• Investors Eager to Buy Infrastructure Assets

    Traditionally, when governments seek financing for infrastructure-related projects, they turn to the big banks. However, as banks grow increasingly reluctant to invest in risky projects, governments are turning to long-term investors such as pension funds, endowment funds, and sovereign-wealth funds.

     

    From the Economist (22 Mar 2014):

     

    Sovereign-wealth funds and others after the raciest returns are keen on owning infrastructure assets rather than just lending to them. Private-equity firms have raised $250 billion to spend on infrastructure, up from $9 billion a decade ago, says Preqin, a data provider. Blackstone, a buy-out firm, is among those that financed a $900m hydroelectric dam in Uganda that provides half the country’s electricity. Bringing in private investors has benefits beyond shifting debt off public balance-sheets (a wheeze behind many of Britain’s less-than-stellar public-finance initiatives). The three prisons in France will be built by a contractor that will bear the risk of cost overruns, for example. Unlike lackadaisical local authorities, the companies involved will be deeply bothered if the prisons open late, as payments will kick in only once they are available. If operating them is dearer than expected, investors will suffer. Private-sector rigour can thus bring down the cost of public services.

     

    (read the full article here)

     

    For discussion:

     

    What are the benefits and risks associated with private funding of infrastructure rather than bank lending?

     

  • Can Retail Investors Beat the Pros?

    In finance, professional traders are often referred to as “informed” traders while retail investors are sometimes called “noise” traders. From these labels, one can conclude that informed traders have the advantage over noise traders, and that noise traders can’t beat the market.

     

    According to this MSN article (Bilello 27 Mar 2014), however, there may be reason for small investors to take heart. While they probably can’t outsmart the pros, they do have a few advantages over them.

     

    1.     Small investors have the advantage of time. With multi-year investment horizons, small investors can outwait the professional investors, who probably need to show a return within a very short time frame.

     

    2.    Small investors have the advantage of patience. No clients means no need to act impatiently. Professional investors do not always have this luxury.

     

    For discussion:

    Do you believe you can “beat” the market? Why or why not?

     

  • Gold Investing May Get Easier

    An investor can buy gold several ways. One is to buy gold futures contracts on the CME. Another is to buy exchange traded funds that mirror the price of gold. Investors can even buy physical gold—but then the headache of delivery and storage comes into play.

    The Singapore Exchange Ltd. (SGX) is considering making the third option more convenient.

    According to Bloomberg Businessweek (Chanjaroen, 26 Mar 2014):

    The plan would include bullion deliveries into and out of the Southeast Asian country, said the people, who asked not to be identified because the issue is confidential. SGX declined to comment in an e-mailed statement.

    SGX may join peers in South Korea and China in offering physical bullion trading as Asian demand increases, drawing supplies out of Europe. The Singapore government is promoting the city-state as a center for precious metals by removing a sales tax on investment-grade metals in 2012, and as JPMorgan Chase & Co. and UBS AG started storing gold for customers.

     

    For discussion:

    What are the benefits and limitations of each of these three methods of gold investing?

     

  • Active Versus Passive Investing

    Two broad approaches to choosing investments for your portfolio are passive investing and active investing. Active investors believe that they (of their money managers) possess the ability to choose winning investments and “beat” the market. Some active investors choose market timing strategies while others choose stock-picking strategies. Unfortunately, on average, most investors are average. In the end, many active investors discover that they cannot beat the market. In fact, many discover that they underperform the market because of the fees involved with trying to actively manage the portfolio.

     

    Enter passively-managed index funds. Proponents of passive investing claim that the best investment decision is to match the market return, and even better, to do so at the lowest possible cost. This investing style chooses financial assets that mimic an index.

     

    According to this USA Today article (Waggoner, 20 Mar 2014):

     

    Your basic index fund boots the manager and selects its stocks (or bonds, or other securities) according to an index, such as the Standard and Poor's 500. Until recently, most stock indexes weighted their holdings according to the market value of the stock.

     

    The article goes on to describe other weighting schemes for passively-managed funds such as equal weighting or rules-based funds. Whether these other weighting schemes are wise is debatable, of course. According to the article, any scheme that deviates from a traditional market value weighted index is just another form of active trading. In the end, a true passively-managed fund may still be the best investment idea.

