• Consumer Financial Protection Bureau Criticized


    The Consumer Financial Protection Bureau (CFPB) was created as part of the Dodd-Frank Act, and was charged with uncovering schemes that hurt consumers. From the CFPB website:

    From the CFPB website:

    Congress established the CFPB to protect consumers by carrying out federal consumer financial laws. Among other things, we:

    • Write rules, supervise companies, and enforce federal consumer financial protection laws
    • Restrict unfair, deceptive, or abusive acts or practices
    • Take consumer complaints
    • Promote financial education
    • Research consumer behavior
    • Monitor financial markets for new risks to consumers
    • Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

    One of the largest cases against a financial institution is the case that was settled in 2013 with Ally Bank. From the NY Times (Moyer, 25 Nov 2015):

    In the 2013 settlement, Ally, formerly known as GMAC, agreed to pay $80 million to minority borrowers and $18 million in penalties without admitting wrongdoing after the consumer bureau and the Justice Department said more than 235,000 minority borrowers paid higher rates for auto loans because of a discriminatory pricing system.

    The article also describes how the CFPB is being criticized for going after easy targets:

    A congressional report criticizing a 2013 settlement by Ally Financial over discriminatory auto lending practices could give more ammunition to lawmakers trying to abolish the Consumer Financial Protection Bureau.

    The report, issued on Tuesday by Republican members of the House Financial Services Committee, called the fledgling agency’s methodology for determining discrimination “junk science” and said the bureau went after Ally because it knew the lender would settle quickly to avoid problems getting government approval on its restructuring.

    In a statement, the chairman of the committee, Representative Jeb Hensarling, Republican of Texas and a longtime critic of the consumer agency, called the settlement a “shakedown.”

    “The C.F.P.B. is a dangerously out-of-control agency,” he said.

    For discussion:

    In your opinion, is there a need for an agency such as the CFPB? What are some financial activities where consumers may need protection"

  • History of the CBOT

    The Chicago Board of Trade started in the 1800s. From the CME website:

    1848 - CBOT creates the world’s first futures exchange, based in Chicago

    1851 - CBOT offers earliest “forward” contract ever recorded; forward contracts begin to gain popularity among merchants and processors

    1865 - CBOT formalizes grain trading with the development of standardized agreements called “futures” contracts, world’s first such agreements CBOT creates world’s first futures clearing operation when it begins requiring performance bonds, called “margin,” to be posted by buyers and sellers in its grain markets

    1870 - CBOT develops first octagonal futures trading pit

    For discussion:

    What is an exchange, and how does an exchange make a profit?

    How does  an exchange decide what contracts will be traded?

  • Student Debt: How Much Do You Owe?

    As a freshman, if you were eligible for student loans, you were told how much you debt you could draw on. Then, when you finish college, you are told how much you will owe.

    Montana State University took a different approach. They sent letters warning students of their debt and they found that students who understood their debt loads were more likely to:

    1. have higher GPAs
    2. declare a STEM major
    3. take out a third less loans

    For discussion:

    How would your choices change if you knew your level of debt each year?

  • The Black Friday Trend in Sales

    Black Friday isn't what it used to be. For a while there, the frenzied Friday shopping deals seemed to be getting earlier and earlier with stores opening at midnight or even on Thursday evening. While a number of retailers continue the Black Friday/Cyber Monday tradition, some are insisting on remaining closed on Thanksgiving day.

    From Bloomberg (Fox, 25 Nov 2015):

    As Brad Tuttle details on Money.com, Black Friday deals have been migrating from Friday morning and Thursday evening in stores to online and/or in stores for the entire month of November. Cyber Monday has lost significance, too -- which makes sense, given that it got its start for the now-archaic reason that people had faster Internet connections at work and thus didn't begin their online shopping until they got into the office the Monday after Thanksgiving.

    This chart from Statista shows the trend in Black Friday sales from 2008 to today:


    You will find more statistics at Statista

    For discussion:

    What do the trends above suggest for the stock prices of retailers such as Walmat and Target? Could there be other cultural shifts that are driving the trends beyond consumer lack of interest in Black Friday?

  • Preparing for Rising Rates

    According to Bloomberg (Goodman and Surane, 23 Nov 2015), the odds of the Fed raising rates in Dec have increased. From the article:

    The probability the Federal Reserve will raise interest rates at its next meeting in December is at 74 percent, and Pacific Investment Management Co. says a move is likely. The chances the central bank will act at its Dec. 15-16 session have increased from about 30 percent in mid-October, futures contracts show.

