• The Federal Reserve: Time for Change?

    This video from the Philadelphia Fed describes the history of central banking in the U.S. Our system of "decentralized central banking" has been the subject of much controversy over the years. And the controversy continues:

    From the Economist (21 May 2016):

    Perhaps it was inevitable in the aftermath of the worst financial crisis in almost a century, but America is boiling over with schemes to remake the Federal Reserve. Some Republicans want the central bank’s monetary-policy decisions to be “audited” by the Government Accountability Office, an arm of Congress. Others wish to use a formula to put monetary policy on autopilot and to haul the chairman in front of Congress every time the Fed steps in. The most extreme sceptics peddle conspiracy theories about how the Fed “debases” the dollar. They propose abolishing the central bank entirely.

    (Read the full article here)

    While it is not likely that the central bank of the U.S. will be completely overhauled, the next U.S. president may address how the Fed is governed.

    In your opinion

    What are the main controversies surrounding the Federal Reserve?

    How should they be addressed?

  • Will Spotify Ever Turn a Profit?

    You will find more statistics at Statista

    The most popular music streaming service in the world has reported rising revenues and falling profits--again. Spotify has over 89 million listeners. Revenues are up nearly 80 percent, but losses continue to increase.

    Regarding the 2015 financials reported recently:

    While revenue growth was tremendous for Spotify in 2015, it actually saw its net loss widen 6.3% to 173.1 million euros. Its biggest cost was the amount it paid in royalties. Spotify says that it pays out about 70% of revenue as music royalties, but in 2015 it had to pay 1.63 billion Euros, 83.6% of revenue. In fact, that number has been above 80% in each of the last three years. What's more, that percentage continues to increase. The additional royalty fees are the result of upfront fees and guaranteed minimums paid to record labels.

    (read the full article on The Motley Fool 27 May 2016 here)

    This is the same story we heard last year and the year before that.

    In 2015, the headline regarding the 2014 results read, "Spotify's Revenue is Growing But So Are Its Losses."

    And in 2014 regarding the 2013 results, headlines read, "Spotify Hits 10 Million Paid Users. Now Can It Make Money?"

    For discussion:

    What do you foresee for the future of the music streaming business? What about the future of Spotify?

    Would you invest in Spotify shares? Why or why not?

  • New versus Used: Which Car to Buy?

    The decision of whether to buy a new or used car involves more than just the initial price of the vehicle. You should consider the running costs of each car, including insurance, gas, and repairs. By considering the total monthly cost of the car, you may find the new car ultimately cheaper than the used car.

    This decision is called the "capital budgeting" decision in finance, and shows the various cash flows that would need to be included in the analysis before making a decision. This video brings up one point, however, that is not normally included in a corporate capital budgeting decision--the cost of funds, or interest.

    In a corporate capital budgeting decision, we normally assume that the decision to acquire an asset is separate from the decision to fund the asset. In other words, we separate the capital budgeting decision from the capital structure decision. Therefore, we would not include interest expense as a relevant incremental expense when determining the project cash flows. In this video, however, interest expense is included in the analysis because used car loans often come with a higher interest rate than new car loans.

    So, all told, which car is a better deal? Used or new? What factors did you consider as you chose between the two?

    And can you explain why it is appropriate to exclude the discussion of interest expense when choosing between these two capital budgeting projects (i.e. new car v. used car)?

  • What Does $500K Buy In Retirement?

    Not much.

    According to Bloomberg's report based on  the HealthView Services 2016 Retirement Health Care Costs Data Report:

    The projected tab for an average, healthy 65-year-old couple retiring this year, in lifetime premiums for Medicare Parts B and D and supplemental insurance, is $288,000, according to the HealthView Services 2016 Retirement Health Care Costs Data Report.1 Add in out-of-pocket expenses, including dental, hearing, and vision care, and the bill reaches $377,412.

