The Finance Professionals' Post

Water as Political Capital

On one hand we need large urban centers to begin aggressively conserving water, while on the other hand there are hundreds of millions of people in India and China who do not have running water. This is a global issue that's not making enough headlines—and it needs to.

Colin Chartres is the co-author of Out of Water: From Abundance to Scarcity and How to Solve the World's Water Problems and is the director general of the International Water Management Institute (IWMI).

Book Review: Trading Options at Expiration

In Trading Options at Expiration: Strategies and Models for Winning the Endgame (FT Press, 2009), Jeff Augen tackles a topic that bedevils many traders and investors. The author draws on his extensive experience with options trading and computer code, algorithm writing, and database management to skillfully blend general trading rules with logistical advice for building the infrastructure necessary to analyze minute-by-minute price data.

Augen identifies “windows of opportunity” that appear in the few days leading up to expiration, allowing the investor to realize high risk-adjusted returns. He believes these opportunities exist because “traditional approaches to calculating the value of an option contract fail, and prices become distorted.” As most traders exit their positions with expiration approaching, the informed options trader can profit handsomely.

Excerpt: Buying at the Point of Maximum Pessimism

In March 2009, the world stock markets unveiled a tremendous opportunity for bargain hunters. March 9, 2009 represented a new low in the 2007 through 2009 bear markets. To be more precise, the March 9 low represented a 57% decline in the S&P 500 from its previous high in October 2007. On a personal note, March 9, 2009 was a particularly exciting time for me. On that day, I sat in a hospital delivery room, simultaneously entering buy orders on my laptop and awaiting the birth of my daughter. To be sure, buying cheap stocks falls far short of becoming a father among life’s precious moments. There is no comparison. Still, the gravitational pull of a bargain hunter to inexpensive stocks can overcome many obstacles, including a less than enthused delivery nurse. The response to buy during periods of sharp market turmoil is not totally unique; there are other stories of investors doing the same. However, the total amount of buyers in the stock market during March 2009 were clearly a minority. Otherwise, the market could not have reached such a low.

The Short Put, a Worthwhile Cash Cow

The short put offers great profit potential with limited risk. Puts cannot be covered like short calls, but short put risks are lower because a stock’s price cannot fall indefinitely.

The maximum risk of writing a short put is the difference between current market value and zero. This worst case outcome is possible; but on a practical level, the real risk bottom is the tangible book value per share. The stock price can fall below that level, but it is only a remote possibility.

Career Podcast: High-Growth Jobs in Finance

In this edition of the career podcast, John Rogers, president and CEO of CFA Institute tells his perspective on the job market for current CFA candidates. Referencing the Bureau of Labor Statistics, he mentions that "in the next 10 years, US employment will grow by 10%," and that "some sectors of financial services will grow faster than others."  Listen and find out what sectors of the financial industry will likely see the most growth in the future.  

 

If you like what you hear, the full audio is available on NYSSA's On-Demand website.

A Toniic for Impact Investors

A small but growing group of high-net-worth individuals are redefining the meaning of investing as they commit increasing portions of their wealth to projects that yield desired social and environmental outcomes as well as financial returns. These pioneer “impact” investors face many challenges, including the task of undertaking time-consuming due diligence and monitoring of investments in far-flung locations, navigating unfamiliar legal systems, and often assuming the heightened risks associated with going it alone without the support and knowledge-sharing of trusted advisors or coinvestors.

Introduction to Islamic Finance (Part I): Context and Concepts

Globally, Islamic finance is one of the fastest growing areas of finance, however measured. So says the popular press. Practitioners concur. The foundation for such assertions, like much that is “known” about Islamic finance, is anecdotally based. Hard numbers are elusive and probably nonexistent.

The dramatic rate of growth of modern Islamic finance, since its birth in the mid‐1990s, is clear. Lawyers, accountants, bankers, and investment firms now proclaim long experience with Islamic finance, enhancing the pool of anecdotal evidence. The publicity, the perception of growth, the simultaneous influx of oil wealth into traditionally Muslim countries, the formation of financial centers, and the rapid regional expansions all work to further expand both interest in and assertions of experience.

Commentary: Crackpots of the World, Unite!

The author reminds the reader that neither markets nor corporations are synonymous with “capitalism,” and one ignores the lessons of economic history at one’s own peril.

In one of his more charitable moods, Dr. Johnson noticed, “A wise Tory and a wise Whig, I believe, would agree. Their principles are the same, though their modes of thinking are different.”¹ I can half-seriously propose that the inverse is also true; namely that ignoramuses, utopians and, finally, fanatics, have remarkably similar modes of thinking though their principles and convictions are vastly different.

Cold Calling: How to Break Through the Secretary

We've all been there; having found the key person in the business to speak to about a possible job in your area of expertise, you fire up for a cold call in an attempt to sell yourself. Unfortunately, rather than the man himself, you end up having to try and persuade his assistant you're worthy of his attentions.

Click here to read the article.