    What does that mean for personal financial decision? With all the talk of soon to be rising interest rates, here is advice on how to prepare your personal budget. One important note: while rising rates can hurt you as a borrower, higher rates will help you if you are a saver or investor.

     

    For discussion:

    What additional advice can you offer investors in light of rising interest rates?

     

  • How to Invest With Conviction

    This investor looks for "game changing" trades by watching the world around him. He reads magazines, goes to movies, and listens to what his friends and neighbors are passionate about. And then he invests in it before Wall Street invests in it.

    That's how he turned $20K into $2 million.

    Of course this is not a new idea. Peter Lynch's famous book, One Up On Wall Street describes how to invest in products you already understand.

    For discussion:

    What is the Efficient Market Hypothesis? According to this theory, can you find trends that Wall Street hasn't picked up on yet?

  • Financial Markets That Don't Make Sense


    We expect markets to behave normally. For instance, in normal markets, long-term interest rates are usually higher than short-term rates, riskier investments offer higher expected returns than safer investments, and investments that are substitutes for one another should offer investors the same returns.

    However, we're in new and different market territory nowadays. This Bloomberg article lists six ways that financial markets are behaving in expected ways:

    1. Swap rates, that is the rate to exchange cash flows with a counterparty, have dropped below U.S. Treasury rates. This means that financial market participants think more highly of their counterparties' creditworthiness than they think of the U.S. government's creditworthiness.
    2. A single "overnight repo rate" has now been replaced by multiple repo rates depending on the collateral used in the trade. This seems to reflect the impact of new government regulation requiring banks to maintain capital on different type of loans.
    3. Investment banks are net short corporate bonds rather than holding inventories of corporate bonds, a trend which may affect the liquidity of corporate bonds.
    4. Using derivatives to hedge credit risk is easier and less costly than using the cash (spot) market, and this is causing the difference between rates on credit derivatives and cash markets to be unexpectedly negative.
    5. Market movements are not normal, that is, not normally distributed. Extreme events are happening with more regularity.
    6. Volatility continues to remain uncertain, even though we're no longer in the credit crisis.

    [real the full article here]

    For discussion:

    So what does this tell you about markets? About the Efficient Market Hypothesis?

    What advice would you give someone who is trying to decide how to invest his/her retirement savings based on the "Six Strange Things" in this article?

  • Attention Star Wars Collectors: What's Your Collection Worth?

    This collector started collecting Star Wars "space toys" and his collection has grown ever since. If it was to go up for auction, the collection would be worth millions, but no one knows for sure.

    How does one put a value on a collection of Star Wars memorabilia or any other memorabilia? One way might be to add up the prices paid for each piece, and call that the value. After all, it's what the collector invested in the collection. In financial markets, this is often called the book value, and it may not be a true representation of what the investment is worth today. After all, a significant amount of time may have gone by and old market participants may be replaced by new ones.

     

    Another way to put a number on a collection is to get an appraisal, and use that as the market value. In real estate and in other financial markets, this is often called the "Method of Comparables." This method is not without problems of its own. The comparable or benchmark asset is not likely to be "exactly" the same, and it might still be tricky to pin down the true value as of today.

     

    Market values can be determined other ways, too. Some may use the auction method: what is someone else willing to pay for the collection if it goes out for a bid. This is one of the most reliable methods, but it's problematic because investors will wear out their welcome with the community if they request repeated bids but then never follow through with a trade.

    For discussion:

    How would you determine what a collection like this is worth? Why might you want to determine a market value of a collection?

    What are some other methods for determining market value of an investment, besides book value and comparables?

  • Tech IPO Underpricing

    The latest tech firm going public priced its shares significantly lower than the market expected. Square, the mobile payments provider, was expected to come to market at $11 to 13/share but instead came to market at $9/share, a significant underpricing.

    From CNN Money:

    Square raised $243 million in the stock sale. And at a price of about $12, the company is valued at $3.9 billion. Last year, Square raised money from venture capitalists at a value of $6 billion.

    "In an IPO market where hype and buzz was a far greater driver of IPO value than fundamentals, Square might have done very well. But the IPO landscape has changed in recent months." said Brian Hamilton, chairman of research firm Sageworks.

     

    Describing the difference between private company valuations and public share valuations, Bloomberg's Barinka and Frier (6 Nov 2015) say this:

    The higher pre-IPO valuations are being driven by investors eager to put billions of dollars into private companies. Hedge funds, mutual funds and other investors are trying to get in to a small, though growing, group of hot startups. As a result, companies are waiting longer to go public and collecting on this glut of funding that’s inflating their values.

