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.
When currency was linked to gold, it was easy to figure out why a dollar had value. However, with currency no longer linked to a commodity, what gives the dollar its value?
This video explains that though the government says that the dollar is the legal currency, that government backing does not give the dollar its value. That just makes the dollar legal.
After watching this video, explain what gives the dollar its value.
What is inflation and what happens to cause it.
CNBC told the story this year of a janitor who had amassed an $8 million fortune. From CNBC (Fox, 9 Feb 2015):
Ronald Read, a Vermont gas station attendant and janitor, invested in recognizable names when he amassed an $8 million fortune, according to his attorney. A large part of that fortune was later bequeathed to an area library and hospital after his death, stunning a community that had no idea about his wealth.
Most of Read's investments were found in a safe deposit box, Read's attorney, Laurie Rowell, told CNBC. Those investments included AT&T, Bank of America, CVS, Deere, GE and General Motors.
"He only invested in what he knew and what paid dividends. That was important to him," she said in an interview with "Closing Bell."
The story is an inspiring story of living within your means, investing wisely, and leaving a legacy for your family. It's the same story told in the 1996 book by Stanley and Danko entitled The Millionaire Next Door. Here's a description of the book from an LA Times article (Hiltzik, 10 Mar 2015)
Stanley's 1996 book, co-written with William D. Danko, defined the "prototypical" American millionaire not as an ostentatious Gatsby or Trump but as the proprietor of a "dull-normal" small business -- "welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors." His (mostly) or her median income was $131,000, and median net worth $1.6 million.
"We wear inexpensive suits and drive American made cars," the book said in the voice of its putative heroes. "Only a minority of us drive the current-model-year automobile."
While the story is inspiring, critics say it is no longer attainable. The Vermont janitor invested in a different era, and today's laborer does not have several hundred dollars left over every month to invest in the stock market.
From the LA Times article:
Economist Nassim Nicholas Taleb noticed, in his own book, "Fooled by Randomness," that the picture painted by "The Millionaire Next Door" was the product of survivor bias -- "the authors made no attempt to correct their statistics with the fact that they saw only the winners," he wrote. What of the millions of investors who invested in the wrong things or whose paving companies failed? They outnumber the winners by a large margin.
Taleb also observed that the book reflected "an unusual episode in history" when the return on assets was astronomical in historical terms. It arrived when that episode was playing out. Only three years after its publication came the dot-com crash; less than a decade later came the 2008 crash and a grinding recession that consigned lots of formerly million-dollar small businesses to oblivion.
How much would you have to invest each month at 4% per year in order to have $8 million if you plan to retire in 40 years? in 30 years? in 20 years?
In your opinion is this attainable?
This Barron's video interview with Duy Nguyen, chief investment officer at Invesco Solutions, explains how to adjust your children's college investments from age 1 to 18.
How much should you set aside when a child is born if you want to fully fund his or her college education in 18 years?
As you watch markets rise and fall, can you pull the trigger to buy or sell at just the right time? This interactive stock market game from Bloomberg shows how hard it is to play when all you have is hindsight.
[Click on this link to play]
How did you do? What lessons can you glean from this exercise?
On average, the trading days between Christmas and New Year and the the two days following New Year have traditionally been up days for the stock market. Not every year, of course, but most years.
This chart from PNC Chief Financial Strategist, William Stone, and posted by Business Insider (Holodny, 21 Dec 2015):
According to U.S. News (Brecht, 23 Nov 2015):
Over this seven-day trading period since 1969, the Standard & Poor's 500 index has averaged a 1.4 percent gain in the Santa Claus rally. One of the factors driving stocks higher is buying action by portfolio managers who are chasing stock winners and gains in an attempt to "window dress" their portfolios for year-end statements, says Jeffrey Hirsch, Yale Hirsch's son and the current editor at Stock Trader's Almanac.
Significantly, the Santa Claus gains can be used as a warning signal for stock market action ahead. "The significance of the Santa Claus rally is really when it does not occur. If Santa Claus should fail to call, bears may come to Broad and Wall," Hirsch says, referring to the streets. Over the last 21 years, the Santa Claus rally has failed to emerge only four times, which preceded flat overall performance years in 1994 and 2005 and down markets in 2000 and 2008, he says.
We're waiting to see how the story ends for 2015. According to USA Today (Shell, 24 Dec 2015)::
Stocks closed mostly lower in a holiday-shortened session Thursday that broke a three-day rally that had raised hopes for a Santa Claus Rally to spark the markets with an end-of-the-year rally.
