Nivine Richie, Ph.D., CFA is an Associate Professor of Finance at the University of North Carolina Wilmington. She teaches courses in corporate financial management, derivatives, fixed income, and commercial bank management. Her research interests include cost of capital, banking, and derivatives. She has published studies in the Journal of Economics and Finance, Journal of Futures Markets, Review of Futures Markets, and Journal of Trading, among others.
This CNBC video reports that although Millenials are optimistic about their financial futures, they are currently doing very little about it. A recent study finds that they are living paycheck to paycheck or are living with or off of their parents. Saving for a vacation seems to be more important than saving for a home.
What are your financial goals? How do you plan to achieve them?
Sometimes a failed business can offer tremendous value in the lessons it leaves behind.
The convention featured in this video is where start-up failures come together to share such lessons as pricing strategy, team management, and communication.
What lesson do you find most valuable from these failed start-ups?
Calyon Building in Midtown Manhattan, former site of RJR Nabisco headquarters. RJR Nabisco was purchased by KKR in 1988 in what was the largest leveraged buyout in history at that time. In the acquisition, KKR did not refinance all of the existing debt, and what remained outstanding suffered a great decline in value to the detriment of the existing creditors.
Which brings us to modern-day poison puts.
Poison puts have become a popular way to protect bondholders in the event of a hostile takeover. These puts are a provision of a company's debt whereby the bondholders have the right to sell back their bonds to the issuer in the event that there is a change in ownership. The bonds can normally be put back to the issuer at a premium, making the change in ownership an unexpectedly expensive venture.
According to this NY Times article (Solomon, 25 Nov 2014):
This kind of maneuvering has become even more commonplace now that shareholder activists have stepped on the scene. Companies began to negotiate poison puts that are activated not only if they are acquired, but also if a shareholder activist unseats a majority of a corporation’s directors.
The ostensible justification of these provisions was to ensure that banks knew whom they were dealing with. Companies argued that the fact that it would deter a shareholder activist was beside the point, placing the blame on banks for demanding this provision. Although these features are common, courts have been struggling with how to deal with them. They have been weighing a need for banks to know whom they are doing business with against the fact that these provisions can entrench existing boards.
Sounds like the agency conflict may be at the heart of the poison put. What began as a way to protect creditors in the event of a takeover, may have led to management protecting itself at the expense of the shareholders.
What is agency conflict?
How might the poison put reduce the agency conflict? How can the poison put lead to further agency conflict?
photo credit: "Credi- Lyonnais-building" by Americasroof Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Credi-_Lyonnais-building.jpg#mediaviewer/File:Credi-_Lyonnais-building.jpg
Financial prowess can be learned. That's what Detroit Lions' defensive lineman Ndamukong Suh gained when he sought out high profile business mentors to help him learn how to manage his money while he is in his prime earning years as a professional athlete.
From the Wall Street Journal (Clark, 25 Nov 2014):
Suh routinely meets with Buffett, restaurant investor Junior Bridgeman and former TD Ameritrade CEO Joe Moglia, who is now the head football coach at Coastal Carolina, among several others. This off-season, Suh met with former NBA star Magic Johnson (“I took 10 pages of notes,” Suh said) and retired Hall of Fame quarterback Roger Staubach, both successful businessmen themselves.
... Suh’s objective is to get advice on the balance between business and his playing career. Despite being only 27, he has been positioning himself for his post-football life for years.
Even Bill Gates has learned a thing or two. This Business Insider article (Martin, 15 Oct 2014) lists the three most important lessons he learned from Warren Buffett:
1. See the big picture
2. Be transparent
What questions would you ask a financial mentor?
According to this Bloomberg video, Apple is positioned to enter a new "super cycle" based on the success of the iPhone 6, the iPad, and the much anticipated Apple Watch.
Based on this interview, why have Apple share prices been depressed?
What do the price multiples suggest about the value of Apple shares?
In your opinion, what is Apple's position in the smart phone market?
