 50 percent higher than the level in January 2012.

     

    The author suggests two ways to interpret this information:

     

    1.     Positive: investors are optimistic and expect the market to rise enough cover their borrowing costs and lead to a profit.

     

    2.     Negative: investors are overly confident and have begun to take excessive risk.

     

    If history is any indicator, margin debt may reach a high just before the market reaches its peak and starts to tumble. Likewise, margin debt may hit a low just before the market reaches a trough and starts to climb.

     

    For discussion:

     

    How does an investor purchase shares (i.e. go long) on margin versus sell short shares (i.e. going short) on margin? What does it mean for an investor to receive a “margin call?”

     

     

  • Financial Markets Watch Jobs Report on Friday

    This Friday’s jobs report is critical to traders, according to this CNBC interview. If the jobs report is positive, then traders could interpret the news as evidence the Fed will taper which could cause stocks to decline. On the other hand, if the number is “not to hot, not too cold” then the stock market may not sell off as expected.

     

    From the CNBC article (Rosenberg, 1 Dec 2013):

     

    With the Fed looking for the chance to reduce the pace of its $85 billion monthly bond-buying program, the November number could show the type of economic strength that will persuade it to finally take that long-awaited step.

     

    So all eyes are on the jobs report this Friday.