Book Review: Decide and Deliver

The financial services industry is the ultimate decide-and-deliver business. As the recent financial crisis showed, however, it is an industry that has been characterized by foolish and reckless decisions that in the end delivered disaster and catastrophe. With this in mind, Decide and Deliver: Five Steps to Breakthrough Performance in Your Organization has much to recommend it. The authors—Marcia Blenko, Michael C. Mankins, and Paul Rogers—are with the management consulting firm Bain & Company. Their new book was compiled through executive interviews and field research. The result is a very specific guide on how organizations can audit their decide-and-deliver process, and how to take steps to improve it.

Bullard Concerned about Japanese-Style Inflation

If you’re worried about a deflationary spiral taking hold in the US, you’re not alone. James Bullard, president of the St. Louis Federal Reserve Bank and a member of the Fed’s Open Market Committee, has been an outspoken proponent of aggressive Fed action to prevent such an outcome.

In a paper titled “Seven Faces of ‘The Peril’,” which was recently published by the St. Louis Fed, Bullard argues that the Fed must take immediate action to stimulate the US economy, otherwise the economy could stagnate for years, much like Japan’s “lost decade,” when prices fell during a more than 10-year period.

Commentary: The End of Investment?

I recently attended a school function and was chatting with a friend (“Pam” for the sake of this post) who is a buy side analyst at a major asset management firm, the kind that manages hundreds of billions of pension fund assets, and 401Ks.

Pam’s firm, like many mainstream asset management companies, is a signatory of the Principles for Responsible Investment (PRI). The first two Principles state:

1. We will incorporate ESG (Environmental, Social, and Governance) issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.

In response to a simple “how’s work going” type of question, Pam proceeded to tell me how much the business has changed in recent years, suggesting this was in response to the financial meltdown. She told me she no longer writes in-depth research reports. “Everything is about short term trading.” Remarkably to me, she told me all the analysts now run their own portfolios and their bonus is 100% driven by performance.

Market Upside Down: How to Invest Profitably in a Shrinking Economy

In autumn 2008, the U.S. stock market crashed to the lows seen only at the depth of the tech stock bubble burst during 2000–2002, then it plunged even further a few months later.

The Dow Jones Industrial Average had just made historic highs the previous year. Euphoria still hung in the air. No one expected to see record lows again—not another bear market, not so soon. Yet, within 12 months, precipitated by house price declines and subprime mortgage defaults, the Dow Jones Industrial Average saw half of its value evaporate. Almost in a flash, investors saw their gains from U.S. stocks in the past decade disappear—all the fruits of their patient long-term investing.

Investing in Neglected Stocks

The term neglected stock can give rise to several different attributes and connotations, but perhaps the most common feature of a neglected stock and the one investors associate most with the term is a relative absence of heavy analyst coverage on the stock. Most often, within the relative comparisons of what constitutes neglect in this sense, there is some agreement that stocks possessing three or fewer analysts covering them are thought to be neglected by the market. The relatively lower number of analysts covering a stock is the primary driving force behind the neglected stock phenomenon. The idea here is that, with fewer analysts covering a stock, the availability of discriminating information on the stock is lower (for example, outside of 10-Ks, and so on), and therefore its scope for a mispricing in the market is greater.

Recent Research: Highlights from October 2010

“An Examination of Traditional Style Indices.” The Journal of Index Investing (Fall 2010). Jason Hsu, Vitali Kalesnik, and Himanshu Surti.

For investors using a core–satellite approach to strategic asset allocation, traditional style indices, such as value and smallcap indices, represent convenient passive vehicles for achieving strategic or even tactical portfolio tilts. In this article, the authors examine traditional style indices using the Fama–French three-factor analysis. They find that most of the style indices exhibit a negative Fama–French alpha and statistically conclude that traditional style indices are suboptimal means for creating style tilts in portfolios. They posit that the source of the sub-optimality comes from the capweighted construction methodology, which these indices are rooted in and demonstrate that using a simple non-priceweighted approach for creating the style indices would result in more efficient exposures.

Book Review: A Colossal Failure of Common Sense

Two thousand and eight was the annus horribilis that changed Wall Street and Main Street. Among all the historic, previously unimaginable, and stunningly painful events, it is perhaps the collapse of  Lehman Brothers that stands out the most. Lehman, the fourth-largestinvestment bank in the US, failed and filed for bankruptcy in September 2008. Prior to filing, the company held more than $600 billion in assets, making this the largest bankruptcy ever.

Access to Volatility via Listed Futures

While it is impossible to directly access spot volatility (VIX(r)), futures and futures-based indices can provide broad access to what has been dubbed the "investor fear gauge." Though they do not track the spot VIX perfectly, these indices have a strong negative correlation with the S&P 500(r) index. The term structure of volatility has a profound impact on index characteristics and is key to efficient usage of these instruments.

To learn more, read the latest research.

