Tag Archives: Economics

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

Image Just over three weeks ago, I was one of nearly 150,000 candidates signed up to sit for one of the levels of the CFA Program. As I strolled into the Des Moines testing center, shuffling through my pile of notecards one last time, I wasn’t surprised to look up and see faces that ranged from “falling asleep exhausted” to “on the verge of tears.” However, something did surprise me about the crowd: there were very few candidates that appeared to be my age.

So why did I, a college senior, decide to sign up to take what is commonly known as Wall Street’s hardest exam?

A Key Certification In Investment Management

Prior to starting my internship as a credit research analyst, I had only heard a little about the designation. It wasn’t until the first day at my internship that I noticed how prevalent it was in the investment management world. After meeting with many of my new coworkers, flipping through pitchbooks, and looking through sell-side research reports on Bloomberg, I realized that it was actually relatively uncommon for analysts and portfolio managers to NOT have those three little letters at the end of their name.

My thoughts were reaffirmed after looking at the different professions that CFA charterholders currently work in. One can certainly tell that the designation is most prevalent in investment management. The most popular positions held are:

  • Portfolio Managers – 22%
  • Research Analysts – 15%
  • C-Level Executives – 7%

Furthermore, a lot of job postings for investment management, portfolio management, or equity/credit research roles will have a note in the applications that say they are specifically looking for candidates that have their CFA charter. Take a look around on LinkedIn and Indeed, even for entry-level positions, and a common theme is to see lines like “Completion or progress toward CFA Designation preferred” or “CFA Designation is an asset.”

Getting My Foot In The Door

I recognized that if I passed this exam, just being able to add the simple “Passed CFA Level I Exam” to my résumé could potentially open up some doors in my future job search. Obviously, it wouldn’t guarantee me a job, but it could be the difference between a firm offering me an interview and them tossing my résumé in the trash. When competing against some of the world’s best and brightest for top entry-level finance roles, a job candidate needs every edge they can get. Having even the slightest edge on my résumé is increasingly important in today’s world as top Wall Street firms like Morgan Stanley are giving offers to less than 2% of summer analyst applicants. (For comparison, Harvard’s acceptance rate was 5.9% last year.)

Hiring managers are looking for a lot of different things when screening candidates, with some of the top basic requirements being:

  1. Is this candidate smart?
  2. Can he or she handle the workload?
  3. Does this person have an actual interest in the work?

While these questions can be answered by asking challenging interview questions and taking a look at prior academic performances, I personally believe that making progress towards earning the charter helps to answer all of these concerns. The men and women in this line of business know what it takes to be a successful CFA charterholder and that’s why the designation is so well-respected.

Expanding My Knowledge Base & Demonstrating Passion

The Candidate Body Of Knowledge, or CBOK, covers an expansive amount of investment knowledge and is no easy endeavor, to say the least. The Level I books total over 3,000 pages and candidates study, on average, over 300 hours. Oh, and keep in mind that the average candidate fails. The curriculum has candidates diving into everything from ethical dilemmas to the calculations of bond convexity and duration via seemingly endless readings, question banks, and mock exams over a 5-6 month period. Personally, I found that I learned more from five months of self-taught studying than I learned in over three years of attending college classes requiring tens of thousands of dollars in tuition, but I digress.

Studying over 300 hours for the Level I Exam while taking college classes, working a job, and handling numerous other responsibilities is quite the achievement. Taking on this difficult program that fails a majority of its candidates requires a true passion for investing to keep from burning out and giving up. It shows that candidates that sign up for the program have decided to invest in themselves and continue their education past their undergraduate years. The passion and tenacity that candidates demonstrate might as well be considered as a prerequisite for breaking into top finance roles.

It’s Easier While You’re Younger

Those that are majoring in finance already have a solid knowledge base of the major CBOK topics and have the classwork relatively fresh in their mind versus those that have been out of school for more than a few years. Taking a look at the weights, most students will realize that by the time they’re seniors, they’ll have learned at least a little about a majority of the topics, the only real outlier being the “Ethics and Professional Standards” section that accounts for 15% of the Level I exam.

In my opinion (and from what I’ve heard from my colleagues), it’s definitely easier to get a head-start and take it while you’re younger. As a senior in college, you (hopefully) aren’t married and you don’t have any kids. Imagine trying to study 20+ hours a week after working 60+ hours and simultaneously having a marriage and handful of kids to tend to. Sounds a lot more difficult doesn’t it? No thanks, I’ll pass.

“But how do I find time for over 300 hours while attending school?”

As long as you plan ahead and allow five to six months for studying, it’s actually not that hard to fit the studying into your schedule. If your target goal is to study 340 hours over 6 months (26 weeks), you’ll need to add around 13 hours per week into your schedule. At first, this may seem like a lot, but it’s less than two hours per day on average. Yes, this may mean you’ll have spend a little more time in the library and a little less in the bar, but you’ll live and it’ll be entirely worth it at the end. Contrary to the commonly perceived belief, you can still have a social life as long as you plan your study schedule appropriately and study efficiently (this means turning your phone off).