This Seeking Alpha article compares the two "heavyweights in global transportation," and the conclusions are:
Which investment would you choose: UPS or FedEx? Why?
photo of aluminum courtesy of Wikimedia Commons
Senator Carl Levin of Michigan believes that banks should stick to taking deposits and making loans and should not deal in the market for physical commodities. According to Senator's press release on Friday, banks should not be involved in such risky markets. Furthermore, banks are accused of manipulating the markets for commodities.
One interesting case is Goldman Sachs' involvement in the market for aluminum. From the press release:
One case study from our report highlights the risks to manufacturers, consumers and markets. In 2010, Goldman Sachs bought a Detroit-area company called Metro International Trade Services LLC, which owns a global network of warehouses certified by the London Metal Exchange, or LME, the world’s largest market for trading metals. Under Goldman’s ownership, Metro mounted an unprecedented effort to dominate the North American market for storing aluminum.
Under the LME’s warehouse rules, no matter how many customers want to remove their metal, the warehouse is only required to ship out a limited amount each day. If customers ask to withdraw more metal than the daily minimum, a line or queue forms, and customers have to wait to take delivery. When Goldman bought the warehouses in 2010, the queue in Detroit was just a few days long. But by this year, it had grown to more than 600 days.
We found that Goldman’s warehouse company made a series of complex agreements with some warehouse customers that made it longer. Goldman would pay the owners of aluminum to put their metal in the queue for withdrawal. When that aluminum reached the head of the queue, it was loaded on trucks, but instead of going to a manufacturer, it was shipped a short distance – sometimes just a few hundred yards – to another Goldman-owned warehouse, and placed back in storage. The effect of these deals was that the queue got longer and longer without actually removing any aluminum from the warehouse system.
The lengthening queue boosted revenue at Goldman’s warehouses – the more metal stored in the warehouses, the more rent and fees. But this merry-go-round also affected aluminum prices by increasing the so-called “premium” that customers must pay to cover logistical costs such as storage. Our report found, and expert witnesses confirmed at our hearing, that Goldman’s warehouse, by making the queue longer and pushing the premium higher, was hurting manufacturers and consumers by making aluminum more expensive.
Expert witnesses also told us that if Goldman could use its warehouse to manipulate the queue, and therefore affect aluminum prices, it could profit by employing trading strategies to take advantage of that power. And in fact, Goldman rapidly increased its own aluminum trading after it bought the warehouse company.
[Read the full press release here]
How is the Federal Reserve partially to blame, according to this Forbes article?
What are arguments for and against banks trading in physical commodities? In your opinion, should banks be allowed to deal in these markets? Why or why not?
This short CNBC video gives a nice glimpse of the history of Wall Street. From its earliest days where horseback travel between cities required several days to today where time is measured in the milliseconds it takes information to travel from the exchange to a broker, traders have always understood that data drive markets.
What are some of the tricks used by traders to get a leg up on the competition?
In your opinion, is high frequency trading good or bad for financial markets?
Photograph of Georgia O'Keefe by Alfred Stieglitz 1918
Even in the art market, prices of works by female artists lag those by male artists. Take Georgia O'Keefe, for example. This week, her work "Jimson Weed, White Flower No. 1" was sold for a record price.
From The Huffington Post (Brooks, 20 Nov 2014):
Georgia O'Keeffe, one of the godmothers of modernist painting, has just made history at Sotheby's auction. A work by the late American artist smashed records Thursday morning when it sold for $44.4 million -- a price three times larger than the previous auction record for a female artist.
Congratulations Georgia, you are now (posthumously) the highest-selling woman in art.
The 1932 offering shown above, "Jimson Weed, White Flower No. 1," depicts one of O'Keeffe's favorite subjects: a magnified flower. To her, the delicate blooms stood as some of the most overlooked pieces of naturally occurring beauty, objects that the bustling contemporary world ignored. So she made it her mission to highlight their complex structures, explaining: “When you take a flower in your hand and really look at it, it's your world for the moment. I want to give that world to someone else. Most people in the city rush around so, they have no time to look at a flower. I want them to see it whether they want to or not."
