Friday, December 20, 2013

Looking Back at 2013

An informal glance of the year just past
Years from now, a finance historian or a research analyst looking back at 2013 won't have a clever moniker for the notable financial events of the year.  The year was eventful, but may not even deserve a whole chapter in finance history.

And perhaps that's a good thing. It wasn't like 1987, 1994, 1998, 2008, years that conjure memories of crises, crashes, volatility, and uncertainty.

The year 2013 was not one of turmoil.  Markets behaved well. We saw equity upswings of the likes of the mid-2000's and mid-1990's, even while old hands suggested a bubble is near and we shouldn't get accustomed to double-digit percentage stock-market increases.

The fury and hoopla over BitCoins, that arcane, macabre digital currency, didn't rise to the surface until late 2013.  That, in fact, could be the bubble that bursts in 2014, and let's hope that damage won't cause debilitating financial ripples around the world.

The year 2013 featured big deals, badgering shareholder activists, headline court cases, and a few notable IPO's. One common theme prevailed, nonetheless:  financial regulation.  Regulators, politicians, and lawyers bickered about what to do, how harsh they should be, and when they plan to roll out new rules promised from Dodd-Frank legislation, now going back several years ago.

New regulation, they argued, must be at least a little painful to make up for late-2000s financial sins. But the unveiling of a new era of restraint and a new playing field has taken a long time. Basel III, Volcker rules and new rules governing derivatives and equity trading have trickled out slowly, to the pleasure of many banks still squeezing out profits from privileges about to go away.

Dodd-Frank, Volcker and Basel III are not favorite topics among bankers, but they are inevitable.  Banks paid lobbyists and waged campaigns to push back, but they know they aren't winning this tug-of-war and have begun to adapt. Compliance officers, lawyers, and business managers are combing through hundreds, thousands of pages of rules, guidelines, and capital and liquidity requirements, as they prepare for a wave of requirements set for 2014-15. Not fun, fancy tasks, but this is the new normal for the late 2010's.

Civil suits, criminal charges and legal indictments were abundant all year long, as federal prosecutors followed a determined agenda to punish those involved in insider trading.  A legal blitz on insider trading kept the mystical, aloof hedge fund SAC Capital on the front pages for much of the year--right until now, as prosecutors one by one investigate and/or indict various members of Stephen Cohen's trading circle. 

Shareholder activists charged out front and waged fierce campaigns, taking some of their battles to the front lines of the media. They pushed to get Apple to pay dividends, pushed to reshape and remake JCPenney, and battled over the legitimacy of Herbalife products--anything to boost corporate values, oust disagreeable management, wrest some value from out-dated business models, or cause fuss in equity markets. Names like Icahn, Ackerman, Einhorn and others--stubborn and persistent and sometimes irate--kept themselves busy chasing after corporate boards.

The public got used to JPMorgan Chase's billions--not quarterly profits, but a series of regulatory or legal settlements, pay-outs, charge-offs, and reserves.  A billion here, a billion there, until we saw a climatic $13 billion mortgage-related settlement that caused the public to gasp until it learned that the bank will still report handsome profits in 2013, still wields a heavy hand in banking, and its CEO  Jamie Dimon's job is not at all in jeopardy. (Recall the past springtime when a shareholder petition requested Dimon give up his chairmanship. Dimon and team, breathlessly but with confidence, waited out what was supposed to have been a close vote.)

Apple, Inc. continued to muddle over what to do with its billions in cash--billions on its balance sheet with a reluctance to reward shareholders. Investor activist Carl Icahn applied pressure, and others proposed innovative financial devices to pay shareholders. During the year, Apple relented, deciding to share the wealth via dividends with shareholders and then testing debt markets by borrowing $17 billion in a deal done mostly to show markets it could manage a debt transaction and debt payments.  Meanwhile, the company continues to amass billions more in cash from normal operations.

Twitter's IPO, in many financial circles, will be cast as the year's deal of the year. Nothing fancy about the transaction. And nothing unusual about it, even if Twitter has yet to show meaningful operating profits and long-term growth rates are uncertain (Will the fad run its course?).  Yet the deal was widely discussed and eagerly bought, if only because it signaled a comeback of sorts in the new-issue market or it proved that an IPO with high expectations can burst through starting gates without market turmoil or mechanical difficulty (like the Facebook IPO).

Other deals made headlines, too, contributing to a summer surge that flirted with bankers, who might have thought the M&A glory days had returned.  In one deal, Verizon borrowed a whopping $49 billion to make an even-more-whopping $130 billion acquisition of the portion of Verizon Wireless it didn't own. But as the fall quarter approached, banks realized corporate CEO's and strategists still harbor economic anxiety and are hesitant about making too many acquisitions too quickly.