    That's in today's dollars. You want it in tomorrow's? Adjusting for inflation, the report projects the lifetime premium costs at $435,472. Add in deductibles, copayments, hearing, vision, and dental, and it's $567,903.

    So what to do if your retirement income does not meet your retirement expenses? According to this CNN Money article:

    As a general rule, you'll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses. So for example if your projected retirement expenses exceed Social Security and pensions by $20,000 a year, you might need a nest egg of $300,000 to $400,000 to bridge the gap.

    For discussion:

    How much do you estimate you'll need in a retirement nest egg? To achieve this goal, how much do you expect you'll need to save each month?

  • What Does the Fed Actually Do?

    The possibility of an interest rate hike has been the subject of much financial news lately. The discussion centers around one of the Federal Reserve's primary responsibilities: monetary policy. That duty and its other responsibilities (payments and supervision & regulation) are described in this video from the Philadelphia Fed.

    Investors are not sure what to make of the rate hike signals. According to CNBC (Domm, 20 May 2016):

    The key to the coming week will be about whether markets can absorb the Fed's rate hike message without getting indigestion.

    The central bank bombarded markets in the past week with the message that it could raise interest rates for the second time in nine years as early as June, if the economy continues to improve as expected. What was different in its message was the new urgency of the timing, made clear in the minutes from its last meeting and in the comments from Fed officials.

    (read the full article here)

    For discussion:

    What is the Federal Reserve and how is it organized?

    What are the primary responsibilities of the Fed?

    If the Fed decides to increase interest rates, what mechanism is it likely to use to implement its plan?

  • Investment in Nascar

    In this video, Nascar chairman and CEO, Brian France, talks bout the $400 million renovation of the Daytona International Speedway and the expected return on this investment. The stadium now has reduced capacity which means higher cost of seats. He describes how this investment requires a return on invested capital, and it seems to be working out well.

    For discussion:

    Where does Nascar get its revenue?

    What is the growth potential for Nascar? Where is the growth likely to come from?

    What is the biggest competitor for Nascar? How much threat does that competition pose for Nascar?

  • High-Earning Hedge Fund Managers

    You will find more statistics at Statista

    Wall street has always been attractive to young graduates because of the salary potential that exists. The chart above shows that for some, that potential was realized.

    Hedge fund managers are the highest paid in financial services. How did they get so wealthy, you ask? The answer is found in the article by Institutional Investor's Alpha (Taub, 10 May 2016). From the article:

    This year about half of the 25 highest-earning hedge fund managers topping Alpha's 15th annual Rich List used computer-generated investing strategies to produce all or some of their investment gains. They include Siegel and John Overdeck, his Two Sigma co-chairman and co-founder, who qualify for the Rich List for the first time. They tie for seventh place after earning $500 million each last year.

    In fact, six of the top eight on this year's ranking are considered to be full-fledged quants: managers who rely heavily on sophisticated computer programs as part of their process. This is a far cry from 2002, when just two computer-driven managers qualified for the initial ranking, including Renaissance Technologies founder James Simon, the only person to appear all 15 years.

    Read the full article here.

    Find the annual Rich List here

    For discussion

    What is a hedge fund? How do "quants" make their money?

  • The Yield Curve Today

    This video describes what happened based on supply and demand. The factors driving the markets are oil prices, fed actions, and market expectations.

    Of particular interest is the discussion regarding the yield curve, which is the graphical representation of the relationship between interest rates and bond maturities. In a "normal" market, we tend to see an upward sloping yield curve, that is, we tend to see long term rates higher than short term rates. However, from time to time, the curve flattens and sometimes even inverts. Lately, we've seen the yield curve flatten.

    The yield curve is important to market watchers because it gives us a sense of what investors expect to happen in the future. Based on the "pure expectations theory" of the term structure of interest rates, if investors expect the 1-year rate next year to be higher than the 1-year rate today, then the 2-year rate today will be higher than the 1-year rate today.

    For discussion:

    Using the current government bond yields, construct the yield curve today. What does this imply about future interest rates?