Despite the drop, the major indexes all posted strong weekly gains.
Are entrepreneurship and philanthropy related? According to AOL founder Steve Case and his wife, Jean, the answer is yes. Encouraging businesses and blending profit with purpose is their way of giving back.
From the Case Foundation website:
The Case Foundation, created by digital pioneers Jean and Steve Case, is a diverse and dynamic institution by design. We create programs and invest in people and organizations that harness the best impulses of entrepreneurship, innovation, technology and collaboration to drive exponential impact. Our partners are changemakers with ideas that have transformative potential and can lead us to uncover new, more impactful ways of addressing chronic social challenges.
Our efforts to drive social change are focused on three key pillars: revolutionizing philanthropy, unleashing entrepreneurs and igniting civic engagement.
(watch this video on YouTube here)
What is the purpose of the for-profit firm? What is the purpose of the not-for-profit firm?
What is a "foundation" and how does a foundation invest its assets?
The International Monetary Fund (IMF) was created in 1944 to oversee the international monetary system. According to the IMF website:
The IMF's primary purpose is to ensure the stability of the international monetary system-the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
This video from the IMF describes the operations of the Fund:
(Watch this video on YouTube here)
Credit cards can be a great way to establish a good credit history, to earn rewards points, and to save on shopping deals. To benefit the most from your credit cards, you should understand what a credit card is and you should do what you can to improve your credit score. Once that is accomplished, here are ways to make even better use of the credit cards you already have.
This article from the Federal Reserve lists 5 tips for getting the most from your credit card:
Some additional ways to make the most of your credit cards (Bucklan, 4 May 2015) include:
What are some other tips you can offer to make the most of your credit cards?
Seems like the low price of oil is all anyone wants to talk about these days. Is the low price good for airlines and travelers? What about markets that rely on revenues from oil sales? From a recent article in The Atlantic (Naim, 31 Mar 2015):
In December, Chevron canceled a $10billion shale-gas exploration project in Ukraine, which the Ukrainian government was counting on to help stimulate its troubled economy and, eventually, lower its dependence on Russian gas. It’s just one example of a broader, industry-wide trend: scrapping or postponing energy projects that have suddenly become too risky or not economically viable at a lower oil-price level. According to Goldman Sachs, $1 trillion worth of investments in energy projects could now be at risk. In the long run, this may mean less oil production and higher energy prices. But in the short run, the abrupt disappearance of this enormous investment flow is bound to hurt energy companies—and especially their equipment suppliers and the construction and engineering firms that were planning to execute these projects. It will also hurt the cities and regions, from Texas to Lagos, where these companies operate.
This video discusses some of the implications of the low oil prices:
(Note: this video can be viewed on YouTube here)
Who benefits from low oil prices? Who is hurt by low oil prices?
What are the short term implications of low oil prices? What about the long-term implications?
If markets are efficient, then stock prices reflect everything we know about the firm. That is, everything that has already happened, is currently happening, and is expected to happen in the future. So if a stock price continues to grow, then it must be the case that the company is experiencing good news or is expected to experience good news in the days and years ahead.
That seems to be the story of Amazon.
The stock price has experienced growth as shown in the chart below. However, other retailers haven't been as fortunate. We can conclude, therefore, that though all retailers may be experiencing the benefit of holiday shopping, Amazon is expected to reap rewards beyond the rest of the crowd.
You will find more statistics at Statista
What is the Efficient Market Hypothesis (EMH)? Based on the EMH, can an investor earn a return by investing in Amazon? If so, what return should the investor expect?
Your FICO score tells lenders how credit worthy you are. It's a single number, but it's made up of several categories. This image from myFICO.com shows the breakdown of how our FICO scores are calculated:
From the Federal Reserve, here are 5 tips for improving your credit score:
Many Americans do not have enough retirement savings. But how much do you need to save now in order to have enough? Conventional wisdom is that saving 10% of your salary is enough.
From this CNN Money article (Updegrave, 29 Oct 2015):
It might be if you start saving that amount in your early 20s and stick to it faithfully over the next 40 or so years. But few of us actually adhere to that regimen. We get a late start or have years when we save less than 10% or we may even dip into our savings occasionally. To allow for more leeway in building a nest egg, many pros suggest a higher target of 15%, which is the figure cited in recent research by the Center for Retirement Research at Boston College.
