• Ownership of the NYSE

    Back in the "old days," the right to trade shares on the New York Stock Exchange (NYSE) belonged to those who owned seats. These seats where a valuable commodity, and their prices rose and fell with the times. In 2005, the NYSE merged with an online trading firm, Archepelago, and for the first time became a publicly traded company.

    Today, the NYSE is owned by the Intercontental Exchange (ICE) who just this past week completed an initial public offering of its shares.

    From the press release (20 June 2014):

    ICE, through a wholly-owned subsidiary, sold 42,248,881 ordinary shares of Euronextt in the IPO at €20 per share, 23,352,000 ordinary shares of Euronext to a group of European institutional investors that will replace ICE as reference shareholders at €19.20 per share and 188,296 ordinary shares of Euronext to eligible Euronext employees at €16 per share. ICE has granted the underwriters an over-allotment option of up to 4,210,823 ordinary shares of Euronext, which can be exercised for 30 days after the first trade date. Therefore, ICE may continue to hold up to 4,210,823 of the 70,000,000 total issued and outstanding ordinary shares of Euronext if the over-allotment option is not exercised in full. Any shares that are continued to be held by ICE will be subject to a 180-day lockup period. If the over-allotment is exercised in full, the IPO and reference shareholder transaction will represent 100% of the total issued ordinary share capital of Euronext.

    For discussion:

    What are the benefits and limitations of pit-traded auction markets? What about electronic markets?

  • Does Inflation Affect You?

    This recent MarketWatch article lists 10 everyday items that are impacted by inflation. Among them are gas prices, food items (such as pork and chicken), and health care spending.


    From the article (Reeves, 27 June 2014):

    The sad reality of stagnant wages means that consumer prices don’t have much wiggle room — because many family budgets don’t have much wiggle room, either. If businesses keep increasing prices, then they are going to force consumers to make hard choices — and could actually depress sales as a result.

    But whatever the long-term trend in inflation or the broader impact on consumer stocks and family budgets, it’s undeniable that prices are on the rise. And for certain expenses, the prices are moving higher very fast, and that could have a significant impact on investors.


    Inflation sneaks up on us. But when higher prices are met with stagnant wages, we eventually notice that we buy less  with each paycheck than we bought with the paycheck before it.


    For discussion:

    How does the central bank's monetary policy affect inflation? What do market experts expect will be the result of Fed policy since the crisis?

  • Millenials Find A Place Of Their Own

    photo by Gregoryj77 available on Wikimedia

    Millenials have long been stuck living with their parents, but as their financial situations improve, they are expected to enter the world of homeownership in the coming years.

    From a recent CNN Money article (Brody, 27 June 2014):

    Some 11 million recent grads were living with a parent in 2012, according to Pew. The homeownership rate for those under age 35 was 36% in the first three months of 2014, down from a high of 43% in 2005, according to the Census.

    Three main factors have been holding them back, said the Harvard study: A weak job market for recent graduates. Student loans. And tight lending standards.

    But as the economy turns around, the obstacles have begun to fall.

    In the meantime, millenials can do some things to take advantage of living at home

    For discussion:

    Are you looking forward to buying your own home? Why or why not?

    Does renting sound more appealing than buying, or buying more than renting? Why?

  • Bond Market Transparency...Or Lack Thereof

    Bond markets are notoriously opaque. Unless you're a dealer active in a particular bond, you can't really identify the fair value of any particular bond. This is a problem for institutional investors as well as retail investors.

    From this Bloomberg article (Levine, 20 June 2014):

    This problem is not really about institutional investors getting ripped off, that is, being tricked into buying bonds at off-market prices. There are more fundamental structural worries about declining liquidity in the bond markets: What will happen if investors want to sell and there are no dealers to buy?7 How risky is it to have so many bonds held by ETFs? Should big bond managers such as BlackRock and Pimco be regulated as too-big-to-fail risks to financial stability?

    These are tough questions, but one plausible way of addressing them might be to open up trading of bonds somewhat. The current model of investors calling dealers for quotes makes sense if dealers provide a lot of liquidity; but if the dealers are just working as well-paid, information-hoarding middlemen between investors, then maybe there are more efficient ways for investors to interact. And in fact there have been efforts to develop electronic, inter-institution trading platforms that would make the bond markets a bit more like the stock markets, by allowing investors and dealers to post quotes in the same place, and trade directly with each other.