Relatively Speaking, It Doesn’t Cost Much

Regarding costs, the initial one-time enrollment fee is $440 and the exam fee is discounted the further ahead you sign up.

  • Signing up by the first deadline – $600.
  • Signing up by the second deadline (about four months prior to the exam) – $800.
  • Signing up by the third and final deadline (about three months prior to the exam) – $1,170.

Although $1,040+ for one exam can sound like a lot to a college student, if you do a little cost-benefit analysis and put it in perspective, it will probably turn out to be around the same, if not less, than one class at your university. In addition, that amount also pays for the six CFA Program books that you’ll be getting quite familiar with. Besides signing up early, another way to potentially save some money is to check out your local CFA Society to see if they offer any scholarships. Additionally, don’t be scared by the annual dues that charterholders are required to pay. Odds are that your future employer will actually cover those costs for you as well as the remainder of your exam fees.

Believe it or not, the biggest cost of the program is actually the opportunity cost. If you spent those 300 hours working at $15/hour, you could pull in and additional $4,500 before taxes. Right now, that’s a considerable amount of money for me and other college students. However, I believe that those opportunity costs right now are much smaller than the opportunity costs I would be faced with if I delayed the studying into my late twenties or thirties. It makes total sense to believe that with a bachelor’s degree and a couple years of industry experience under my belt, my future time and compensation will be valued at more than $15/hour.

The Additional Networking Opportunities

One of the least talked about perks of the CFA Program is that it’s a great way to network. Take a look at your local CFA Society and you’ll likely see successful individuals from top firms in your state/region that make up the leadership team and board of directors. Signing up and attending some of these events could perhaps be the most beneficial part of the CFA program. It’s a great way to gain some insight on the industry from experienced professionals and to introduce yourself to the industry leaders that could one day help you land a job.

At The End Of The Day, It Made Sense For Me

The decision to sign up and commit to the rigorous program is not one to be taken lightly. The CFA charter is one of the hardest designations to obtain and it provides benefits only within certain areas of finance.  You should make sure your decision is based on a true interest in investing and the corresponding material that you will be spendings months, and eventually years, on. If you believe you are interested in the program, I would highly recommend doing some additional research for a few days on all of the requirements and expectations to make sure that it really is the right fit for you at this point in your life. I was lucky and was able to study for it while interning full-time and not taking college classes. I had many discussions with friends and coworkers that are charterholders or are currently pursuing the charter before I decided to make the leap and sign up.

Even if I hear back in late July that I did not pass, I will still look back favorably on my time spent studying. I took on the biggest challenge in my life thus far, learned skills and a wealth of information applicable to my internship and personal investing, and helped prepare myself for a role as a future analyst. I learned a lot about the CFA curriculum, but just as importantly, I also learned a lot about myself along the way.

Disclaimer: All opinions are my own. The CFA Institute does not endorse or promote any part of this blog. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute.

 

Taking Another Look At The College Finance Curriculum

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Over the past year, I’ve had exposure to four different ways of learning about the world of finance:

  • In my most recent semester at Iowa, I completed classes including Investment Management, Corporate Finance, and Corporate & Financial Risk Management
    • Mostly full of lectures on theories that, for the most part, aren’t actually applied (CAPM, EMH) and heavily weighted on multiple exams
  • I sat for Level I of the CFA Program in early June after five months and 400+ hours of studying
    • Exam oriented (obviously) with a broad “foot deep and a mile wide” sense of learning about everything from ethics to dividend discount models
  • I’ve read articles and books on finance and investing in my own personal time
    • Often brings a more historical approach often citing previous examples in economic history at my own speed
  • I’ve learned about credit research analysis and the debt markets since starting my internship in January
    • Fast-paced environment approach to how analysis and bond trading is really done in the real world 

Each way of learning has its own pros and cons, but the various curriculums and methods have brought me a larger knowledge base nonetheless.

