• Moody's Downgrades Russian Debt

    On Friday of last week, Moody's Investor Service announced that it has downgraded Russia's sovereign debt from Baa3 to Ba1, and that the outlook is negative.

    From the press release (20 Feb 2015):

    New York, February 20, 2015 -- Moody's Investors Service has today downgraded the government of Russia's sovereign debt rating to Ba1/Not Prime (NP) from Baa3/Prime-3 (P-3). The rating outlook is negative. This rating action concludes the review for downgrade that commenced on January 16, 2015.

    Moody's downgrade of Russia's government bond rating to Ba1 is driven by the following factors:

    (1) The continuing crisis in Ukraine and the recent oil price and exchange rate shocks will further undermine Russia's economic strength and medium-term growth prospects, despite the fiscal and monetary policy responses;

    (2) The government's financial strength will diminish materially as a result of fiscal pressures and the continued erosion of Russia's foreign exchange (FX) reserves in light of ongoing capital outflows and restricted access to international capital markets;

    (3) The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service.

    The assignment of the negative outlook reflects the potential for more severe political or economic shocks to emerge, related either to the military conflict in Ukraine or a renewed decline in oil prices, which would further impair Russia's public and external finances.

    For discussion:

    What are the implications for Russia of this rating downgrade? What are the implication for other countries?

  • How Do the Smart Ones Invest?

    How would you like to invest like the pros? Well, if you watch the financial news stations, you can do just that...although a little later than you'd probably like.

    This video news clip tells how Warren Buffet recently sold his energy stocks. Some of the most successful hedge fund managers did likewise. Watch this to see what else they did:

    For discussion:

    What is "alpha" and how do investment managers generate it?

    Would you follow suit and invest according to the news in a video like this? Why or why not?

  • The New Tech Bubble

    The NASDAQ is close to a historic level of 5000. The last time it saw 5000 was 15 years ago in March, 2000.

    According to this CNBC article (Levy, 22 February 2015):

    Back then, Nasdaq 5,000 was more than just smoke and mirrors. It was madness. It was Pets.com and Webvan and $5 trillion of paper wealth just waiting to evaporate. When it rapidly vanished, scores of Silicon Valley office parks were left vacant almost overnight, glutting the market with pool tables, Aeron chairs and kegs of pale ale.

    David Golden, who ran investment banking at Hambrecht & Quist during the bubble years, recalls one particular idiom that encapsulated the mayhem, "If you could fog a mirror, you could go public."

    The end result, when the dust finally settled in October 2002, was Nasdaq 1,108.49.

    Fast forward to the present and, to use the most dangerous cliché in finance, things are different this time. The new Nasdaq 5,000 is built on the value of every Google search, Facebook status update, Amazon.com purchase, iPhone app and super high-speed device powered by an Intel or Qualcomm processor.

    These aren't PowerPoint presentations filled with pie-in-the-sky forecasts. These are some of the biggest franchises in the world, and they've driven the Nasdaq to 4,924.70 as of Thursday's close, 1.5 percent shy of 5,000.


    Image: courtesy of The Street http://www.thestreet.com/story/13051444/1/are-we-in-another-technology-bubble.html


    For discussion:

    What factors are driving the value of the NASDAQ? Are these values reasonable, or in your opinion, are we in another tech bubble?

  • The First Finance Course

    The history of finance is relatively new. Markowitz was published in the 50s and first taught in Chicago in the 60s. This was before the Capital Asset Pricing Model, which hadn't been published yet.

    This interview with one of the fathers of finance, Eugene Fama, gives a sense of the short history of finance as its own discipline.

    For discussion:

    What are "fat tails" and what does that mean for stock markets?

    How did data analysis begin in finance research, and how important is that for stock market analysis?

  • Investors Hungry for Late-Stage Technology Companies

    Recently, Pinterest, Uber, and Snapchat raised money, which tells us that investors are willing to invest in these late-stage tech companies.

    The interesting thing is that these companies are choosing to raise money but remain private.

    For discussion:

    Why are these companies choosing to remain private? In other words, what benefits do they retain by remaining private firms?

  • Attention Millenials: Don't Turn Into Your Parents

    You can do better than your parents when it comes to planning for retirement. According to this CNBC video, only 14% of baby boomers have a written plan for retirement. So financial planning can be the best remedy to not turning into your parents.

    For discussion:

    When do you want to retire, and what is your spending/saving plan to achieve that goal?