During the year, we began to observe the slow death watch of Blackberry.  Losses continue, employees have been let go, and management--those who remain--has run out of ideas and imagination about products.  A Canadian private-equity firm had a long-running bet that things would turn around. During the year, it contemplated stepping up the bet to acquire the portions of the company it didn't own. Near the end of the year, it, too, had begun to change its mind about Blackberry.  The company stumbles, gets on its feet every few months when it announces what it perceives as a novel product offering or a strategy geared to corporates, but then it trips again.

Michael Dell had grand dreams of taking his computer company Dell private, where he could seize control of the company's strategy without the withering distractions of shareholders, research analysts, and whimsical stock prices.  Dell, however, didn't realize he had to ward off shareholder activists and prolong the process by addressing apparent conflicts of interest (with him leading both the public company and the private buy-out).

Goldman Sachs didn't make it through the year without headlines, no matter how much it preferred. It had a sideline seat in the civil trial of one of its employees (Fabrice Tourre), the one singled out as instrumental in structuring the large mortgage securities/derivative transaction that permitted hedge-fund investor John Paulson to earn billions. Goldman wasn't an accused party, but for Goldman, the trial caused headaches and reputation blemishes.

Outside courtrooms, Goldman made news when former employee Greg Smith's published his long-awaited book about why he left Goldman.  The book was widely awaited and carefully reviewed and read, although the author didn't stir up as much trouble as some might have hoped. Nor did he offer more than an insider's account of his decade working and watching Goldman drift slightly away from its firm principle of treating clients as kings and queens.

Banks, once every five or ten years, try to do something revolutionary to change the pressure-cooker culture of banking. In the past, they allowed for permissive dress codes (business casual, as it came to be) and tried to be tender-hearted about late nights and all-nighters in the workplace.  Goldman took a big step in 2013 when it announced it would forbid junior bankers (analysts) from working Saturdays t to instill a more civil, comfortable work environment.  The move was praised and appreciated, although skeptics know how little this might be enforced or how the new standard might be forgotten in the months to come. But Goldman is praised for daring to show empathy.

Cheryl Sandberg, Facebook's COO, published her  book Lean In and presented pages of advice of how women can aspire to senior roles in business and how women can confront difficult business settings with a more aggressive stance or posture. No book in business in 2013 was more talked about, tossed about, and debated than Sandberg's tome. Women on both sides of the argument of the effectiveness of leaning in weighed in. But was her book applicable to all groups under-represented in business?

An eventful year, but one that didn't leave the blood boiling or cause business and finance leaders to sink into an abyss of anxiety. With bits of the recession and crisis still haunting and reminding all how bad things can be, companies and capital markets proceed into 2014 with degrees of confidence. But they cling to appropriate amounts of worry, wondering if a devastating market blow looms over the horizon.

Tracy Williams

Friday, December 6, 2013

Volcker Rule: Point of No Return

Volcker's rules: Any day now
Three years have elapsed since regulators proposed new regulation to restrict proprietary trading at banks (more specifically, depositary financial institutions).  Three years of discussion, debate, rule-writing and re-writing, dissension, lobbying, and procrastination. 

And now the new rule, better known as the Volcker Rule and named for former Federal Reserve chairman Paul Volcker, who first proposed limits on bank trading during the crisis, has reached a point of no return.  Regulators--the SEC, FDIC, OCC, CFTC and the Federal Reserve--have promised to sign off before mid-December.

Banks aren't surprised. They aren't caught off guard. They knew an old era of gun-slinging, wild, volatile, frantic, but overwhelmingly profitable proprietary trading at the major banks was coming to an end.  While regulators and their lawyers sequestered themselves for years to write hundreds and hundreds of pages of rules, banks tried to push back and soften the blow. But they knew they wouldn't win much of this tuggle, although they poured resources and time into the effort.  They had already begun to scale down prop-trading activity. 

New rules will prohibit outright proprietary trading (trading for banks' own accounts using their own capital), but will permit trading for clients, trading for hedging purposes and limited hedge-fund activity. And therein lies profound complexity.   

Regulators have spent the past three years trying to define all possible scenarios of client trading, hedging, and hedge funds with such fine-tooth clarity that banks won't be able to exploit loopholes in the way they can do adeptly and profitably to their advantage--and, in the eyes of regulators, at the expense of clients and individual customers.  Regulators, worried about how banks can exploit omissions in the rules, have tried to cover every base in hundreds of rules-making pages. 

