• Wall Street Culture In Need Of Reform


    "Federal-reserve-33-liberty" by Dmadeo - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

     

     

    The New York Fed will be leading a workshop on October 20 for bankers on "reforming culture and behavior" on Wall Street. In his article for the NY Times, William D. Cohan (25 Sep 2014) expresses his reservations about the program.

    From the article:

    But will anything of substance come from the workshop that might lead to meaningful change on Wall Street? The potential is certainly there. After all, the New York Fed is one of Wall Street’s most important regulators, and if it demanded changes to its compensation system or the way it finances itself, you can be sure that it would happen.

    On the other hand, the New York Fed has never been known as a tough Wall Street taskmaster. Its current president, William C. Dudley, is a former Goldman Sachs partner and hardly a reformer, although he has called for changes — so far not enacted — to the dangerous Wall Street practice of financing its operations with short-term financing that can dry up like rain in Death Valley.

    Like the other Federal Reserve banks, the New York Fed is owned and controlled by its member banks, not by the public or the federal government. Accordingly, there is little doubt that the New York Fed will continue to serve its banking masters.

    For discussion:

    What kinds of reform are needed on Wall Street? 

    Why is reform not likely to take place, according to the author?

  • How to Draw Down Your Retirement Account

    This CNBC article describes five best practices for drawing down your retirement account once you decide to retire.

    According to the article (MacBride, 27 Sep 2014):

    "Most people are not able to easily convert stock to flow," said Charles D. Ellis, an investment management expert and author of the classic "Winning the Loser's Game." He added, "We are just not in practice at it."

    The smart ideas for accessing your nest egg include:

    1. Delay claiming Social Security for as long as you can
    2. Take money from taxable accounts first

    However, while some advocate the rules of thumb found in the CNBC article above, others suggest that following some of this advice can push you into a higher tax bracket unintentionally.

    According to this MarketWatch artible (Powell, 29 Sep[ 2011):

    Specifically, the so-called common rule of thumb for withdrawing retirement savings — taxable savings before tax-deferred savings — can inflate required minimum distributions (RMDs) and thus reduce tax efficiency and wealth, according to Coopersmith and Sumutka’s paper.

    RMDs are, of course, the distributions that older Americans must take from their retirement accounts (though not their Roth IRAs) after age 70½. Waiting until age 70½ to start withdrawing money from those accounts could force you to take large distributions that push you into a higher tax bracket.

    So, instead of using the common rule-of-thumb strategy, the authors advocate for using a tax-efficient withdrawal plan. With this plan, the goal is to withdraw money in ways that maximize the final total account balance over a retirement horizon, not just one year.

    For discussion:

    What are some other tax-efficient ways to draw down retirement savings wisely?

  • No More Hedge Funds for Calpers

    The California Public Employees' Retirement System (Calpers) announced this month that it was no longer going to invest in hedge funds due to their "complexity and cost."

    From the NY Times (Stewart, 26 Sep 2014):

    As the biggest public pension to publicly turn its back on hedge funds — Calpers had over $300 billion in total assets at the end of its most recent fiscal year — “this is a watershed moment,” said Timothy Keating, president of Keating Investments in Greenwood Village, Colo., an investment adviser and author of several studies on asset class performance.

    The decision startled the investment world, but it was hardly spur of the moment. Under the direction of Ted Eliopoulos, who was confirmed as Calpers’s chief investment officer last week, the pension fund has been examining hedge funds since February, when it revised its broad asset allocations and demoted hedge funds to a “program” rather than a separate asset class with a specified allocation target.

    As to why Calpers would choose to drop hedge funds, a big reason is fees:

    It’s no secret that hedge funds rank among the most expensive investment vehicles. They typically collect a performance fee, frequently 20 percent, and also take a percentage of assets under management, often 2 percent but sometimes more, even if their investments lose money. Calpers said it spent $135 million in hedge fund fees in its last fiscal year and $115 million the year before.