According to the article, what is the "priciest" piece of artwork ever sold?
What explanations can exist to explain the differences in price tags for male artworks versus female artworks?
A recent CNN Money article reports (Rooney, 14 Nov 2014) that American lawmakers' reported stock investments have an uncanny correlation--not a perfect correlation, but a positive one--with the companies that do the most lobbying in Congress:
From the article, the top 10 stock list includes:
1. General Electric
3. Proctor and Gamble
4. Wells Fargo
9. JPMorgan Chase
10. Exxon Mobil
From CNN Money (Solomon, 1 October 2014), the top 10 lobbying firms are:
4. Northrop Grummon
5. Comcast Corp
7. FedEx Corp
8. Exxon Mobil
9. Lockheed Martin
What are some other explanations for the overlapping firms on the two lists?
Photo of UK Financial Conduct Authority (FCA) http://www.fca.org.uk/site-info/contact/logos-and-photos
Bloomberg BusinessWeek reported this week on British and Swiss regulators' settlements with big banks UBS, Citigroup, JPMorgan, Bank of America, Royal Bank of Scotland, and HSBC.
From the article (13 Nov 2014):
The settlements with six banks—UBS (UBS), Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC), Royal Bank of Scotland (RBS), and HSBC Holdings (HSBC)—paint a depressingly familiar picture. Foreign exchange traders profited at their clients’ expense by abusing information about orders, and they conspired to influence London-based benchmarks that affect decisions and transactions worldwide. The transgressions went on from 2008 through late 2013, persisting even as some of the same banks were reaching settlements over the rigging of the London interbank offered rate, or Libor.
Details presented by regulators illustrate just how commonplace the manipulation had become. Traders formed groups—with names such as “the 3 musketeers” and “the A-team”—that focused on specific currencies. Using private chat rooms, they shared information about their clients’ orders with the aim of pushing the WM/Reuters benchmark exchange rates, set at 4 p.m. London time, in the desired direction. “Hooray nice team work,” one trader wrote after an attempt to “whack” the British pound.
In what ways do collusion on interest rates hurt investors and financial markets?
What can be done to deter such behavior in the future?
Virgin America issued publicly traded shares for the first time at $23/share and raised over $300 million this week.
Here is a short CNBC video describing the benefits and risks associated with buying Virgin America shares.
What are some factors that make the Virgin America shares a good investment?
What are some factors that make them a risky investment?
All the perplexities, confusions, and distresses in America arise, not from defects in their constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.
John Adams, letter to Thomas Jefferson (25 August 1787)
The International Monetary Fund (IMF) defines money as, "Money is something that holds its value over time, can be easily translated into prices, and is widely accepted."
In this WSJ video, artist Nicki Enright has created his own money, the "Globo" and is busy selling it two for one US dollar.
What makes money real?
What purposes does money serve?
What is the role of the Federal Reserve in the money supply?
This Financial Times interview describes the state of the Russian Ruble and what is leading to its decline.
1. What is the link between the Russian currency and the market for oil?
2. What has the Russian government been doing to deal with the situation?
3. What is the key factor leading to a decline in the Ruble?
Pessimists become optimists, and bears become bulls. At least that's what recent market sentiment surveys are telling us. According to Chuck Jaffe in his recent MarketWatch article (7 Nov 2014):
According to the most recent sentiment survey from the American Association of Individual Investors, bullish sentiment has reached its highest level this year — with more than half of the respondents optimistic that the market will rise in the next six months — while bearish sentiment reached its lowest level since 2005, with just 15% of investors expecting the market to fall in the next half year. Bearish sentiment reached a recent high — with over one-third of investors expecting trouble — as the market was hitting its mid-October lows.
In fact, Charles Rotblut, editor of AAII Journal, noted that the low pessimism number is what’s most unusual, noting that it has only been at or below this level 5% of the time, in just 56 of the more than 1,400 sentiment readings the group has done dating back to 1987.