  • Real Estate Investing

    Real estate investing can be daunting, but this infographic describes how to invest in real estate and how to secure funding.

    Infographic courtesy of auction .com

  • Using Leverage to Achieve the Right Portfolio

    Markowitz frontier

    Source: wikimedia.org


    One of the great discoveries in modern finance has been the "optimal" risky portfolio, which when combined to some degree with the risk-free asset (aka, U.S. Treasury Bills or your savings account) can achieve the right mix of asset allocation to satisfy any investor's level of risk aversion.


    This article by well-known investor Cliff Asness supports this notion and suggests that using leverage, i.e. investing in the risk-free asset or borrowing at the risk-free rate, is not such a bad idea.

    From the article:

    Imagine the simple case of allocating between stocks and bonds. Without leverage, if you're aggressive, you go with mostly stocks; if conservative, mostly bonds. But therein is a problem. Both of these portfolios are undiversified. By first finding the "best" portfolio and then applying more or less leverage to it, you can set the risk to your taste while always investing in a diversified portfolio.

    [read the full article here]


    For discussion:

    (1) Like any tool, leverage can be used imprudently. What suggestions does the author offer for using leverage wisely? 

    (2) This theory relies on the idea that an investor can easily adjust his/her use of leverage by investing (lending) at the risk-free rate or borrowing at the risk-free rate. If an investor must borrow at a higher rate than the risk-free rate, what happens to the shape of the CAL in the graph above? 

  • Does Customer Service Impact Stock Price?

    This video suggests that Comcast is one of the worst companies based on its treatment of customers. However, despite a terrible reputation, shares of Comcast are popular among investors.

    For discussion:

    What factors affect the price of a company's stock? How would you explain why Comcast shares continue to perform well for shareholders in spite of its poor customer service record?

  • High Risk, High Return

    In this Financial Times interview, we find that investing in countries with higher levels of corruption may lead to greater investment returns than investing in countries with lower levels of corruption. That doesn't make sense, unless you consider risk and return. Higher risk countries, that is countries with more volatile stock markets, may be the same countries where the corruption index shows higher levels. Consequently, it is very reasonable that such higher risk countries may offer higher investment returns in the long run.

    For discussion:

    What are some possible explanations for higher returns in more corrupt economies?

    Would you invest in such economies? Why or why not?


  • Wanted: Ability to Analyze Big Data

    The market place is asking for business school graduates who can analyze "big data," and business schools are happy to oblige.

    According to SAS:

    As far back as 2001, industry analyst Doug Laney (currently with Gartner) articulated the now mainstream definition of big data as the three Vs of big data: volume, velocity and variety1.

    • Volume. Many factors contribute to the increase in data volume. Transaction-based data stored through the years. Unstructured data streaming in from social media. Increasing amounts of sensor and machine-to-machine data being collected. In the past, excessive data volume was a storage issue. But with decreasing storage costs, other issues emerge, including how to determine relevance within large data volumes and how to use analytics to create value from relevant data.
    • Velocity. Data is streaming in at unprecedented speed and must be dealt with in a timely manner. RFID tags, sensors and smart metering are driving the need to deal with torrents of data in near-real time. Reacting quickly enough to deal with data velocity is a challenge for most organizations.
    • Variety. Data today comes in all types of formats. Structured, numeric data in traditional databases. Information created from line-of-business applications. Unstructured text documents, email, video, audio, stock ticker data and financial transactions. Managing, merging and governing different varieties of data is something many organizations still grapple with.

    At SAS, we consider two additional dimensions when thinking about big data:

    • Variability. In addition to the increasing velocities and varieties of data, data flows can be highly inconsistent with periodic peaks. Is something trending in social media? Daily, seasonal and event-triggered peak data loads can be challenging to manage. Even more so with unstructured data involved.
    • Complexity. Today's data comes from multiple sources. And it is still an undertaking to link, match, cleanse and transform data across systems. However, it is necessary to connect and correlate relationships, hierarchies and multiple data linkages or your data can quickly spiral out of control.

    (read more here)

    For discussion

    In what ways does big data impact finance and investing?

  • Crazy Bond Prices

    Bonds are often considered the boring side of investing. After all, how exciting can it be to lend money and then sit back and wait to be repaid principal and interest? Today, however, there's some excitement in bonds due to factors such as the volatility in oil prices or the settlement of credit default swaps on bankrupt companies like RadioShack.

    Before we can delve into the exciting trades, it would be worthwhile to check out what bonds are and how they work. This infographic does a good job of explaining the bond market.

