Thursday, December 20, 2012

A Quick Glance Back at 2012

How will 2012 be remembered in the annals of finance?
In the annals of finance, 2012 was eventful, but won't be remembered as remarkable. The year won't deserve a chapter in economics texts or finance history (like the years 1987, 1998, 2001, or 2008). The financial system didn't collapse, and equity markets, although sometimes unsettled by volatility and uncertainty, didn't fall through a sinkhole.

No major financial institution went bankrupt; many continued to improve their balance sheets and narrow their business scopes.  Deals got done, although at a pace still far below the torrid mid-2000s. China proved to be human--at least in economic prowess. Brazil was proclaimed a favorite emerging market. Interest rates remained near zero, and banks remained squeamish about the burdens of new regulation.

A few events, trends or phenomena, nonetheless, will stand out. Every year something unexpected occurs, a close-to-black-swan event (the large, breath-taking losses at JPMorgan). Every year something that was supposed to proceed smoothly hits a sudden, rough patch (Facebook's IPO, projected in 2011 to have a blazing 2012 launch).

Facebook's Fumble. Everybody who has anything to do with equity markets counted down the days  until Facebook's springtime opening day:  underwriters, traders, market-makers, brokers, investment managers, Facebook employees, financial consultants and hedge-fund traders. And then the company fell flat on its face out of the starting blocks. For weeks, fingers pointed everywhere at lead underwriter Morgan Stanley and at the stock exchange Nasdaq to determine what went wrong and why.

Facebook's stock price nose-dived initially and then bounced around thereafter for months. It has since settled near its first-day offering price. The industry continues to assess what happened and define the lessons learned from what appeared to be a botched underwriting. Morgan Stanley and its lead-underwriter team, many said, had over-priced the stock. Nasdaq, many thought, was clumsy in opening-day trading because of systems problems.

Morgan Stanley, this week, continues to feel some repercussion. Regulators in Massachusetts fined the firm on how it managed the IPO. 

(See also:
CFN: Facebook IPO: What Went Wrong?
CFN: Facebook's Underwriters)

JPMorgan's Whale of Losses. JPMorgan's senior managers didn't see the "big whale" coming last spring. The announced $4 billion-plus in losses turned out to be a financial sock to its face, if they didn't tarnish its reputation for a month or two.  In 2012, the big whale couldn't restrain himself, kept selling certain credit-default swaps uncontrollably.  It turned into the big trade that went badly awry.

The trade started off as a basic hedge against risks in its loan and bond portfolio, but exploded into billions in trading losses. It resulted in job losses for many, inquiries from regulators, and befuddlement from outsiders that had assumed that JPMorgan's CEO Jamie Dimon had a tight rein on all matters inside the JPMorgan machine--including risk management.

Once again, the misunderstanding of exotic financial instruments led to losses and red faces from bankers and traders who thought they had everything within grasp.

JPMorgan decided to come clean, rid itself of the positions, revamp the entire unit, and simplify the role of credit hedges in risk management. This week, it reported that it had off-loaded the positions to a hedge fund, which has sold down the whole portfolio.

A lesson learned for managers of credit and market risk. But is it? Is it a lesson that will have been forgotten when we hear about the next billion-dollar loss?

(See also:  CFN: Where Was the Risk Management Unit?)

A Resignation Heard Round the World. Remember Greg Smith? Frustrated with what he saw and experienced at Goldman Sachs, he announced his resignation in front of millions of New York Times readers. In an op-ed piece in early 2012, he described a client/firm culture that, he alleged, put the firm far ahead of the client. He was peaking in his career in equity-derivatives sales, decided he couldn't bear what he observed and submitted his reflections on resignation to Goldman and The Times' editors, who readily published it.

The op-ed column eventually turned into a book, Why I Left Goldman Sachs, a book tour and an appearance on CBS-TV's "60 Minutes." Critics lampooned the book, not because he wrote carelessly of his experiences, but because they found no incidences where Goldman could be accused of illegal banking. While they found little they considered "juicy," the book goes onto the shelf alongside Michael Lewis' 1980s' Liar's Poker, which could have been titled Why I Left Salomon Brothers

What's next for Smith? Another book. Another career. Anywhere, but Wall Street.

(See also CFN: Greg Smith and His Letter to Goldman.)

Libor in Turmoil. Before 2012, most laymen outside of finance knew little or nothing about Libor--interest rates for corporate borrowers, pegged by a club of banks in London. Many in finance knew of Libor. Few could explain how it was founded, derived, and/or agreed upon.  Many knew that corporate bonds, corporate loans and mortgage-related securities and loans were tied somehow to Libor rates. A few knew how Libor determined values of interest-rate swaps and other interest-rate derivatives (including futures, caps and collars).

Nobody expected 2012 would be engulfed by a Libor-related scandal that ultimately sacked the CEO of Barclays (Bob Diamond) and led to calls for sweeping changes in how Libor is calculated or whether Libor should be replaced by something else.  As the year ends, Libor continues as an agenda item in 2013, and UBS has stepped up to pay a large fine, as Barclays did. Whispers suggest there is more to come.

(See also CFN:  Libor in Crisis)

Knight's Dark Day. JPMorgan's wasn't the only institution that was pummeled with sudden trading losses.  JPMorgan's "whale" losses eventually exceeded $5 billion, but never jeopardized the bank's existence.  Knight Capital, a market-maker in equities, launched a new electronic trading scheme with the New York Stock Exchange this past fall. But within an hour of unveiling it, it suffered technical glitches and had to absorb $440 million in trading losses that almost put the firm into bankruptcy. 

Knight's board, investors, lenders and counter-parties huddled all weekend to resuscitate the firm, inject more capital, and give it a second life.  Knight survived, but for weeks thereafter, the global debate on trading markets revolved around electronic and high-frequency trading:  Does speed-trading jeopardize the integrity of markets? Will high-frequency, electronic trades shove aside and discourage retail investors?  Should governments move rapidly to corral this activity?

Knight is humming along now; in recent days, the firm announced discussions with Getco, the high-frequency trading firm, to merge in the new year. The trading glitches forced eventual merger discussions, but the rationale is likely also two firms meshing together their counter-parties, systems technology experts, and respective market niches to make them even stronger, better in, yes, high-frequency markets.

(See also:  CFN:  Knight's Darkest Moment
CFN: What's Next for High-Frequency Trading)

Apple's Stash of Cash.  Apple survived the year with the absence of Steve Jobs.  Depending on the day of the week, it claims the highest market value of any corporate enterprise around. Throughout the year, it was flush with cash, billions on top of billions, not sure what to do with it:  Invest? Acquire something? Build more new gleaming, white stores? All of the above? Or pay dividends to dividend-starved shareolders? Or buy back stock?

A delightful corporate-finance challenge it had for much of the year.  It decided it was okay to reward shareholders (with Jobs not around to veto the move), as it contemplated and unveiled dividend and buy-back programs, while still being able to hold unto more billions in cash on the balance sheet.

(See also:  CFN:  Apple's Stash of Cash--What to Do With It?)

And for those aspiring for the grand old days of investment banking, whether they hark back to the 1980s of management buy-outs and bridge loans, the flurry of dot-com IPOs of the 1990s and early 2000s, or the exotic structures of mortgages or synthetic creations of Ph.d bankers of the mid-2000s, the signals everywhere were sour in 2012.  Week after week, big banks announced lower bonuses and significant layers.  The economy was in recovery, and markets improved. But new regulation is strangling the existing investment-banking business model.

UBS's Surrender. By late fall, UBS led the way with its huge-scale downsizing in investment banking. Others would follow later, from Credit Suisse to Barclays. Others, like Jefferies and other boutiques, will try to fill the gaps or capture market share where they can.

Investment banking and sales & trading at big banks will need to reinvent itself in 2013, and it's driving all crazy that they haven't figured out what that invention should be. 

(See also:  CFN:  UBS Throws in the IB Flag)

Tracy Williams

See also:
CFN:  MBAs Gear up for 2013

Tuesday, December 11, 2012

MBAs Gear Up for Summer, 2013

Now is the time to prepare for interviews
Most MBA students know that to secure the right job in financial services, you can't stroll out of the classroom, jump into an interview suit, and glide into a round of interviews.  Preparation is critical. You don't secure the dream job with a few practice sessions of the elevator speech.

