Tag Archives: Banking

Thursday’s Top Links: Fixing Shiller CAPE, A Better LIBOR, The End of Quantitative Easing

Fixing The Shiller CAPE Model


Philosophical Economics wrote a great piece about the downside of relying on the Shiller CAPE ratio. While the tool has been criticized because it has been consistently stating that equities are overvalued for a large part of the last decade, very few have proposed a solution to fix the model. This piece goes into great detail to describe how changes in earnings due to small tweaks in GAAP and the treatment of goodwill have affected it. Perhaps, Pro-Forma adjustments are the solution? However, changes definitely need to be made in order for investors to continue to claim that the Shiller CAPE is still a credible model going forward.


KKR Charging Its Own Investments I-Banking Fees

A little over two weeks ago, payment processing company First Data received a $3.5B equity injection from its controlling private equity companies. I noticed this when the highly levered company’s bonds dropped in yield significantly from this action and made some big news in the credit markets. This financial engineering move has the potential to save the First Data billions of dollars going forward if they decided to call their debt and reissue at assumed lower borrowing rates with an improved credit outlook. However, I came across this article that shows KKR went ahead and just took $40mm out of that $3.5B total for underwriting fees. I’ve never heard of a P/E firm pulling this move, but it could potentially be the industry standard for private companies with multiple large owner interests going forward.


The End of QE (Is In Sight)

After its June meeting, the Fed has made plans to end its quantitative easing program in October of this year. In that month, the Fed will purchase its final $15B in bonds and mortgage backed securities (presumably until the next recession). This meeting was held before the release of the extra 288K+ non-farm jobs added in June, which goes to support the Fed’s theory that the economy will continue to slowly improve & support itself and that the stimulus isn’t needed anymore.

While this clears up one of the questions for the Fed, a more important question remains for investors: when will interest rates go up? When quantitative easing began during the crisis and rates plunged down to zero, Fed Chairman Ben Bernanke stated over and over again that rates will remain low for a considerable time and to his credit, they have. However, FOMC members have been hinting at a future rate increase coming in the next few years which has led to a lot of speculation. Wall Street is starting to pay more attention to the FOMC “Dot Plot” which shows where each FOMC member thinks the Fed benchmark rate will be at certain points over the next two years and beyond.


This chart shows congruency among the members of their thoughts on the rates through 2014 and going forward after 2016, however we see a lot of differing opinions as to where the Fed benchmark will be in 2015 and 2016. There are a lot of differing thoughts on the future of rates, from PIMCO’s Bill Gross betting big on a “New Neutral” to Goldman’s Jan Hatzius’s thoughts. Only time will tell who the winner is, but we know who the loser will be; the FOMC having to deal with Wall Street’s prying questions and pressure over the next few years.


A Better LIBOR?

Interesting piece by Quartz on how a new company called Credit Benchmark which is aiming to create more reliable and transparent benchmark data. With banks being accused of manipulating LIBOR and a handful of other reference rates, it sounds like this company could have a shot. It reminds me of IEX, the exchange created after the controversy caused by predatory high frequency trading earlier in the year. I really hope this pans out and becomes the new normal because after all of the lawsuits being brought on banks in the past few years, some ethics and credibility in major financial institutions is much needed.

More:

-How to improve the lack of liquidity in the credit markets?: get rid of the complexities of the debt issues and make them similar to the equity markets on the exchanges.
-We just had DOW 17,000 yet short selling is low?
-Charts that show why trading volume remains low: increased regulation & ETF popularity
-Effects of taxes show that being the best trader in the world doesn’t compare to buy-and-hold results
Myths that hurt investors. Just remember, you’ll never be Buffett, nor will the stock market make your riches for you.
-Everyone will eventually own a smartphone and Android will disappoint from here on out

Best Reads Of This Week: A Real Financial TV Show, US Lacking Literacy, & New Distressed Investing

Finally, An Idea For A Legitimate Show On Investing

Every day at my internship, the mounted televisions show a muted CNBC. While the channel sometimes does show decent programming (interviews with industry leaders are about all I’ll watch), a majority of it is just useless noise that investors shouldn’t bother with. The worst part about some of the programming is that people will make emotional-based trades (the worst kind) based off of what some “financial pundit” says on TV. It’s important to remember that the pundit making these recommendation has no idea about your background, education, financial standing, needs, or goals and top of that, they’re right about their picks about as often as you are. Most don’t realize this fact because the financial gurus on TV aren’t actually held accountable for their picks. When was the last time you heard one of them say “Oh, uh…yeah, last month I told you to buy XXX company and now it’s down XX%. I’m sorry about that.”? The answer is “Never.”