Despite regulators' attempts at clarity, banks now prepare for the burdens and chores to remain in compliance.  Banks know well that trades that look like, feel like and were booked as client trades might evolve into prohibited proprietary trading.  New rules will allow "inventory" (securities and derivatives on banks' balance sheets) to exist on banks' balance sheets as items on a shelf to sell to clients.  But Volcker rules might define inventory exceeding a certain level or inventory maintained for more than a certain number of days as illegitimate "proprietary activity" (and determine it to be out of bounds). 

Banks that choose to remain prominent in sales and trading will need to invest in an army of compliance personnel and significant amounts of infrastructure to ensure they stay within client-trading or hedge-trading boundaries. A nightmare for some banks. An onerous cost of doing business at others. 

Volcker proponents say the new rules will reduce the likelihood of another round of "Whale Trading" losses at places like JPMorgan Chase, which lost over $4 billion from credit-derivatives trades in 2012. Critics and JPMorgan argued that "Whale-related" trades would have been permitted by Volcker rules. (JPMorgan launched the first phase of these trades for hedging purposes--to hedge credit risks in its large loan portfolio. But the trades piled on top of each other and the massive positions turned into something very "proprietary.")

Now big banks across the U.S. must decide (and have decided) whether (a) to stay in the game of securities and derivatives trading and eke out profits from client-driven flows or (b) to retreat, withdraw or just get out.

The bulge-brackets, such as Goldman Sachs, JPMorgan, and Morgan Stanley, are fully invested, have been adapting to a Volcker world. The big banks have resigned themselves to declines in trading revenues as much as 10% (25% at Goldman, one analyst contends). They hope to turn their once-magnanimous trading desks into humming, full-throttle plays on volume and flows.  Their desks have been reorganized and restructured.  They've shuffled talent, shut down some desks, invested in automated trading systems, and allowed many traders to seek employment at hedge funds.

Other banks have withdrawn and expect to engage in a token amount of trading at modest levels and minimal volumes--all client-related or tied to risk-management hedges.

In 2014 and beyond, critics, proponents, and regulators will watch banks closely.  Some say liquidity in certain sectors of capital markets will diminish, because large well-capitalized banks won't be able to buy, sell, and hold in large amounts of securities in the way they could before.  Some (municipalities, for example) say rates on bonds may increase because of diminished liquidity, because banks will nudge margins up to account for lack of liquidity, and because banks won't be to rationalize holding any inventory. 

(Imagine scenarios where banks can rationalize economically holding large amounts of securities/derivatives in inventory even for eventual client sales, but will choose not to build up inventory for clients to avoid the risk of penalties of not complying with Volcker restrictions.) 

Some say the best talent for managing trading volumes, risks, portfolios and positions will no longer reside at banks. Some say new rules will discourage financial innovation, because banks often trade and make markets in new products in large volumes to generate interest and liquidity. (Banks don't push new trading products if the profit dynamics don't make sense.)

Yet others contend we won't see those periodic billion-dollar trading losses because banks' "prop desks took a view" of the market or tried to guess interest-rate trends, commodity prices, or economic indices in their efforts to make gobs of money from proprietary positions.

At least for a while in 2014, banks will routinely convene troops of lawyers, traders and compliance officers to figure out this new world. It won't be easy. What happens if a bank amasses a position with intents to sell to a client, but the client decides not to pursue the trade? Will a regulator slap the bank's wrist right then and there? What happens if the bank purchases certain derivatives to hedge a portfolio, but volatile markets abruptly change the hedged position into an huge, unhedged derivatives position?   

Somebody within the banks' troops will be required to spend all-nighters trying to determine the  section in the hundreds of rules pages that cover these scenarios.

Tracy Williams

Thursday, November 21, 2013

At JPMorgan Chase, Is $13 Billion a Lot of Money?

The $13 billion: It can handle it.

A question has lingered for much of the past week, one that hasn't been asked often out loud or asked pointedly. Is $13 billion a lot of money for JPMorgan Chase? 

Will it crush the bank's growth plans and business opportunities in the periods to come? Will it strangle a banking empire and cause it to retreat into a shadow of its post-crisis self?

Announced in business headlines everywhere, the $13 billion is the total amount in the bank's settlement with the U.S. Department of Justice, all related to the bank's mortgage-securitization business in the 2000's and the businesses it inherited from its acquisitions of Bear Stearns and Washington Mutual. 

The government claims JPMorgan and affiliates improperly and unfairly structured mortgage securities, leading to billions in losses to investors who had purchased the securities. The settlement puts an end to one chapter in the bank's efforts escape the mortgage nightmare of that decade. 

For a financial institution with market value and book value in the hundreds of billions and with billion-dollar earnings announced every quarter, is $13 billion a lot? Let's decide.