    (source: www.mint.com)

    For discussion:

    Based on this Bloomberg article http://www.bloomberg.com/news/articles/2015-02-05/nothing-like-a-quick-2-5-billion-to-draw-a-crowd-to-oil-bonds, how is the volatility in oil prices affecting bonds?

  • RadioShack Files For Bankruptcy

    RadioShack filed for Chapter 11 Bankruptcy which means reorganization under the court's supervision.

    The announcement wasn't news to financial markets, however. Before the announcement, the stock had been trading for $0.09/share, which is effectively zero. In fact, the chart below from the OTC Pink Sheet market shows that the stock price has steadily declined in recent months, The Efficient Market Hypothesis suggests that information is immediately and fully reflected in a stock's price, which would imply that investors are smart enough to evaluate Radio Shack's prospects and draw the conclusion that bankruptcy was imminent.

    For discussion:

    What information would have led investors to value Radio Shack stock at a price close to zero long before the bankruptcy announcement was made?

  • Negative Corporate Bond Yields

    A crazy phenomenon is underway. Investors are willing to pay borrowers for the privilege of investing.

    While central banks in Europe have been paying negative interest rates on deposits for months (see BBC, 18 Dec 2014), financial markets were surprised this week when corporate bond yields for Nestle, the Swiss chocolate maker, dipped into negative territory.

    From a recent Bloomberg article (Marsh and Bakewell, 2 Feb 2015):

    With the growing threat of falling prices menacing the euro-area’s fragile economy, some investors are calculating it’s worth owning Nestle bonds, even with little or no return. That’s because yields on more than $2 trillion of the developed world’s sovereign debt, including German bunds, have turned negative and the ECB charges 0.2 percent interest for cash deposits.

    “In the same way that bunds went negative, there’s nothing, in theory, to stop short-dated corporate bond yields going slightly negative as well,” Martin said. “If investors want to park some cash, the problem with putting it in a bank or money market fund is potential negative returns, because of the negative deposit rate policy of the ECB.”

    CNN reports:

    Investors navigating these unchartered waters have to decide what to do with their money.

    While banks don't (yet) actually have negative interest rates for mom-and-pop customers, people with $100 million can't just run to their local branch bank and expect to get a return much above zero. They may decide ultra-safe corporate bonds like those issued by Nestle make more sense.

    "You've got over $1 trillion of euros that will be created. All of that new money needs to find a home," said Thomas Urano, a managing director at fixed-income manager Sage Advisory. "I could park it in the bank and lose money for certain or I could put it into a corporate bond and maybe only lose one basis point."

    [read the full article here]

    For discussion:

    Based on these news sources, why would investors accept negative interest rates on their money?

    Image courtesy of Nestle.com

  • Federal Reserve Gold Vault

    All kinds of secrecy surrounds the gold held in the vault below the Federal Reserve Bank of New York. Recently, the Dutch central bank, De Nederlandsche Bank (DNB) removed 122.5 tons of gold from the Federal Reserve, and more recently, the German central bank, the Bundesbank, announced that they brought home 85 tons of gold from New York as well (read more here).

    One man in particular, 45 year old German Peter Boehringer, is among those who believe that money should be backed by gold and he has made it his business to learn the story behind the German gold held in NY.

    From Bloomberg Business (Silver, 5 Feb 2015):

    Boehringer is a gold bug, a member of the impassioned tribe of investors and academics who distrust central banks and paper money, unless the governments that print it will exchange the cash for gold or silver from their vaults. He has an asset management firm that invests his own money and that of clients in gold, silver, and mining stocks, and he’s a founder of the nonprofit German Precious Metal Society, which educates the public about “the craziness of unbacked monetary systems,” he says. In short, Boehringer is worried that the global economy is built on a fiction of currencies that aren’t backed by precious metals. Which is why he set out to make sure the gold that Germany and other nations say they have actually exists.

    Almost half of Germany’s gold resides at 33 Liberty St., the headquarters of the Federal Reserve Bank of New York, 80 feet below street level in a vault that sits on Manhattan’s bedrock. In 2012, Boehringer started a campaign on his blog to bring it home. He argued the gold should be shipped to the German central bank in Frankfurt. The hoard, amassed during Germany’s postwar boom, had never been subject to a published bar-by-bar physical review by its owners.

    For discussion:

    Why is gold such a popular store of wealth? Why is the storage of gold by the NY Fed such a controversial topic?


    (photo: source New York Federal Reserve)