  • Why Take the CFA Exam

    The Chartered Financial Analyst® or CFA designation is considered "the most respected and recognized investment management designation in the world" (see more from CFA Institute here). For years, many have debated the benefits of an MBA versus the CFA charter, and quite often, the CFA wins.

    From the Financial Times (Boyd, 22 June 2014):

    Those pass rates and the sheer complexity of what the students have had to study are beginning to confer a premium on the qualifications they receive.

    Indeed, some argue that students who have completed all three levels and won the right to put the three letters CFA after their names and be called a chartered financial analyst have an advantage over those with an MBA.

    “I think there might be a crossing point soon – I think the CFA in the financial industry might soon eclipse the MBA,” says Mark Shackleton, professor of finance and associate dean of postgraduate studies at Lancaster University Management School.

    (read the full article here)

    So how should one go about preparing for the CFA exam? This article offers "9 Tips for passing the CFA exams from the man who writes the questions." The tips include advice to focus on the CFA curriculum, know the format, and manage your time. Read the full article here.

    For discussion:

    • Based on what you can learn from the CFA website, what financial career will benefit the most from the CFA designation?
    • What factors would you consider if you are choosing between an MBA and a CFA designation?

  • What is Shadow Banking

    This Financial Times video explains shadow banking. According to the NASDAQ, Shadow banks are "Financial institutions and activities that in some respects parallel banking activities but are subject to less regulation than commercial banks. Institutions include mutual funds, investment bank, and hedge funds"

    For discussion:

    What are some names of financial institutions involved in shadow banking?

    What are the issues surrounding shadow banking?

    How large is this industry? Why does it matter?

  • Has Gold Lost its Luster?

    The jury on gold seems to be hung. No consensus in sight. Some say gold will go higher while others say lower.

    From INC Magazine (AJ Agrawal, 7 May 2016)):

    With troubled waters ahead for both the US economy and the world economy, this is the time to invest in gold. All experts point towards gold prices continuing to increase. How much they'll increase remains to be unknown, though.

    It's wise to invest in gold, at least to some extent. Build a solid platform based on gold and you will be protected against the worst of the decline of paper currency, should it be more profound than expected.

    (read the full article here)

    But from CNBC (Tan, 29 Feb 2016), we see competing stories:

    SocGen analysts said gold is overvalued by around 6 percent currently and should be around $1152 an ounce instead. The spot gold price is around $1,245 an ounce.

    Deutsche Bank on the other hand expects prices in the fourth quarter to be $1,230 an ounce in the fourth quarter. Spot prices were loweer when Deutsche had made the forecast.

    (read the full article here)

    For discussion:

    What factors drive the price of gold?

    Do you think gold is a wise investment?

  • Valuing a Race Horse

    Q: What is an asset worth?

    A: The present value of all future cash flows.

    And when it comes to race horses, future cash flows include race winnings and earnings from stud fees. This is the story of Uncle Mo who was once a contender for the Kentucky Derby himself. He was forced to retire following illness, but his value didn't end.

    According to US Racing (Halterman, 17 Mar 2016):

    His success didn’t just end when he left the race track.  Uncle Mo is one of the best first year sires we’ve seen in years.  His first crop is winning at an alarming rate, and seems to not be stopping anytime soon.  Nyquist has been his most successful colt.  He’s a perfect 6 for 6 horse who won the Breeders Cup Juvenile as well as the Eclipse Award as two year old horse of the year.  He also has three more horses that are currently in our Kentucky Derby Top 20 list in Laoban, Mo Tom, and Outwork.  All of these horses have shown a lot of talent, and could become super stars as the year goes along.

    For discussion:

    What cash flows should be included in the valuation of a race horse? What other factors should be included?

  • Investing in Government Bonds

    Investing in bonds or "fixed income securities" currently does not offer very attractive returns because interest rates are so low. This video from the Financial Times explains a few ways that investors find higher yields in bond markets. But higher yields come with higher risks.