Of the $13 billion, about $7 billion is tax-deductible.  Hence, the bank will have a benefit on its tax books (reduction in tax liability, e.g.) of some kind for about $2-3 billion, effectively reducing the "pain" of the settlement by that amount. 

Of the $13 billion, about $4 billion is slated for mortgage relief for homeowners.  Banks and investors who hold those loans or hold securities backed by those loans have likely written them down, charged them off, or set aside significant reserves.  If JPMorgan continued to hold some of those loans and securities on its books, the settlement amount captures assets that the bank had previously written off or planned to write off. In effect, the settlement number acknowledges and accounts for write-offs the bank already took (related to mortgage securitization).

The rest comprises payments to state regulators and to investors who bought mortgage securities and suffered substantial losses.  In the $13 billion, the net cash payments due to organizations, regulators, and investors amount to something less than $8-9 billion (estimated). 

In 2012, the bank (consolidated) reported $21 billion in earnings. It operates at a pace of generating about $6-7 billion each quarter (or about $24-28 billion/year). Hence, a gross $13 billion settlement doesn't result in fiscal-year losses (comprising about half of expected annual income).  The bank will continue to be profitable, expecting to report profits above $15 billion in 2013 and above $25 billion in 2014. 

Even more, the bank indicated it has already set aside reserves (and adjusted financial statements) to account for the entire $13 billion--including about $9 billion in legal reserves (including write-offs and loss provisions) in the third quarter in anticipation of various legal settlements. 

JPMorgan's equity base exceeds $206 billion, an amount that has already netted out much, if not all, of the $13 billion. A $13 billion settlement comprises less than 7% of equity, if it had not already made equity adjustments for such charges. As massive as the number appears in headlines, $13 billion won't put the institution in financial peril. 

Has the bank's market value (share value) suffered because of the settlement?  In recent weeks, as the public heard rumors and eventually learned about a finalized settlement, the bank's share price didn't plummet and even flirted with record levels.  That's because the market, whether it's partly or fully efficient (depending on which finance theorist you believe), had already accounted for all possible losses related to the settlement.

Equity markets, too, like companies that flush out losses and start anew.  Markets like companies that erase vast amounts of uncertainty (especially related to lingering legal issues).  Markets appreciate and value companies when they clean the slate and eradicate such hangover. 

Then there are regulators, who have applied an increasing burden of capital and liquidity requirements to big banks. Does the $13 billion jeopardize regulatory compliance? Not really.  The bank had already begun to retain, boost and increase capital to comply not only with capital requirements of today, but the progressively increasing requirements over the next few years.  Its regulatory ratios were in good shape.

New regulation has certainly annoyed JPMorgan (and its peers) and has stifled business activity in certain segments (trading, the best example).  The bank continues to grapple with new rules regarding trading, leverage and liquidity.  But the settlement hardly influences the scenarios the bank confronts on these fronts.

Still, $13 billion is still a mind-boggling total, so it has to hurt somewhere, if capital ratios, earnings, balance sheet, and stock price have not felt pain.  Moody's, the ratings agency, in November downgraded the holding company a notch, but the downgrade had little to do with settlement figures, more to do with systemic issues and how Moody's suspects big banks can manage through crisis scenarios. 

Some "hurt” or injury should exist, contends the Justice Department, which wants the bank to comprehend the impact of its past actions.  The bank has weathered public embarrassment, glaring headlines and threats to gilded reputation, but all that could be short-lived, as regulators and the media move on to the next big issue plaguing financial institutions. 

For now, the "pain" of the settlement is not financial. Could there could be a cumulative, damaging effect from having to ward off the slings and arrows of many legal issues at once? They include (a) the time commitment and distractions involved in legal wrangling and legal negotiation, (b) the possibility, even if remote, of criminal charges arising from any of the past activities, and (c) other legal issues (including any related to last year's "Whale trading" derivatives losses that exceeded $6 billion. 

Don't forget, too, the expected "pain" of explaining to senior managers, deal-doers, and business leaders how inappropriate it might be in 2013 to pay eye-popping bonuses in the wake of a $13 billion shakedown, an internal corporate message that always results in the risk of losing talent. 

And $13 billion is an amount of missed opportunities--new investments in business expansion, product growth and new technology that the bank could have made, but didn't.  The bank, nonetheless, would counter that it has ample resources, people and capital (from retained earnings) to make all the investments it needs in the post-crisis era. 

At JPMorgan, the "pain" will be bearable.  CEO Jamie Dimon will sleep at night. The $13 billion was, well, not too much money. 