One of the best ways to gear up and prepare for the rigors of recruiting season is to have a useful framework, one that you can use to formulate a strategy, demonstrate expertise, and express a self-brand. The goal is to get from campus to a significant summer internship in finance in investment or corporate banking, investment management, private equity, asset management or corporate finance.  Indeed in the post-crisis environment of 2013, the world of finance has emerged from the abyss, but opportunities continue to be fleeting, segmented and scarce.  Approaching interviewing season with strategy, framework, optimism and unbridled confidence can go a long way. Not to mention a proven mastery of technical skills.

The Consortium Finance Network hosted its second annual fall webinar on "Internships and Recruiting" Dec. 11 to help first-year Consortium MBA students in finance plan for the upcmoing interviewing season and emerge with offers from their top-choice institutions.  CFN hosts Camilo Sandoval, D-Lori Newsome-Pitts and Tracy Williams welcomed panelists Eric Lane and Mark Santos, recent Consortium graduates and led an hour-long discussion to launch the 2013 recruiting campaign.  For the MBA students participating, panelists provided stories and advice from their own successful campaigns to win job offers.

Lane is an associate in M&A and equity finance at Loop Capital in Chicago, a mid-size investment bank. Santos is in corporate finance at Dell, the computer company. Both entered business school at the height of the crisis and were able to use effective strategies to get from campus to positions in finance during a time when it seemed as if nobody was hiring.
CFN's framework for approaching interviewing season revolves around the MBA student demonstrating competence, experience or expertise in five pillars:

(a) background, 
(b) interest, 
(c) drive, 
(d) capability and 
(e) insight.  

The financial institution, whether it's Morgan Stanley or Loop Capital, is evaluating the candidate, in most cases, in those five broad categories. The successful candidate demonstrates excellence across the board throughout the process. The process includes information interviews, first-round interviews, and call-back, on-site interviews.

CFN, during the webinar, showed how MBA students, in numerous ways, can show excellence in each area.  Knowing that interviewers, for example, are seeking to detect interest and drive, MBA students should seize the process, demonstrate interest and drive and do it frequently.

Lane advised MBA students to look beyond the better-known institutions, the bulge-bracket firms such as Citi and Goldman Sachs, and explore working, too, at niche firms, regional firms, and boutiques.  Loop Capital is an example, as well as such firms as Lazard, Greenhill, M.R. Beal, and Evercore. Opportunities may exist outside the well-worn paths and may afford visible, broad roles for first-year MBA associates.

Santos advised MBA students interested in finance to take steps even beyond financial institutions and examine roles in corporate finance, corporate development, M&A and strategy within client companies--the industrials, the manufacturers, and the technology companies, such as, say, Dell, IBM, Pepsico or Eli Lily.  The companies have critical roles in corporate finance and ultimately choose to work directly with investment banks for advice or financing.

The formal interviewing season for MBA summer internships usually starts immediately after fall exams. The process accelerates in January. Major financial institutions have already identified some candidates they covet and desire to see on interview lists. They will inform some of them they have been invited to interview on "A" lists.  Candidates not on these lists can still seek interview slots in other ways. Smaller firms and corporates proceed with a different recruiting agenda and timetable-- partly because they have fewer slots and opportunities. 

Second-round interviews, where MBA candidates are brought on site, can occur from mid-winter until early spring. Many MBA graduates have told legendary stories about their interviewing experiences--often unique, sometimes memorable--to convince a Goldman Sachs, Credit Suisse, or Wells Fargo to hire them. Some have told about enduring sessions to show how they "think on their feet," how they would manage a trade or deal transaction, or how they would respond in a market crisis.

Throughout it all, successful candidates in the past had a few things in common:  a clear goal, a workable strategy, and a useful framework, all on top of networks, mentors, and special ties inside some institutions. Most successful candidates also had a passion for finance, boundless knowledge about markets, trends and products, and glowing confidence.

During the webinar, panelists and hosts reminded students of the importance of demonstrating knowledge and polishing it with rational viewpoints about markets, past transactions, and economic trends. An informed opinion shows candidates have thought about the topics of the moment and conveys leadership potential. Panelists also reminded students to concentrate on how to stand out and differentiate among others vying for the same spots. Demonstrate excellence, but distinguish yourself. However you look at it, it's a competition.

The webinar presentation and recording will be available to students who registered for the event and to others upon request (through the CFN's Linkedin page).

Tracy Williams

See also:

CFN:  Internships and Recruiting, Fall, 2011
CFN:  MBA Job Hunting, No Need to Panic Yet, 2012
CFN:  The Toughest Interviewers, 2012
CFN:  Mastering Technical Skills, 2010

Thursday, December 6, 2012

Bring on 2013: Cliffs, Reforms, Recovery

What lies ahead in finance?
After a long haul and after markets watched and studied the results, we've jumped the hurdle of the presidential election. We now head toward a year-end where sound bites and gurgles of noise from Washington scream "fiscal cliffs" and a possible end-of-world scenario if legislators don't reach an agreement and unveil a fiscal plan before January 1.

Often in an election year, capital markets and finance managers go through pauses, starts and stops. They gauge the political winds that will affect economic recovery, interest rates or the tendencies for companies to invest in growth, merge with others, borrow long term or issue new stock.

The election is done, and it's time to bring on 2013, of course, after legislators cease jousting with each other. What lies ahead for professionals in finance? What is the outlook for those who manage portfolios, trade derivatives, underwrite securities,  borrow funds, invest in big projects, advise clients on retirement planning, and advise companies pondering a merger?

In the post-financial-crisis era, finance professionals are accustomed to volatility and uncertainty.  The two terms are portrayed as variables, statistics and concepts in theoretical finance. Today, they are a way of life. Just when signs point to a full-fledged economic recovery, from around the corner come a momentary slowdown or unsettling gyrations in markets--caused by factors or events previously unaccounted for:  Mideast uprisings, Greece, bipartisan politics, Spain, Italy, China, and the lingering reluctance of U.S. Congressmen to agree on anything. Markets become volatile because they can't handle, measure or project uncertainty or the impact of unforeseen events.

It has become the new normal for finance professionals, complicating how they manage portfolios, assets, balance sheets, funding needs, and foreign currencies. To be prepared, they must brace for the next startling event that unleashes itself to cause havoc in capital markets.

Some events, nonetheless, aren't uncertain in the year to come. They will occur, and bank managers and traders will spend much of 2013 and beyond wrestling with them.

New bank regulation and reform is for real. It's about to happen. The politics, debating and fretting over Dodd-Frank and Basel III are diminishing. The implementation has become. Large banks, broker/dealers and trading firms are hustling to prepare for a new world of restrictive rules of capital requirements, leverage, and trading.

Hence, new regulation will dictate how financial institutions do business, generate revenues, organize their global operations, and expand.  Most of the new rules require banks to hold more capital now, more capital next year, and even more capital in the years to come.  The new rules restrict proprietary trading and require extensive vetting, analysis and approval of new financial products.  Gone are the days when banks could amass large trading positions in options or commodities or when a coterie of bankers with math doctorates could design a derivative one month and trade it profitably with hundreds of counter-parties the next.

With increased amounts of capital set aside to support the same business, they can't generate or reach targeted levels of return on equity. If banks have an ROE (NPAT/Equity) target of 15%, then new capital above the old capital implies (a) they can't borrow as much to support existing business levels and balance sheets, (b) they must squeeze out more revenues from the same business model and/or (c) they must wring out costs from existing businesses.

This week, with revenue growth uncertain, Citigroup decided it needed to slash costs to address the same issues. It announced major plans to cut businesses and trim staff by 11,000--partly to bolster its ROE while meeting the growing capital requirements. 

With the new normal of uncertainty and the periodic slowdowns in recovery, like Citi, other financial institutions, too, are zooming in on cost control and business efficiencies to meet ROE targets. No business line or activity, it seems, is exempt from a revamping, a re-engineering, or a shut down. Some are selling off or closing businesses to meet performance targets; some are choosing to redeploy resources, attention and hiring toward business units already above ROE targets.

Fixed-income.  These business units (corporate bonds, mortgage bonds, structured finance, public bonds, high-yield debt, leveraged loans, etc.) at many financial institutions are under the gun right now. With thin profit margins on trading and lending activity and low fees from underwriting, some banks can't rationalize existing business. Not being able to make it work, many are withdrawing from fixed-income businesses or reducing their scope or capital deployed to support it.   

UBS announced this fall that it was virtually shutting down activities in this sector, while it contracts in investment banking overall. Other banks, too, are painfully making fixed-income decisions. A few more will persevere with hopes of gaining market share from banks exiting the business.