     

    For discussion:

     

    ·       According to the article by Bill Sharpe found here http://www.stanford.edu/~wfsharpe/art/active/active.htm, what are the differences between active and passive investors? Why must the actively managed fund underperform the passively managed fund?

     

    ·       According to the USA Today article cited in the post above, what are the limitations associated with a market-value (or market-cap) weighted index fund?

     

  • Baby Boomers and Retirement

    The top financial regret of baby boomers is that they didn’t save enough money in their younger years. Dowd (21 Mar 2014) cites a recent AARP survey that “36% of workers age 55+ have less than $10,000 in savings and investments; nowhere near the amount they need for financial security after they leave the labor market.”

     

    That’s scary.

     

    From the article:

     

    The last of the baby boomers will celebrate the big 5-0 birthday this year. And experts say that after they blow out all their candles, boomers need to take an honest look at their financial situation and establish their financial future.

     

    Known as the generation of opportunity and optimism, many boomers are worried over retirement—and for good reason. A study released by the Employee Benefits Research Institute earlier this week shows that 18% of workers report being “very confident" that they'll have enough money for a comfortable retirement, an increase from 13% in 2013. Thirty-seven percent say they are "somewhat confident" and 24% are "not at all confident." While the numbers are an improvement from last year thanks to Wall Street’s record performance, it’s still low.

     

    For discussion:

     

    What are some steps you plan to take in your early career to prepare for financial security in retirement?

     

  • Insider Trading The Old-School Way

    In this technologically sophisticated age, the thought of passing insider trading tips on napkins and post-it notes seems like a blast from the past. But that is exactly what three men are accused of doing in Grand Central Station in NYC.

     

    According to the NY Times (Protess, 19 Mar 2014):

     

    When armed with an inside tip, Mr. Metro would contact the middleman with a simple text message: “Do you want to meet for coffee?” They would get together at a New York coffee shop, where Mr. Metro would show his cellphone screen displaying the ticker symbol of the stock that should be bought.

     

    The middleman would then head to Grand Central Terminal’s signature four-faced clock, where he would relay the stock to Mr. Eydelman on a Post-it note or napkin. Mr. Eydelman — who, according to the government, used the tips to place well-timed trades on behalf of himself, family and more than 50 other brokerage customers — would watch as the middleman “chewed up, and sometimes ate, the Post-it note or napkin.”

     

    Mr. Eydelman would often return to his office to gather public research about the stock, which he then emailed to the middleman. When regulators questioned some well-timed trades by some of Mr. Eydelman’s customers, he cited that paper trail to fend off the inquiry.

     

    For discussion:

     

    What types of information are considered “material non-public information?” Does the fact that Mr. Eydelman created a paper trail after receiving an inside tip justify his purchases of these stocks?

     

     

     

  • The Fight Against High-Frequency Trading

    The question keeps resurfacing: is high-speed trading is unfair? In a fresh assault on this popular and profitable market practice, NY Attorney General Eric Schneiderman said that he will investigate the potentially “predatory” practices associated with high-speed trading.

     

    From his speech at the New York Law School:

     

    “Rather than curbing the worst threats posed by high-frequency traders, our markets are becoming too focused on catering to them,” said Attorney General Schneiderman. “I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market.  We call it Insider Trading 2.0, and it is one of the greatest threats to public confidence in the markets.  It’s long past time that we focus on structural reforms to help eliminate the unfair advantages enjoyed by high-frequency traders.”

     

    According to Bloomberg (Geiger and Mamudi, 18 Mar 2014):

     

    The investigation threatens to disrupt a model that market regulators have openly permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.

     

    For discussion:

     

    Should regulators curb high-frequency trading? If so, how should they do it?

     

     

  • The Week Ahead for the Fed

    Big week ahead for the Fed and Fed watchers. The Fed will be releasing its policy statement on Wednesday, and investors are waiting to see how that statement will affect financial markets.