     


     

    For discussion:

    What is a hedge fund, and how does it differ from a mutual fund?

    How are typical hedge fund fees structured?

  • Unthinkable: Bill Gross Leaves PIMCO

    In the professional investing world, Bill Gross is legendary. The founder of PIMCO and CEO has announced that he is leaving for to join Janus. He leaves a very profitable legacy having started the fund in 1987 when yields were higher and he's "skied down the yield level" to the low rates of today.

    For discussion:

    How did Mr. Gross profit from the difference in yields from 1987 to today?

  • Commodities Keep Inflation in Check

    source: Bloomberg.com

     

    Commodity prices are helping keep inflation low as large crops and rising oil output are causing prices to rise less than expected in the U.S. According to Bloomberg (Mulvany and Durisin, 26 Sept 2014):

    While commodities usually have a smaller impact on inflation than housing costs or wages, lower raw-material prices may allow the Fed to maintain interest rates that have remained near zero percent since 2008 in a bid to spur growth, said Cetin Ciner, a professor of finance at the University of North Carolina-Wilmington’s Cameron School of Business.

    The article further illustrates the link between commodity prices and inflation as it describes how soybean, cotton, corn, and wheat futures fell due to large U.S. harvests, and the result could be that food prices will grow at 2 to 3 percent rather than 2.5 to 3.5 percent they were expected to grow next year.

    For discussion:

    According to the article cited here, what has been happening in the gold market, and how is that linked to inflation? What about oil?

     

     

  • Market Impact of the Scottish No Vote

    A sigh of relief swept financial markets once the vote was counted. As expected, Scotland voted no to becoming an independent country, and instead voted to remain part of the United Kingdom. With a voter turnout of 84.5%, Scots displayed one of the highest voter participation rates in the Western world.

    For discussion:

    What was the impact on stocks and on currency?

    How has this vote impacted political risk of European markets?

    How have investments been impacted across Europe?

  • Alibaba IPO: The Big Winner

    The Chinese e-commerce company Alibaba launched its IPO this week, and the market loved it. With an IPO price of $68 per share or 29 times earnings, early investors were the big winners when the shares traded above $93 per share this week.

    According to Bloomberg (Picker and Cioli, 19 Sep 2014):

    Alibaba -- which is profiting from China’s consumer class by dominating the e-commerce industry in the country of 1.36 billion people -- had no shortage of interest in its sale. Founder Jack Ma drew crowds of money managers to meetings held around the world as the company pitched itself to investors this month. As many as 800 people turned up to the first event at New York’s Waldorf Astoria hotel.

    Ma, who started Alibaba from his Hangzhou apartment in 1999 with $60,000, watched his net worth swell to $26.5 billion as the shares rose. He is China’s richest man according to the Bloomberg Billionaires Index, and will own about 7.8 percent of Alibaba after the IPO, company filings show.

    At recent meetings with investors, Alibaba’s founder focused on the company’s ambitions outside of both the e-commerce field and its home base, describing it as an “Internet company that happens to be from China.”

    For discussion:

    How would investors determine the value of a newly issued firm like Alibaba?

    What do the authors of the article mean by the "IPO discount?"

  • Diversification is Not Always a Winning Strategy

    Photo courtesy of Bayer AG

     

    All students of finance know the benefits of diversification--spread out your risk, not all eggs in one basket, et cetera et cetera. But when companies try the same strategy, investors are not happy.

    This NY Times article (Webb, 18 Sep 2014) describes how investors have rewarded Bayer for selling off its plastics business and focusing on health care.

    From the article:

    It’s unclear if this will be a straight spinoff to existing shareholders or a flotation, introducing new owners. Either way, this will be more about market perception than fundamental change to the underlying business.

    Investors currently prize focus over diversity. That is prompting a range of companies, including mining firms, media groups and food companies, to slim down. In time, the reward should be a richer stock-market valuation, although Bayer already trades on a fairly rich 16.1 times forward earnings.