Asset management. New regulation won't overwhelm asset-management sectors as much.  They don't require substantial amounts of new regulatory capital (not much beyond the capital required to support infrastructure).  Financial institutions are, therefore, swarming to the apparent benefits of this sector:  less-onerous regulation, stable revenues, and everybody's projections regarding savings habits among consumers or corporations hoarding cash.  Even this month, Goldman Sachs announced plans to push this segment harder in global frontiers.  

For these reasons asset management--and variations of it (from private wealth management to investment management and institutional client management)--will get attention from bank senior management. Because of such attention, financial institutions will find ways to expand, grow assets under management, offer new products and hire researchers, investors, portfolio managers and client managers.

Risk management. In the years after the crisis, financial institutions everywhere beefed up their risk-management units to prepare for the next black-swan event or Lehman-AIG-Bear-Stearns collapse.  Many had units, people and systems in place, embedded in much of the trading and banking organization.  Risk managers were already detecting, managing, approving and projecting risks (and the exposures, defaults, non-performing assets that arise from those risks).  In recent years, however, financial institutions have tweaked governance and increased the authority of risk managers--given them more institutional power to act, make impactful decisions, raise flags and stop bad banking behavior. 

In the last year or two, risk management now incorporates a bit of compliance, arguably a growth industry in finance these days.  Banks and broker-dealers, now more than ever, require professionals who must interpret the thousands of pages of Dodd-Frank, decipher Basel II and III, and help build systems to monitor capital, leverage and liquidity. Opportunities abound for those who can master the rules, have the discipline to monitor them, and can explain their precise impact on business activity.

Compensation for experts in risk management and compliance sometimes lags that of those on the glamorous front lines.  Some institutions have taken proper steps to close these differences. Others need to. 

Equities.  Equity units aren't suffering as much as fixed-income units, partly because profit margins and fees on equity activity (trading, market-making, underwriting and investing) are higher, despite the worrisome volatility in markets, the anxiety of retail investors and the hesitancy of some client companies to issue new stock. Higher margins and fees explain how banks with equity prowess and market share can rationalize the business and keep in humming--in hopes volumes will once again reach pre-2008 peaks.

Corporate Banking.  Renewed  emphasis in corporate banking has surged in recent years, as major banks see value in old-fashion corporate lending, corporate cash management, custody and processing.  Managing corporate relationships from day to day results in satisfied clients, who provide a steady flow of business and revenues--in good times and downturns. Corporate banking, if risks are managed and harnessed, can meet the ROE hurdles, even with Basel II and III rules keeping tabs on corporate-loan volume.

Derivatives.  "Derivatives" has been the ugly word of finance since the finance crisis. Since then, derivatives have resurfaced in different forms and ways.  They (interest-rate swaps, credit-default swaps, options, warrants, etc.) are still useful corporate hedging tools and weren't legislated out of existence by new reforms.  New regulation now requires that most of them should no longer be traded "over the counter," "by appointment" or at the whims of large institutions.

New reforms will require they be traded and cleared more transparently on exchanges and at approved clearing organizations, so trading participants can see prices, volumes and counter-parties. This upends the trading and market-making models at big banks, which for years gushed at high margins and their ability to strong-arm markets in the way they could. New reforms will slash those margins and profits.

The new trading schemes for derivatives are still under review and subject to vast restructure. Banks, trading firms, broker/dealers, hedge funds, exchanges and clearing firms remain at the drawing board planing how interest-rate swaps and credit-default-swaps and other derivatives will trade going forward. Nervous, they are still unsure how they'll generate sufficient profits to meet ROE targets.

Some banks and firms will retreat; others will try to pick up the slack and make money from volumes and technology efficiencies. For most, it will still be a question mark for 2013 and forward.

Hiring and recruiting.   Financial institutions still hire with the same recruiting habits--massive hiring when the market picks up, massive reductions when threats of a downturn appear. Amidst the profitability challenges and cost-control campaigns, there will be reductions or limited recruiting in some segments (fixed-income, sales/trading, e.g.). They are offset by opportunities in areas where banks are confident earnings will be stable and expansion less risky:  asset management, corporate banking, consumer banking, e.g. Better opportunities exist, too, for those willing to go abroad (Southeast Asia, Brazil, e.g.).

In good times and bad, amidst market bubbles or threats of a system collapse, financial institutions still make their appointed rounds on campus at top business schools. They make their corporate presentations, identify students they covet, and hold interviews. Actual hiring tends to be erratic, but they maintain relationships, always hoping for that sustained market turnaround.

Compensation.  Compensation is always tricky, sometimes bewildering, often one grand puzzle. Media stories dare to project compensation in financial services (bonuses, first-year base salaries, total packages for senior bankers, etc.). Often the stories reflect the sentiments of one or two institutions and are based on quick interviews with a handful of executive recruiters.

For the most part, bonus packages in current times tend to (a) be as volatile and as uncertain as markets, (b) reward those designated as top performers, and (c) be a grab bag of cash, stock, deferred arrangements and even debt securities these days. Many large banks in the past five years have reduced bonus payouts substantially, but have offset that with significant increases in base pay.

Compensation overall may have trailed off, but most packages have been and will likely continue to be attractive for the best of the lot.


Markets are volatile, and so is the emphasis financial institutions place on diversity--whether that's diversity at entry levels or diversity at the most senior rungs.  Most institutions devote more attention at the lower professional levels and neglect it at the senior levels. At levels above vice president, they tend to allow the numbers to be whatever they are.

As 2013 approaches, diversity (no matter how it is defined or what it encompasses) has forged its way back onto corporate priority lists at most financial institutions.  During the crisis, diversity initiatives, programs and targets became a forgotten agenda item shoved into the back of the drawer. Today, with a bit of optimism, the major institutions see and feel the benefits of a more inclusive organization. Smaller firms (hedge funds, private-equity and venture-capital outfits, e.g.) haven't quite bought the benefits.

In 2012, diversity highlights culminated with Goldman Sachs' fall announcement that 14% of its new partners were women. Even in 2012, people applauded the 14%, a figure that hints at notable progress when compared to numbers from other years. But 14% still suggests that we still have a long way to go.

In all, whatever is happening in Washington will keep the industry from storming out of the starting gates, as 2013 launches. But most in the industry sigh and feel comfortable 2013 won't be 2008 or 2009.

Tracy Williams

See also:

CFN:  Approaching 2012, Dec-11
CFN:  Opportunities in 2012, Dec-11

Friday, November 23, 2012

10 yrs Cycle and the KLCI

In response to a reader's question whether this cycle theory applicable to the KLCI. Below are the charts for the analysis:

1. 1980 - 1989
In the 80's we can see from the chart above, the KLCI was choppy with a horizontal trend with price index ranging from 200 to 500. It didn't follow the 10 year cycle theory whereby the first few years should be low, and there should be a run-up in the middle of the decade, finally reaching a peak at the later years and follow by a crash. However, in 1987 there was a crash of about 50% from its peak.

2. 1990 - 1999
In the 90's we can see clearly that the KLCI followed the theory whereby there was a nice run-up till 1997 and followed by a severe down turn with price index dropped 80% from its peak.

3. 2000 - 2009
Again during the millennium decade, there was a consolidation in the first few years, then price index had a steep rise from 2006 on wards and reaching the peak in 2008. This round, the KLCI dropped 42% from its peak.

From the above findings, we learned:

  • except the first chart, first few years are consolidation years whereby prices are lower compared to the later years.
  • prices tend to double from the year 0 to the peak. In the 80's KLCI started with 200 and reached a peak at almost 500 in 1987; In the 90's KLCI started with 600 and ended up at 1200 in 1997; Except in 2000, KLCI started with 1000 and reached a peak at 1400, but if you were to count from the low of 600 in 2001, it was more than double.
  • In the 10 year period, there are phases of consolidation whereby prices move within a tight range before a breakout either to the upside or the downside.
  • The crash is usually steeper and the duration is shorter than the bull trend.
There are many reasons for the way stock prices behave, in the technical analysis perspective, it is assumed that history repeats itself, from the past data we can predict future price movement. 

Having said that we have to acknowledge the importance of knowing the fundamental analysis too. The best trader will use both in their analysis. 