    From the Financial Industry Regulatory Authority  or FINRA, here are 10 tips to consider before investing in bonds:

    1. Don't give in to the temptation to seek higher yields
    2. Define your investment objectives
    3. Determine your risk tolerance and the risk associated with different bonds
    4. Learn about bonds
    5. Read the prospectus
    6. Find a good broker
    7. Learn when and at what price a bond last traded
    8. Understand the costs associated with investing in bonds
    9. Reinvest coupons to earn interest on interest
    10. Don't try to time the market.

    For discussion:

    What are the differences between stocks and bonds?

    What risks are associated with investing in bonds?

  • Fintech: The Great Disruptor

    Fintech is the big buzzword in finance and it stands for "financial technology," that intersection of technology with financial services. From a recent article in the NY Times Dealbook by Andrew Ross Sorkin (6 April 2016):

    The promise of all these new technologies is to fundamentally disrupt the biggest players in finance. Companies like Stripe, a payments company, hope to become replacements for PayPal and others. Lending Club wants to make getting a loan cheaper and easier. Wealthfront wants to advise you and manage your money from your phone. And, of course, Bitcoin and its many derivatives wants to be the new gold, or better yet, digital cash.

    If they succeed, Wall Street as we know it may become an outpost of Palo Alto. According to a Citigroup report last week, fintech may be on the cusp of an “Uber moment,” as Antony Jenkins, the former chief executive of Barclays, predicted last year. Some 800,000 people will have lost their jobs at financial services companies to some of the newly dreamed up software in a decade, the report said. “Roughly 60 to 70 percent of retail banking employees are doing manual-processing-driven jobs,” the report explained. “If all the current manual processing can be replaced by automation, these jobs can disappear or evolve.”

    The acceptance of fintech by consumers varies across the globe. Bank customers in Asia seem more willing to go completely digital than customers in the U.S. From a recent article by McKinsey & Company:

    The digital revolution in banking has only just begun. Today we are in phase one, where most traditional banks offer their customers high-quality web and mobile sites/apps. An alternate approach is one where digital becomes not merely an additional feature but a fully integrated mobile experience in which customers use their smartphones or tablets to do everything from opening a new account and making payments to resolving credit-card billing disputes, all without ever setting foot in a physical branch.

    More and more consumers around the globe are demanding this. Among the people we surveyed in developed Asian markets, more than 80 percent said they would be willing to shift some of their holdings to a bank that offered a compelling digital-only proposition.

    For discussion:

    What do you foresee in the future of financial technology? Do you think the day of the brick-and-mortar bank is over?

  • How to Win With Your 401K

    The key to becoming a 401K millionaire is starting early and taking advantage of your employer match.

    Investment advice from Prudential includes:

    How to invest 401(k) contributions. Most plans offer a diversified array of investment options, from conservative to aggressive. Financial experts suggest that "asset allocation"—spreading your money across different types of investments—is a good approach. When making decisions, consider your age, how close you are to retirement, your financial goals and your risk tolerance. The company that administers your plan may offer interactive tools and worksheets, but if you prefer, a licensed financial professional can help. There is no guarantee that asset allocation will ensure a profit or protect your investment against losses in declining markets.

    For discussion:

    What other tips can you find to growing your savings to $1 million?

  • What Are Hedge Funds?

    Hedge funds are popular among high net worth and institutional investors. They can offer higher returns, but they come with higher risks as well.

    The video above describes some of the features of hedge funds that distinguish them from traditional mutual funds.

    From the SEC:

    Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds.

    Unlike mutual funds, hedge funds are not subject to some of the regulations that are designed to protect investors. Depending on the amount of assets in the hedge funds advised by a manager, some hedge fund managers may not be required to register or to file public reports with the SEC. Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.

    (read more from the SEC here)

    For discussion:

    What are the key differences between hedge funds and mutual funds?

    Would you invest in a hedge fund? Why or why not?