• The Link Between Household Debt and Economic Growth

    In this Financial Times interview, authors Atif Mian and Amir Sufi of the new book House of Debt explain the link between the rise of household debt and the decline in spending and employment. Using data at the city and zip code level, the authors list household debt as the single most important factor to explain economic decline.

     

    For discussion:

     

    Beyond the household debt argument, what are the other explanations for the economic crisis?

     

  • Can Efficient Markets Be Beat?

    The Efficient Market Hypothesis is the central theory of finance. The notion that market prices reflect all available information immediately and fully is widely accepted among many academics and practitioners.

     

    This Financial Times video discusses the current view that because of behavioral biases, markets are not perfectly efficient, and yet the market is still nearly impossible to beat.

     

    For discussion:

     

    What are the three forms of the Efficient Market Hypothesis? What are some of the behavioral biases that violate the EMH?

     

  • Jobs For Bond Traders

    A recent Bloomberg article reports that Wall Street hiring of bond traders has increased recently as Nomura and Deutsche Bank add to their bond trading desks.

     

    From the article:

     

    Debt trading hasn’t been what it was before the 2008 crisis from a profit point of view for two main reasons: New rules have reduced the wagers banks can make with their own money, and near record-low yields are eroding returns. But with interest rates forecast to finally go up sometime soon, it’s poised to become more lucrative.

     

    [read the full article here]

     

    Bond trading is profitable in both the primary and the secondary markets. According to the author, in volatile markets, traders can generate profits as investors sell bonds in the secondary markets. At the same time, bond underwriting fees mean that investment banks earn profits from primary markets as well.

     

  • Banking and Community Development

    Photo of abandoned Packard Automotive plant in Detroit, 2009 by Albert Duce. Used under creative commons license and available on Wikipedia.

     

     

     

    JP Morgan is in the business of taking deposits and issuing loans. That business thrives during times of economic growth when businesses borrow to finance profitable ventures. So it makes sense for JP Morgan to invest in the economy, and that is exactly what JP Morgan’s CEO, Jamie Dimon, announced in his interview with Matt Lauer on NBC’s Today Show.

     

    According to the article from Today Money (Stump, 21 May 2014), Dimon announced a $100 million investment by JPMorgan Chase into Detroit.

     

    From the article:

     

    Detroit, the largest U.S. city to seek bankruptcy protection, is $19 billion in debt and currently has an unemployment rate of about 14%, more than double the national average.

     

    "We're doing this to grow investments, to grow the city, and create a healthy and vibrant city,'' Dimon said. "And if that happens, it's good for us, too. I also look at it as an American patriot. This is one of the few cities that hasn't had a renaissance. Most other cities have. If it's done right, they can have one here, too."

     

    In a city where 40 percent of the buses are broken, 40 percent of the streetlights don't work and a third of the population has left over several decades, Dimon sees opportunity. The bank is hoping to make money from interest on the loan and by rejuvenating a market in which it has a million regional customers.

     

    For discussion:

     

    In your opinion, is this announcement by JPMorgan a publicity stunt, or is it good business sense? Why?

     

  • Repay Student Loan Debt or Build Savings?

    According to this CNBC article, graduates should maintain a balance between paying off student loan debt and saving for retirement. With average student loan balance at $29,400 and credit card debt at $3,000, new graduates are tempted to focus strictly on getting out from under the control of debt.

     

    From the article (Grant, 16 May 2014):

     

    Though it can seem overwhelming, don't focus solely on student loan debt. "A lot of people ask, 'should I be paying off my debt and then start to invest?'" said Stanzak, whose son and daughter will be graduating from college this spring. "It's really important to keep a balance and do both." Time is on young adults' side to build those savings into a retirement nest egg.

     

    Saving as you pay down the debt can also make your financial situation less precarious. Most planners recommend having at least three months' worth of living expenses in a savings account. "Establish an emergency fund so if something goes wrong, you aren't begging, borrowing or stealing," said Mark Prendergast, a certified financial planner based in Huntington Beach, Calif.

     

     

  • What Does The Future Hold for Fannie and Freddie?

    Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) that were born for the purpose of breathing new life into the mortgage market after the Great Depression. These GSEs provided banks with a secondary market by buying mortgages and freeing up banks’ balance sheets so that banks could originate new mortgages and encourage more families to buy homes. In other words, when banks ran out of lending power, Fannie Mae and Freddie Mac stand ready to buy existing mortgages so that the banks can have fresh capital and begin lending once again. (Read more about the history of GSEs here.)

     

    Today, some question whether Fannie Mae and Freddie Mac should live on.