     

    This infographics describe the state of tech IPOs recently:


    You will find more statistics at Statista

    For discussion:

    How does a firm determine its share price for an IPO?

    What are the theoretical reasons for IPO underpricing?

  • Finance Career Forecast

    Finance careers follow trends in the broader market, according to this CNBC interview. Hence, healthcare finance is expected to be the big winner. Another area worth mentioning is the derivatives area, especially equity derivatives.


    For discussion:

    What are some of the known tradeoffs associated with careers in annce.

  • Guilty: High Frequency Trading

    In a recent landmark case, a high frequency trader has been found guilty of "spoofing" in futures markets.

    What is spoofing? According to this WSJ blog article:

    “Spoofing” is an illegal type of market manipulation that works like bluffing: A trader places big orders for stocks, bonds or futures to get others to think the price is going up or down. Then, in the blink of an eye, the spoofer cancels those orders and puts in opposite orders to take advantage of those traders. Spoofing can earn a big payoff but can undermine confidence in the markets and hurt other traders, The Wall Street Journal reports.

    Read the full article here

    For discussion:

    Why is spoofing considered harmful to markets? In your opinion, should the government control high-frequency trading? Why or why not?

  • Social Media Stocks Not to Buy

    For the most part, selecting a social media stock is not very different from selecting any other company stock. The firm needs to be doing something successfully, and generating sustainable earnings. When the growth prospects are uncertain, the stock suffers, and social media stocks are no different.

    This video lists several social media stocks to buy and others to avoid.

    For discussion:

    What current market trends seem to be driving the stocks listed in the video above? Do you foresee any other issues that would influence your decision to buy or sell these stocks?

  • Watch Out for Identify Theft

    Identity theft costs its victims time and money. From the Federal Reserve:

    The consequences of identity theft can be staggering. Victims spend extensive time closing bad accounts, opening new ones, and fixing credit records. There can be high out-of-pocket expenses related to clearing your name. You could be denied loans and jobs - and, though unlikely, you could even be mistakenly arrested as a result of crimes committed in your name.

    [read more here]

    This infographic shows several ways that identify theft could affect you or someone you know.

    For discussion:

    What are some ways you can protect yourself against identity theft.

  • Retirement Accounts and Fees

    In this CBS video, NY Times bestselling author Tony Robbins talks about saving more and spending less, especially when it comes to 401K fees.

    For discussion:

    What are the fees in a typical 401K account? How much will you pay in fees over the life of your retirement account if you start with a $100,000 today, pay 1% per year, compounded annually and expect to retire in 20 years? 30 years? 40 years?

  • Trends in Digital Banking

    For years now, people have believed that brick and mortar banks were headed for extinction as electronic banking grew more popular. According to Bankrate.com:

    From 2006 to 2010, the number of most types of common transactions performed inside bank branches declined, from opening bank accounts to making deposits and resolving problems, a study by industry research group Novantas LLC says.

    (Read more here)


    You will find more statistics at Statista

    For discussion:

    What are some precautions you should take when banking electronically according to resources here?

  • What Drives the Stock Price?

    From Zacks investment analysis:

    Stocks are the most volatile asset class in the financial markets. They gain and lose value erratically at times and can go from the biggest, high-flying investment to a penny stock seemingly overnight. Sometimes the factors that move the market value of stocks are predictable, but often they are not. Nonetheless, investors can observe certain events in anticipation of some stock movement, occurrences that may unfold internally at a business or externally in the broader markets or economy.

    (Read more here)

    This chart shows the growth in ad revenue for Facebook since the launch of the IPO, and below we can see a similar pattern for Facebook stock.


    You will find more statistics at Statista

    Now look at the growth in the stock price over the same period.

    For discussion:

    Based on the information in the Zacks article and the evidence presented here, what factors are driving Facebook stock price? What do you think the future holds for Facebook shareholders?

  • The Charlie Brown Money Machine

    Many years after his death, Peanuts creator Charles Schulz continues to be one of the highest-earning dead celebrities.

    From CelebrityNetWorth:

    In a typical year, his heirs have been known to earn more in royalties than the heirs of John Lennon, Jimmi Hendrix and Elizabeth Taylor combined. And if that's not crazy enough, Charles himself is believed to have earned over $1 billion personally during the comic strip's unprecedented 50 year run. Not exactly Peanuts!

    Read the story of Charles Schulz here

    For discussion:

    How would you estimate the value of the Schulz estate? What inputs would go into the formula? What estimates would you use for the inputs?