    For retail investors, nailing down the value of a particular bond is tricky and involves phone calls and expertise. For institutional investors with the expertise, identifying the value of a bond is still a time-consuming, and labor intensive, endeavor. What's an investor to do?

    For discussion:

    1. What is liquidity, and how would we measure liquidity in bond markets?

    2. Why are bond markets so opaque? What can be done to improve transparency?

    3. Is transparency a desirable quality in financial markets? Why or why not?

  • Minimum Wage: A Study in Supply and Demand

    (photo courtesy of creative commons)

    Though minimum wage is still $7.25/hour, some parts of the country are experiencing economic booms and are seeing wages climb to $11/hour or higher. North Dakota is one example. Fast food managers there can earn up to $20/hour. With low unemployment, finding workers willing to accept low wages is impossible.

    From a recent CNBC article (Little, 20 June 2014):

    North Dakota's 2.6 percent unemployment rate is the lowest in the nation. Within that, Williams County, where Williston is located, boasts an unemployment rate of just 0.9 percent 

    "That basically means that anybody who wants a job can get one almost immediately," Perry said. "You really don't need living wages or minimum wages because the market pushes wages way up."

    To counteract higher wages, franchise operators have pared down and priced up.

    For discussion:

    What are some of the effects of higher wages on consumers?

  • Men and Women: Wealth Gap v. Income Gap

    This Bloomberg video discusses a survey that found about half of millionaire women entered their marriages with the same or more wealth than their husbands. However, only about a third of the women earn more income than their spouses. So when it comes to wealth, no real gap exists, but an income gap still exists.


    For discussion: What factors can explain these findings?

  • Risks To Your Investment Portfolio

    Image courtesy of http://www.planetofsuccess.com/ used by Creative Commons license.

    A recent MarketWatch article (Jaffe, 14 June 2014) lists the 9 financial risks you should not forget, the first of which is Market Risk. This risk is probably the one that most investors fear the most: the risk that the value of your investments will fall. For bonds, this is closely related to interest rates because as interest rates rise, prices will fall.

    From the article:

    If losing money in the market is your biggest fear and you go to all cash in response, you assuage the big worry, but over time you will have a growing scare that your money isn’t keeping pace with inflation or, perhaps, that you will outlive your nest egg.

    Moreover, if you take that kind of all-or-nothing position, having everything in cash could leave you afraid that if the market doesn’t have a comeuppance soon, you’ve lost real opportunities to grow your savings.

    For discussion:

    What other risks are identified in the article cited above? How can an investor manage these risks?

  • How to Invest in Emerging Markets


    In this interview with famed emerging market expert Mark Mobius of Templeton Emerging Markets Investment Trust, we hear the secret to succeeding in emerging market investing. Some interesting investing issues appear in this interview:


    • Relationship of economic growth and the stock market. Mr. Mobius describes how the economic growth of emerging markets is the primary driver of the investment returns in that market. If the economy grows, then the companies in that economy will grow as well.

    • Contrarian investing is a winning strategy. Following the advice of founder John Templeton, success comes to those who buy unpopular investments and then hold them when others are selling, as long as you continue to believe that they are sound investments.

    • Diversification doesn’t beat the market. Well diversified portfolios have a difficult time outperforming the market. Compared with funds that mimic the S&P 500 index or other broad market indices, the Templeton Emerging Market fund holds only 60-70 names, making it far more concentrated than other funds.

    • Emerging markets are still sensitive to capital flows. In recent years, capital has exited emerging markets, causing a decline in investment returns.


    For discussion:

    What are the risks and rewards associated with emerging market investments?


  • Corporate Governance Gone Awry: The Tale of MicroStrategy

    The extravagant spending by MicroStrategy Inc. CEO Michael Saylor is stunning. But what’s more surprising is that the Board allows it to continue, despite a near bankruptcy in 2000. Not all shareholders approve. One activist institutional investor, in particular, is pushing for the Sylor’s removal as Chief Executive,


    This article by Keith Larson for Southern Investigative Reporting Foundation (SIRF) reveals the following (9 June 2014):


    The company's general and administrative costs – the corporate overhead account that addresses standard business expenses, including perks – was more than $104 million in 2013. According to SIRF research, this was more than twice as much as that of software companies with similar revenue. While a host of factors can influence profitability measures, software and analytics enterprises are often popular with investors because of their generally larger margins.


    One likely culprit in the weaker margins is the 2007 purchase of a $46 million Bombardier jet, and nearly $1.4 million of NetJets expenses he racked up in 2010 and 2011 when a February 2010 blizzard collapsed the roof of the Bombardier’s airplane hangar.