Wednesday, November 21, 2012

The Benefits of Utilizing Twitter for your Business

Every business out there is looking for the one thing that is going to give them the edge over the competition. Most businesses believe it is all in the products and services being offered. However, in reality, the marketing plan of the business is one aspect that has a huge effect on the number of consumers the business sees throughout the years. With this being stated, the business who wants to take their marketing campaign to the next notch will find using Twitter has several benefits for the business.

Opening up Communication

When most businesses find employees or customers are not happy this is due to the business not communicating effectively with these people. Twitter changes all of this for the better. Those who use Twitter can voice concerns about the business, whether this be concerning the product that is offered or the work environment. The business can read the tweets and form a plan to get these problems taken care of. The key to getting the varied communication line is to have numerous followers. You can buy twitter followers with ease, to make it easier to use Twitter successfully for your business. 

Improves Traffic to your Business

Twitter followers

Though buy followers twitter, the chances of having increased business is dramatically increased. With the use of Twitter, the business becomes known to those who may have no idea that the business even exists. It allows a person to increase the chances of someone finding their business since they are using social media to their benefit.

Strengthens the Ties to the Community 

The use of social media and letting the world know what is on the mind of those who are in the business, the tie that the business has to the community is strengthened. For example, if there are problems with the local community, a business can tweet their feelings on the issue. This can win over a few people who may have not decided to use the business or not. It makes for a great way to get followers to your Twitter account.

Monitor Competition

One of the biggest benefits for a business to utilize Twitter is the ability to watch competitors. Other businesses out there are going to post new products and upcoming products. As a business on Twitter you can see these posts as well to ensure that you are staying competitive in the market. It could mean the difference between having a failing business and one that surpasses what people thought would happen.

Overall, a business will find that through using Twitter, they will reap the benefits for months and years to come. Once the business has established themselves on Twitter as a great business that is friendly towards customers, it increases the presence of the company on the web. This can result in more customers to the website and to the business itself. In the day and age in which technology is ruling the world, it is prudent that businesses have the use of a Twitter account to keep up with the ever changing social media world. 

This guest post by Tommy Stretton of A site to go to Buy Twitter Followers and get more likes..

Friday, November 16, 2012

Jefferies: Comfortable in its Niche

In finance circles, Jefferies, the mid-sized, New York-based investment bank, is a "tweener"--too big and mature to be a young upstart, but not  large or imposing enough to earn the label "bulge bracket" or "too big too fail." Like a Knight Capital or MF Global, if Jefferies were in danger of sliding into oblivion, government regulators and market counterparties would let it go.

Amidst all the post-election squabble about "fiscal cliffs" and recent stomach-churning market volatility, Jefferies quietly slipped into the business news this month. It agreed to be acquired by its minority owner, the conglomerate holding company Leucadia.  The transaction won't shake the broker/dealer world. It may hardly move anybody in any way.

But it brings to mind the consistent, stable performance of a niche investment bank, one that has always been too small to be a threat of any kind to behemoths Morgan Stanley, Goldman Sachs and JPMorgan. Yet it is one that is a bit too large to be called a specialized boutique (like Greenhill or Evercore) and too broad in scope to be a Lazard.  The quiet acquisition reminds us how one firm through decades of incarnations and shake-ups has survived when others (bigger and better known) like Bear Stearns and Lehman couldn't.

MBA students interested in banking and finance usually don't know the firm as well as it should. Jefferies is not widely known to criss-cross the country to visit top business schools and make flashy corporate presentations, hungry to recruit the best MBAs. And some might rate its diversity  record slightly less than satisfactory.  Bankers and traders across the globe are from various ethnic groups, many backgrounds and countries. The board of directors and executive committee, however, appear to be a club of long-time Jefferies executives--with virtually no representation from under-represented groups (women and minorities).  

The firm, which used to promote itself the go-to investment bank for the "middle market," has endured its share of troubles, problems and scares. When the dust often settles--whether they were insider-trading problems years ago or European-debt turmoil of a year ago, Jefferies appears to wipe itself off and proceed with its normal course. Or it sometimes swoops in to purchase the valued pieces left behind by other firms that failed.

The acquisition by Leucadia will come with synergies and provide a resource for more capital, if and when it needs it. (Leucadia, known also to be a "Baby Berkshire," manages private investments in multiple industries.) Jefferies will continue its business as usual. In times when capital is king, Jefferies likely decided that it should have a parent that could provide capital at a moment's notice--without it having to fall into the hands of the big boys like JPMorgan or Credit Suisse. Jefferies can now have access to capital, but still be Jefferies after all.

The bank manages a diverse array of businesses (sales & trading, investment banking, equities, fixed-come, precious metals, and brokerage) with a $3.3 billion capital base--too large to be called a pure-advisory boutique like Greenhill or Moelis, too small to be in the league of Goldman or Morgan Stanley.  To its credit, it has never aspired to go head-to-head with Morgan Stanley in most of its business lines.

Years ago it pronounced itself as the favorite investment bank for middle-market clients, seizing upon a niche that even the boutiques and bulge-brackets often ignored.  Growing, middle-market companies are enterprises that issue modest amounts of new equity and high-yield debt to support growth. Jefferies elected, too, to tap aggressively into the high-yield niche, when boutiques couldn't do so and the bulge-brackets wavered about their commitment to "junk bonds."

The bank has certainly withstood its share of storms. Its founder, Boyd Jefferies, got caught in the whirlwind of insider-trading scandals of the 1980s. At the time, the firm was better known as a "third market" trading firm, making markets in equities after normal trading hours. More recently, as the financial crisis unfurled, the firm got caught with excessive amounts of high-yield and mortgage securities on its balance sheet (just like its larger peers). 

Last year, when the whole world watched the crumbling state of finances in Greece and Spain, market watchers turned suddenly to Jefferies and wondered whether the firm was overloaded with European debt or other related exposures.  Rumors swirled, and its stock price tanked. When MF Global collapsed, partly because of excessive Europe exposures, financial markets wondered if Jefferies would be next. Markets always play a guessing game of who's-next. Some made unfair, ungrounded accusations about what toxic waste might be hiding on Jefferies' balance sheet.

Somehow Jefferies escaped that tumult and pulled through to have a stellar, profitable year in 2011.  In 2012, it's on its way to a $250-million-plus earnings year (good enough for a respectable 8-10% ROE).

Every other year, there are industry shake-outs. While firms like DLJ, Drexel Burnham, A.G. Edwards, Alex Brown, Hambrecht & Quist, Montgomery Securities and L.F. Rothschild have disappeared to the back financial history books, Jefferies plods along. Richard Handler is its CEO, who roared often when others claimed the firm was overloaded with Greek exposure, and will also become the head of Leucadia.

A strategy of remaining comfortable and aggressive within its niche, allowing itself to seize pockets of opportunity when they arise, has probably made the difference. It would, however, be nice to see it do better in diversity at its top rungs.

Tracy Williams

See also

CFN:  MF Global and Its Collapse, 2011
CFN:  Knight Capital's Darkest Day, 2012

Thursday, November 15, 2012

Cycle Analysis and The Stock Market

When we talk about cycle analysis we will definitely think of WD Gann, the legendary stock and commodity trader who had made tons of money from the financial markets. It was estimated that in his lifetime he made $50 million from stocks and commodities. Imagine how much is $50 million 80 years ago translated to today's money. What was his secret?

He had the ability to forecast the market by studying the historical prices. He said, "Everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock market." (more quotes from him)

In 1928 the year before the crash he successfully predicted the crash in 1929 and said that it would take years for the stock market to recover. You may read his detail prediction  here.

Today I want to talk about one of his famous theory on the cycle analysis, its known as the Decennial Cycle or the 10 year cycle. According to Gann, he compiled the past 100 years of price data and put them on a chart. He plotted the y-axis as the price while the x-axis as the year ending with 1,2,3,4,5,6,7,8,9,0. The actual chart was very blur as it was a very old chart, so I try my best to illustrate on the chart below:

From the above chart, we can see that the year that ends with 1,2,3 such as 1981, 1982, 1983, 1991, 1992, 1993 and 2001, 2002, 2003 have a similar price pattern, they start from low price levels. Year that ends with 7 or 8 usually experience crashes.

Below is an extract from Gann's teaching:

Each decade or 10-year cycle, which is 1/10th of 100 years, marks an important campaign. The digits from 1-9 are important. All you have learn is to count the digit on your fingers in order to ascertain what kind of a year the market is in.

No.1 in a new decade is a year in which a bear market ends and a bull market begins. Look up 1901, 1911, 1921, 1931...