Tracy Williams

Wednesday, November 13, 2013

MBA Students: An Eye on Summer '14

CFN hosted its annual webinar to launch interview season
Most MBA students today, including Consortium students across the country, will argue there is no one segmented part of the calendar for "recruiting season."  Every aspect and experience of business school is "recruiting season," from the time students declare their intentions to attend a certain school until graduation. Every day, not just a few weeks in the fall, MBA students contemplate where they want to be and what they should do to secure the right job.

Students today, and their career-advisory specialists on campus, say there is seldom a time when an MBA student is not absorbed in thought about information interviews, mentors, alumni connections, career choices, or a specific post that awaits after graduation. Nonetheless, late fall usually signals the formal start of interviews:  information interviews,  first rounds, lottery interviews, interviews earned from being selected by companies, second rounds, technical interviews, and follow-up sessions to decide whether to accept an offer or go elsewhere.

The Consortium Finance Network hosted its third MBA recruiting webinar Nov. 13 for Consortium first-year MBA students to launch interview season for those interested in finance and financial services.  Panelists included Consortium graduates in a variety of finance roles, working for financial institutions and industrial, entertainment, and consumer-products companies. CFN steering-committee members, D-Lori Newsome-Pitts, Camilo Sandoval and Tracy Williams, moderated the presentation and subsequent discussion. Consortium students logged into the webinar from schools around the nation.

Panelists included Consortium alumni Abijah Nyong from Dow Chemical (Indiana-Kelley business school), Christina Guevara from Goldman Sachs (NYU-Stern), Stephanie Rosenkranz  from ESPN-Disney (USC-Marshall), and Brace Clement from Starbucks (Wisconsin). Some were recent graduates, fresh from the experience of going through the process. 

Nyong from Dow Chemical set the tone for the evening.  "When it comes to talent," he said, "good talent comes off the shelf.  Even if the business prognosis is not good, we take good talent."

To guide students, CFN presented a general recruiting outlook in several segments of finance. Opportunities in finance fluctuate and take assorted, unexpected turns from year to year.  In 2013-14, the outlook is generally upbeat, as banks, investment firms, and companies have become confident enough to open their doors for more MBAs.

But as most experienced finance professionals know well, it helps to be cautious, careful, and forewarned.  In finance, the tide and sentiment of recruiting can turn on a dime. Some years, companies hire more than they need. In other years, companies are sour on economic prospects and hire fewer than they should.  More than ever, however, financial institutions and companies are serious in hiring summer interns, since most hire interns with hopes of offering them full-time employment when the summer is over.

In corporate finance and corporate treasury, as the economy grows and improves, companies are growing and expanding and will, therefore, have financing needs and investment opportunities.

Nyong said companies like his employer are looking for outstanding candidates and are increasing hiring. "We want to ramp up to try to make sure good employees are in the pipeline."

In investment banking, whether it's M&A, FIG, real estate, energy or health care, all depends on the industry segment, expectations within that industry and general business trends. M&A, for example, had shown signs of starting to soar this summer, but experts now can't figure out why it stalls from time to time.

FIG investment banking has benefited from the capital requirements and restructuring initiatives of banks everywhere, in the wake new regulation and reforms. Equity finance is patting itself on the back after renewed confidence from IPOs (think Twitter) and investors' comfort in stocks.  Debt finance has been bolstered by low interest rates.

In private banking and wealth management, banks will continue to emphasize growth, because they like the fee-based businesses without having to build up their balance sheets.

"Banks have pushed to build out (in private banking) because of the sticky assets," Guevara said. "They are focused on growth."

In corporate banking, opportunities exist because big banks, which had swooned toward the high returns and headlines of investment banking, have learned to appreciate the stable returns and bread-and-butter benefits of corporate lending and cash management.

Sales & trading opportunities at financial institutions are limited, because regulation and reform will restrict what they can do--if not now, then over the next few years, as SEC and Dodd-Frank rules are written and become clear.

Banks everywhere have restructured trading desks and trading roles. The best opportunities, if any, for MBAs interested in trading will be at asset managers, boutiques, specialty trading firms and hedge funds. Others will remind us, however, how significant aspects of trading are now directed by computers, algorithm, client flow, and trading schemes--not requiring as many desk traders (or people).

For years, MBAs overlooked opportunities in risk management and didn't know much about the role. Financial institutions seldom tapped business schools for risk managers. After the crisis, financial institutions have learned lessons or have been forced to beef up emphasis, add professionals and become more attuned to all forms of risks. Regulators, too, in these times are always in the vicinity and insist that banks devote resources and attention to risk management in the way they may not have done so in years before the crisis.