    For discussion:

    How do investors "reward" a company? Why do investors "prize focus over diversity?" In other words, why would investors prefer a concentrated firm over a diversified firm?

     

  • Betting Markets on the Scottish Vote

    The vote on whether Scotland will remain in the United Kingdom has not yet been counted, but according to betting markets, the "no" vote is in. According to this Financial Times video, betting market are better indicators of sentiment than opinion polls considering investors are using real cash. Even when the opinion polls gave a slight edge to "yes," the bets were still favoring "no."

    For discussion:

    Why do you think that the bigger money is betting on "no?"

  • How to Super Size your IRA

    With a limit of $5,500 contribution per year, growing an IRA to over $5 million seems like a fantasy. But according to this Bloomberg article, it's been done.

    From the article (Collins and Rubin, 17 Sep 2014):

    The Government Accountability Office reported yesterday that about 9,000 U.S. taxpayers have each accumulated at least $5 million in individual retirement accounts. While the GAO didn’t say how they managed to do so, Mitt Romney and some other successful executives offer a road map.

    Outsized, tax-advantaged returns in such accounts drew attention during the 2012 presidential campaign, when Republican presidential nominee Romney reported he had an IRA worth $20 million to $102 million. Congress and President Barack Obama have scrutinized IRAs since, saying they weren’t intended to be a tax shelter for millionaires and billionaires.

    Some of the tips described in this article are not accessible for most of us, but we can still follow some of the advice. For instance, while we may not have the privilege of working at a start-up getting paid in very low priced shares that are then parked in an IRA, we may be able to create different classes of shares of the family business that may be sold in the future. 

    For discussion:

    What are the other explanations in this article for why some Americans have such large IRAs considering the limited annual contribution?

  • Women as Angel Investors

    Finding investors is challenging, especially for start-ups launched by women. This Bloomberg BusinessWeek article (Klein, 10 Sep 2014) describes the story of two moms who started an educational business but had trouble finding investors. They eventually connected with a female investor group and their firm has taken off since. 

    From to the article:

    Today women make up about 20 percent of both the entrepreneurs and investors involved in angel deals, up from single-digits a decade ago, according to the University of New Hampshire’s Center for Venture Research(PDF).

    Women made up 23 percent of all entrepreneurs seeking angel capital in 2013, up from 9 percent in 2005. There were fewer than 20,000 female angel investors in 2005, but that number increased to nearly 58,000 by last year.

    For discussion:

    What reasons can you give to describe the proportion of male/female investors and entrepreneurs?

  • Coming Soon to a Wallet Near You: Apple Pay

    What started out as a "cardboard I.O.U." later grew into the giant financial industry we know as the credit card business. 

    From the "History of Credit Cards" by Tesco Bank:

    According to MasterCard the first bank card, 'Charg-It', was introduced in 1946 by Mr. John Biggins, a banker in Brooklyn. When a customer used the card to make a purchase, the bill was sent to Biggins' bank. The bank reimbursed the seller and then received payment from the customer. Purchases, however, could only be made locally and Charg-It cardholders had to have an account at the bank.

    Visa and Mastercard came later: Visa in 1958 and Mastercard in 1966. According to Visa's website

    Visa can trace its roots back to 1958, when the Bank of America launched BankAmericard, the first consumer credit card program available to middle-class consumers and small- to medium-sized merchants in the United States. It didn't take long for the company to grow; the company expanded internationally in 1974, followed quickly by the introduction of the debit card in 1975.

    Today, the plastic credit card may be replaced by Apple Pay. According to this video, Apple Pay may be more secure than paying by credit card.

     

    For discussion:

    In what ways may Apple Pay be more secure than a credit card? Do you think paying by cell phone will replace credit cards someday?

  • Can Olive Garden Turn Things Around?


    Some of the best food we've ever tasted was in Italy. Northern Italy to be precise. Every now and then we find an Italian restaurant in the US that is almost as good, but Olive Garden isn't one of them.

