Tag Archives: Equities

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.