     

    From CNBC (Rosenberg, 16 Mar 2014):

     

    The Fed meeting starts on Tuesday, and the Federal Open Market Committee is set to release its policy statement on Wednesday at 2:00 p.m. ET. The real excitement could come a bit later that afternoon, when Janet Yellen gives her first press conference as Fed chair.

     

    Most economists expect the Fed to taper asset purchases by another $10 billion, reducing the size of quantitative easing to $55 billion per month.

     

    … But when it comes to the federal funds rate, the question of what the Fed will do becomes more complicated. In the FOMC's previous statement, the Fed reiterated that it would keep that key rate ultralow as long as inflation is not projected to rise more than half a percentage point above 2 percent, and the unemployment rate remains above 6.5 percent.

     

    For discussion:

     

    What is expected to happen to financial markets if the Fed begins to taper asset purchases as expected?

     

  • Uncovering a Pump-and-Dump Scheme

    When a financial journalist is paid to write articles about a particular stock, one might consider this freelance work. But when the author is paid to write favorable articles about a particular stock and agrees not to disclose the payment arrangement, one has to suspect a “pump-and-dump” scheme.

    According to Barron’s (Kimmelman, 14 Mar 2014), a recent scheme involving Galena Biopharma and CytRx Corp. was uncovered by Richard Pearson, an investor and freelance writer who was asked to promote these stocks in the online investment magazine, Seeking Alpha.

    From the Seeking Alpha article where Pearson documents his investigation:

    A few weeks ago I received a surprising email asking me to be a paid stock tout for IR firm "The Dream Team Group." I was asked to write paid promotional articles on Galena Biopharma (GALE) and CytRx Corp (CYTR), without disclosing payment. Rather than refuse outright, I decided to investigate. I began submitting dummy articles to the Dream Team rep (with no intention of ever publishing them). My goal was to determine how involved management from these two companies were in this undisclosed paid promotion scheme. Below I will provide detailed documentation (emails and attachments) that indicate management from both Galena and CytRx were intimately involved in reviewing and editing the paid articles on their own stock at precisely the time they were looking to sell / issue shares.

     

    Pearson goes on to describe how the promotional articles were “coordinated with the release of news.” Proving unethical behavior might be a challenging task, but this case looks and smells like a scheme designed to drive up stock prices.

     

    For discussion:

    What is a “pump-and-dump” scheme?

    What ethical violations are the executives of Galena and CytRx Corp accused of committing? How do their actions hurt investors and the integrity of financial markets?

     

     

  • Is Margin Debt Bullish or Bearish?

    Margin debt is on the rise, and according to this CNBC article, this could be interpreted as a bullish or a bearish signal.

     

    "Bears beware," said TrimTabs chief executive David Santschi in a research note on Monday. "Rising margin debt is a bullish indicator in the TrimTabs Demand Index this week."

     

    … But there remains some debate as to whether this margin debt indicator is actually a negative sign. Investors might be so confident in the market that funding their purchases from other sources will mean that they'll be able repay their debts and pocket a nice profit as markets rise. On the flipside, investors might be so confident that they're willing to take risks and over leverage themselves and accentuate any future market correction.

     

    For discussion:

     

    What is margin debt? How does margin lead to leverage of returns?

     

     

  • It's Time To Make The Donuts

    Source: finance.yahoo.com

    It seems that despite how unhealthy donuts are, we still love them. And as long as donuts generate revenue, donut stocks generate stock returns.  

    Krispy Kreme (ticker KKD) and Dunkin’ Brands (ticker DNKN) are two stocks that have been doing well recently.

     

     

    For discussion:

    ·       Based on recent financial statements, how profitable are these two companies?

    ·       In your opinion, should you buy, sell, or hold one or both stocks? Why?

     

  • Historic Bond Default in China

    Chinese investors experienced a historic event this week: the first bond default in 17 years. While the default of a single company may be a non-event in most developed economies, in China where weak companies have not been allowed to fail in the past, this bond default signals a new stage of financial development.

     

    From CNBC (Cox, 7 Mar 2014):

     

    Standard & Poor's analysts in Hong Kong called the default a "transformative event" for China's bond market that nevertheless probably won't pose systemic credit risks.

