• Ace Greenberg, legendary former CEO of Bear Stearns Passes Away

    Founded in 1923, Bear Stearns survived the crash of 1929 and grew to be one of the largest and most successful investment banks on Wall Street. But in 2008, leverage and high-risk mortgage-backed securities led to its failure. The Fed eventually brokered the sale of the investment bank to JP Morgan for $2/share.

    This week, legendary former CEO Alan 'Ace' Greenberg passed away, and author Bill Cohen discusses the legacy that the Bear Stearns and Ace Greenberg leave behind.


    For discussion:

    What are mortgage-backed securities? What are collateralized debt obligations?

    In this video, why does Cohen describe Bear Stearn's business as a "cancer" that spread around the world?

  • Money Market Funds Face Floating NAVs

    In an effort to prevent instability in money market mutual funds (MMMFs) such as the near run in 2008, the SEC yesterday voted to require that risky MMMFs no longer hold the net asset value (NAV) fixed at $1 per share. Instead, the NAV will be allowed to float. Not all money market funds are subject to the new rules; the safest funds that cater to most retail investors will not be subject to the new rules. 

    From a recent article on Bloomberg (Michaels, 23 Jul 2014):

    The strongest of the measures are reserved for prime money funds, which cater to institutional investors and primarily buy riskier securities, such as commercial paper issued by banks. Instead of a stable price of $1, which means a dollar invested can always be redeemed for $1, prime funds will have to price their shares in a way that will reveal fluctuations. Funds will have two years to comply with the change.

    This decision involved more than just the SEC. Prior to this rule, investors who moved money into and out of funds where the price fluctuated were forced to track gains and losses based on the prices at which they bought and sold. Now, however, the IRS will only require that investors track year-end prices for gains and losses. According to the article, "'With that change, the floating-NAV went from being a deal-breaker to being a pain in the butt,' said Peter Crane, president of Crane Data LLC, a research firm that tracks the industry."

     

    For discussion:

    What is an NAV?

    In what ways are money market mutual funds an alternative to bank accounts?

    What are the benefits and limitations to a floating NAV for money market mutual funds?

     

  • Housing Still the Best Investment According to Paulson

    According to money manager John Paulson, buying a house is still the best investment for an individual. With rents rising every year and borrowing costs continuing to stay low, the fixed cost of owning a home remains an attractive investment.

    From the CNBC article (Delavigne, 17 July 2014):

    "Today financing costs are extraordinarily low. You can get a 30-year mortgage
    somewhere around 4.5 percent. And if you put down, let's say, 10 percent and the
    house is up 5 percent, which is the latest data, then you would be up 50 percent
    on your investment," hedge fund manager Paulson explained. "And you've locked in
    the cost over the next 30 years. And today the cost of owning is somewhat less
    than the cost of renting. And if you rent, the rent goes up every year. But if
    you buy a 30-year mortgage, the cost is fixed."

    For discussion:

    What factors should you consider as you weigh the decision to rent versus buy a home?

    Based on the example in the article, suppose you buy a $200,000 house, put 10% down payment, and borrow the rest at  a 5% annual interest rate.

    (a) What would the monthly mortgage payments be on your house?

    (b) If the house increases in value by 5% per year, what is your return on the asset in the first year? What is the return on your invested capital in the first year?

     

     

     

  • The Runaway Court

    (photo: by www.stockmonkeys.com and used courtesy of creative commons license)

     

    In 1996, a popular legal thriller told the tale of Nicholas Easter, a juror in the case of Celeste Wood who sued a big tobacco company over the death of her husband. In this John Grisham novel, the tobacco company loses and the plaintiff wins a bundle of money.

    Celeste Wood's unlikely story came true this week as a Florida jury awarded the widow of a chain smoker more than $23 billion in her lawsuit against R.J. Reynolds Tobacco Company.

    From the CNBC story:

    The case is one of thousands filed in Florida after the state Supreme Court in 2006 tossed out a $145 billion class action verdict. That ruling also said smokers and their families need only prove addiction and that smoking caused their illnesses or deaths.

    The damages a Pensacola jury awarded Friday to Cynthia Robinson after a four-week trial come in addition to $16.8 million in compensatory damages.

    For investors, tobacco companies have been a steady source of income as consumers remain insensitive to price changes associated with a pack of cigarettes. Investors who reject tobacco stocks often must leave investment returns on the table. The results of this legal case may change the face of socially responsible investing after all.

    For discussion:

    Would you invest in a tobacco company stock? Why or why not?

  • The Rise and Fall of Technology


    "In technology, dominance never lasts." Or at least that is what this video suggests. 

    This video shows the stagnation of Sony and the superior growth of Apple, which can be explained by the rise of all things iTech. Sony, on the other hand, has lost its "wow factor' according to this video from The Economist. 

    For discussion:

    If you were managing Apple, how would you react to this information? What if you were managing Sony? What can or should both companies do differently?

  • Computer Code: The New Language of Business

    Employers are increasingly looking for business school graduates with “technical and quantitative skills.” They are not necessarily seeking computer programmers with computer science degrees, but they are requiring that new recruits are able to read and understand computer code.

    From a recent Bloomberg Businessweek article (Weinberg, 11 July 2014):

    “We’ve got a lot of MBAs graduating and going off to be high-tech product managers. If you look at that world, there are a bunch of big tech companies that insist that anyone in that role be technical—understand code well enough to read it and write it,” says Thomas Eisenmann, an HBS professor who teaches a course on product management.

    Companies don’t want an army of programmers from B-schools—they can recruit from computer science programs for that—but they need managers who know the basics of code to work with technical staff. To be a product manager at Amazon (AMZN), for instance, MBAs need to “dive into data and be technically conversant,” says Miriam Park, director of university programs at the company.

