David Burnstein's List: Finance

The 'guru' of business valuation

Background, history and context of CFA exam and CFA Institute

For those retirees who expressed concern about leaving money on the table if they died too young, Mr. Thaler said they should think about it in a different way: “If I buy an annuity, I’m buying my children an insurance policy against me having to move in with them when I run out of money.”

Shlomo Benartzi, a business professor at the University of California, Los Angeles and the chief behavioral economist at Allianz Global Investors’ Center for Behavioral Finance, said research had shown that most people were incapable of managing a lump sum of money well and that at least half of them got worse at it by the time they turned 80 and their mental faculties declined.
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Still, the question of who opts in, or out, of the annuity is an equally big issue for Prudential. The company’s risk calculations will be skewed if all the sick people take the lump sum and all the people who will live to 90 stay in the plan. For a group annuity like this to work, some people have to die young so there is enough money untapped for those who live longer than average.
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Mr. Thaler said that one option for people truly concerned about outliving their money might be to take the lump sum payout and use some portion of it to buy a deferred annuity that does not start until, say, age 85. (Delaying taking Social Security, he pointed out, is also a cheap and easy way to increase the size of what is essentially an annuity.)

Over 10-year periods since 1900, stocks have outperformed bonds 75 percent of the time, according to Bernstein’s calculations. But today, bond prices are relatively high — their yields, which move in the opposite direction, are extraordinarily low — and stock prices are relatively low. So the firm sees the chance of stocks beating bonds over the next 10 years at 88 percent.

So the bank merger frenzy that Mr. Weill set off in the late 1990s was not the proximate cause of the financial crisis. Nor was the concentration of our banking system, which is less centralized than those in Britain, France, Germany, Italy, Japan, Switzerland and many other countries.

What brought our financial system to its knees was old-fashioned poor management that expanded the banks’ portfolios and activities too aggressively without sufficiently robust risk controls, enabled by lax (or nonexistent) oversight by regulators. Many of those excesses were concentrated in the housing sector, where a now legendary bubble formed without regulators or industry leaders recognizing it.
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We need a Dodd-Frank do-over to create the right oversight apparatus for huge banks. Regulators will always be outnumbered by bankers, and they will never find every problem. But, like prison guards, regulators are essential, even if they are outnumbered. In a world of behemoth banks, it is wrong to think we can shrink ours to a size that eliminates the “too big to fail” problem without emasculating one of our most successful industries.

The “strategy” component considers in part the fund’s approach for managing its “glide path,” or the period over which the fund moves from being mainly invested in stocks, to being more heavily invested in bonds. More funds have been adopting the “managed to retirement” approach, in which the most conservative mix is achieved in the year specified by the fund’s title (2040, for instance) — typically, the year the investor expects to retire.
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The report awards letter grades to more than 40 fund series, based on five criteria that are weighted differently: Performance over the prior three years (30 percent), risk (25 percent), fees (20 percent), strategy (15 percent) and an analysis of the fund’s parent company/organization (10 percent).

Currently, the national average on an interest-bearing, federally insured savings account is a meager 0.13 percent, according to Market Rates Insight, a financial data research firm, down from 0.79 percent in July 2007.

And the national average rate on certificates of deposit — with maturities from three months to five years — is 0.70 percent, down from 4.56 percent in July 2007.

“Based on a statistical analysis that I did going back even further, almost 50 years, interest rates on deposits have never been this low,” said Dan Geller, executive vice president at the firm.

Considering that the inflation rate is running at about 1.7 percent a year (and many consumers are experiencing even higher costs), many savers are losing purchasing power.
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So you might start searching for a higher-yielding online savings account on Web sites like MoneyRates.com, Bankrate.com or MoneyAisle.com
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Or, you can consider playing a little game with Ally Bank’s five-year C.D., which pays 1.73 percent; it charges a penalty that amounts to 60 days’ worth of interest if you withdraw your money before the C.D. matures.