“It’s almost capitulation on the part of people who are pessimistic about what will happen over the short term,” Rotblut said. “It’s not that everyone is thinking happy days are here again and to stay, but they do seem to think that things will either be good, or at least not bad.”
Traditional economic theory tells us that investors are rational and maximize expected returns while minimizing risks. Emotion has nothing to do with returns, they say. However, behaviorists claim otherwise. Studies have shown that investors tend to give too much credence to recent information leading them to overreact. This is just one of several behavioral biases that may be present in markets today.
Markets like the one described in Jaffe's article suggest that perhaps emotion does have something to do with returns. And perhaps overreaction is alive and well.
What are some other behavioral biases? Which one(s) are you most prone to yourself?
Source: Bureau of Labor Statistics USDL-14-2037
Once upon a time, the unemployment rate and wages moved in opposite directions. As labor markets tightened, wages increased.
In the U.S. the labor market has tightened--unemployment is down from over 8% to 5.9%--but American's haven't seen raises in 6 years.
From Bloomberg BusinessWeek's article, aptly titled "When Will Americans Ever Get Raises?" (Schrager, 6 Nov 2014):
In an August speech, Federal Reserve Chair Janet Yellen speculated that “pent-up wage deflation” might have held wages down during the recovery. What does that mean? “In a downturn, employers may need to cut wages, but they are reluctant to do so,” says San Francisco Fed economist Mary Daly. They prefer laying people off, which they believe tends to have less impact on workforce morale, she says. The result is that when the economy recovers, employers are slower to raise pay than if they had imposed cuts during the slump. Daly says wages were slow to increase after the past three recessions, too. She estimates that unemployment will have to fall to 5.2 percent before wages begin rising.
Even a drop to that level might not be low enough to spur gains. Dartmouth economist Daniel Blanchflower says the labor market is in worse shape than the unemployment rate suggests. “Something changed in 2010,” he says. “The unemployment rate is no longer a sufficient statistic.” An accurate gauge of the market, he says, must include people who’ve given up looking for work and those working in part-time or low-paying jobs because they can’t find anything else. Measures that include discouraged workers, such as the labor force participation rate, have worsened since 2008. Blanchflower says pay won’t increase until the slack is absorbed, and he can’t predict when that might happen.
The article cites several factors that may contribute to wage deflation. What are they, and which one(s) seem most likely to you? Why?
Berlin is booming. Millionaires are buying luxury real estate at prices significantly lower than comparable digs in London or Paris.
What are some of the negative consequences associated with the luxury property boom in Berlin?
What is the outlook for luxury property in Berlin?
According to a recent study by Spectrum's Millionaire Corner, 40% of non-millionaires do not use a financial advisor. Instead, they go it alone and make their own investment choices as "self-directed" investors.
Here are the top reasons cited by this article (Liebenson, 30 Oct 2014):
Based on these results, the number one reason is the agency problem. Investors don't believe a financial advisor would seek their best interests.
How can the investor-advisor relationship be structured to mitigate the agency conflict?
The Bank of Japan surprised financial markets by announcing a larger than expected monetary stimulus plan.
From Bloomberg (Fujioka and Hidaka, 31 Oct 2014):
Kuroda, 70, and four of his eight fellow board members voted to raise the BOJ’s annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion yen, the central bank said. An increase was foreseen by just three of 32 analysts surveyed by Bloomberg News. The BOJ also cut its forecasts for inflation and growth in Japan, the world’s third-biggest economy.
Facing projections for failure to reach the BOJ’s 2 percent inflation target in about two years, and with the pressure from a higher sales tax, enlarging the stimulus at some point had been anticipated by analysts for months. Kuroda opted not to telegraph his intentions in recent weeks, leaving today’s move a surprise -- sending the Nikkei (NKY) 225 Stock Average to the highest level since 2007.
[Watch this Bloomberg video here]
What was the response by financial markets to this announcement?