No.2 or the second year is a year of a mirror bull market, or a year in which a rally in a bear market will start at some time. See 1902, 1912, 1922...

No.3 starts a bear year, but the rally from the second year may run to March or April before culmination, or a decline from the second year may run down and make bottom in February or March, like 1903, 1913, 1923...

No.4 or the fourth year, is a bear year, but ends the bear cycle and lays the foundation for a bull market. Compare 1904, 1914, 1924...

No. 5 or the fifth year is the year of Ascension, and a very strong year for a bull market. It can be a new bull market or a big correction in an existing uptrend. See 1905, 1915, 1925...

No. 6 or the sixth year is a bull year, in which a bull campaign which started in the 4th year ends in the fall of the year and a fast decline starts. See 1896, 1906, 1916, 1926...

No.7 or the seventh year is a bear number, and the seventh year is a bear year because 84 months or 84 degree is 7/8 of 90. See 1897, 1907, 1917, 1927...

No.8 or the eighth year is a bull year. Prices start advancing in the seventh year and reach the 90th month in the eight year. This is very strong and a big advance usually takes place. Review 1898, 1908, 1918, 1928...

No.9 the highest digit and the ninth year, is the strongest of all for bull markets. Final bull campaigns culminate in this year after after extreme advances and prices start to decline. Bear markets usually starts in September or November at the end of the ninth year and a sharp decline takes place. See 1899, 1909, 1919, 1929...

No.10 the tenth year, is a bear year. A rally often runs until March and April; then a severe decline runs to November and December, when a new cycle begins and another rally starts. See 1910, 1920, 1930...

This is just one of the cycle theories, there are also the Presidential cycle (4 year cycle), secular bull and secular bear, yearly cycle, monthly cycle and many more. From the study of past cycles, we see a very clear picture that history seems to repeat itself and by learning more technical analysis theories we can make better investment decision to help ourselves to grow our wealth.

Finally, I'm going to end this article with a statistical table to show how accurate is this theory:

Happy investing,
Pauline Yong

Monday, November 5, 2012

UBS Throws in the IB Flag

UBS, the Zurich-based global financial institution, announced last week that it plans to dismiss 10,000 employees as it continues, like most big banks, to review, revamp and re-scale its business units around the world.  That's not an unusual news item. In financial services, that's a news blurb we see almost every other day.

UBS provided more details.  Most of the dismissals will come in its investment-banking group.  More specifically, its fixed-income businesses will suffer the most.  The dismissals, the down-scaling and shrinkage are unfortunate. The announcements are, nonetheless, not shocking, since they are a common event in the business press.

This might, however, be the first wave of dismissals in finance, where the bank stepped up to admit  blame solely on its inability to justify business lines because of hefty capital requirements from the new wave of regulation. UBS says new regulation (in Switzerland and from the reforms of Basel II, II.5, and III, and new Dodd-Frank and Volcker rules) will require substantial increases in its equity capital base just to continue doing existing business. And barring any spectacular periods of revenue growth, the increases in capital will push down returns on equity to levels that can't be explained to shareholders.  About as simple as that.

(See CFN on Basel III, 2010 for more background on Basel regulation. In effect, the combination of Basel and Dodd-Frank would virtually double the capital requirements at large banks (those commonly thought to be "too big to fail") between now and 2019. The requirements will step up in increments over the years.)

For all practical purposes, UBS has decided to withdraw from huge-scale investment banking after having decided years ago to attempt to be a bulge-bracket bank.  It has decided it can't make the numbers make sense for it to be a Top-10 investment bank.  Sure, it will continue in certain niches--equities, research, brokerage, and investment management.  But it will not try to compete head-to-head with Goldman Sachs, JPMorgan, Deutsche Bank, and Morgan Stanley.

UBS, through the years, had built up its investment-banking practice through acquisitions, corporate-banking relationships, the reputation of its investment-management and private-banking businesses and the heft of its capital base. Some may recall how in two decades it penetrated U.S. borders by acquiring the well-known retail brokerage Paine Webber and the boutique firm Dillon Read. It absorbed those operations years ago and used them as a base to compete in the U.S. in many areas.

UBS's rationale makes some sense.  It articulates that it seeks to generate a return on equity (ROE) from 12-17 percent. That varies with business cycles and market volatility. On average, it strives to seek returns of 15 percent.

New regulation throws a thorn into its side.  The bank must, as it has done the past year or so, reduce leverage, get rid of bad assets, and push costs down significantly. It also had to deal with the $2 billion loss of a rogue trader, repair risk management and trading operations and improve controls.  While sprucing up controls and balance sheet, new regulation comes along and adds the burden of boosting capital and taking leverage down even more.

If it decides that it must boost capital by 10-20 percent, then ultimately it would need to increase net earnings by 20 percent or more. Increasing net earnings in the current environment--one of uncertainty, volatility and fierce competition from the other big banks--might be near impossible, unless UBS decided to cut costs vigorously.

So where do you cut costs? You do so in businesses where regulation will require big increases in capital, where profit margins are already slim or vulnerable and where costs can be cut swiftly.  Its fixed-income businesses (corporate bonds, municipal bonds, government bonds, interest-rate derivatives, corporate lending) became the first target of deep cuts. This includes (within fixed-income units) corporate-advisory activity, underwriting, trading and market-making.

Senior management may have deduced that, at best, ROE would hover around 5-7 percent in those businesses. ROE in the range of 0-5 percent for a business that already uses up significant amounts of capital would be a certain drag on the bank's overall ROE.  An unsatisfactory result for shareholders, who too dream of earnings growth, stock-price increases and a nice, reliable dividend.

UBS Investment Banking won't go away. It requires a certain amount of investment banking (underwriting, market-making, securities distribution and equity research) to complement other profitable or growing business lines:  investment management, private banking, brokerage, and corporate banking. Yet with massive departures in London and in fixed-income activities, there will be minimal activity in corporate bonds, short-term instruments, mortgage securities, structured securities, private placements, subordinated debt, mezzanine debt, interest-rate swaps, and any of the products and activities that fall under the fixed-income spectrum.

UBS in its announcements hints this is not a cowardly business act. It claims to be making a tough business decision (at the expense, unfortunately, of thousands who must seek employment elsewhere) that all of its old peers must inevitably make over the next few years. It is patting itself for making that decision now.

Tracy Williams

See also:

CFN:  Basel III and Capital Cushion, 2010
CFN:  Big Banks and Dreadful Downgrades, 2012
CFN:  JPMorgan Chase and Regulatory Rants, 2012
CFN:  Big Banks and Where Do We go from Here? 2010

CFN:  The Volcker Rule, 2010
CFN:  The Volcker Rule, Part 2, 2011

Friday, October 26, 2012

On Campus: Midterms and Beyond

USC-Marshall (above) announces a new "MBV" program
Across the country at top business schools, MBA students keep a watchful eye on all that's necessary to secure summer internships and full-time jobs.  It requires hard, steadfast work these days to secure work. But through it all, they keep an eye on yet another ball--midterms now, final exams later. It's a task of terror to attempt to pile on 6-8 weeks of intermediate corporate finance into a few days.

On campus these days, including at the Consortium 17, students scramble to find jobs for 2013, ponder the presidential election in the days to come, rush off to case-group meetings, and bury themselves in cubicles to study for an exam in advanced accounting. The pulse is steady, even as many try not to worry too much about what will or won't happen by next summer.

Choices and Challenges

In between normal academic chores, Dartmouth (Tuck) MBA students found an interesting guest on campus two weeks ago, as part of the school's ethics program. Tuck hosts a "Choices and Challenges" series of speakers in the ethics program.  It invites guests (experts, experienced managers, or alumni) to study, analyze and ponder tricky issues of ethics in business--from managing clients, employees and business units to managing portfolios, investing in new businesses and doing deals.

Andrew Fastow, the former CFO of Enron, came to Hanover (N. H.) to discuss what the current generation of MBA students might learn from the frauds and misrepresentations of the 1990s high-flying energy company, Enron.  Fastow paid his dues by spending five years in prison. Now comes the time to share lessons learned and morals unearthed from years of Enron financial chicanery.

Fastow, who, too, has an MBA (from Northwestern), talked to students about deceitful off-balance-sheet transactions Enron employed. "I used loopholes in the rules," he said, "to get around the principles of of rules."  He spoke to students also about "degrees of fraud," how fraud is not always committed in obvious ways, but in the way of incremental decisions and steps. 