    For discussion:

    What are the benefits and costs associated with learning computer code as part of business school curriculum?

    Why is learning to code considered such a necessary skill?

  • Most Popular Award Goes to...ETFs

    Exchange traded funds (ETFs) are similar to mutual funds in that one share represents a basket of underlying securities. Unlike mutual funds, however, ETFs can be bought and sold on stock exchanges throughout the day, making them more popular than mutual funds. 

    According to a recent CNBC article (Cox, 13 July 2014):

    ETFs as an industry have much lower fees than their mutual fund counterparts. They're also more liquid in that they can be traded during the day like stocks—mutual funds can only be bought and sold outside regular market hours—and boast tax advantages as well.

    As a result, the two groups are heading in opposite directions, even though the mutual fund industry is still much larger. Mutual funds globally have $15.4 trillion under management, with about $9.4 trillion of that in domestic assets. Over the past 12 months, though, ETF assets have expanded by 19.8 percent while mutual funds have lost 10.7 percent, according to data from the Investment Company Institute.

    Industry experts believe ETFs still have a long way to run.

    The surprising thing about their popularity is that hundreds of different ETFs are available to investors, many of which are complicated and offer investors ways of making leveraged bets on the direction of the market. Even so, market participants claim that the market is not yet saturated and that that there is room for even more ETFs to come to market.

    For discussion:

    1. In what ways are ETFs similar to open-ended mutual funds? In what ways are ETFs similar to closed-end funds?

    2. What are the benefits and risks associated with investing in ETFs?

    3. For which investors are ETFs most appropriate?

  • I'll Have a Lime With That, Please...

     

    Oranges and grapefruit are grown in the U.S., but not limes. As this Bloomberg video explains, over the years several factors have driven all lime production out of the U.S. and into lower cost of production markets. The result has been a supply of limes dominated by one producer: Mexico. Consequently, we find lime prices fluctuating this time of year, and there's not much the American consumer can do about it.

    For discussion:

    What is comparative advantage in international trade, and how does that affect the lime market?

    What factors have contributed to the current market conditions for limes?

     

  • Next Acquisition in Streaming Music

    Looks like everyone is chasing streaming music business. Google is the latest with its big to acquire Songza, a streaming music provider. Competing with Pandora and Spotify, Songza sounds like just another company in this marketplace, but according to Forbes:

    In the music space, only Songza embraces the human curation experience. Spotify, Pandora and the other music sites are all dependent on algorithms.

    But Songza uses data and humans. Relying on time of day, location, weather, activity and more to help their DJ’s program their music. As Songza investor  at Metamorphic Ventures David Hirsch explained to CNBC: “The future isn’t about people finding things, it’s about things finding people.”  This is no small statement from the former Googler turned VC; “I really think that what Songza has done has brought context to content, which I believe is the next wave of the web. It’s based on situation and context.”

    For discussion:

    What factors do you think Google should consider in determining the purchase price for this new acquisition?

  • What Are Stocks Worth?

    Dow Jones Industrial Average, Yahoo Finance

    As stock prices rise, investors are getting worried that perhaps stocks are trading at prices that are higher than the stocks are worth. According to a recent Market Watch article (July 3, 2014):

    The market surge this week, including the reaction to the stronger-than-expected jobs report on Thursday that finally pushed the Dow over 17,000 just after the opening bell, suggest that bulls are in charge for now.

    But the wall of worry persists. Yale professor Robert Shiller, of the Case-Shiller home price index, said last week that his cyclically adjusted price-to-earnings ratio (CAPE) is running at 26, far above the long-term average of 17. In fact, the CAPE has only been higher three times, 1929, 2000 and 2007. “It looks to me like a peak,” Shiller said.

    For discussion:

    What is a P/E ratio and how can an investor use it to make trade decisions?

  • Russian Central Bank Sells Shares in Russian Stock Exchange

    According to a Bloomberg report this week, the Russian Central Bank sold over half its shares of the Russian stock market in order to comply with a mandate that it divest ownership of the stock market. From the article (Galouchko and Pavliva, 2 July 2014):

    The central bank said in a statement yesterday it is divesting the shares in a series of transactions to fulfill a legislative requirement from last year, when it was mandated to complete its exit from the bourse before Jan. 1, 2016. The sale is the biggest by a Russian company since retailer Lenta Ltd. (LNTA)’s IPO in London raised $952 million in February, data compiled by Bloomberg show.

    Goldman Sachs Group Inc., JPMorgan Chase & Co., VTB Capital, Sberbank CIB, OAO Gazprombank and Citigroup Inc. helped manage the offering, according to terms obtained by Bloomberg.

    Russia’s central bank is the largest shareholder in the bourse, followed by OAO Sberbank’s about 10 percent stake, according to Moscow Exchange’s shareholder data.

    From an article in Central Banking.com (Bowker, 3 July 2014):

    Russia's central bank yesterday sold half its stake in the country's main stock exchange to a range of investors including sovereign wealth funds around the world, in a major step towards a total divestment in the company, which it must complete by January 1, 2016.

    Russian sovereign wealth fund Russian Direct Investment Fund (RDIF), which focuses on domestic development opportunities, led a consortium of "leading international institutional investors" from China, Germany, Qatar, Singapore, UAE, the UK and US.

    The offer of 11% of the Moscow Exchange, valued at 16,036,454,280 rubles ($468.5 million), was several times oversubscribed, according to the Bank of Russia. In the end, "bids of 96 investors were satisfied", it said.

    For discussion:

    Should the central bank own the stock market? Why or why not?