  • Real Estate Rebounds

    Home prices are recovering. That's good news for anyone who bought a house during the financial crisis.

    From Realtor.com (Davis, 27 Oct 2015):

    Home prices continued their year-over-year rises in both July and August, according to the S&P/Case-Shiller U.S. National Home Price Index on Tuesday morning. It recorded a year-over-year gain of 4.7% in August, and a 4.6% rise in July.

    The 10-City Composite, which covers the nine major metro areas including New York, San Francisco and Los Angeles, reported similar numbers: a 4.7% year-over-year rise in August and 4.5% in July.

    The cities that won the price climb prize: San Francisco (10.7%), Denver (10.7%) and Portland (9.4%). The average home prices for the metro areas in both the 10-City and 20-City Composites were back to their winter 2007 heights, and they’ve recovered 34.8% and 36.1% respectively from their March 2012 lows.

    For discussion:

    What factors drive real estate markets? What are some ways that investors can gain positions on real estate?

  • The Future of Tablet Computers

    I use a laptop computer, my Samsung 10.1 note tablet, and my smart phone all at the same time. They all have different uses, and for me, they can't replace one another. However, others are finding that as their tablets age, they may not need to replace them at the same speed they replace their cell phones. Consequently, tablet sales are suffering.

    In 2014, the future looked strong for the iPad and all tablet computers. From a forecast of trends in tablet computers (Reality Mine):

    The tablet as we know it in 2014, has now been on the market for over four years, and is firmly established as a distinct device category between smartphones and the traditional laptop. As of January 2014, the Pew Internet Project found that 42% of Americans owned a tablet computer, this has increased steeply since their introduction onto the market and is set to rise even higher in the next few years.

    Just a year later, the forecast looked less promising as consumers were satisfied with the super "skinny" computers and their larger smartphones. From ZDnet (Tung, 5 Jan 2015)

    Don't expect a turnaround for the troubled tablet category: it's forecast to grow by just eight percent year on year in 2015, with sales reaching 233 million units.

    Double-digit growth in tablet sales buoyed the PC industry in the years after Apple released its first iPad in 2010, but last year, the steam started running out of the category. While tablet sales continued to grow, their pace was nowhere near that seen over the past four years.

    According to analyst firm Gartner, 2015 will tell a similar story for tablets, with growth in sales expected to reach just eight percent. The analyst expects shipments to rise from last year's total of 216 million to 233 million this year.

    More recently, Apple announced its earnings. Globally, the tablet market is in decline:


    You will find more statistics at Statista

    For discussion:

    In your opinion, what should investors expect in profits generated by tablet computers? If you were Apple, what would you do in light of your expectations?

  • The Gender Pay Gap

    According to this Washington Post article (Labaton, 25 July 2014), here are five myths about the gender pay gap:

    1. The gender pay gap is narrowing rapidly.
    2. Women earn less because they work in industries that pay less.
    3. Women earn less because they don't negotiate well.
    4. Women earn less because mothers choose to work less.
    5. To close the pay gap, we should focus on deterring discrimination

    [Read the article here to learn what the evidence really says.]

    This infographics give a picture of the gender pay gap for different women:


    You will find more statistics at Statista

    For discussion:

    What factor makes the most sense to you about why the gender gap continues? In your opinion, what is the solution?

  • What is the Federal Reserve?

    The Fed is in the news every day. As the U.S. central bank, the Fed performs several important functions within our financial markets. 

    But it wasn't always this way. The creation of a central bank was controversial from the beginning. Banks issued their own currencies, and bank runs were common and no central authority could step in to save the financial system from itself. From the website of the San Francisco Fed:

    As the industrial economy expanded, the weaknesses of the nation’s decentralized banking system became more acute. Bank panics or “runs” occurred frequently. Many banks did not keep enough cash on hand to meet unusually heavy demand. Panics and runs often occurred when customers lost confidence in their banks after hearing news of failures of other banks. Fearful customers would rush to their banks to withdraw money, which often could not meet the sudden demand for cash. That sometimes created a contagion that triggered a succession of bank failures. A particularly severe panic took place in 1907 that abated only when a private individual, the financier J.P. Morgan, personally intervened to arrange emergency loans for financial institutions. This episode fueled a reform movement, which prompted Congress to establish the Federal Reserve System in 1913.

    Former Fed chair, Ben Bernanke, explains the role of the Fed and the structure of the "decentralized" central bank of the U.S.

    For discussion:

    What are the primary objectives of the Federal Reserve? How is the Fed organized?

    (Advanced) What are the assets and liabilities on the Fed's balance sheet?