     

    "We believe this landmark event will make lenders and investors more disciplined, and it will likely lead to higher funding costs and tighter refinancing conditions for low-quality corporates," S&P credit analyst Christopher Lee said in a statement.

     

    The firm said it believes China's government "is beginning to address the difficult moral hazard and implicit state guarantee of financially weak and commercially unviable borrowers."

     

    China's nearly $14 trillion corporate debt market is a minefield often filled with overpriced securities for companies that reap the benefits of having implicit government guarantees.

     

    For discussion:

     

    What is moral hazard? How is the “implicit state guarantee” lead to moral hazard in the Chinese bond market?

     

    Based on this Bloomberg article, what impact has the default had on markets for Chinese bonds?

     

  • Are We In A New Dot-Com Bubble?

    What should you look for before you buy shares in a company? Would you consider fundamentals like their market share, revenue growth, earnings?  If so, you may be in the minority.

     

    From a recent Bloomberg editorial by Jonathan Weil (7 Mar 2014):

     

    Today a 16-year-old company that loses money called Coupons.com Inc. went public. Had I been paying attention to Coupons.com sooner, I might have guessed after the disastrous post-IPO performance of Groupon Inc. that investors' appetite for yet another online-coupon company would have been sated. But no, that would have been wrong.

     

    Coupons.com, with Goldman Sachs as its lead underwriter, raised $168 million, selling 10.5 million shares for $16 each. And the stock rose as much as 103 percent to $32.43, making it today's biggest gainer by far. If that doesn't remind you of 1999, then you probably weren't following the stock market back then.

     

    Weil compares the recent IPO craze to the dot-com bubble of the 1990s. Are we in for it again?

     

    For discussion:

     

    How does Weil describe the dot-com bubble of the late 1990s? How does that compare with the IPOs of today?

     

     

  • Hitting the Jackpot

     

    Image of gold discovery via Kagan’s inc. available at http://time.com/13071/saddle-ridge-hoard-gold-coins/

     

     

     

    Imagine finding a jackpot buried by an old tree in your yard. A northern California couple did just that when they were out walking their dog and happened to find gold coins dating from 1847 to 1894 worth $10 million.  

     

    From CNBC (25 Feb 2014):

     

    What makes their find particularly valuable, McCarthy said, is that almost all of the coins are in near-perfect condition. That means that whoever put them into the ground likely socked them away as soon as they were put into circulation.

     

    Because paper money was illegal in California until the 1870s, he added, it's extremely rare to find any coins from before that of such high quality.

     

    "It wasn't really until the 1880s that you start seeing coins struck in California that were kept in real high grades of preservation," he said.

     

    The coins, in $5, $10 and $20 denominations, were stored more or less in chronological order in six cans, McCarthy said, with the 1840s and 1850s pieces going into one can until it was filed, then new coins going into the next one and the next one after that. The dates and the method indicated that whoever put them there was using the ground as their personal bank and that they weren't swooped up all at once in a robbery.

     

  • How Much Do You Need for Retirement?

    This CNN Money video explains that to get through retirement at the lifestyle you’re accustomed to, you’ll need to have saved about 12 times your annual income. Other factors that influence how much money you need to have set aside include:

     

    ·       What you want to do during retirement

    ·       Inflation

     

    For discussion:

     

    How should you choose how much to invest in stocks versus bonds?

     

    What role does diversification play in planning your retirement savings?

     

    How should you include your future income and job security in the planning of your retirement income?

     

  • What's A Company Worth?

    Bloomberg reported the Berkshire Hathaway was up 0.9% to $183,772  per share. From the article (Buhayer, 7 Mar 2014):

     

    Berkshire traded today for 1.36 times its book value, a measure of assets minus liabilities, according to data compiled by Bloomberg. That compares with an average ratio of about 1.4 over the past decade.

     

    Buffett has said intrinsic value, a subjective metric that accounts for the amount of cash that can be taken out of a business in its lifetime, is a better tool for evaluation. He cited the gap between the two measurements as a reason to buy back the company’s stock if it trades for less than 120 percent of book value, and said he’d be “aggressive” with repurchases.

     

    For discussion:

     

    How can an investor estimate the intrinsic value of a share of stock?