    For discussion:


    What is corporate governance and agency theory?


    Based on the SIRF article, are there any legal violations at the moment? What about ethical violations? What conflict of interests appear to exist?

  • Overcoming Behavioral Investing Biases

    Traditional finance says that investors are rational and that they make decisions based on optimizing the expected return and risk tradeoff. In other words, investors weight all available information correctly and arrive at optimal investment portfolios.


    Behavioral finance, on the other hand, suggests that investors have psychological biases that cause them to overweight some information and underweight other information, which could lead to suboptimal investment decisions. In this Financial Times video interview, Michael Ervolini, the chief executive of Cabot Research, discusses how portfolio managers can be coached to improve their buying and selling decisions based on their particular behavioral biases.



    For discussion:


    One behavioral bias is called the “Endowment Effect.” What is this behavioral bias and how does it impact a portfolio manager’s selling decisions?


  • Capital Budgeting and Ethical Decision Making

    In evaluating a project, finance students are taught to compare the present value of all expected cash flows with the initial investment. If the total present value of all expected cash flows is greater than the initial cost of investing in the project, the net present value (NPV) is positive and the project should be accepted. If the NPV is negative, then the project should be rejected.


    What we may not discuss much is the fact that some projects or ideas should be rejected, even if the NPV is positive.


    Take GM’s recall, for example. 

    If the firm was to decide whether to recall a faulty product based strictly on the numbers, some executives may choose the profitable path, but not the ethical one. 

    For discussion:


    In what ways is the NPV decision rule a reliable way to make capital budgeting decision? In what ways is it not reliable? 

  • S.E.C Chief Takes On Market Structure

    In a speech in New York yesterday, S.E.C. Chair Mary Jo White announced her intention to improve market structure. In her speech, she identified several measures of market quality that indicate markets are well-functioning, such as:


    ·       Trading costs for large orders have declined for institutional investors

    ·       Intraday volatility has returned to 2006 (pre-crisis) levels

    ·       Bid-ask spreads are narrower than ever


    She went on to say that though the market is not “fundamentally broken,” issues associated with technology still exist.


    From the speech:


    First, as I have said from the day I took office, one of the most serious concerns about today’s equity markets is the risk of instability and disruption. Technology can and has greatly increased the efficiency of our markets, but it can also allow severe problems to develop very quickly — just consider some of the systems events of the last few years at exchanges and brokers.


    Regarding high frequency trading, Ms. White stated:


    These traders use a variety of low-latency tools, including co-located servers in trading data facilities and direct data feeds from trading venues rather than the slower consolidated data feeds of the SIPs. Much of the recent public focus has been on high frequency trading firms, but it is important to remember that many brokers use the same tools on behalf of their customers.


    The SEC should not roll back the technology clock or prohibit algorithmic trading, but we are assessing the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them.


    For discussion:


    What is high-frequency trading and how does that differ from algorithmic trading? Should high-frequency trading be banned? Why?


  • Qualities Shared by the Super-Rich

    A recent CNN Money article (Sahadi, 1 June 2014) investigates the characteristics that the wealthy seem to share.

    The list includes such qualities as:

    1.    An entrepreneurial spirit

    2.    Willingness to work long days

    3.    High energy and positive attitudes

    4.    Can-do spirit

    5.    Recognize talent in others

    6.    Ability to live within their means

    7.    Risk tolerant but not risk seeking


    For discussion:


    Which of those qualities would you rank as the top three qualities of super-wealthy individuals?


  • Is Active Investing Worth It?

    Determining whether active or passive investing is the best choice is widely debated. Active managers claim that their superior stock picking or asset allocation skills are worth the management fees that they charge. Passive managers claim that the best investment is the market as a whole, so choosing to mimic the market is the wisest, and least expensive, choice.


    Given the debate of whether active management is worth the fees, a recent Institutional Investor article asks the question, “Is Investing an Art of a Science?” Some, like value investor Seth Klarman believe that investing is more art than science. Others like Vanguard Group founder Jack Bogle disagree.


    From the article (Pelz, 1 June 2014):


    [Bogle] has long argued that investors are best served by putting their money in low-fee mutual funds that closely match the returns generated by the stock or bond market as a whole. The science for firms like Vanguard is in replicating the performance of an index at the lowest possible cost.


    For discussion:


    What evidence exists to suggest that active management is a wise choice? What evidence exists to suggest that passive management is a wise choice?