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.
Spending $300,000 on drinks in one evening will get you noticed. And not in a good way.
Alex Hope, a former forex trader, was convicted of a single count of fraud and sentenced to seven years in London, as reported by the NY Times (Bray, 30 jJan 2015). From the article:
The Financial Conduct Authority of Britain said that the trader, Alex Hope, promised large returns for investors from foreign exchange trading from March 2011 to April 2012 but suffered heavy losses and spent more than £2 million on himself.
Mr. Hope was convicted of a single count of fraud in London this month after pleading guilty in April 2014 to operating a collective investment scheme without authorization.
From the F.C.A. press release (9 Jan 2015):
Between March 2011 and April 2012, Hope took over £5 million from investors, and used over £2million of this for personal expenditure. Hope told investors that he would trade their money on the foreign exchange (forex) markets. Hope held himself out to be a talented and successful trader who could make investors a return of up to 100% in just a few months. In reality, Hope’s trading was heavily loss-making. He lost over £500,000 of the £650,000 held in his trading accounts.
What are some warning signs of fraud that investors can look for in investment proposals?
* Image "Champagne tower" by ori2uru - originally posted to Flickr as champagne tower. Licensed under CC BY 2.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Champagne_tower.jpg#mediaviewer/File:Champagne_tower.jpg
Capital budgeting is built on cash flow. And cash flow--inflows AND outflows--fall into three categories: (1) operating cash flows, (2) change in net working capital, and (3) capital spending, also called "capex."
In the energy sector, a low price of oil is affecting corporate profitability for companies like Shell. To overcome a decline of cash inflow from operations, Shell and others will be cutting their net capital spending to wait for oil prices to return to more profitable levels.
This Financial Times video discusses the cuts to capex by Shell and others.
Why would a company hesitate to cut capex, even if operating cash flow is declining?
The problem with using ratios to analyze a company is that ratios can improve two ways: (1) by changing the numerator and (2) by changing the denominator. So without digging into the components of a ratio, an investor can miss the true picture. Take P/E ratios, for example. The market has long assumed that higher P/E ratios indicate that investors are generally expecting the stock price to rise, which in itself can cause the price to rise as expected. This is the case for growth stocks which tend to have higher P/E ratios than their "value stock" counterparts.
Unfortunately, higher P/E ratio can also be driven by a decline in the earnings per share or EPS, and that seems to be the case nowadays.
According to a recent report by Factset Insight (Butters, 23 Jan 2015):
The forward 12-month P/E ratio for the S&P 500 now stands at 16.6, based on yesterday’s closing price (2063.15) and forward 12-month EPS estimate ($124.04). Given the high values driving the “P” in the P/E ratio, how does this 16.6 P/E ratio compare to historical averages? What is driving the increase in the P/E ratio?
The current forward 12-month P/E ratio of 16.6 is now well above the three most recent historical averages: 5-year (13.6), 10-year (14.1), and 15-year (16.1). In fact, this week marked the first time the forward 12-month P/E has been equal to (or above) 16.6 since March 14, 2005. On that date, the closing price of the S&P 500 was 1206.83 and the forward 12-month EPS estimate was $72.65.
In this recent CNBC article, Rosenberg, (26 Jan 2015) points to the "E" in the P/E ratio:
Unsurprisingly, much of the decline in earnings expectations comes from energy sector analysts, who are still reeling over oil's 50 percent plunge from its 2014 highs. From the end of the year, earnings per share estimates for the energy sector have swooned 27 percent.
Since share prices haven't fallen nearly as much, the overall impact is that the P/E for the energy sector has risen to 22.4, FactSet senior earnings analyst John Butters finds—the highest for any sector in the S&P.
Identify some other popular ratios used in equity valuation and identify how those ratios can suggest a different explanation.
Many of us take for granted the benefits of having a bank account. And yet, in spite of the benefits, the FDIC reports that 9.6 million households representing 25 million people were unbanked in 2013 (read the Oct 20, 2014 press release on the National Survey of Unbanked and Underbanked here).
From the press release:
Living paycheck to paycheck and relying on check cashing services becomes especially problematic during times of crisis. This Federal Reserve video describes what happened to unbanked families in the wake of Hurricane Katrina and the lessons that can be learned.
What problems did unbanked families face during this crisis? What lessons can be learned?