Clement from Starbucks said, "I wish I took more classes in risk management (while in business school) and learned more how to manage (market) risks."  He described ways in which his company must hedge the complex risks of costs of commodity products. Business schools have responded in recent years to offer courses in risk management (for credit and market risks). 

Opportunities in venture capital, private equity and hedge funds are fleeting or uncertain, partly because these firms often recruit beyond the eyesight of business schools and tend to have opaque recruiting procedures. There exists, also, possible fall-out from recent insider-trading scandals (think SAC) and industry-wide hedge-fund shake-out.  Hedge-fund returns, believe it or not, trail that of equity markets in the past year or two, and more than a few hedge funds have closed their doors in the last year.

In venture capital and private equity, some industry observers say too much money might be chasing too few good deals.

Sandoval presented CFN's framework for approaching interviews.  The framework encourages students to examine and polish themselves in five areas:

(a) personal background,
(b) personal interest in the industry and company,
(c) personal drive and motivation,
(d) capability (expertise, knowledge, understanding of industry) and
(e) insight.

Nyong said, "I did a lot of informational interviews to find out what (industry segment) felt natural to me." He instructed students, "Look at the spectrum of positions available.  Seek out alumni."

Panelists emphasized the importance of being aware of current events, topics and issues, because interviewers will refer to them and being informed can help students make decisions about what they want to do. Guevara advised that students should make sure to "study markets and current events and have a sense of what's going on."

Rosenkranz recommended that students register and subscribe to, a website that aggregates news stories and headlines, based on specific business areas (finance, accounting, marketing, etc.) or specific topics (derivatives, currencies, digital advertising, etc.). A student can tailor the website aggregation to his specific interests and can see the updates he needs to see.

Panelists emphasized frequently the importance of conveying interest, drive and enthusiasm in finance-oriented interviews. In interviews, Sandoval explained, "We forget to talk about our general interest and passion for finance."

Clement summed up, "You want them (the companies) to believe you can do this job."

"You have to know who you are and where you want to go," Nyong said. "If you can't buy it yourself, you can't sell it."

As panelists presented the CFN framework, Sandoval reminded students, "You are in the driver seat.  You design the framework that works for you. You control the questions."  

Year after year, finance students fear the technical interview, where financial institutions try to gauge what candidates know and how they describe finance scenarios on their feet. To prepare for what they perceive as stressful exercises, students study market trends and refresh themselves in principles of finance, markets and accounting. Beyond that, candidates seldom know how that interview will evolve.

Investment banks may require candidates to present a detailed deal strategy or advise in valuing a stock offering.  Hedge funds or asset managers may require candidates to  explain trends in interest rates or derivatives pricing. Corporate-finance managers may require candidates to evaluate a balance sheet.

Nyong advised, "Read the company's 10-K to prepare.  It offers a vision of their market and shows contrasts with competition."

Rosenkranz said, "Listen to the (company's) investor calls to see how management responds.  Listen to the kinds of questions (analysts) ask during the calls."  She added that for technical interviews, companies want to "see if you have intellectual curiosity." And she suggested that candidates can learn much about the company's structure, management and culture by referring to the website

"How does the company make money?" Rosenkranz asked, recommending candidates study closely the company's business model.

Clement saw the benefits of understanding thoroughly a company's income statement.  "You'll want to understand the P&L from top to bottom, understand the balance sheet," he said, because interviewers will be familiar with this financial information and will want candidates to show familiarity, as well.

CFN panelists, now experienced and entrenched in finance positions, shared other observations and advice.  However, while satisfied with their efforts to get from the classroom and case study to roles in finance, is there something they would have done differently in the recruiting process?

"I would have gotten a better sense of other roles (in the company)," Nyong said. They would include roles in operations, marketing, manufacturing and other functions, because finance touches so many important activities in an industrial company.  "I would have gotten a better understanding."

"I would have found somebody to act as a blueprint," Clement said, explaining the importance of connecting with a school alumnus, an experienced mentor,  or a senior manager to learn more about the recruiting process, the industry, and the ropes for converting dreams into strategies into meaningful job offers.

Rosenkranz said she understood the importance of showing intellect, expertise and general knowledge about the industry, but wished she examined more carefully companies' work environment and culture.

Panelists concluded that most MBAs, especially ambitious Consortium students at top schools, will find opportunities and take advantage of some of them.

"You want to be intentional," Clement offered. "You shouldn't just want to find any place to land. You shouldn't be fishing for just any place."

Tracy Williams

(A recording of the webinar and the accompanying written presentation will be available to CFN members in Linkedin.)