     

    According to Bloomberg BusinessWeek (Coy, 16 May 2014):

     

    On Thursday a narrow bipartisan majority of the Senate Banking Committee voted to send along to the full Senate a bill that would wind down Fannie Mae and Freddie Mac over five years. But because of all the opposition from left and right, the bill is unlikely to get a floor vote this session.

     

    (Read the full article here)

     

    For discussion:

     

    What are the arguments for and against bringing Fannie Mae and Freddie Mac to an end?

     

  • "Recession Babies" Avoid the Stock Market

    Working as a summer bank teller, I remember seeing an older gentleman cash his pension check then carry the cash to his safe deposit box and lock it up. This man and others like him were called “Depression Babies,” and as a group, they distrusted banks after the crash of 1929.

     

    Today, millennials are being renamed “Recession Babies” because of a similar distrust. This time, however, the distrust is directed at the stock market rather than at banks.

     

    According to a recent Bloomberg article (Smialek, 14 May 2014):

     

    Affluent millennials hold 52 percent of their money in cash and 28 percent in stocks, compared with 23 percent and 46 percent for older people, a UBS survey released in the first quarter found. The study focused on 21- to 29-year-olds with $75,000 in income or $50,000 in investable cash, and 30- to 36-year-olds with $100,000 in income or assets.

     

    “They are risk averse, so they have the most conservative portfolio profile of any age bracket under 65,” said Neil Howe, founding partner of LifeCourse Associates, a consulting service for generational marketing and workforce issues. Howe is credited with coining the term “millennial.” “They look at the stock market and they see nothing but danger,” he said.    

     

    For discussion:

     

    What are the consequences of avoiding the stock market?

     

  • Failure to Supervise During IPO Sale

    The Financial Industry Regulation Authority (FINRA) recently announced that one of the big brokerage firms is being fined for failing to supervise its brokers as they solicited orders from retail customers in 83 initial public offerings (IPOs).

     

    In a typical IPO, the brokerage firm asks investors for “indications of interest” before the IPO is launched. These indications are not true orders, however, because the brokerage firm must reconfirm that the investor actually wants to buy the shares before a transaction can take place.

     

    According to the FINRA press release (6 May 2014):

     

    Firms may solicit non-binding indications of customer interest in an IPO prior to the effective date of the registration statement. An "indication of interest" will only result in the purchase of shares if it is reconfirmed by the investor after the registration statement is effective. Brokerage firms are also permitted to solicit "conditional offers to buy," which may result in a binding transaction after effectiveness of the registration statement if the investor does not act to revoke the conditional offer before the firm accepts it.

     

    On February 16, 2012, Morgan Stanley Smith Barney adopted a policy that used the terms "indications of interest" and "conditional offers" interchangeably, without proper regard for whether retail interest reconfirmation was required prior to execution. The firm did not offer any training or other materials to its financial advisers to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited. FINRA also found that Morgan Stanley Smith Barney failed to adequately monitor compliance with its policy and did not have procedures in place to ensure that conditional offers were being properly solicited consistent with the requirements of the federal securities laws and FINRA rules.

     

    (read the full press release here)

     

    For discussion:

     

    What is the difference between an “indication of interest” and a “conditional offer,” and why is it important?

     

    What can Morgan Stanley Smith Barney to remedy the supervisory failure?

     

     

  • The "New Neutral" For U.S. Treasury Yields

    The rise in the price and drop in yield of the 10-year US Treasury note is telling us that the market expects central banks to keep rates at their current low levels.

     

    In a recent MarketWatch article (Eisen, 16 May 2014), Bill Gross of PIMCO is quoted as saying that the new 10-year yield of 2.50% is the “new neutral.”

     

    From the article:

     

    With economies expanding more slowly than they did prior to the financial crisis, central banks are likely to keep their key interest rates low, cushioning lending rates from a sharp rise. In the U.S., the fed funds rate is currently anchored near zero, with many traders expecting it to begin rising in the middle of next year . But Gross suggested yields will be dictated by how high the Fed eventually hikes rates. It may stop at a lower point than it did in past rate cycles.

     

    “If the new neutral policy rate is 0% and the Fed achieves its 2% inflation target, then the 10-year Treasury should trade at close to 2%. However, because of the large uncertainty as to what the New Neutral rate should be, I would not expect it to trade there,” the Pimco founder said.

     

    Under his outlook, the Fed’s nominal funds rate would top out somewhere near 2% in the coming years. That’s a relatively small climb from the current rate of near zero.

     

    For discussion:

     

    According to this blog post, what is meant by the shift from the “new normal” to the “new neutral?”