From a recent announcement by the North Carolina Lottery Commission (20 Jan 2015):
Tyndall is the latest player to claim the top prize in the $1,000 a Week for Life! game, which is part of a series of four instant games offering the chance to win as much as $5,000 a week for life. The tickets are available for $1, $2, $5, and $10 per play. A top prize is structured in annual payments that continue for a winner’s entire life. The guaranteed value of the prize is at least 20 years of payments to a winner or the winner’s estate. The guaranteed value of the $1,000 a Week for Life! game is $1,040,000. Top prize winners can also choose to claim their winnings as a lump sum with a cash value equal to the guaranteed prize amount.
[read the full press release here]
Mr. Tyndall had the choice of receiving the winnings as a lump sum payment or as an annuity stream of weekly payments for life. Had he chosen the lump sum payment, he would likely have received a single amount that is less than $1,040,000 (which is $1,000/week for 20 years). That's because the Lottery Commission would assume he would invest the lump sum and earn enough to have $1,000/week.
The choice of lump sum versus annuity payments is the same choice facing many retirees who will receive a pension. Given the choice of a single check versus monthly payments for life, many people choose the lump sum payment.
Read this article (http://www.practicalplanner.com/financial_articles/Winning_the_Lottery_Lump_Sum_or_Annuity.pdf) and summarize the factors that you would consider if you were faced with a similar decision as the one faced by Mr. Tyndall. Do you think you would choose the lump sum or the annuity? Why?
The U.S. dollar (USD) is strong relative to the euro (EUR)--good news for European exporters but bad news for U.S. companies selling their goods overseas.
This chart from the WSJ shows the EURUSD (quoted as USD per 1 EUR) has declined dramatically in recent weeks. In other words, the EUR has depreciated while the USD has appreciated.
source: Wall Street Journal http://quotes.wsj.com/EURUSD/fx-interactive-chart
Why are countries engaging in a currency war at the moment?
According to this CNBC video, is the U.S. doing anything to counter this currency war? In your opinion, should the U.S. act?
Researchers are learning what it takes to be a successful investor:(1) understanding your own emotions and (2) understanding those of other people. According to this CNBC article (MacBride, 21 Jan 2015):
People who are good at emotional regulation—in other words, overcoming their unease at going against the herd—tend to be better at investing, said Camelia M. Kuhnen, associate professor of finance at the University of North Carolina's Kenan-Flagler Business School.
If you're the kind of person who could go skydiving or who could talk yourself out of an action, like selling in a panic, you might be good at emotional regulation. You might say to yourself, "I know there is no day-to-day predictability in the market. I know this objectively, and even though I feel this sense of anxiety, what I saw in the market yesterday doesn't mean I should sell," Kuhnen said.
Neuroeconomics is a relatively new field that brings together neuroscience and financial decision making. From this Bloomberg article (Hutheesing, 31 Aug 2011):
That emotions play a powerful role is nothing new. Benjamin Graham, considered the father of value investing, once said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” But the core theories of the field now known as behavioral finance were developed by Richard Thaler, professor of economics and behavioral science at the Booth School of Business at the University of Chicago, and Daniel Kahneman of Princeton University, whose work on the questions, with the late Amos Tversky, won him the Nobel Memorial Prize in Economic Sciences in 2002.
What is behavioral finance? Choose one behavioral bias and describe how it influences investor choices.
Cyberattacks on JP Morgan Chase and 9 other large financial institutions have bankers concerned about their ability to protect sensitive data from hackers. Eighty three million accounts were affected by the largest "computer intrusion" in history. And though JP Morgan Chase has stated that they find no further evidence that the hackers are still in their systems, not everyone is satisfied.
From the NY Times (Goldstein, Perlroth, and Sanger, 3 October 2014):
This summer, Treasury Secretary Jacob J. Lew called on Congress to pass legislation that he said would bolster the information sharing process.
“As it stands, our laws do not do enough to foster information sharing and defend the public from digital threats,” Mr. Lew said.
That the hackers were apparently able to move around JPMorgan’s computer system undetected for several weeks is perhaps the most troubling aspect of the recent breach, officials at other large banks say.
The hackers were able to attain high administrative privileges within JPMorgan’s network, rooting more than 90 servers and rummaging through customer databases with detailed information for 76 million households and seven million small-business online accounts.
What are the main issues being discussed regarding cybersecurity of financial information in this video?
Like the Energizer bunny, this company just keeps going and going... So many articles, blog posts, and interviews have explored how much Blackberry is worth as a firm. With the dominance of iOS and Android operating systems, Blackberry seems like it should have become extinct by now, but it is still around. Believe it or not, Blackberry users still exist. 40 million of them, to be exact.
What is a company worth? Finance is all about valuation, after all. From business school classes, we know that an investment is worth the present value of all future cash flows. So in valuing Blackberry, what are the sources of future cash flows?