Rankings Hoopla

Business-school rankings, as just about every MBA student or dean knows, can be useful, but they can be dangerous, tricky and misleading. And among the dozen or so institutions and publications that present lists, which one (or ones) are most authoritative?  Sometimes they can be inconsistent and wrong. Yes, list-compilers make errors, perhaps more frequently than they admit.  The Economist magazine this month presented its list of the world's top business schools.  Some Consortium schools, including UC-Berkeley and NYU-Stern, appeared on the list.  The magazine, however, made an odd, somewhat embarrassing mistake with two other Consortium schools.

When the list first appeared, it placed Virginia-Darden no. 2, followed by Dartmouth-Tuck at no. 3--astounding achievements for both schools, when measured against business schools around the globe.  However, shortly afterward, to its own chagrin, the magazine was forced to announce an egg-in-the-face correction. It had made an error. Its list was not what it meant.  Dartmouth was supposed to be no. 2, and Virginia no. 3--probably an insignificant switch in a list of outstanding, prominent schools, but an embarrassment for the publication and a cause of wonder at Dartmouth, Virginia and perhaps all top schools.

Does this mean that such lists are wreaked with more than a few errors, inaccuracies and misrepresentations? ("Degrees of fraud," as Fastow would say.)  Have there been cases in the past when list-producers have made errors, but were too embarrassed to announce a correction and decided to correct the error in another list the following year?

And which list to believe, use, discard, ignore or shrug off? Recent lists, for example, show the top school with the best faculty was Carnegie Mellon (Tepper) (by The Economist) and UC-Berkeley (by the Princeton Review).

An MBA for Vets

How about a new degree certification? The MBV.  USC-Marshall this fall announced a new master's in business for veterans, essentially an MBA program geared for armed-forces veterans.  The program starts in the fall, 2013. Plans call for a one-year, intensified program to leverage the experiences of verterans and to enhance leadership and organizational skills they gained in the services.
Trends in Apps

Business schools everywhere experienced application declines in the past year and are bracing more for declines in the coming admission season.  The reasons have been hashed, explored and analyzed.  Schools haven't concluded yet whether declines are a momentary dip or part of a new long-term trend (declines falling to a stable plateau). 

One school, Cornell-Johnson, thinks declines may be due to factors beyond the sentiments of twenty-somethings and factors beyond tuition costs and employment uncertainties. Avoiding declines can be overcome, it says, by novel approaches to recruiting. Cornell reports its applications the past year were up 17%; revamped recruiting strategies have helped, it contends.

First of all, it has improved recruiting efficiencies--staging joint recruiting programs and presentations with other top schools.  Second, it says applications increased because of aggressive efforts to reach out to under-represented minorities and international students in Asia and Latin America.  Now in 2012-13, Cornell waits to see if this is a one-year spark or part of a welcome long-term trend in attracting top students to Ithaca.

Tracy Williams

See also:

CFN:  On Campus:  Getting Back to School, 2012
CFN:  On Campus:  No Summertime Slowdown, 2011
CFN:  On Campus:  Admission Season, 2011
CFN:  On Campus: What's Up? What's New? 2011
CFN:  On Campus:  Getting an Offer! 2011
CFN:  On Campus:  Never Enough Time, 2009
CFN:  On Campus:  Ready to Seize Opportunity, 2009
CFN:  On Campus:  Countdown to Summer, 2010
CFN:  On Campus:  Spring Fever, 2009
CFN:  On Campus:  Recruiting, a Sixth Course, 2009

Friday, October 19, 2012

Why Was Citi's CEO Asked to Resign?

Citigroup caught everybody off guard this week, when its board announced it had asked for the sudden resignation of CEO Vikram Pandit. Or did it catch anybody off guard? Was this a gesture  investors pushed for?

Was it the right move for the big global financial institution that seemed to have leaped a hurdle to move beyond the darkest days of the financial crisis--back when there were moments when many thought its survival was in jeopardy?

Over the past few years, Pandit and team took appropriate, bold steps to make the behemoth profitable again. They sold assets en masse. They shuffled bad, non-performing, defaulted, bankrupt, and/or foreclosed assets into a special holding company and, little by little, sold off these positions, properties, securities and full operations.  By doing so, it rid itself of spoiled segments and began to polish ongoing core operations.  They downsized in every way possible--in just about every unit, operation, division, and geography. They finally sold its stake in the brokerage joint venture with Morgan Stanley (although at a large loss).

Earnings, too, had improved. In the days before Pandit's exit, Citigroup announced third-quarter income of over $460 million (somewhat misleading because of a handful of accounting adjustments banks are permitted or forced to do) and has boosted its equity capital base to over $185 billion. Returns on its capital base throughout 2012 have hovered between 5-8 percent-not stellar, but much better than the debilitating losses of years ago.

With regulators showing their hands in all aspects of its business and that capital structure, Citi has cooperated, even when it desperately wanted to resume paying a dividend to shareholders. Growing  leaner, it felt comfortable settling in as the third or fourth largest bank in the U.S., below the first-place perch it had held for many years.

Pandit and team had unraveled the mammoth financial-services empire Sandy Weill and his own team constructed throughout the 1990s and early 2000s. Yet the board, under chairman Michael O'Neill, behind the scenes had been huddling to plan a Pandit departure. It appears Pandit had little clue.

Why then would a CEO who followed the marching orders of both government regulators and a corporate board be told his time is up?

Impatience with the stock price is always a reason. Over Pandit's five-year stint, shares of Citi have fallen 80 percent and more, even though share price is up 10-12 percent in 2012.  The market may have appreciated the bank's revival, but perceived that the clean-up, the reengineering, and the resumption of basic banking aren't complete. The market perceived that other thorns or problems might still remain hidden in operations and haven't been resolved, sold off or at least shoved into the Citi Holdings, the special entity that corrals all the "bad assets" and prepares them for sale.

Investors and the board applaud Citi for separating out the bad assets. But the bad assets still reside with Citi and must be maintained, grappled with and funded.  The board may have been pushing for Pandit hard to get rid of them with more urgency and haste--if only to present a new, cleaner, "de-risked," and unrestrained Citi. The bad assets of Citi Holdings remain as a scar on its overall balance sheet and a stinging reminder of the crisis.

Shareholders also seem to covet their dividends.  Banks traditionally have rewarded their owners with a regular, comfortable stream of dividends. Pandit this past year felt financial improvements warranted Citi resuming paying a dividend; however, Citi sparred with regulators, who vetoed the move. Dividend-loving shareholders appear to have blamed Pandit for not making the improvements quickly enough to result in dividends or share repurchases to help give a jolt to the stock price.

Investors and the board, too, are likely peeking at the performance of peers, the other big banks (Goldman Sachs, Wachovia, and JPMorgan Chase, e.g.) that seem to have rebounded far more swiftly. Citi has escaped the starting blocks, but runs several strides behind the others.

Years ago, Pandit arrived at Citi after his stint at Morgan Stanley and after selling his hedge fund to Citi. He rose to become its CEO when previous CEO Charles Prince was pushed out when the public learned about Citi's crashing values of mortgage securities and mortgage-related structures.  Pandit had been a successful fund manager. Re-juggling portfolios of assets, restructuring balance sheets and assessing the values of trading positions summarize Pandit's experiences and skills.

Citi is now at a pivotal point. Shareholders dream of 10-percent returns on capital and new respect in the banking community. And the board appears to have assessed that Pandit lacked expertise and deep experience in the trenches off basic banking:  operations, branches, systems and technology, corporate lending, deposit taking, cash management, and custody. It needed a new leader that knew as much about the profitability of retail branches and the costs of doing money transfers as about valuing derivatives and mortgage securities.

So it tapped Michael Corbat, a long-time Citi banker with broad experiences in sales and trading, wealth management and international operations. In fact, board chairman O'Neill phrased it as something like a different horse for a different course. The board is pronouncing the restructuring phase as over, and it is time for Citi to become what it wants to be--large, omnipresent, global, familiar to all, yet simpler, basic, stable with boring, steady profits, 10-percent returns (at least) and, yes, quarterly dividend payments to owners.

Tracy Williams

See also

CFN:  Richard Parsons and Citi, 2012
CFN:  Morgan Stanley Progress Report, 2012
CFN:  Moody's Downgrades Big Banks, 2012

Thursday, October 18, 2012

Is the Eurozone Crisis Bottoming?