I recently read a blog post called “Rethinking The Finance Curriculum” by Tim Johnson and have found it to really hit the nail on the head. At the end of his great post that looks at typical business class requirements and the curriculum of the CFA Program, he comes to an interesting conclusion as to what should actually be emphasized:

In summary, my syllabus structure would be

1. The nature of money (macroeconomics and more)

2. The purpose of finance (history and ethics)

3. The practice of finance (behavioural, risk and asset management

4. Tools and techniques (optimisation, statistics)

While I do agree with most of his thoughts, here are three items that I think should be added to and/or most emphasized in the typical business curriculum regarding finance:

  1. Personal Finance & Financial Literacy – It’s a shame that this isn’t a required class or group of classes taught at every high school and again at a more in-depth level at colleges. No matter what career path you decide to venture into, you’ll need to at least understand the basic concepts of personal finance and financial literacy. Hell, even before you decide to venture into a career, you need to have a good grip as you’ll most likely be making a choice that will cost you tens of thousands of dollars: what college to attend. From understanding the banking system, loans, mortgages, savings and investing methods, products, and tools is increasingly important in today’s ever-changing financial world. Financial literacy is a huge key to success and it’s frighteningly shocking how few people can even calculate a monthly car payment anymore.
  2. An Emphasis On Economic History – Interning and listening to conversations between analysts (especially sovereign), portfolio managers, and traders has made me realize that I haven’t learned much about the history of finance or the financial system while at school. Frequently, I will read about or hear past economic events brought up, from the 1997 Asian financial crisis to the OPEC oil price shock, and I find myself not knowing nearly enough to participate in a discussion on the subjects. I’ve also found it increasingly important to learn how everything in the financial markets move when other parts and pieces move up and down. Hearing discussions about what will happen to Country X’s economic demand and currency strength if Event Y happens in Country Z is a very important side of finance that I have yet to learn much about in my classes.
  3. A Comprehensive Look At Major Industries, Sectors – While at my internship, creating models and analyzing companies in various industries and sectors has opened my eyes up to how little we actually learn about them in our current classes. Understanding how companies in the technology sector operate and how analysts valuate them versus other sectors would be great base information to know coming out of college. I would be willing to bet that most graduating finance students couldn’t name half of the sectors that make up the S&P 500.

I’m interested to hear the thoughts of others in the finance community. 

 Continue reading 

The Millennial Generation: Quick Facts On Financial Standing, Tech Trends & Consumer Behavior

ImageWho Are Millennials?

Millennials (Generation Y) are the youngest adult generation and are roughly defined as those born between 1980 and 2000 (Generation X: Born 1965-1980 and the Baby Boomers Generation: Born 1946-1964).  They’ve been given a lot of other names like ”Generation All About Me”, “The Complaining Generation”, “Generation Everyone Gets A Trophy”, but to describe them in one long line: 

They are America’s most racially and ethnically diverse generation ever and are classified as being political and social liberals, tech savvy, healthier, highly educated, less religious, slower to get married, and saddled with debt and lousy, underpaying jobs.


Why Is This Important?

The Millennial generation is huge; 7% larger than the baby-boomer generation and consists of 86 million people. The annual spending of this generation is going to be $2.45 trillion in 2015 and that number will grow to $3.39 trillion by 2018 so the trends and preferences of this generation are going to have a powerful effect on the businesses we see growing and created in the future.


Demographics:

86 Million is the size of the Millennial generation as of 2014, 7% larger than baby-boomer generation. (Barrons)

59.2% are white, 19.9% are Hispanic, 13.5% are black, 5.1% are Asian (Millennials Civic Health Index)

70% are affiliated with any type religion compared to 78% of Gen X and 83% of Boomers. (Pew Research)

50% classify themselves at politically independent, 27% Democratic, and 17% Republican (Pew Research)

60% voted for Barack Obama in 2012, 66% in 2008. (Pew Research)

 

Tech Trends:

90% used social networking sites in 2013, compared to 78% of Gen X, and 65% of Boomers (Pew Research)

1.8 hours spent per day on social media sites by the average Millennial (US Chamber Foundation)

55% have shared a “selfie” on a social networking site compared to 24% of Gen X and 9% of Boomers (Pew Research)

2.5x more likely than older generations to be an early adopter of technology (Barkley)

60% have uploaded content to the web vs. 29% of non-Millennials (Barkley)

27 times per nonworking hour that consumers in their 20s switch between communication platforms and devices (Advertising Age)

85% of those 18-29 use their phone to go online, compared to 73% for those aged 30-49, and 51% for ages 50-64. (Barkley)

65% of Millennials say losing their phone or computer would have a greater negative impact on their daily routine than losing their car. (Zipcar)

41% have only a cell phone and no landline, compared to 24% of Gen X, and 13% of Baby Boomers. (Pew Research)

75% of Millennials with TVs use it to watch “Over-The-Top” content (Netflix, Hulu, etc.) while 68% use their connected TV to watch programming from cable or satellite. (NPD Group)

 

Lifestyle:

36% of 18-31 year olds are living at home with their parents as of March 2012, up from 32% in 2007. (Pew Research)

20% of 27 year olds own or pay a mortgage. (The Atlantic)

21% of Millennials are married; 42% of Baby Boomers were married at this age. (Pew Research)

38% have 1-6 tattoos and 23% have a piercing in some place other than an earlobe. (US Chamber Foundation)

63% of Millennial workers have a Bachelor’s Degree (Millennial Branding)