This interview identifies the cash flow issues that a financial analyst should consider in valuing this firm.
What do you think? Is Blackberry worth its current selling price? Why or why not?
Source: blog.comparecards.com and used by Creative Commons license
The big news in financial markets this week has been the Swiss National Bank's (SNB) shocking announcement that it was abandoning the cap on its currency exchange rate with the euro. In one sudden move, the Swiss franc jumped dramatically against the euro, and Swiss exporters found themselves the immediate sellers of very expensive goods.
This Bloomberg video gives a decent recount of the events as announcers try to guess what happens next:
Which companies or individuals are likely to be hurt the most by the SNB's decision?
In this article by Yale University's Nobel Laureate, Robert Shiller, he asks, "What Good Are Economists?"
Interesting question. Here's an excerpt from his article:
Whenever a crisis loomed in the last century, the broad consensus among economists was that it did not. As far as I can find, almost no one in the profession – not even luminaries like John Maynard Keynes, Friedrich Hayek, or Irving Fisher – made public statements anticipating the Great Depression.
...Interestingly, contemporary news accounts reveal little evidence of public anger at economists after disaster struck in1929. So why has the failure to foresee the latest crisis turned out so differently for the profession? Why has it–unlike previous forecasting failures–stoked so much mistrust of economists?
One reason may be the perception that many economists were smugly promoting the “efficient markets hypothesis” – a view that seemed to rule out a collapse in asset prices. Believing that markets always know best, they dismissed warnings by a few mere mortals (including me) about overpricing of equities and housing. After both markets crashed spectacularly, the profession’s credibility took a direct hit.
[Read the full article here]
Do a Google search on 'Economists get it wrong' and you'll get many hits. One article by Paul Krugman published in the NY Times in 2009, not long after the crisis began, says this:
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.
So these opinions seem to be pointing to the Efficient Market Hypothesis as the root of all market evils--the notion that market participants are rational and investments are fairly priced.
What do you think?
Do you believe markets are efficient? Why or why not?
This CNNMoney video of high frequency trading by Citadel Group in Chicago shows lots of activity but very little noise. Traders are surrounded by computer screens and data while computer algorithms make decisions to buy and sell.
In this video, the Head of Citadel Execution Services describes dark pools as the mechanism by which trades are crossed. They're called "dark" because the information is not shared with the rest of the market--not because there's anything shady going on.
Well, maybe nothing shady at Citadel, but UBS may be a different story.
Yesterday, UBS agreed to pay $14.5 million to settle claims that it did not treat all customers fairly in operating its dark pool. From a recent NY Times article (Alden, 15 Jan 2015):
The S.E.C. zeroed in on a UBS system called PrimaryPegPlus that let traders place orders in increments of a fraction of a penny, violating a set of rules known as Regulation National Market System, according to the agency. Placing buy orders at a fractionally higher price or sell orders at a fractionally lower price could let high-frequency trading firms unfairly jump ahead of others in the market, the S.E.C. said.
In a disclosure failure, the UBS dark pool pitched this pricing system almost exclusively to high-frequency traders and similar firms, according to the S.E.C.
In your opinion, should high-frequency trading be allowed?
This interview with the highly respected investor, Mario Gabelli describes his investment style and ideas. He explains his view on investing and where he sees opportunity.
What are some of the key investing themes you can take away from this interview?
Declining inflation in the eurozone suggests that basic goods and services are cheaper now than they were before. And that is true, depending on which goods and services you are talking about.
This Financial Times video explains the difference between headline inflation, which includes everything, and core inflation, which excludes food and energy prices.
What is the danger with focusing on one measure of inflation over the other?
If you work for the government or a large organization, then you may find a credit union available to you and your family. These not-for-profit financial institutions offer financial services to people with a common bond, and often these financial services off better terms than would be available at traditional commercial banks.
Based on the infographic from the IBM Southeast Employees' Federal Credit Union, these financial institutions may not be for everyone. What are the benefits and limitations of banking with a credit union?
In spite of the financial problems that plagued Europe over the last several years, there still seems to be suitors. The tiny country of Lithuania, with its 3 million citizens, joined the Eurozone on Jan 1 and adopted the euro as its currency.
According to CNBC's Katy Barnato:
The country is likely to be the last new member of the union for a while, however. Romania is the only EU country with a target date to start using the euro—and that is four years away in 2019.
Established EU members Denmark and the United Kingdom have opted out of using the euro, and newer members Bulgaria, Croatia, Czech Republic, Hungary and Poland do not currently have target dates to start using the currency.
What were some arguments for and against Lithuania adopting the euro?