In ECB President Mario Draghi's words: "The worst is over for the EU crisis, but risks remain!". He was refering to the low inflation registered in the EU region. As long as the inflation is kept below 3%, the ECB is happy at keeping the benchmark refinancing rate and the deposit rate unchanged at 0.75% and 0% respectively, and the ultra low interest rate will spur economic growth in the EU.

However, not many economists share the same view with Draghi. 

A London professor of economics, Costas Lapavitsas said:
"This misleading impression has been created by Mario Draghi of the ECB, who announced that he will lend freely to countries in trouble, driving interest rates down. There has been virulent opposition, led by the Bundesbank. For conservative German opinion, Draghi is the devil of Goethe's Faust, luring Angela Merkel into a deadly pact of inflation. Also for ECB lending to materialise, a country must accept tough austerity conditions. Which European politician will do that?"

Indeed, the austerity condition has already caused social unrest in Greece, Spain and other EU countries to go on strike in the streets as spending cuts tend to affect lower income groups, especially when the cuts are to welfare payments.

In addition, the fiscal union is not easy to realised as that would means centralised control of national budgets and tax policy in the Eurozone. Germany is the main driver behind the fiscal union as they want to make sure other EU countries do not overspend if they want to use the German's money! 

We have already seen at the current European Summit that France and Greece are opposing the idea of fiscal union, they want "solidarity" to balance the budget austerity demanded by Germany. 

Hence, the actual solution is not whether the interest rate is low enough to stimulate growth in the economy, it's the "confidence" that matters most. In order to judge whether the Euro crisis is over depends on how each of the EU members cooperate with one another, minimise their conflicts, and to reinstate the confidence back to the economy. 

Monday, October 15, 2012

Financial Wisdom in Medical Insurance

In this day and age, some prudent reluctance when it comes to spending is only to be expected from most people, especially if they have a family to care for. But no matter how much people might like to keep money in their savings account, the issue of possible medical expenses should not be ignored either. Someday, someone will get sick or injured which could drain you of all your savings. As such, paying for something like Medical Insurance would be a far better deal than having to shoulder all the burden of medical expenses later on.

So what is Medical Insurance?

When put in a broad perspective, Medical Insurance is simply the means by which you can protect yourself and your family from any financial trouble that would arise due to expenses incurred by medical issues. How the policy would accomplish this depends on the scenario, but having medical coverage will certainly help in a lot of ways which we will get into further along.Suffice it to say, Medical Insurance is incredibly important if you want to avoid substantial damage in case major medical procedures become necessary.

What are the uses of Medical Insurance?

Now to be more specific, Medical Insurance accomplishes its uses in a variety of ways, but in all of them it basically acts as a safeguard against financial damages or as an assurance of financial capability. For the more well-known example, we have the much needed surgical procedures which involve quite a lot of money. On their own, the medical expenses for this kind of service would be enough to devastate most people financially. With a policy for medical coverage though, the fallout is not as painful. 

Medical Insurance

For another big benefit of having medical coverage, we have hospital admittance. Although it may not be pleasant to hear, the medical industry seems to have become rather obsessed with money of late and people have more of a chance to get admitted into hospitals and gain access to their best services if they are covered. Things that are often taken for granted like staff attention and prioritization are also easier to obtain if you have medical coverage. 

Check-up prospects are also greatly enhanced when you have medical insurance because you would then be more thoroughly inspected for debilitating diseases. This allows you to take better care of yourself if a problem is detected sooner which translates to better survivability. Such a service is not available to everybody since the procedures involved in careful examinations often make use of rather sophisticated and expensive machinery. 

Finally, the services of health professionals are also more easily rendered if you have medical coverage since a policy marks you as a client who has the ability to settle their bills. Such a statement is not meant to sow resentment towards good doctors since such an example does not extend to all of them, but it is also a fact that their services are not always theirs to dispense. It is also a fact that patients have a far greater chance at recovery and survival if they have a specialist monitoring their situation closely.

Thursday, October 11, 2012

Are MBAs turned off to Investment Banking?

In the past two weeks, national media outlets hopped on a storyline, proclaiming that MBA students and graduates in finance have reached a boiling point of discouragement in investment banking and other activities in financial services.  The Financial Times and CNBC reported last week that MBAs at top schools are somewhat turned off to investment banking as a long-term career, at least based on hiring patterns the past few years. Yahoo reported similar trends last week.

The Financial Times reported the dimming in popularity of banking and finance in Wharton's recent MBA classes.  In the past three years, the percentage of graduates entering banking has declined from 25% in 2008 to 16% in 2011.  At Harvard, MBAs choosing banking declined from 10% of its class to 7%.

Are MBAs turned off? Or are they scared off? Are they turning away, or are they looking more closely at alternatives--like consulting and entrepreneurship?  Is there a campus backlash toward the industry? Or has the industry done a poor job of attracting and retaining graduates? Are the numbers a misrepresentation of what might be occurring--that banks have become imprecise, whimsical and peculiar in their hiring processes?

The general consensus among students, graduates and perhaps deans and faculty is likely this:  MBAs are not necessarily turning away from investment banking, as much as they might be fatigued at the industry's not being able to determine where it is going from here.

Faced with regulation, reform and not an inkling's notion of new sources of stable revenues, the industry has wavered in recruiting, hiring, development and retention. Discouraged MBAs are likely turning to other industries that can at least promise with some conviction a career path, upward mobility, a healthy environment, and--to say the least--a job for the next 3-5 years.

Each year, including at Consortium schools, thousands of new MBA students declare a possible interest in investment banking. As they learn more about industry uncertainty, they pay attention to exciting appeals from other industries. Little by little, they turn elsewhere--to industrial companies, to start-ups, to consumer companies, or to consulting.

Consulting continues to be a popular alternative, even while consulting and investment banking share common experiences--long hours, project orientation, client immersion, tight deadlines, industry specialization, compensation tied to incentives, prestige, and demanding clients. The consulting firms, it seems, have been more successful in recent years in offering a more defined, more predictable, and more certain career opportunity.

Investment banks, no doubt, have little problem in filling needs from year to year at all levels. At least the current needs for the moment. The positions become open, and supply of professionals always exceeds demand. When they huddle among themselves, industry leaders worry, however, whether they are attracting the best and brightest in finance, capital markets, financial analysis, and client management. In soaring times in the 1990s and mid-2000s, investment banking could lure those who might otherwise have been at the top of their fields in physics, astronomy, mathematics or law. Are the top banks now surrendering the creme de la creme to the payrolls at McKinsey or Booz Allen or to Kleiner Perkins, Google, Apple, Citadel, or John Deere?

MBA students and recent graduates who genuinely have an interest in banking wonder whether banks are taking the right steps, beyond lavish receptions and fly-backs to New York City, to improve the environment in investment banking? Are they focusing properly on the development of younger bankers and providing an environment to promote longer career stints? Have banks gone beyond the familiar mindset of hiring associates in large, flowing numbers when there is increased deal flow, only to dismiss them in waves when there is a hint of a downturn, with hardly a care about what they can do to help associates learn, improve, dissect markets, manage clients and prepare for a career of 10-plus years?

Many students and recent graduates don't necessarily think so. And that might be reflected in the recent trends.

What are other factors discouraging them from chasing after investment banking with the same passion and enthusiasm MBAs did only a few years ago?

1.   Uncertainty and risks in choosing this career path. This has been discussed and hashed out often. MBAs who must invest tens of thousands in graduate education, beyond the opportunity costs from leaving current positions, are not sure they want to take the risk in going into banking roles, only to be dismissed less than two years later when a downturn of any kind threatens.

2.  Work environment and work culture.  The stories of the lifestyle of an investment or corporate banker are legendary--80-100-hour work weeks, little flexibility in schedules and weekends, and indifference to the contributions analysts and associates make.  The industry always promises to improve the culture and make it more humane.  The gestures in the short term are applauded; however, there is a long-term reluctance to change the environment. The pressure to generate revenues from an uncertain flow of deals supersedes the importance of tending to the day-to-day environment of associates.

3.  A LIFO approach to managing personnel numbers.  An ugly tradition of investment banking is to  beef up hiring when the going is good and to reduce staff in droves when there lies a looming threat to deal flow or incentive compensation.  Notwithstanding the performance and potential of analysts and associates, senior managers tend to take a LIFO approach--"last in, first out"--when orders from upstairs require staff reduction. MBAs are astute enough to know this practice might continue and wise enough to decide they may not want to be subject to it.