See also:

CFN: MBAs and the Summer of 2013
CFN:  Is the MBA Under Attack? 2013
CFN:  MBA:  Remaining Relevant, 2011
CFN:  Mastering Technical Skills, 2010
CFN:  Who's Headed into Finance? 2013
CFN:  How Mentors Help, 2009

Sunday, November 10, 2013

What A Fantastic Year 2013!

WD Gann once said, "Everything moves in cycles as a result of the natural law of action and reaction. By a study of the past, I have discovered what cycles repeat in the future." 

How amazing, by studying the historical price data, we look at the statistics and generate the probabilities of how price action repeats itself. After all, that's the most important assumption of technical analysis that "history repeats itself".   

Now, let's take a look at the following chart that I published before in May this year.

Gann was able to forecast the 1929 stock market crash accurately in advance and he shared his secret in his publication that in order to forecast for that particular year, all you need to do is to look at the previous years that end with the same number year. For example, to forecast for 2013, you may study the price action of year 2003, 1993, 1983 and so on. 

Unlike the Dow Jones Industrial Average that has 100 years of history, KLCI only has less than 40 years of data. So I go to this website: Tading Economics to get the required data.

From the data, I see that the year ending with '3' is always a bullish year for Malaysia, the chances are 3 out of 3 bullish. This findings help me in planning for my investment into the stock market this year.

In one of my previous article I mentioned that August to November this year would be volatile and it would be suitable for shorter term trading because I saw that the 1983 chart showed that the second half of that year the price action was zig-zag in a horizontal trend. In addition, there were some important fundamental reasons such as the Fed tappering, our Malaysian Budget and other fundamental reasons that help me to come to that conclusion. 

So if you are wondering what's the market outlook for 2014, let me show you the next chart:

Looking at the chart above, we know that 2014 would be different from 2013, we do not have a clear-cut bullish trend. Investing in the stock market will be more challenging but I'm still optimistic about the Malaysian stock market as over the years we have proved that we are less volatile than the regional markets, as we have strong support from the local institutional players.

Below are some thoughts that may affect the market in the near future:

1. Construction and Property Sectors
According to the BMI (Business Monitor International) review on the Malaysian construction sector, they believed there will be some slow down in the construction sector in 2014 due to the falling demand for residential and non-residential buildings. They have maintained their construction growth forecasts for 2013 10.1% and 2014 to be 6.7%.

The property sector will experience some slow down as well due to the cooling measures by our government to curb speculative property activities. I believe this pull back is healthy for our economy as the property market need the necessary consolidation phase to digest the excess supply in the market.

2. Low Interest Rates
With a ultra low interest rate environment globally, the chances of running into a financial crisis is low. Unless there is inflation problem that force the Central bank to raise interest rate, otherwise, we are likely to enjoy this until 2015.

3. Excess Liquidity in the Economy
Ironically, quantitative easing is the biggest driver to drive the financial markets to the ceiling and yet it is currently the biggest risk posed by the financial markets.  In this quantitative easing process the Central Banks from the EU, US, UK and Japan kept pumping in the liquidity into their banking system. In fact JP Morgan's Nikolaos Panigirtzoglou, an expert in global monetary flows and liquidity, said the current excess liquidity is the most extreme ever as compared to the past 3 major episodes of excess liquidity namely: 1993-1995, 2001-2006 and 2008-2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at that time.

Since the 1990's the Fed has been playing the money game by pumping in money each time after a financial crisis instead of long term investment in real products and education. The excess liquidity is doing the economy no good as it merely drive up the asset prices and not protecting our purchasing power parity. 

In order to play along with the music, everyone has to dance regardless whether you like to dance or not. Just like in this money printing world, we are losing purchasing power with our fiat money, we are force to invest in this risky asset environment regardless whether we like it or not, as long as we know the Fed is pumping money into the system, we have to participate in the equity and property markets to protect our purchasing power. If we do not dance with the music we will be losing out. 

At the end of the game, we need to win the game beautifully but the problem is how? Because we never know when will the music stop. Right now, keep investing as the music is still playing around the world.

Thursday, October 31, 2013

Goldman Sachs and Work-Life Balance

Goldman Sachs announced this week that it had instituted ways to improve the work experience of analysts (in its BA program) and reduce the number of hours they work each week. It's the lore of investment banking to hear stories of analysts and MBA associates, too, who work long hours that stretch through the weekend and through holidays and vacation time.

Goldman acknowledges that it is missing out on some top talent, when recruits have selected other finance jobs or industries because of work-life-balance issues. Talented BA's and MBA's will express an interest in corporate finance, will have the aptitude and drive to work on deals and with important clients, but, as Goldman sees it, they back out and accept offers elsewhere. And they may whisper to Goldman and other major banks that it wasn't about the compensation.  Thus, they choose pathways that take them to the shorter hours and better lifestyles offered by hedge funds, smaller boutique firms, and the finance or strategy departments of non-financial companies.