    According to a recent BloombergBusinessweek article (Bachman 12 Sep 2014):

    Olive Garden doesn’t know how to cook pasta, soaks its salads in too much dressing, dumps sauce haphazardly atop its dishes, forgets to sell wine, and has strayed far from its Italian roots with dishes no one in Italy would touch. And that’s how the slumping restaurant chain is seen by people who dearly want to see it flourish.

    Starboard Value, one of Darden Restaurants’ (DRI) largest shareholders, believes Olive Garden and its parent company can still turn things around under all-new management—and with dozens of highly specific changes to almost every aspect of how it runs restaurants. The activist hedge fund released a soup-to-nuts 294-page revival plan late Thursday, ahead of Darden’s latest earnings report. Total sales in the past quarter of $1.6 billion matched the company’s guidance; Olive Garden, its largest chain, saw yet another drop in same-store sales.

    Maybe the plan to revive Olive Garden will work. In the meantime, I'll take risotto at home any day.

    For discussion:

    What are some of the ideas to revitalize Olive Garden? Can you think of other ways to boost sales?

    Photo by Anthony92931 used courtesy of Creative Commons and available on Wikimedia

  • Five Biggest IPOs Ever

    Remember when Facebook's shares sold for the first time, and how everyone thought they were such a rotten investment? Well, times have changed. According to this Bloomberg video, Facebook is one of the top 5 IPOs in US history, and is up 94% since it was listed in 2012.

    For discussion:

    What is an IPO and how is the initial listing price determined? 

  • European Central Bank Cuts Rates Unexpectedly

    This week, the European Central Bank (ECB) cut interest rates unexpectedly, and the euro fell in response.

    From Bloomberg (Riecher, 4 Sep 2014):

    The rate cuts come three months after an historic package of stimulus measures, and two weeks after Draghi signaled he was ready to act again. Additional measures he could unveil later may include a purchase program for asset-backed securities or a larger program of quantitative easing that risks dividing policy makers.

    For discussion:

    Why is this action described as the "beginning of the end of the world bond market bubble?"

     

  • Rogue Trader Released

    Photo by Paaah, available by Creative Common

     

    In 2010, Jerome Kerviel was sentenced to three years in prison for breach of trust, forgery, and unauthorized used of computer systems. This week, just 110 days after his sentence began, Mr. Kerviel has been released to serve the rest of his sentence under a curfew restriction at home.

    The story raised quite a fuss in France where Kerviel became a folk hero of sorts as the public held the bank partially responsible for the failure.

    From the NY Times at the announcement of the sentence in 2010 (Clark, Oct 5 2010):

    It was the size of the awarded damages, equal to the entire amount the bank lost in unwinding his trades in early 2008, that seemed aimed at insulating French banks in general — and particularly a bank renowned for its expertise in complex financial derivatives--from accusations of lax oversight and U.S.-style “casino capitalism.”       

    “It’s a whitewash,” Bradley D. Simon, a white-collar criminal defense attorney at Simon & Partners in New York who specializes in securities and bank fraud, said of the verdict. “The evidence does not support absolving the bank completely,” he said. “This was a lot larger than Kerviel.”       

    But this week, after multiple appeals, Mr. Kerviel is free. From the more recent NY Times article (Clark, Sep 4, 2014):

    The Court of Cassation found that the lower court’s sentence had failed to fully take into account the weaknesses in Société Générale’s risk-management systems at the time of Mr. Kerviel’s illegal trades. The high court has called for a civil trial to determine any damages Mr. Kerviel might have to pay, although no date has been set for those proceedings.

    Throughout his legal travails, Mr. Kerviel has never denied falsifying documents and entering fake trades into the computer systems of Société Générale, France’s third-largest bank. But he has maintained that his bosses turned a blind eye to his activities and even tacitly encouraged him, as long as his deals were profitable.

    For discussion:

    In your opinion, who is responsible for the losses incurred by the false trades at Societe General?