     

    Based on the Chairman’s Letter on p. 3 of the Berkshire Hathaway Annual Report, what are some of the activities that are driving the intrinsic value of this firm?

     

  • Greece Tests the Waters Again

    photo by phillyboy92 available at http://simple.wikipedia.org/wiki/File:Greek_flag_waving.png#filelinks

     

     

    Greece is testing the waters again. According to the NY Times (Kitsantonis, 6 Mar 2014):

     

    Piraeus Bank, Greece’s largest lender, is set to became the first Greek bank to tap the capital markets since the euro zone crisis erupted five years ago.

     

    Piraeus is planning to issue a senior bond after a European road show that is to begin next week “with a series of meetings with fixed-income investors in selected European cities,” the bank said in statement on Thursday. It did not specify the value of the debt issue, but media reports indicated it would be 500 million euros.

     

    The bond issue will be ahead of the planned assessment by European regulators of regional banks this fall. Piraeus Bank said it was able to make the leap because of “the constantly improving economic environment in Greece and the strong position of Piraeus Bank.”

     

    For discussion:

     

    What is a “roadshow?” According to this Reuters article, what hurdles does Pireaus Bank face as it tries to borrow money after years without access to capital markets?

     

     

  • Options and Unexpected Dividends

    Option pricing models assume that the underlying asset pays no cash flows during the life of the option. That’s an unrealistic assumption, of course, because stocks pay dividends.

     

    So we adjust the model to account for dividends…the dividends we expect, that is.  However, for special dividends, stock splits, and other big events that affect the share price, the strike price of existing options contracts are adjusted.

     

    This CNBC video explains that there are two kinds of dividends: (1) regular, expected cash dividends, and (2) special dividends, like the one recently announced on the QQQ exchange traded fund. 

     

    Read more about contract adjustments here.

    For discussion:

     

    How is the Black-Scholes-Merton option pricing model adjusted for regular cash dividends?

     

  • A Tale Of Two Rivals

    The battle for the men’s suit continues. According to this NY Times article (First, Jos. A. Bank tried to buy Men’s Wearhouse, but failed in its attempt. Men’s Wearhouse responded with a hostile takeover bid for Jos. A. Bank. Not to be thwarted, and to defend against the hostile bid, Jos. A. Bank then tried to buy Eddie Bauer.

     

    According to the NY Times (De La Merced, 14 Feb 2014):

     

    The deal appears to be an effort to blunt the hostile $1.6 billion bid by Men’s Wearhouse, which Jos. A. Bank has called underpriced. Yet the clothier built escape hatches into the Eddie Bauer deal in case an alternative transaction, mainly a higher offer from Men’s Wearhouse, emerges.

     

    The deal on Friday is the latest twist in the protracted drama that has enveloped two of the country’s most prominent suit retailers. Jos. A. Bank moved first, trying and failing to buy its bigger rival for $2.3 billion in the fall. Men’s Wearhouse then turned the tables, pursuing its onetime suitor and beginning a campaign to oust Jos. A. Bank’s chairman and chief executive as directors.

     

    For discussion:

     

    What is the latest negotiation from the Jos. A. Bank v Men’s Warehouse drama according to this NY Times article (De La Merced, 27 Feb 2014)?

     

    What is a hostile takeover? What defenses do company management have against a hostile takeover?

     

  • Regulation Post Bitcoin

    What began as an online gaming platform grew into Mt. Gox , the Bitcoin exchange that went bust this past week. Now federal regulators are trying to figure how to keep something like this from happening again.

    From the NY Times (Tabuchi and Abrams, 26 Feb 2014):

    Authorities around the world are grappling with how to regulate virtual currency in the wake of the implosion of Mt. Gox, a prominent trading platform for Bitcoin.

    In Tokyo, where Mt. Gox is based, Japan’s top government spokesman, Yoshihide Suga, said on Wednesday that agencies including the Financial Services Agency, the Finance Ministry and the police were collecting information on the Bitcoin trade in Japan, with an eye toward regulatory action.

     

    For discussion:

    Why are regulators so interested in Bitcoin? What risks are associated with this digital currency?