Coming of Age: A Brief History of the Changing Role of the Securities Analyst

From green-eyeshade-wearing, slide-rule-toting, underpaid, inconsequential “statisticians,” to highly respected, well-paid, recognized experts on major industries and their most interesting companies—over the last half century the securities analyst has been transformed from peon to potentate. Motivated by the recognition, now universal, that analysts’ judgments move markets, change securities prices, and impact corporate strategies, the evolution of the analyst has been, albeit unevenly, a global phenomenon.

Book Review: Leveraged Finance

It is often the markets that are not widely publicized by the popular press or closely followed by analysts that present the most complex challenges and most attractive rewards. The authors of Leveraged Finance: Concepts, Methods, and Trading of High-Yield Bonds, Loans, and Derivatives understand that, and have put together a comprehensive overview that will orient new investors and prompt industry veterans to reevaluate some fundamentals.

In Defense of a Quant (Part II): The Ups and Downs of the Normal Distribution

In my previous column, I mentioned that particular attacks on the deficiency of mathematical finance are centered on the alleged misuse of “simplistic” normal distribution by the quants. Nassim Taleb never fails to contrast the disdainful and primitive “Brownian” paradigm with the supposedly more sophisticated “fractal” point of view, which he attributes to Benoît Mandelbrot. I quote only two passages from the Black Swan: “I find it ludicrous to present the uncertainty principle as having anything to do with uncertainty. Why? First, this uncertainty is Gaussian.” Or another pick: “So selecting the Gaussian while invoking some general law appears to be convenient. The Gaussian is used as a default distribution for that very reason.”

Update on Brazil: More Than a One-Note Samba, But Changing Key

INDEX: WEATHERING THE CRISIS | EMERGING RISKS IN BRAZIL | A CROWDED TRADE | CHANGING POLITICS | THE IRRESISTIBLE COOKIE JAR (PETROBRAS) | OVEROPTIMISM AND “BRASIL GRANDE” | SUMMARY

Worldview first covered Brazil in the Winter 2009 edition of The Investment Professional. At the time, when it was not entirely clear that the dramatic crash of late 2008 had fully run its course, this column argued that investors willing to invest or hold on to their Brazilian exposure would likely find their patience rewarded. There were several arguments in favor of Brazil:

1. Extensive Brazilian experience in surviving and adapting to economic shocks.
2. Large foreign reserves and manageable debt loads, shielding Brazil’s government from fiscal and political crisis.
3. Highly professionalized fiscal and monetary authorities.
4. A substantial domestic sector that could buffer reduced international demand.
5. A more diversified export base than generally appreciated by most investors.
6. (Exports diversified by both export destination and industry.)
7. Foreign investors predisposed to run at the first sign of trouble in Brazil, providing an opportunity to enter at attractive valuations.
8. Attractive correlation (i.e., diversification) features.

Strategies for Avoiding Hiring Freezes

As usual, at this time of year, hiring is becoming increasingly frozen. If anything, it may be worse this year because: (a) banks got a little carried away and may have hired too many people, and (b) they’ve announced redundancies and can’t be seen to be recruiting anyone while they’re trying to reallocate internally.

Click here to read the full article.

Why Have REITs Been So Strong?

Despite the recent slump in the real estate economy, publicly traded REITs (real estate investment trusts) have been outperforming dramatically. REITs are also significantly ahead of the stock market, beating year to date returns of 2.3% for the S&P 500 and 5.2% for the Russell 2000 (see Table 1).  That’s not much of a surprise, since REITs have surpassed the stock market over nearly any historical period since inception of the FTSE NAREIT U.S. Real Estate Indexes in January 1972.

Interview with Amy Geffen, NYSSA's New President and CEO

On September 9, 2010, NYSSA announced the appointment of its new president and CEO, Amy Geffen, PhD. During her tenure at the American Society of Mechanical Engineers, Dr. Geffen expanded the global reach of the organization and spearheaded the delivery of online learning. Before beginning her new role on October 4, Geffen sat down to answer a few questions. 

You’ve been with the American Society of Mechanical Engineers for almost 10 years, which is a long tenure these days. (The average tenure for an American worker is 4.1 years.) What did you enjoy most about working for ASME?

Although ten years may seem a long time to be at one organization, in my ten years at ASME I held three different positions. The first was as Director of the Continuing Education Institute for four years. My greatest accomplishment there was to launch online courses that grew from zero to 100 in four years.

Financial Reporting Issues Crowd Agenda

To say that vital financial reporting issues are clamoring for attention is a major understatement. Not only are huge accounting convergence projects underway with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), but controversies surrounding such issues as bank window dressing and underfunding of public pension are also hitting the business pages.

Cartoon: Bull vs. Bear

Illustration by Karl Wimer.

As an impartial, nonprofit forum for the finance and banking industries NYSSA encourages discussion and debate among its member and other professionals. Commentaries, however, should be taken as the sole opinion of the author(s) and not of NYSSA. If you would like to submit a commentary to the Finance Professional's Post, send your article to the editor.