45% of 18-24 year olds were currently enrolled in college in 2011 compared to 31% in 1990. (NY Times)

38% were bilingual as of 2013, up from 22% in 2003. (Nielsen)

32% believe America is the greatest country in the world compared to 48% of older generations. (Pew Research)

52% believe personal success is the most important thing in life compared to just 31% of older generations. (Barkley)

Austin, Texas is the city with the highest concentration of Millennials, followed by Salt Lake City, Seattle, Los Angeles, and Denver. (Nielsen)

33% regularly eat organic foods compared to 18% of older generations. (Barkley)

58% say that are willing to pay more for all natural and organic food products (Alix)

60% work out on a regular basis compared to 43% of non-Millennials. (Barkley)

81% of 20-24 year olds had a driver’s license in 2010, down from 92% in 1983. (CNW Marketing Research)

 

As Consumers:

$2.45 Trillion will be the annual spending of the Millennial generation in 2015. It will be 3.39 Trillion in 2018. (Oracle)

Google – Favoritebrand among Millennials in 2013 followed by YouTube , Amazon, Nintendo, and Oreo (Vision Research)

BMW – Top prestige brand for Millennial men. Chanel was the most prestigious for women. (L2 Prestige Brand Study 2010)

4 – Number of banks in the Top-10 brands hated most by Millennials (Scratch)

45% will go out of their way to shop at stores offering rewards programs. (Barkley)

47% of Millennial females and 38% of males reported shopping for clothes more than twice a month. (Boston Consulting Group)

38% are willing to leave brands they perceive to have bad ethics (Adroit Digital)

48% say word-of-mouth influences their product purchases more than TV ads. Only 17% said a TV ad prompted them to buy (Intrepid Study 2010)

77% participate in loyalty reward programs (Aimia)

41% have made a purchase using their smartphone (Edelman Digital)

51% use smartphones to research products and services when shopping compared to 22% of older generations (Barkley)

11% of US auto sales went to 18-34 year old buyers in 2012, down from 17% in 2007 (CNW Marketing Research)

 

Financial Standing:

$27,547 is the average outstanding balance for a borrower with student debt. One in eight has more than $50,000 in student debt. (USA Today)

538% – How much the cost of college has risen since 1985. (Labor Department)

94% would like cash in place of gifts for Christmas (Upromis)

38% have difficulty affording groceries compared to just 21% of those 55 and older (Information Resources, In.)

$39,700 is the median salary across Millennials (Pay Scale)

21% is the amount the average net worth of 29 year olds has fallen since 1983. (Urban Institute)

42% of Millennials when asked, “If you were given additional money, what would you do with it?” said “Pay off debt.” (UBS)

$2,241.20 is the average checking account balance of a Millennial compared to Gen X that maintained an average of $2,081.80. (TD Bank)

6% believe they’ll receive full benefits from Social Security. More than half believe they’ll receive no benefit. (Pew Research)

 

Investing:

52% of a Millennial’s overall asset allocation is held in cash and 28% is held in equities. Non-Millennials hold only 23% of their overall asset allocation in cash and have 48% of their assets in equities. (UBS)

43% describe themselves as “conservative investors” compared to 31% of Boomers. (Accenture)

28% believe long-term investing is a key to achieving success, compared to 52% of Non-Millennials that believe long-term investing is a key to achieving success. (Pew Research)

83% of Millennials who work for companies offering a 401(k) plan enroll in the program. (T. Rowe Price)

84% are seeking investing advice (Merrill Lynch)

61% would be interested in having video meetings with financial advisors. (WealthManagement.com)

 

In The Workforce:

75% of the US Workforce will be made up by Millennials in the US Workforce by 2030. (BPW)

16.3% of Millennials are classified as unemployed in the US (US Labor Dept)

48% of employed college graduates work in jobs that don’t require a four-year degree (The Center For College Affordability and Productivity

284,000 college graduates working minimum-wage jobs in 2012 (Wall Street Journal)

5.36x is how many times more likely a Millennial is to hold the position of a “Merchandise Displayer” compared to older US generations. Other notables include Clothing Sales Representative (4.63x) and Cell Phone Sales Representative (4.03x) (Nielsen)

27% are self-employed (US Chamber of Commerce) and 46% wanted to start a business in the next five years (Employers Insurance)

4% of employers reported parents attending their children’s job interviews. (College Employment Research Institute)

23% of companies reported having heavy contact with parents of Millennial employees. (College Employment Research Institute)

2 years is the average job tenure for Millennials, compared to 5 years for Gen X, 7 years for Baby Boomers, and 10 years for the Silent Generation. (Pay Scale)

47% work for companies smaller than 100 employees, 30% work for companies of size between 100-1500 employees, and 23% work for companies with 1,500+ employees. (Pay Scale)

69% believe office attendance in unnecessary on a regular basis. (Cisco)