Many young adults get their first credit card in college. I'm not talking about the debit card that allows you to access your checking or savings account through the ATM machine and which has a Visa symbol on it. I mean your own credit card with a line of credit that you have to repay. Credit cards are issued by banks and retail stores who use a service like Visa or MasterCard as the payment system.
According to Investopedia:
A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual's credit rating.
Credit cards aren't all that difficult to get, and consumers can easily get to a place where they have too many credit cards to manage and pay off. How many should you have?
According to this Business Insider article:
In their book "On My Own Two Feet," Manisha Thakor and Sharon Kedar advise that you should have no more than two personal credit cards.
One of those cards should be reserved for regular, everyday use. The other should be used only in the case of an emergency.
Medical bills, for example, count as an emergency. The new winter coat that you could use but can't really afford is not an emergency.
The article goes on to say that one reason to get a third card is to keep your work expenses separate from your personal expenses. Otherwise, with too many credit cards in your wallet, you face the temptation to overspend.
Photo: By Lotus Head from Johannesburg, Gauteng, South Africa (sxc.hu) [GFDL, CC-BY-SA-3.0 or CC BY-SA 2.5-2.0-1.0], via Wikimedia Commons
What other reasons can you think of that you might want to limit the number of credit cards you have?
Hedging your bets. It's a common phrase, but what does it mean?
This video from the London Metal Exchange (LME) describes how a firm might use options and futures, aka "derivatives" to hedge its risks associated with changing market prices.
What does it mean to enter a forward contract? To go long a forward? To go short a forward?
How can a firm use a forward contract to hedge its risk?
Climate disasters often result in economic disaster. According to the National Center for Environmental Information:
In 2014, there were 8 weather and climate disaster events with losses exceeding $1 billion each across the United States. These events included a drought event, a flooding event, 5 severe storm events, and a winter storm event. Overall, these events resulted in the deaths of 53 people and had significant economic effects on the areas impacted.
This infographics shows the natural disasters from 1995 to 2015 and the cost associated:
Using the tools you've learned in finance, how would you estimate the cost or value of a natural disaster.
For anyone traveling overseas, a strong US dollar is a nice bonus when it comes to buying souvenirs. But for any firm selling goods overseas, a strong dollar is a challenge, especially if the goods being sold have fairly sticky prices in the foreign country.
So why is the dollar so strong?
This video by Fed Vice Chairman Fischer describing the strength of the US dollar and its impact on the US economy.
NOTE: if the video above won't play, you can find it here on YouTube
Have you ever considered a career with the Federal Reserve? For finance and economics students, the opportunity to work at the U.S. central bank is a chance in a lifetime. This video describes what it is like to work at the Fed.
NOTE: If you can't view the video above, please see it on YouTube here
What financial careers attract you?
The jobs report that came out yesterday was good news for the market. With more jobs being added and wage grown not too crazy, market participants now fully expect the Federal Reserve to follow through on its promise to raise the Fed Funds rate
From the NY Times (Schwartz, 4 Dec 2015)
American employers expanded their payrolls at a robust pace in November, the government reported on Friday, all but guaranteeing that policy makers at the Federal Reserve will raise interest rates for the first time in nearly a decade when they meet in less than two weeks.
This Bloomberg video explains a little more clearly why the market reacted with enthusiasm at the jobs report:
NOTE: If the video above won't play, please view it on YouTube here
Why do investors want the Fed to raise interest rates? What are some potential consequences if the Fed raises rates too slowly? Too quickly?
Security in retirement is a growing concern for many. With low savings, many fear that they will retire in poverty rather than in style.
From the Economics Policy Institute (Morrissey, 15 Oct 2015):
Though 401(k) and IRA distributions will grow in importance in coming years, the amounts saved to date are inadequate and unequally distributed, and it is unlikely that distributions from these accounts will be enough to replace bygone pensions for most retirees, who will continue to rely on Social Security for the bulk of their incomes.
Poverty in retirement is a global problem, and this infographics shows the countries where retirees (pensioners) are most prevalent.
How much should you have saved up by retirement to be able to maintain your lifestyle? How much would you need to put away every month between now and retirement to achieve your goal?
Not everything is what it seems. From fake websites to fake gift cards to fake charities, the holiday season is a favorite for scammers. From the Richmond Fed, here is a list of common scams to beware:
(read the full article here)
This video from the Wall Street Journal identifies several holiday scams to beware:
How can consumers guard against these scams?