To help consumers find better yields to beat inflation, the Web site NerdWallet has started a monthly interest-rate monitor, which will feature deposit accounts that beat the C.P.I., the most widely used measure of inflation. (The Web site focuses on accounts that aren’t tied to temporary promotions, but does identify significant promotional rates, too.)
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The accounts highlighted, however, were offered by credit unions, which may have restricted eligibility requirements for membership.
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NerdWallet says three-fourths of the accounts identified with a rate greater than 1.70 percent were from credit unions, not banks.

Overall, companies in the Standard & Poor's 500 are expected to have increased revenue 2 percent in the second quarter, according to S&P Capital IQ. That is the lowest growth, outside of a recession, in more than nine years.
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Revenue matters because it's a good path, though not the only one, to higher profits. If you sell more, you will often earn more. Companies in the S&P 500 index increased revenue 11 percent last year. That helped lift earnings 16 percent to a record high.

But now companies are having trouble getting people to buy more.
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For all the ominous news, most investors are still buying stocks. The S&P 500 is up 11 percent so far this year. That is because in the end, all that matters is earnings, not revenue. And earnings, after barely rising in the second and third quarters, are supposed to explode.
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Previously when revenue has faltered, companies were able to cut costs to compensate...[However] The problem is, there's a limit to how much you can squeeze your workers and use technology to produce more. And U.S. companies are just about as lean as any time in history.

U.S. companies are pulling nearly 9 cents of net income out of every dollar of revenue versus a three decade average of 7 cents or so. Yet the consensus among analysts is that this profit margin will jump to a record 9.6 cents per dollar next year, according to Goldman Sachs.

In other words, companies will do even more with less.

We went through more than 90 finance-related mobile apps and these are the best ones we found.

Caramadre realized it didn't have to be that way. There was no requirement that the investor and the annuitant be the same person. In fact, as he read the contracts, the annuitant didn't need to have a relationship with the investor at all. Caramadre or one of his clients could buy an annuity on the life of someone who was not expected to live long and then pocket any profit when that person died.
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The bond program had similarities to the variable annuity scheme. Caramadre would buy certain corporate bonds on the secondary market. After the financial crisis, these bonds were selling at a steep discount. As a sweetener, the companies that originally sold the bonds had included survivorship rights for co-owners.

For example, if you owned the bonds with your wife and she died, you didn't have to wait decades to redeem them. The company would buy them back at full value. Caramadre would "co-own" the bonds with a terminally ill person. When that person died, he would redeem the bonds at face value, reaping the value of the discount.

Some stock market pundits are highly critical of companies that repeatedly emphasize "adjusted" (also known as non-GAAP or pro forma) earnings over GAAP earnings.
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"We believe that the best EPS measure for valuation purposes sits somewhere between pro forma and GAAP EPS, where in between varies by company, industry and sector," wrote Deutsche Bank's David Bianco in December 12 note to clients. "Although pro forma EPS can overstate true EPS, GAAP EPS can understate true EPS."

In 2002, 85% of all U.S. stock-market trading happened on the New York Stock Exchange and the rest mostly on the Nasdaq. NDAQ +3.36% By early 2008, there were 13 different public exchanges, most just stacks of computer servers in heavily guarded buildings in northern New Jersey. Now, if you place an order for 1,000 shares of Microsoft, MSFT 0.00% it pings from exchange to exchange claiming a few shares at each stop, seeking the best price until the order is completed. But the moment that it hits the first exchange, the HFTs see it, and they race ahead to the other exchanges, buy the stock you want, and sell it back to you for fractionally more than you hoped to pay. All in a matter of milliseconds, millions of times a day to millions of investors—your grandmother and hedge-fund titans alike. These tiny but profitable trades, Mr. Lewis writes, add up to big profits for firms like Getco and Citadel.

[INVERSION is where] an American company is able to incorporate abroad by acquiring a foreign company. The buyer, in effect, becomes a subsidiary of a foreign parent — even though American shareholders own most of the merged company and the company’s headquarters and top executives stay in the United States. Incorporating in one country and being based in another creates opportunities to play the tax laws of one nation off against another’s; conceivably, profits might not be taxed in any country. Some 25 companies have used inversions since 2008.

The White House wants to block the practice, and legislation to do so has been introduced...

[Shifting profits from US to a foreign country] is only part of the game.  Inversions can also facilitate income shifting to tax havens where the rate is zero.