     

  • Financial Literacy in America

    Financial literacy continues to elude many. According to the 2012 report on the Financial Capability in the United States released in May by FINRA, the Consumer Financial Protection Bureau, and the U.S. Department of Treasury:

     

    ,,,While the percentage of Americans with “rainy day” funds for unanticipated financial emergencies has increased relative to 2009, the majority still have not set aside emergency funds, and do not plan for predictable life events, such as their children’s college education or their own retirement.

     

    … Americans continue to borrow in potentially expensive ways. More than two in five credit card holders engage in costly behaviors such as paying the minimum, paying late fees, paying over-the-limit fees or using cash advances from their credit cards. Nearly a third of Americans report using non-bank borrowing methods (such as payday loans, advances on tax refunds or pawnshops). Forty-two percent of Americans feel they have too much debt.

     

    For discussion:

     

    How do you rate yourself in terms of financial literacy?

     

  • CME Launches Futures Trading in London

    The world’s largest futures exchange has expanded. The Chicago Mercantile Exchange (CME) launched CME Europe about two weeks ago. The new exchange is based on London, and provides a venue for trading of currencies and some commodities.

    For discussion:

     

    According to the video and this article in Hedge Week (Williams, 30 Apr 2014), what factors prompted the CME to establish CME Europe?

     

  • Networking: The Key to Success

    As the former head of wealth management at Bank of America, Sallie Krawcheck knows something about how the business world operates. Today she owns the women’s networking organization, 85Broads, which was named for Goldman Sachs’ original address, 85 Broad Street, and included women who worked at the investment bank.

     

    In a recent speech to business students, Ms. Krawcheck shared her 10 tips for success on Wall Street. Among her top 10 was tip #5:

     

    Nurture your network

     

    Networking is the number one "unwritten" rule for success in business, says Krawcheck.

     

    Making connections with people in your business circle will help you identify new opportunities, spot talent and learn about potential threats. But you have to nurture your network in order for it to yield results.

     

    Krawcheck recommends doing one favor for a person in your network and deepen a relationship at least once a month.

     

    (read the full list at CNN Money, Rooney 9 May 2014)

     

  • The Popularity of Share Repurchases

    Corporations can distribute cash flow to shareholders in two ways. The most obvious way is to pay dividends. The other is to buy back shares.

     

    According to a recent Washington Post article (Pearlstein, 9 May 2014):

     

    The corporations of the Standard & Poor’s 500-stock index spent $477 billion last year buying back their own shares, a 29 percent increase over 2012 and the most since the peak year of 2007. The idea behind buybacks is that they are a tax-advantaged way to return profits to shareholders by boosting the market price of their shares. Since the stock market tends to value companies by multiplying the profits per share times the number of shares, reducing the number of outstanding shares has the arithmetic effect of boosting the stock price.

     

    Firms that bought back their own shares in 2013 include Boeing, Caterpillar, and Microsoft.

     

    For discussion:

     

    Where are firms finding the cash to pay for the share buybacks? What are some reasons why share repurchases are so popular lately?

     

  • Liquidity is King

    The best thing about buying a “mega-cap” stock is that it’s easy to sell.

     

    Liquidity—the ability to sell an asset quickly without a loss in market value—is highly prized, especially among the top money managers.

     

    According to this MarketsMedia article (5 May 2014):

     

    Professional money managers held nearly one-quarter of their portfolios in just 40 stocks out of the 13,000 listed companies in the U.S. The five most held stocks by institutions were Apple, Google, ExxonMobil, Microsoft and Wells Fargo. The analysis was compiled from 13-F filings for the quarter ended December 31, 2013, the most recent quarter for which data is available.

     

    Companies with large institutional ownership accounted for a disproportionate share of the market’s trading volumes. In March, the 600 most liquid stocks represented 75% of all the dollars that traded daily during that time period.

     

    For discussion:

     

    Does this investing pattern by large money managers suggest investment opportunity for the small retail investor? Why or why not?

     

     

    photo by N. Richie

     

  • How Do Social Media Companies Make Money?

     

    To watch this Bloomberg video, click here

     

     

    Ever wonder how social media companies generate profits? This video explains how LinkedIn works and makes money.

     

    LinkedIn’s revenue source is a little different from Facebook’s revenue source, though there are some similarities.

     

    For discussion:

     

    What do you think the future holds for LinkedIn and other social media firms?

     

    Are there growth opportunities in this industry?

  • Credit Card Microchips: Coming Soon to a Bank Near You

    photo of Bank of China Platinum Visa Credit Card with EMV chip by Shujenchang. Available at http://en.wikipedia.org/wiki/File:BOC_Platinum_EMV_Visa_Credit_Card.jpg under creative commons license.