One of my favorite blogs to read consistently, A Wealth of Common Sense, recently featured on article on how to create a solid television show about investing. Here are Ben’s thoughts on his idea for a financial TV show that will cater to a long-term investor

– It would only be on once a week.

-Weekly guests would include the different ETF and mutual fund providers along with portfolio managers to explain their strategies and fund options.

-The audience could call/email/tweet their questions on the portfolio management process.

-There would also be a financial advisor segment to discuss how they run their client portfolios and any issues that seem to come up on a regular basis.

-Guests would get at least 15-20 minutes a piece instead of the 5 minute soundbites they get now so they could explain themselves and their positions in detail (other guests would include authors, bloggers, academic researchers and successful individual investors).

-Obviously, you would need many different voices to share their experiences and thoughts since there isn’t a single way of doing things.

-A focal point would be investor behavior and how human nature messes with our decision-making process. There is talk of the ‘dumb money’ from time to time on financial programs these days, but not much coverage gets paid to the long list of cognitive biases that seem to affect every investor, both professional and novice, in different ways.

Ben really hits the nail on the head with this article and it would be delightful to see a show on TV that actually educates its audience on the fundamentals and what’s really important. Now if this was made into a show, I would actually watch intently and encourage others to do the same. However, it’s not likely to ever happen as it wouldn’t feature men screaming at exchanges and other annoying eye-catching “entertainment” that the current programming is so fond of.


Lack Of Literacy

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According to a study by the Organization for Economic Cooperation and Development, American teens are lagging behind in financial literacy, especially when compared to top countries like China and Belgium. The executive director of the Foundation for Financial Planning, Jim Peniston had a quote that caught my eye:

“I don’t put it on the school system, I put it on our generation. What do kids learn? They learn from what they see at home.”

I agree and disagree with Jim on this quote. I do believe it is important for parents to teach their children the value of money, the importance of saving, and to educate them on the rest of the financial basics. However, I do believe that the lack of financial literacy is a failure of our education system. Financial literacy is one of the most important skills to be taught in schools, from elementary to university, as I wrote about here. I’d go as far as to argue that a student’s level of financial literacy is far more important than their GPA. Those that don’t understand it generally end up taking on more debt, accumulating less wealth, and being poorly prepared for retirement or personal emergencies. While I do believe that this should be taught by parents, I see no excuse as to why it has not been taught in schools. It gives kids a solid foundation for financial well-being and will prove useful throughout their entire lives, unlike, you know, an art class.


Golf Courses: The New Distressed Asset Investing

Private equity firms are heading into new assets, like troubled US golf courses. The last decade hasn’t been good for most of those in the golf business. The boom in new golfers with the emergence of Tiger Woods as a dominant player in the late 90’s and early 2000’s has faded away. That, paired with tough economic times has led to a decline in new golfers, rounds played, and overall profits of golf courses. Last year, only 14 new courses opened while 157 closed down as owners decided to shut their doors rather than continue to take losses with the extensive operating expenses that are required for basic course upkeep.

It will be interesting to see how these investments pay off. While I’m not sure that golf will ever return to the Tiger-mania days that had new golfers out to the courses in droves, I think it could make a rebound if younger golfers get hooked again. The PGA is rolling out its new “A Quick Nine” initiative to get golfers to play nine holes, versus the typical four hour 18 hole round. Perhaps a shorter time commitment could attract more people that aren’t willing to spend half their day playing golf. Regardless, it will be important for these private equity firms to find a way to create value for a new version of customers if they really want to turn the business around. I believe that this could come from expanding some of the services the golf club offers (spas, workout facilities, pools, etc.) and changing up the membership styles to be more customizable and attractive.


Battle For Bankers

Private equity firms are really starting to piss off investment banking programs with their recruiting tactics. What’s next? Going “full SEC football” and laying dibs on middle school students? Okay, maybe that was a little exaggerated, but the recruiting intensity is ramping up as we see a lot of young talent heading away from Wall Street for Silicon Valley.

Michael Lewis: Not A Fan Of Deeb Salem 

I’ve always been a big fan of Michael Lewis’s work from Liar’s Poker to Moneyball (Flash Boys is still on my reading list). The other day he made fun of Deeb Salem, the former Goldman Sachs trader who is disgruntled about not getting the millions that he was “promised”, in a fake letter to his mother and oh was it funny.

All-Time Investor Scoreboard

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From @HarrimanHouse