Goldman, for its part, will discourage analysts from working weekends.

Big banks have tried to address these issues over the past 13-15 years, going back to the times when banks risked losing talent to dot-com opportunities. But the slope is slippery. They implement programs and try to change the culture. They make promises to recruits and junior bankers.

Yet in the trenches, old managerial habits surface, and analysts and MBA associates are pushed to extremes to help in deals, to do extensive modeling and research and to participate in elaborate client pitches. No matter how hard banks try to tweak and twist the work culture, mid-level bankers face unbearable pressures to win deal mandates, generate revenues, manage risks and comply with new regulation--without regard to firm rules about working weekends or until midnight. For some middle and senior bankers, there is a little bit of "because I did it, they ought to, too."

Often the messages of improving work experiences, coming from senior managers far removed from deals and clients, are lost in execution or not enforced fairly or properly. The deal, the pitch and the demands of the client becomes the modus operandi.

Still, because this is Goldman, the industry will watch how this unfurls. Goldman has said that, if necessary, it will hire more analysts to compensate for work not getting done during weekends.

The reports, at least what has come out, don't address work-life issues for MBA associates. Therefore, although the firm likely wants to improve work experiences for the older group, it wasn't ready to say they (the associates) can have all weekends off, too.

Tracy Williams

See also:

CFN:  Delicate Balance:  Long Hours and Personal Lives, 2010
CFN:  Is I-Banking Still Hot? 2011
CFN:  Summer-Internship Experiences, 2010

Monday, October 28, 2013

The Budget 2014

The recent announcement of the Budget 2014 was unexcited as predicted. Compared to the last Budget this budget is more realistic as we need to look into our deficit problem seriously as Fitch has already downgraded the Malaysian credit outook from "stable" to "negative" in July this year.

Currently, Federal Government debt at 54% of GDP while Household debt at 83% of GDP; Our budget deficit was 4.5% of GDP this year (for budget deficit > 5% is consider unhealthy). Hence a contractionary budget for next year is expected as people need to wake up from the over-indulgence of 'goodies' during the pre-election period. There is a price to pay for all the big spending!

However, the GST is further delayed to 2015 which also mean that the budget in fact is not that contractionary and our credit rating of 'negative' may remained for quite a while.

Moving forward, as far as KLCI is concerned there are winners and losers sectors for this budget. The winners are: telecommunication (increase of internet coverage in the rural areas), Oil and Gas, and Construction (West Coast Expressway, Doble-tracking rail project).

Biggest loser is the property sector especially the properties that rely on foreign buyers like the Iskandar region in Johor. As for the sin tax, the price hike in tobacco was implemented one month before the budget announcement day with a tobacco excise tax of 14%.  

The new RPGT of 30% for the first 3 years with no DIBS will definitely dampen the property market. However, I don't think there will be a major crash in the property market, but more like a mild correction kind of consolidation will take place as many of the projects will only be ready beyond 2015. 

For example, if you are holding 3 or more condos with price below RM1 million, you'll most likely have the difficulty to look for local buyers as most Malaysian middle income earners can't afford to buy a property in the sub sales market. The difference between buying from the developers and from the sub-sales market is that, if you buy from the developers, very often you do not need to pay high down payment, low (or non) legal fees, DIBS (now no more), easy to obtain the loan approval from banks. But if you are buying in the secondary market you need to pay tens of thousands of ringgit for the legal fees, stamp duties, down payment and etc. Hence, this new ruling in fact is a nightmare for speculators with no holding power but a good news for genuine buyers because it's everyone's dream to own a house for old age retirement and for the next generation.

Now you may be thinking what is my advice for the general equity investor. My advice is keep investing in the equity market. Buy only when the KLCI has a minimum correction of 80 points - 120 points. Sell when you see your stocks rise by 20% - 30%.  Once you've sold your position do not buy immediately but to wait patiently for the next opportunity to strike. If you recall my previous articles, there were 2 strategies that I mentioned before: 

1. Buy at the cycle low that usually happens in the month of February, May, August and November.

2. Buy when the KLCI is in a correction mode. A correction happens when the KLCI violated the trendline and the 20 day MA. When the index is in the correction mode, individual counters usually reacted more.

For sell signals it is up to the individual investor, it could be a 3-to-1 reward to risk ratio, below 20 day MA, or any other technical indicators that you are familiar with.

For questions and enquiries you are most welcomed to emailed me at