     

     

    When it comes to credit card security, the U.S. is behind its global counterparts. For years, consumers in Europe and elsewhere have been using credit cards with chip-and-pin technology. That is, a microchip is embedded in the credit card that makes it difficult for the card to be duplicated.

     

    According to this article from the Virginian-Pilot online (Varble, 7 April 2014):

     

    In the wake of high-profile thefts of data like the breach late last year at Target, major credit card companies are pushing banks and merchants to convert to microchip technology by October 2015 because personal information is much harder to lift from microchips. The cards are known as EMV cards – named after Europay, MasterCard and Visa, the companies that developed the technology.

     

    The technology can be used two way: chip-and-pin or chip-and-sign. As their names suggest, the first requires the credit card holder to enter a pin number into the point-of-sale terminal while the other requires a signature. Of course neither technology will eliminate fraud, especially as credit cards are used to pay for purchases online. However, the presence of the microchip should put a dent in crime and reduce the cost of fraud as it has overseas.

     

    For discussion:

     

    Why has the U.S. been slow to adopt this microchip technology? What are some possible effects that are likely to occur after such technology is adopted?

     

     

     

  • The Green Index: A New Level Of Social Responsibility

    For years, the performance results of socially responsible investments have been mixed. Some investors choose not to invest in so-called “sin stocks,” that is tobacco, alcohol, or gambling. Others take social responsibility a step further and choose not to invest in companies that mistreat their employees or test their products on animals or violate human rights.

     

    Environmentalism has always been a popular screen for socially minded investors, but this week marks the first time such investors would have a truly “green” stock index to track.

     

    From Bloomberg (Roston, 2 May 2014):

     

    The Natural Resources Defense Council this week announced a partnership with the FTSE Group, a leading creator of stock indexes, and BlackRock, the world’s largest asset manager. They will develop a global stock index for climate-minded investors that excludes coal, oil and natural gas companies, and any others that profit from extraction, a first, according to NRDC.

     

    Investors will be able to use the index to build their own fossil-free funds, and thus avoid risks they see from "unburnable carbon." The phrase, which was popularized by the U.K.-based Carbon Tracker Initiative, refers to fossil fuel reserves that can't be burned if the atmosphere is to stay within a low level of warming.

     

    Holding fossil-fuel stocks could put investors at risk, as society starts to leave carbon in the ground, the thinking goes. Some environmentalists have taken the Carbon Tracker research as a cue to dump fossil fuel investments altogether, rather than as a tool to consider portfolio risk.

     

    For discussion:

     

    According to this article by Glushkov and Statman, how do socially responsible investment returns compare with conventional portfolios? What explanations do the authors offer for their results?  

     

  • Papa Murphy's Experience

    In this video, Papa Murphy’s CEO describes his experience working with a private equity firm and preparing for an IPO. The IPO launched Friday priced at $11/share.

     

    From The Oregonian (Francis, 2 May 2014):

     

    With a pricing at $11 and an opening price of $12.10, the launch of trading was about an $73.7 million event for Papa Murphy's. A portion of the proceeds were returned to Lee Equity Partners, an early investor that continues to own about 40 percent of the company.

     

    Papa Murphy's is putting the proceeds to work on multiple fronts, Calwell said, but a particular focus will be on a geographical expansion focused on franchises in the Midwest and Rocky Mountain States. He said the company expects to add 105 new stores this year. It has about 1,400 stores in 38 states now and thinks it could eventually reach as many as 4,500, he said.

     

  • Private Equity For The Rest Of Us

    In a departure from industry standard, private equity firm K.K.R. is seeking investors with as little as $10,000 to invest.

     

    From the NY Times (Alden, 1 May 2014):

     

    K.K.R. is working with another firm to allow investors to commit a minimum of just $10,000 for exposure to its private equity funds, according to a filing with regulators on Thursday. The new investment product, subject to approval by the Securities and Exchange Commission, would be the first time K.K.R. had taken smaller investors into its core business of buyouts.

     

    Private equity giants, which typically raise their funds from institutions and ultrawealthy individuals, are trying to gain access to so-called retail investors, who are seen as a vast new source of capital. A rival of K.K.R., the Carlyle Group, introduced a product last year that, in partnership with a third-party firm, allowed investors to commit as little as $50,000 for access to Carlyle’s private equity funds.

     

    For discussion:

     

    What is a private equity firm and why have they been available to wealthy clients only?

     

    Do you think that retail investors should be able to invest in private equity? Why or why not?