4.  The relentless banter about re-engineering and restructuring in the industry. Since the financial crisis and in the midst of Dodd-Frank and Basel III reform, investment and corporate banking is evolving. Some contend a major overhaul is under way or about to happen.  For new MBAs, there is continuing specter that drastic structural change is under way in how deals are done, how groups are formed, how clients are managed and how people are paid. MBAs may not be sure they want to launch careers when the industry is in the midst of soul-searching.

The numbers reflect souring sentiments. However, rest assured, at top schools there continues to be a core of students and graduates interested in corporate finance for finance's sake, not for the sake of what the industry always awarded--prestige, travel, headlines from deals, and lucrative bonuses. These are the MBA students and graduates who pursue banking because of the lure of the deal, the appeal of market activity, and the thrill of finding and delivering financial solutions to Fortune 500 companies.

They are the ones who withstand the ills of the environment and culture and see investment banking as a process of building crucial finance skills and experiences for the long, long career haul. They endure both the good and bad, appreciating newfound knowledge and understanding of markets. The declining trend is not yet alarming to banks, because supply is still steps ahead of demand and because hard-core finance graduates seem to always navigate their ways toward banking.

Tracy Williams

See also:

CFN--Investment banking vs. private banking, 2009
CFN--Is investment banking still hot?  2011
CFN--What about corporate banking? 2010
CFN--Who's heading into finance?  2012

Friday, September 28, 2012

High-Frequency Trading: What's Next?

Let's pause for a moment, if the lightning pace of high-frequency trading permits us to do so. In the U.S. today, high-frequency, electronic, computer-aided trading accounts for as much as 65 percent of all stock-volume activity.

Computers whiz and hum.  Black boxes send out trading orders in thousands and millions of shares, and rout orders to exchanges and "dark pools" all over the globe. Execution occurs in fractions of a second. Algorithms and programs determine what to buy, when to buy, when to sell, when to buy and sell at the same time and on which one of a dozen or more electronic exchanges. Algorithms provide guidance on volume, prices to show, prices to execute, and prices, if only for a few seconds, to report as "bids" or "offers."

High-frequency traders dart in and out of trading positions in seconds. Some firms buy in one venue and sell in another. They earn pennies per share, but generate large profits via big volume--tens of thousands of shares bought and sold in seconds. Tens of millions of shares throughout the day. Many buy or sell shares in one venue and simultaneously sell or buy the related derivative over the counter, in another country, or in exchange thousands of miles away. Execution and profit-generation are confirmed by the flickering of light on computer screens. 

Traders--or actually, their humming black boxes--study patterns, trends and data. They look for discrepancies, distortions, or something out of line. Traders (yes, humans, often quantitative analysts and experts) update computer code and write more algorithms to instruct their firms to deploy more capital to get into and out of trading positions in seconds. Timing is of the essence. 

Many aim to finish the trading day with neutral positions--little or no overnight risk. Some preside over non-stop trading--trading into and out of positions, making markets, and providing bids and offers all over the globe for a continuous 24 hours.

Some trade other "asset classes," as well, exploring similar opportunities in instruments beyond equities, looking to do the same or find discrepancies and trends in foreign currencies, options, convertible bonds, and government bonds. Or they seek to decipher relationships between "asset classes" (convertibles and equities, bonds and mortgages, options and equities, interest-rate derivatives and bonds). Most trade for their own accounts; many trade or execute for customers and clients.

Over the past several years, they have  include such firms with unfamiliar names as Getco, Jump, Allston, Gelber, Jane Street, Sun and Quantlab. They also include hedge funds and clients of hedge funds and asset managers. Occasionally they may include other types of funds (investment funds, pensions and endowments), all looking for an advantage based on rapid execution and "best prices."

In the realm of finance, some say this is exponential progress. Compare to the more docile manner of trading in the early 1970s, when stock certificates were exchanged, counted, bundled, boxed and rolled into the vaults of brokerage houses all over Wall Street from day to day, creating such a paper-work crisis that the industry once days off to recover from the mounds of paper.

Others say this represents a setback for retail investors or value-oriented investors. Is anybody among the throngs of high-frequency traders buying stock to support a company's investment in a new business, investment in sales growth, or investment in expansion to a new region of the country?  Do they care for more than a few seconds about a company's new-product strategy or its business plans for 2013?

Many high-frequency firms rebut that they contribute to capital markets in several major ways:

(a) They provide market liquidity, active markets, and ready buyers and sellers.

(b) They provide "price discovery" with bids and offers updated continuously during the trading day.

(c) They provide "best prices," opportunities for buyers and sellers to search venues to find the best price for a particular stock.

Their detractors argue they hamper markets in many ways:

(a) Unlike the stock specialists in the past, they disappear when markets become too volatile. They balk or refuse to participate at certain times.

(b) They don't always provide honest, good-faith bids and offers. Sometimes they show their hands and wander away before execution.

(c) Skipping from venue to venue (electronic exchange to electronic exchange) with less-than-sincere bids and offers, they often try to trick or deceive markets to gain information advantages--advantages that slice profits from retail- and long-term investors.

And they cause what happened in May, 2010:  the "Flash Crash," when the market fell (Dow Jones) almost 1,000 points (9 percent)--a precipitous, unfathomable, and bizarre collapse in minutes for no explained reason. Perhaps just as odd was the market's subsequent rebound the same day.

It took months for market experts, regulators, and exchange officials to figure out what happened. Some still don't agree. Most worry that flash crashes, in this new, 21st-century trading environment, will appear regularly. Many are concerned about the impact of a market (or markets covering all asset classes and many geographies) on individual investors. What are the virtues and attractions of a marketplace where the better capitalized electronic traders appear to have an ongoing advantage, where these traders get access to the best prices and best execution, and where 1,000-point, unexplained drops in the Dow are regarded as by-products of the game?

Over the past year, we've seen other debacles and unexpected turmoil in equity markets.  BATS, an electronic exchange, widely known for its swiftness in execution and the technology that supports it, botched and then canceled its own IPO offering earlier this year--because of technology glitches.  This summer, Knight Trading, a market-making firm, botched an electronic-trading vehicle that was intended to allow even retail investors to have better electronic access at the New York Stock Exchange. That led to losses over $400 million and several days of its existence in jeopardy.

What will happen next? And to whom? Will there be another collapse of some kind, something unpredicted, unexpected out of nowhere--blamed on high-frequency traders, but inexplicable or puzzling to the public at large?

Where do we go from here? Do we allow the marketplace by itself to resolve these quirks, collapses, and unpredictable swirls? Or should regulators (from Congress to the SEC and CFTC) rush in to take steps, even as they try to understand trading models that are racing a hundred steps ahead of them. 

Attempting to understand their trading schemes (their intents, purposes and profits) can be a mind-boggling exercise for those who contemplate regulation. What are their strategies?  How do the translate strategies into profits? How do they allocate capital? While the black boxes hum away, how do senior managers stay on top of the activity? Perhaps most important, how do they approach and manage risks--risks to their firms and risks to counter-parties and other traders and investors in the market?

No one knows for sure what the right next steps should be--at least in the U.S. Should there be transaction fees or taxes to restrict such activity? Should there be increased capital requirements for participants--as protection against what would likely be yet the next big loss or flash crash?  Should regulatory review boards approve all trading strategies and trading innovation?

Many of the same trading firms preside over or direct trading into what are called "dark pools"--private in-house marketplaces where electronic firms can exchange thousands of shares without having to let public markets see what they are doing. In some ways in the industry, it appears what could happen next--near month or next year--is like wandering into an unknown, uncertain "dark pool.

We're likely at a precipice.

Technology innovation will continue, as long as there are profit opportunities. Some argue profit margins will decline as the number of participants increase, and that in itself could slow down the rush to be the fastest in executing trades on the planet.  With other priorities on their plates (Dodd-Frank and Basel 3, most notably), regulators won't be able to catch up quickly, always hustling from several steps behind, panting while trying to project what is the worst that could possibly happen.

Meanwhile, feeling disadvantaged and sometimes clueless, worn down by the equity-market tumult from the crisis, retail investors seem to have decided to watch this play out while they remain on the sidelines.

Tracy Williams

See also:

CFN:  Dark Days at Knight Capital, 2012
CFN:  Market Volatility, Can You Stand It? 2011
CFN:  Uncertainty in Markets, 2011
CFN:  Here They Come, the Volcker Rules, 2011